##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


Form 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission file number 1-05492

Nashua Corporation

(Exact name of Registrant as Specified in its
Charter)


|                                                                                                        |  |                                      
|------------------------------------------------------------------------------------------------------- |  | -------------------------------------
|Massachusetts                                                                                           |  | 02-0170100                           
|(State or Other Jurisdiction of
    Incorporation or Organization)                                      |  | (IRS Employer
    Identification No.)
|                                                                                                       
|11 Trafalgar Square, Second Floor
    Nashua, New Hampshire(Address of Principal Executive
    Offices) |  | 03063(Zip Code)                      

Registrants telephone number, including
area code:

(603) 880-2323


Securities registered pursuant to
Section 12(b) of the Act:

|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Each Class           |  | Name of Each Exchange on Which Registered
|                              |  |                                          
|Common Stock, par value $1.00 |  | New York Stock Exchange                  

Securities registered pursuant to
Section 12(g) of the Act:

None


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 þ          No o

Indicate by
check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.      þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes o          No þ

As of June 27, 2003, the aggregate market
value of the registrants voting stock held by
non-affiliates was approximately $26,149,407. As of
March 1, 2004, the number of shares outstanding of the
registrants Common Stock was 5,970,034.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of
the definitive Proxy Statement for the Annual Meeting of
Stockholders of the registrant to be held on May 4, 2004
are incorporated by reference into Part III of this
Form 10-K.



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TABLE OF CONTENTS



|                                           |                                                                                                                      |  |  |  |  |  |  | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                    
|                                           | Item 1. Business                                                                                                    
|                                           | Item 2. Properties                                                                                                  
|                                           | Item 3. Legal Proceedings                                                                                           
|                                           | Item 4. Submission of Matters to a Vote of Security Holders                                                         
|PART II                                   
|                                           | Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|                                           | Item 6. Selected Financial Data(1)                                                                                  
|                                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations                       
|                                           | Item 7A. Quantitive and Qualitative Disclosures About Market Risk                                                   
|                                           | Item 8. Financial Statements and Supplementary Data                                                                 
|REPORT OF INDEPENDENT AUDITORS            
|                                           | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.                       
|                                           | Item 9A. Controls and Procedures                                                                                    
|PART III                                  
|                                           | Item 10. Directors and Executive Officers of the Registrant                                                         
|                                           | Item 11. Executive Compensation                                                                                     
|                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management                                             
|                                           | Item 13. Certain Relationships and Related Transactions                                                             
|                                           | Item 14. Principal Accountant Fees and Services                                                                     
|PART IV                                   
|                                           | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                            
|SIGNATURES                                
|EX-4.05 4TH AMENDMENT TO CREDIT AGREEMENT 
|EX-10.08 MANAGEMENT INCENTIVE PLAN        
|EX-14.01 CODE OF ETHICS                   
|EX-21.01 SUBSIDIARIES OF THE REGISTRANT   
|EX-23.01 CONSENT OF ERNST & YOUNG LLP     
|EX-24.01 POWER OF ATTORNEY                
|EX-31.01 CERTIFICATION OF C.E.O.          
|EX-31.02 CERTIFICATION OF C.F.O.          
|EX-32.01 SECT. 906 CERTIFICATION OF C.E.O.
|EX-32.02 SECT. 906 CERTIFICATION OF C.F.O.



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PART I






|        |         
|------- | --------
|Item 1. | Business

GENERAL

Nashua Corporation is a manufacturer, converter
and marketer of labels, specialty papers and imaging products.
Our primary products include thermal and other coated papers,
wide-format papers, pressure-sensitive labels and tags,
transaction and financial receipts and toners and developers for
use in photocopiers.

Our Company was incorporated in Massachusetts in
1904. We changed our state of incorporation to Delaware in 1957
and back to Massachusetts in 2002. Our principal executive
offices are located at 11 Trafalgar Square, Nashua, New
Hampshire 03063, and our telephone number is
(603) 880-2323. Our Internet address is
www.nashua.com. Copies of our Exchange Act reports can be
accessed from our website. References in this Form 10-K to
us, we, ours, the
Company or to Nashua refer to Nashua
Corporation and our consolidated subsidiaries, unless the
context requires otherwise.

OPERATING SEGMENTS

Set forth below is a brief summary of each of our
three operating segments together with a description of their
more significant products, competitors and operations. Our three
operating segments are:

(1) Label Products

(2) Specialty Paper Products

(3) Imaging Supplies

Additional financial information regarding our
business segments is contained in Managements Discussion
and Analysis of Financial Condition and Results of Operations in
Item 7 of Part II, and Note 13 to our
Consolidated Financial Statements included in Item 8 of
Part II of this Annual Report on Form 10-K.

On April 17, 2000, we completed the
acquisition of all outstanding shares of Rittenhouse Paper
Company. The acquisition of Rittenhouse was accounted for using
the purchase method of accounting and the operations of
Rittenhouse are included in the operating results of our Label
Products and Specialty Paper Products segments from the date of
acquisition.

Label Products Segment

Our Label Products segment converts, prints and
sells pressure-sensitive labels and tags to distributors and
end-users.

Nashua pressure-sensitive labels and tags are
used for supermarket scales, retail shelf tags, inventory
control, tracking, automatic identification, event tickets and
address labels. We are a major supplier of labels to the
supermarket industry and our labels are also used for such
applications as retail shelf, ticket media, transportation,
automatic data collection (barcode), mailer/package distribution
and pharmaceutical and prescription fulfillment. The label
industry is price-sensitive and competitive and includes
competitors such as Moore-Wallace, Inc., Hobart Corporation and
Convergent Label Technologies, as well as numerous regional
converters.

We depend on outside suppliers for most of the
raw materials used by our Label Products segment to produce
labels and ticket media. Primary materials used in producing our
products include laminated paper and inks. Thermal paper
constitutes a large percentage of the raw material cost for our
and our competitors products. As a result, our costs and
market pricing are heavily impacted by changes in thermal paper
costs. We purchase materials from multiple suppliers and believe
that adequate quantities of supplies are available. However, for
some important raw materials, such as laminated paper and inks,
we either sole source or obtain supplies from a few vendors.
There is no current or anticipated supply disruption but a
future supply disruption could negatively impact our operations
until an alternate source of supply could be qualified.
Additionally,

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there can be no assurance that our future
operating results would not be adversely affected by either
future increases in the cost of raw materials or sourced
products or the curtailment of supply.


During the third quarter of 2001, we discontinued
our lamination business within our Label Products segment. In
connection with this discontinuance, we entered into a supply
agreement for laminated and coated products with The Fasson Roll
North America division of Avery Dennison that commits us to
purchase a significant portion of the laminated materials from
them through December 31, 2005. If we fail to meet the
minimum purchase volumes specified in the agreements, we will be
subject to financial penalties. We acquired the required
quantities and were in compliance with the requirements of the
agreement for 2002 and 2003. Prior to our decision to exit the
lamination business, we manufactured most of our laminated
materials at our Omaha, Nebraska facility. Our decision to enter
into the supply agreement and to cease our manufacturing of
laminated materials increased our reliance on outside suppliers
but eliminated a future need for significant capital investment
in lamination equipment.

In February 2003, we acquired the assets of The
Label Company from Bunzl Distribution and signed a multi-year
agreement to supply Bunzl with label products. The Label Company
had primarily been a supplier of supermarket promotional, scale
and product identification labels mainly for Bunzl and other
customers. We believe this acquisition provides flexibility to
our label manufacturing operations, adds additional volume to
our coating facility within our Specialty Paper Products segment
and enhances our relationship with a valued and long-standing
customer. Operating activity relating to The Label Company is
reported under our Label Products segment from the date of
acquisition.

In November 2003, we acquired the assets of the
supermarket label product line from Zebra Technologies, Inc. The
supermarket label business markets and distributes pressure
sensitive direct thermal labels used solely for marking
prepackaged meat, produce, deli and bakery items in
supermarkets, grocery and convenience stores. Operating activity
relating to this line is reported under our Label Products
segment as discussed in Note 13 to our Consolidated Financial
Statements.

Specialty Paper Products Segment

Our Specialty Paper Products segment coats,
converts and sells papers and films. Products include: thermal
papers, dry-gummed papers, heat seal papers, wide-format media
papers, carbonless papers, small rolls, financial receipts,
retail consumer products, ribbons and cut-sheet bond papers. In
September 2003 we sold our cut-sheet bond paper product line
after determining the business was not strategic to our
long-term goals.

Thermal papers develop an image upon contact with
either a heated stylus or a thermal print head. Thermal papers
are used in point-of-sale printers, package identification
systems, gaming and airline ticketing systems, medical and
industrial recording charts and for conversion to labels. We
coat and sell large roll thermal papers primarily to printers
and converters. Competitors in the large roll thermal papers
market include companies such as Appleton Papers, Inc. and Ricoh
Corporation, as well as other manufacturers in the United
States, Asia and Europe.

Dry-gummed paper is a paper that is coated with a
moisture-activated adhesive. We sell dry-gummed paper primarily
to fine paper merchants, business forms manufacturers and paper
manufacturers, who ultimately convert it into various types of
labels and stamps. Our major competitor in the dry-gummed label
market is Troy Laminating and Coating, Inc.

Our heat seal papers are coated with an adhesive
that is activated when heat is applied. We sell these products
through fine paper merchants who, in turn, resell them to
printers who convert the papers into labels for use primarily in
the pharmaceutical industry. Heat seal papers are also used in
bakery, meat packaging and other barcode applications.

Carbonless paper is a coated paper used in the
production of multi-part business forms which produce multiple
copies without carbon paper. We coat and sell carbonless paper
in sheet form through fine paper merchants and in roll form
directly to the printing industry, where it is converted into
multi-part business

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forms. Within the carbonless paper market, we
generally compete with Appleton Papers, Inc., MeadWestvaco
Corporation and Imation Corporation.


Small rolls of bond, carbonless and thermal
papers are used for such applications as point-of-sale receipts
for cash registers and credit card verification, financial
receipts for ATMs, teller systems and check processing,
adding machine papers, and self-service applications, such as
gas station pay-at-the-pump, casino/gambling and thermal
facsimile for thermal fax printers. We sell converted small
rolls to fine paper merchants, paper distributors, superstores,
warehouse clubs, resellers and end-users. Our small roll brands
include Perfect Print and IBM. Our major competitors in the
small roll market include NCR Corporation, Paper Systems, Inc.
and Moore-Wallace, Inc.

Wide-format media papers are premium quality
papers untreated or treated with either resin or non-resin
coatings. We sell wide-format media papers to merchants,
resellers, print-for-pay retailers and end-users for use in
graphic applications, signs, engineering drawings, posters and
for the reproduction of original copies. Our major competitors
include Intelicoat Technologies, Inc. and Océ N.V.

We depend on outside suppliers for the raw
materials used by our Specialty Paper Products segment. Primary
raw materials include paper, chemicals used in producing the
various coatings that we apply, inks and ribbons. Paper
constitutes a large percentage of the raw material cost for our
and our competitors products. As a result, our costs and
market pricing are heavily impacted by changes in paper costs.
Generally, we purchase materials from multiple suppliers.
However, we purchase some raw materials for specific coated
product applications from a single supplier. While there is no
current or anticipated supply disruption, a future supply
disruption could negatively impact our operations until an
alternate source of supply could be qualified. There can be no
assurance that our future operating results would not be
adversely affected by future increases in either the cost of raw
materials or sourced products or the curtailment of supply.

Several of the products in our Specialty Paper
Products segment are in mature and declining markets. These
include our dry-gummed papers, heat seal papers, bond papers and
carbonless papers. Future sales and profitability for these
product lines depend on our ability to maintain current prices
and retain and increase our market share in these declining
markets. We believe the market for thermal papers will continue
to grow in the foreseeable future.

We acquired the operating assets of Computer
Imaging Supplies, Inc. on April 1, 2002 and certain assets
of Dietzgen LLC on June 21, 2002. Operating results of our
Specialty Paper Products segment reflect activity from the
Computer Imaging Supplies point-of-sale fraud prevention
business and the Dietzgen wide-format business as of our
acquisition dates.

In December 2003 we acquired the Magellan
wide-format product line from PM Co. L.L.C. Operating activity
under this product line will be reported in our Specialty Paper
Products segment.

Imaging Supplies Segment

Our Imaging Supplies segment manufactures and
sells consumable products used in producing hard copy images.
Our product line is comprised primarily of high quality,
competitively priced toners and developers compatible with
printers and copiers manufactured by Xerox Corporation, Ricoh
Corporation, Océ N.V., IBM and others. In addition, this
segment is vertically integrated in that it produces some of the
resins that are used in the production of toners for both
internal use as well as for sales to some external customers.

We market our products worldwide under both the
Nashua brand and select private labels. We sell our products
through a variety of distribution channels. For example, we sell
toner and developer to government agencies, machine service
providers and print-for-pay customers through both direct and
agent sales forces. We have also aligned ourselves with
strategic partners who market our Ricoh compatible toner and
developer products in complementary market segments. While sales
for our Imaging Supplies segment represent less than ten percent
of our consolidated sales, this segment has a significant
customer that represents more than half of its sales. The loss
of this customer would have a material adverse effect on this
segment.

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Our major competitors for toner and developer
products include Xerox Corporation, Ricoh Corporation, Océ
N.V. and IBM. We also compete with other smaller independent
manufacturers of toner and developer products. The market for
toner and developer products is highly competitive, with more
sophisticated toner formulas and shorter copier machine life
cycles requiring timely product development.

We depend on outside suppliers for most of the
raw materials used by our Imaging Supplies segment. One of our
major raw materials is resin, which is an oil-based product that
is susceptible to oil price fluctuations. Generally, we purchase
assorted custom raw materials from multiple suppliers and
believe that adequate quantities of supplies are available.
However, we purchase some raw materials from single source
suppliers. As such, while we are not currently aware of the
existence of a disruption of a vendors business or our
relationship with them that could significantly impact our
operations, such a disruption in the future could negatively
impact our operations until an alternative supplier could be
qualified. There can be no assurance that our future operating
results would not be adversely affected by future increases in
raw material prices or the curtailment of supply. During 2002,
we outsourced our toner filling operation and rely on
third-party suppliers to complete this portion of our
manufacturing process at a reduced cost compared to our prior
internal cost. As such, disruption of toner filling supply from
one or more vendors could negatively impact our operations until
an alternative supply could be arranged. The third-party filling
operations are currently satisfying our requirements.

We discontinued our remanufactured laser
cartridge operation during the first quarter of 2000 due to a
continued decline in sales and profitability.

INFORMATION ABOUT MAJOR CUSTOMERS

We have one group of customers under common
control that represents more than ten percent of our
consolidated revenues. Sales to Wal-Mart and Sams Club
totaled $31.8 million in 2003, or approximately
11 percent of our total sales in 2003, comprised of sales
of $20.1 million for our Specialty Paper Products segment
and $11.7 million for our Label Products segment. While no
other customer represented ten percent of our consolidated
revenues, each of our segments has significant customers. The
loss of a significant customer could have a material adverse
effect on us or our segments.

DEVELOPMENT OF NEW PRODUCTS

Our success depends in part on our ability to
continue developing and marketing new products. There can be no
assurance that we will be able to develop and introduce new
products in a timely manner or that new products, if developed,
will achieve market acceptance. Additionally, our future growth
depends on our ability to penetrate new markets and to sell our
products through alternative channels of distribution. There can
be no assurance that the markets currently being served by us
will continue to grow, that our existing and new products will
meet the requirements of the markets in which we operate, that
our products will achieve customer acceptance, that our
competitors will not force prices to an unacceptably low level
or take market share from us, or that we can achieve or maintain
profits in the markets in which we operate.

INTELLECTUAL PROPERTY

Our ability to compete may be affected by our
ability to protect our proprietary information, as well as our
ability to design products outside the scope of our
competitors intellectual property rights. We hold a
limited number of U.S. and foreign patents, but there can be no
assurance that our patents will provide meaningful protection,
nor can there be any assurance that third parties will not
assert infringement claims against us or our customers in the
future. If one of our products was ruled to be in violation of a
competitors intellectual property rights, we could be
required to expend significant resources to develop
non-infringing alternatives or to obtain required licenses.
There can be no assurance that we could successfully develop
commercially viable alternatives or that we could obtain
necessary licenses. Additionally, litigation relating to
infringement claims could be lengthy or costly and could have an
adverse material effect on our financial condition or results of
operations regardless of the outcome of the litigation.

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MANUFACTURING OPERATIONS

We operate manufacturing facilities in the
following locations:



| |   |                          
| | - | -------------------------
| |  | Nashua, New Hampshire    
|
| |  | Merrimack, New Hampshire 
|
| |  | Omaha, Nebraska          
|
| |  | Jefferson City, Tennessee
|
| |  | Morristown, Tennessee    
|
| |  | Vernon, California       
|
| |  | St. Louis, Missouri      

Our New Hampshire, Nebraska and California
facilities are unionized. We completed multi-year labor
negotiations for all three sites during 2002. More information
regarding the operating segments and principal products produced
at each location can be found below in Item 2 of
Part I of this Form 10-K. There can be no assurance
that future operating results will not be adversely affected by
changes in either our or market labor wage rates or productivity.

RESEARCH AND DEVELOPMENT

Our research and development efforts have been
instrumental in the development of many of our products. We
direct our research efforts primarily toward developing new
products and processes and improving product performance, often
in collaboration with customers. Our research and development
efforts are focused primarily on new thermal coating
applications and in developing printed circuits technology for
our Specialty Paper and Label Products segments and new toner
and developer formulations and toner cartridge designs for our
Imaging Supplies segment. Our research and development
expenditures were $2.5 million in 2003, $3.1 million
in 2002 and $3.2 million in 2001.

ENVIRONMENTAL MATTERS

We and our competitors are subject to various
environmental laws and regulations. These include the
Comprehensive Environmental Response, Compensation and Liability
Act, as amended by the Superfund Amendments and Reauthorization
Act, commonly known as CERCLA, the Resource
Conservation and Recovery Act, commonly known as
RCRA, the Clean Water Act and other state and local
counterparts of these statutes. We believe that our operations
have operated and continue to operate in compliance with
applicable environmental laws and regulations. Nevertheless, we
have received notices of alleged environmental violations in the
past and we could receive additional notices of alleged
environmental violations in the future. Violations of these
environmental laws and regulations could result in substantial
fines and penalties. Historically, we have addressed and/or
attempted to remedy any alleged environmental violation upon
notification.

Our expenditures for compliance with
environmental laws and regulations were $.4 million in 2003
and approximately $1.0 million per year in the previous
four years. Additionally, for sites which we have received
notification of the need to remediate, we have assessed our
potential liability and have established a reserve for estimated
costs associated with the remediation. At December 31,
2003, our reserves for potential environmental liabilities were
$.7 million for continuing operations. However, liability
of potentially responsible parties under CERCLA and RCRA is
joint and several, and actual remediation expenses at sites
where we are a potentially responsible party could either exceed
or be below our current estimates. We believe, based on the
facts currently known to us, our insurance coverage and the
environmental reserve recorded, that our estimated remediation
expense and on-going costs of compliance with environmental laws
and regulations are not likely to have a material adverse effect
on our consolidated financial position or results of operations.

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EXECUTIVE OFFICERS

Listed below are our executive officers as of
March 1, 2004. No family relationships exist among our
executive officers.

|                   |  |     |    |          |  |                                                                                            
|------------------ |  | --- | -- | -------- |  | -------------------------------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Andrew B. Albert   |  |     | 58 |          |  | Chairman, President and Chief Executive Officer                                            
|John L. Patenaude  |  |     | 54 |          |  | Vice President  Finance, Chief
    Financial Officer and Treasurer                        
|Margaret M. Callan |  |     | 37 |          |  | Corporate Controller and Chief Accounting Officer                                          
|Robert S. Amrein   |  |     | 49 |          |  | Vice President  Human Resources,
    General Counsel and Clerk/ Secretary                 
|Margaret S. Adams  |  |     | 48 |          |  | Vice President, Chief Information Officer and
    President of the Converted Paper Division
|Donna J. DiGiovine |  |     | 42 |          |  | Vice President, President of the Toner Products
    Division and the Coated Paper Division 
|Thomas R. Pagel    |  |     | 47 |          |  | Vice President, President of the Label Products
    Division                               

Mr. Albert has been our Chairman of the
Board, President and Chief Executive Officer since December
2000. He became our President and Chief Operating Officer in
April 2000 when we completed our acquisition of Rittenhouse
Paper Company. Prior to joining us, Mr. Albert served as
Chairman and Chief Executive Officer of Rittenhouse Paper
Company since 1983.

Mr. Patenaude has been our Vice
President  Finance and Chief Financial Officer since
May 1998. In addition, since August 2000 and from May 1998 to
October 1999, Mr. Patenaude has served as Treasurer. From
July 1996 to May 1998, he served as our Assistant Treasurer.

Ms. Callan has been our Corporate Controller
since May 2003. She served as our Director of Strategic Planning
and Analysis from January 2001 to May 2003 and our Director of
External Reporting from November 1998 to January 2001.

Mr. Amrein has been one of our Vice
Presidents, General Counsel and Clerk/ Secretary since December
2000 and Vice President  Human Resources since May
2002. Prior to joining Nashua, he served as Chief Legal Counsel
for M/A-Com, Inc. from 1997 to 2000 and as General Counsel and
Corporate Secretary of Schneider Automation from 1988 to 1997.

Ms. Adams has been one of our Vice
Presidents since May 2002 and Chief Information Officer since
October 2001. She has also served as President of our Converted
Paper division since August 2003. Prior to joining Nashua, she
served as Vice President of Operations for Kriticka from June
2000 to May 2001 and Vice President, Information Technology for
Esselte from June 1998 to June 2000. Prior to June 1998,
Ms. Adams held various marketing, operational and
information technology positions at Avery Dennison, the most
recent being Group Director of North American Technology.

Ms. DiGiovine has been one of our Vice
Presidents since December 1999. She has also served as President
of our Coated Paper division since August 2003 and President of
our Toner Products division since December 1999. From April 1999
to August 2003, she served as the General Manager of the Toner
Products division. She served as Director of Marketing for our
Imaging Supplies segment from September 1998 to April 1999 and
as its Manager of Consumer Product Marketing from July 1996 to
September 1998.

Mr. Pagel has been one of our Vice
Presidents and President of our Label Products division since
February 2001. He became President of our Tennessee Label
operation in April 2000 when we completed our acquisition of
Rittenhouse Paper Company. Prior to joining Nashua,
Mr. Pagel served as President and Chief Operating Officer
of Rittenhouse Paper Companys Label Media Group.

Our executive officers are generally elected to
their offices each year by our Board of Directors shortly after
the Annual Meeting of Stockholders.

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EMPLOYEES

We had 929 full-time employees at
February 1, 2004. Approximately 306 of our employees are
members of one of several unions, principally the Paper, Allied
Industrial, Chemical and Energy Workers International Union. We
believe our employee relations are satisfactory.

Our significant labor agreements include:

|                                                                              |  |               |     |          |  |                 |               |  |  |  |                | 
|----------------------------------------------------------------------------- |  | ------------- | --- | -------- |  | --------------- | ------------- |  |  |  | -------------- | 
|                                                                              |  | Approximate # |     |          |  |                
|                                                                              |  | of Employees  |     |          |  |                
|Union                                                                         |  | Covered       |     | Location |  | Expiration Date
|                                                                              |  |               |     |          |  |                
|Paper, Allied Industrial, Chemical and Energy
    Workers International Union |  |               | 119 |          |  |                 | Omaha, NE     |  |  |  | March 31, 2007 | 
|Paper, Allied Industrial, Chemical and Energy
    Workers International Union |  |               | 129 |          |  |                 | Merrimack, NH |  |  |  | April 2, 2006  | 
|United Commercial Food Workers Union                                          |  |               | 51  |          |  |                 | Vernon, CA    |  |  |  | March 5, 2005  | 
|Other                                                                         |  |               | 7   |          |  |                 | Merrimack, NH |  |  |  | April 2, 2006  | 

FORWARD-LOOKING AND CAUTIONARY
STATEMENTS

Information we provide in this Form 10-K may
contain forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995. We may also make
forward-looking statements in other reports we file with the
Securities and Exchange Commission, in materials we deliver to
stockholders and in our press releases. In addition, our
representatives may, from time to time, make oral
forward-looking statements. Forward-looking statements provide
current expectations of future events based on certain
assumptions and include any statement that is not directly
related to historical or current fact. Words such as
anticipates, believes,
expects, estimates, intends,
plans, projects, can,
may and similar expressions are intended to identify
such forward-looking statements. Forward-looking statements are
subject to risks and uncertainties which could cause actual
results to differ materially from those anticipated. Such risks
and uncertainties include, but are not limited to, our future
capital needs, stock market conditions, the price of our stock,
fluctuations in customer demand, intensity of competition from
other vendors, timing and acceptance of our new product
introductions, general economic and industry conditions, delays
or difficulties in programs designed to increase sales and
improve profitability, the settlement of tax issues, the
possibility of a final award of material damages in our pending
litigation and other risks detailed in this Form 10-K and
our other filings with the Securities and Exchange Commission.
We assume no obligation to update the information contained in
this Form 10-K or to revise our forward-looking statements.






|        |           
|------- | ----------
|Item 2. | Properties

All of our manufacturing facilities are located
in the United States. We believe that our manufacturing
facilities are in good operating condition and suitable for the
production of our products. We have excess manufacturing space
in some locations. Our corporate offices are located in a leased
facility in Nashua, NH. The lease for our corporate offices
expires on May 30, 2005.

Our principal facilities are listed below by
industry segment, location and principal products produced.
Except as otherwise noted, we own each of the facilities listed.

8



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##### Table of Contents



Principal Properties

|                                 |                                    |              |  |                             |     |  |                                            
|-------------------------------- | ---------------------------------- | ------------ |  | --------------------------- | --- |  | -------------------------------------------
|                                 |                                    | Total Square |  |                            
|Location                         |                                    | Footage      |  | Nature of Products Produced
|                                 |                                    |              |  |                            
|Corporate                        |                                    |              |  |                             |     | 
|                                 | Nashua, New Hampshire (leased)     |              |  | 12,000                      | (1) |  | none (corporate offices)                   
|                                 | Park Ridge, Illinois (leased)      |              |  | 3,000                       | (1) |  | none (administrative offices)              
|                                 | San Francisco, California (leased) |              |  | 1,000                       |     |  | none (administrative offices)              
|Specialty Paper Products Segment |                                    |              |  |                             |     | 
|                                 | Nashua, New Hampshire (leased)     |              |  | 6,000                       | (1) |  | none (administrative offices)              
|                                 | Merrimack, New Hampshire           |              |  | 475,000                     | (2) |  | coated paper products                      
|                                 | Jefferson City, Tennessee          |              |  | 145,000                     |     |  | converted paper products                   
|                                 | Morristown, Tennessee (leased)     |              |  | 80,000                      |     |  | converted paper products                   
|                                 | Vernon, California (leased)        |              |  | 61,000                      |     |  | converted paper products                   
|                                 | Park Ridge, Illinois (leased)      |              |  | 8,000                       | (1) |  | none (corporate and administrative offices)
|                                 | Plymouth, Massachusetts (leased)   |              |  | 7,000                       |     |  | none (sales and administrative offices)    
|                                 | Palatine, Illinois (leased)        |              |  | 4,000                       |     |  | none (sales and administrative offices)    
|                                 | Kent, Washington (leased)          |              |  | 10,000                      |     |  | none (warehousing)                         
|Label Products Segment           |                                    |              |  |                             |     | 
|                                 | Omaha, Nebraska                    |              |  | 170,000                     |     |  | label products                             
|                                 | Jefferson City, Tennessee          |              |  | 60,000                      |     |  | label products                             
|                                 | St. Louis, Missouri (leased)       |              |  | 33,000                      |     |  | label products                             
|Imaging Supplies Segment         |                                    |              |  |                             |     | 
|                                 | Nashua, New Hampshire              |              |  | 203,000                     |     |  | dry toner and developer products           
|                                 | Merrimack, New Hampshire           |              |  | 112,000                     |     |  | dry toner and developer products           



---



|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our Specialty Paper Products segment and
    corporate staff share approximately 11,000 square feet of office
    space in Park Ridge, IL and 18,000 square feet of office space
    in Nashua, NH.                                
|   
|(2) | Our Specialty Paper Products segment utilizes
    approximately 315,000 square feet and a portion of the remaining
    space is leased to a third party with the balance being marketed
    as rental space to other third parties.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In August and September 1996, two individual
plaintiffs filed lawsuits in the Circuit Court of Cook County,
Illinois against Nashua Corporation, Cerion Technologies, Inc.,
certain directors and officers of Cerion, and our underwriter,
on behalf of all persons who purchased the common stock of
Cerion between May 24, 1996 and July 9, 1996. These
two complaints were consolidated. In March 1997, the same
individual plaintiffs joined by a third plaintiff filed a
Consolidated Amended Class Action Complaint. The consolidated
complaint alleged that, in connection with Cerions initial
public offering, the defendants issued materially false and
misleading statements and omitted the disclosure of material
facts regarding, in particular, certain significant customer
relationships. In October 1997, the Circuit Court, on motion by
the defendants, dismissed the consolidated complaint. The
plaintiffs filed a Second Amended Consolidated Complaint
alleging similar claims as the first consolidated complaint
seeking damages and injunctive relief. On May 6, 1998, the
Circuit Court, on motion by the defendants, dismissed with
prejudice the second amended consolidated complaint. The
plaintiffs filed with the Appellate Court an appeal of the
Circuit Courts ruling. On November 19, 1999, the
Appellate Court reversed the Circuit Courts ruling that
dismissed the second amended consolidated complaint. The
Appellate Court ruled that the second amended consolidated
complaint represented a valid claim and sent the case back to
the Circuit Court for further proceedings. On December 27,
1999, we filed a Petition with the Supreme Court of Illinois. In
that Petition, we asked the Supreme Court of Illinois to

9



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##### Table of Contents



determine whether the Circuit Court or the
Appellate Court is correct. Our Petition was denied and the case
was sent to the Circuit Court for trial. Discovery has been
completed, but no date has been set for trial and pre-trial
motions. On October 8, 2003, the Circuit Court heard
motions on a Summary Judgment motion and a class action
certification motion. The Circuit Court is expected to rule on
these motions in the first quarter of 2004. We believe that the
lawsuit is without merit and will continue to defend ourselves
in this matter. We also believe that we will receive the value
of our 37.1 percent ownership in the Cerion Liquidating
Trust which was valued at $.9 million on an after-tax basis
at December 31, 2003. Our investment in Cerion is included
under other assets in our Consolidated Balance Sheet.


On September 14, 2000, Edward G. Krasnecki
and EGK Realty Corporation filed suit against Nashua Corporation
in the Superior Court of the Commonwealth of Massachusetts,
Middlesex County. The plaintiffs are the owners of real
property, formerly leased by us, located at 260 Billerica Road,
Chelmsford, Massachusetts. The plaintiffs alleged that when we
vacated the premises in 1997, we failed to remove improvements
we had made to the property, failed to clean the premises as
required by our lease, and left contamination on the property
resulting in lost opportunities to the plaintiffs, for which the
plaintiffs seek damages. We responded to their complaint,
denying all liability and asserting affirmative defenses. We
maintained that when we vacated the premises, we removed three
underground tanks that we were entitled to remove under the
terms of our lease, we detected soil contamination, reported and
took prompt remedial action all in accordance with Massachusetts
law, and were not liable to the plaintiffs. We also denied that
we failed to remove improvements or that we failed to clean the
premises in accordance with the terms of our lease. The matter
was settled in 2003 and is now resolved.

On May 30, 2003, Ricoh Company, Ltd. and
affiliated companies filed a suit in the U.S. District Court for
the District of New Jersey against several defendants, including
the largest customer of Nashuas Imaging Supplies segment
and another company who is a supplier to the Imaging Supplies
segment. The Complaint alleged multiple counts of patent
infringement, trademark infringement, unfair competition and
copyright infringement by the defendants. On October 17,
2003, Ricoh amended the Complaint and added Nashua as an
additional co-defendant in the suit. The allegations arose from
the sale and distribution of Ricoh compatible toner products.
Nashua filed a legal answer to the Complaint in December 2003.
The suit is at its earliest stages with the legal discovery
phase to continue in 2004. Attorneys for Nashua are in the
process of reviewing the background and history of the lawsuit
in order to fully develop our legal position and defenses in
this matter. We believe we have valid defenses and potential
recourse against certain other co-defendants in this matter.

In December 2002, we eliminated the availability
of certain postretirement health benefits to union and non-union
employees of Nashua who had at least 10 years of service
and chose to retire between age 60 to 65 which provided
access to health benefits until age 65. The unions in New
Hampshire objected to the action and filed a grievance. The
final step of the grievance process is arbitration by the
American Arbitration Association. The subject of the Arbitration
was the interpretation of the collective bargaining contract
language which we believe allows modification of the eligibility
of those postretirement health benefits. The unions
position is that regardless of the contract wording, these
benefits cannot be eliminated without bargaining with the
unions. The Arbitration hearing occurred on July 28, 2003
and the arbitrator ruled in favor of the unions on
October 24, 2003. On November 24, 2003, we filed an
appeal of the arbitration decision with the U.S. District
Court for the District of New Hampshire. We believe the
arbitrator erred in his decision process. We anticipate the
complete appeals process could take several years.

We are involved in certain environmental matters
and have been designated by the Environmental Protection Agency,
referred to as the EPA, as a potentially responsible party for
certain hazardous waste sites. In addition, we have been
notified by certain state environmental agencies that some of
our sites not addressed by the EPA require remedial action.
These sites are in various stages of investigation and
remediation. Due to the unique physical characteristics of each
site, the technology employed, the extended timeframes of each
remediation, the interpretation of applicable laws and
regulations and the financial viability of other potential
participants, our ultimate cost of remediation is difficult to
estimate. Accordingly, estimates could either increase or
decrease in the future due to changes in such factors. At
December 31, 2003, based on the facts currently known and
our prior experience with these matters, we have concluded that
it is probable that site

10



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##### Table of Contents



assessment, remediation and monitoring costs will
be incurred. We have estimated a range for these costs of
$.7 million to $1.3 million for continuing operations.
These estimates could increase if other potentially responsible
parties or our insurance carriers are unable or unwilling to
bear their allocated share and cannot be compelled to do so. At
December 31, 2003, our accrual balances relating to
environmental matters were $.7 million for continuing
operations. Based on information currently available, we believe
that it is probable that the major potentially responsible
parties will fully pay the costs apportioned to them. We believe
that our remediation expense is not likely to have a material
adverse effect on our consolidated financial position or results
of operations.


We are involved in various other lawsuits, claims
and inquiries, most of which are routine to the nature of our
business. In the opinion of our management, the resolution of
these matters will not materially affect our Company.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.




PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

Our common stock is listed and traded on the New
York Stock Exchange under the trading symbol NSH. As
of December 31, 2003, the number of holders of our common
stock was approximately 1,115. The following table sets forth
the high and low sales price per share for our common stock as
reported by the New York Stock Exchange for each period
indicated.

|     |      |         |   |         |  |         |   |         |  |      |   |       |  |  |   |      |  |  |   |       | 
|---- | ---- | ------- | - | ------- |  | ------- | - | ------- |  | ---- | - | ----- |  |  | - | ---- |  |  | - | ----- | 
|     |      | 1st     |   | 2nd     |  | 3rd     |   | 4th     |  |     
|     |      | Quarter |   | Quarter |  | Quarter |   | Quarter |  | Year
|     |      |         |   |         |  |         |   |         |  |     
|2003 |      |         |   |         |  |         |   |         |  |      |   |       |  |  |   |      |  |  |   |      
|     | High |         | $ | 9.02    |  |         | $ | 9.48    |  |      | $ | 9.50  |  |  | $ | 9.08 |  |  | $ | 9.50  | 
|     | Low  |         | $ | 8.65    |  |         | $ | 8.73    |  |      | $ | 6.75  |  |  | $ | 7.93 |  |  | $ | 6.75  | 
|2002 |      |         |   |         |  |         |   |         |  |      |   |       |  |  |   |      |  |  |   |      
|     | High |         | $ | 7.54    |  |         | $ | 7.25    |  |      | $ | 10.20 |  |  | $ | 9.60 |  |  | $ | 10.20 | 
|     | Low  |         | $ | 5.40    |  |         | $ | 5.85    |  |      | $ | 6.20  |  |  | $ | 6.85 |  |  | $ | 5.40  | 

Our ability to pay dividends is restricted to
$.6 million under the provisions of our debt agreement,
without the prior approval of our lenders. We did not declare or
pay a cash dividend on our common stock in 2003 or 2002 and do
not currently intend to pay dividends in the foreseeable future.

11



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##### Table of Contents






Item 6.Selected
Financial Data(1)

NASHUA CORPORATION AND SUBSIDIARIES

FIVE-YEAR FINANCIAL REVIEW

|                                                                                        |                          |                                       |         |      |  |      |         |       |  |      |         |       |   |   |         |       |  |   |         |       |  
|--------------------------------------------------------------------------------------- | ------------------------ | ------------------------------------- | ------- | ---- |  | ---- | ------- | ----- |  | ---- | ------- | ----- | - | - | ------- | ----- |  | - | ------- | ----- | -
|                                                                                        |                          |                                      
|                                                                                        |                          | December 31,                         
|                                                                                        |                          |                                      
|                                                                                        |                          | 2003                                  |         | 2002 |  | 2001 |         | 2000  |  | 1999
|                                                                                        |                          |                                       |         |      |  |      |         |       |  |     
|                                                                                        |                          |                                      
|                                                                                        |                          | (In thousands, except per share data,
|                                                                                        |                          | number of employees and percentages) 
|Operations(2)                                                                           |                          |                                       |         |      |  |      |         |       |  |      |         |       |   |   |         |       |  |   |         |      
|Net sales                                                                               |                          | $                                     | 288,906 |      |  | $    | 283,190 |       |  | $    | 272,510 |       |   | $ | 253,122 |       |  | $ | 170,844 |      
|Gross margin percentage                                                                 |                          |                                       | 18.6    | %    |  |      | 19.8    | %     |  |      | 20.5    | %     |   |   | 20.1    | %     |  |   | 24.0    | %    
|Selling, distribution, general and administrative
    expenses as a percentage of sales |                          |                                       | 16.5    | %    |  |      | 16.9    | %     |  |      | 18.3    | %     |   |   | 19.5    | %     |  |   | 20.3    | %    
|Income before interest and income taxes as a
    percentage of sales(3)                 |                          |                                       | 0.5     | %    |  |      | 1.9     | %     |  |      |        |       |   |   | 5.9     | %     |  |   | 2.1     | %    
|Income (loss) before income taxes as a
    percentage of sales(3)                       |                          |                                       | 0.1     | %    |  |      | 1.4     | %     |  |      | (1.0    | )%    |   |   | 5.1     | %     |  |   | 1.7     | %    
|Income (loss) as a percentage of sales(3)                                               |                          |                                       | 0.0     | %    |  |      | .8      | %     |  |      | (0.9    | )%    |   |   | 2.1     | %     |  |   | (0.3    | )%   
|Effective tax provision (benefit) rate                                                  |                          |                                       | 53.4    | %    |  |      | 39.5    | %     |  |      | (12.0   | )%    |   |   | 58.3    | %     |  |   | 114.6   | %    
|Income (loss) before income taxes(3)                                                    |                          | $                                     | 219     |      |  | $    | 3,828   |       |  | $    | (2,782  | )     |   | $ | 12,914  |       |  | $ | 2,883   |      
|Income (loss) from continuing operations(3)                                             |                          | $                                     | 102     |      |  | $    | 2,316   |       |  | $    | (2,448  | )     |   | $ | 5,386   |       |  | $ | (420    | )    
|Loss from discontinued operations, net of taxes                                         |                          |                                       |        |      |  |      |        |       |  |      |        |       |   |   |        |       |  | $ | (4,001  | )    
|Net income (loss)                                                                       |                          | $                                     | 102     |      |  | $    | 2,316   |       |  | $    | (2,448  | )     |   | $ | 5,386   |       |  | $ | (4,421  | )    
|Basic and diluted earnings (loss) per common
    share:                                 |                          |                                       |         |      |  |      |         |       |  |      |         |       |   |   |         |       |  |   |         |      
|                                                                                        | Continuing operations(3) |                                       | $       | 0.02 |  |      | $       | 0.40  |  |      | $       | (0.43 | ) |   | $       | .95   |  |   | $       | (0.07 | )
|                                                                                        | Discontinued operations  |                                       |         |     |  |      |         |      |  |      |         |      |   |   |         |      |  |   | $       | (0.70 | )
|                                                                                        | Net income (loss)(3)     |                                       | $       | 0.02 |  |      | $       | 0.40  |  |      | $       | (0.43 | ) |   | $       | .95   |  |   | $       | (0.77 | )
|Financial Position(2)                                                                   |                          |                                       |         |      |  |      |         |       |  |      |         |       |   |   |         |       |  |   |         |      
|Working capital                                                                         |                          | $                                     | 22,296  |      |  | $    | 21,011  |       |  | $    | 16,528  |       |   | $ | 22,531  |       |  | $ | 35,562  |      
|Total assets                                                                            |                          | $                                     | 151,676 |      |  | $    | 146,188 |       |  | $    | 145,046 |       |   | $ | 170,471 |       |  | $ | 130,445 |      
|Non-current portion of long-term debt                                                   |                          | $                                     | 24,200  |      |  | $    | 23,000  |       |  | $    | 23,280  |       |   | $ | 35,905  |       |  | $ | 511     |      
|Total long-term obligations                                                             |                          | $                                     | 27,468  |      |  | $    | 27,079  |       |  | $    | 25,740  |       |   | $ | 46,171  |       |  | $ | 1,022   |      
|Total capital employed                                                                  |                          | $                                     | 88,797  |      |  | $    | 87,018  |       |  | $    | 95,677  |       |   | $ | 118,048 |       |  | $ | 67,848  |      
|Total debt as a percentage of capital employed                                          |                          |                                       | 31.1    | %    |  |      | 28.7    | %     |  |      | 26.4    | %     |   |   | 38.7    | %     |  |   | 1.5     | %    
|Shareholders equity                                                                    |                          | $                                     | 61,197  |      |  | $    | 62,018  |       |  | $    | 70,397  |       |   | $ | 72,337  |       |  | $ | 66,826  |      
|Shareholders equity per common share                                                   |                          | $                                     | 10.37   |      |  | $    | 10.66   |       |  | $    | 12.32   |       |   | $ | 12.79   |       |  | $ | 11.86   |      
|Other Selected Data(2)                                                                  |                          |                                       |         |      |  |      |         |       |  |      |         |       |   |   |         |       |  |   |         |      
|Investment in plant and equipment (excluding
    acquisitions)                          |                          | $                                     | 4,307   |      |  | $    | 4,349   |       |  | $    | 2,375   |       |   | $ | 9,625   |       |  | $ | 7,855   |      
|Depreciation and amortization                                                           |                          | $                                     | 7,942   |      |  | $    | 7,581   |       |  | $    | 9,748   |       |   | $ | 9,304   |       |  | $ | 6,381   |      
|Dividends per common share                                                              |                          |                                       |        |      |  |      |        |       |  |      |        |       |   | $ | .01     |       |  |   |        |      
|Return on average shareholders equity                                                  |                          |                                       | 0.2     | %    |  |      | 3.5     | %     |  |      | (3.4    | )%    |   |   | 7.7     | %     |  |   | (6.2    | )%   
|Common stock price range:                                                               |                          |                                       |         |      |  |      |         |       |  |      |         |       |   |   |         |       |  |   |         |      
|                                                                                        | High                     |                                       | $       | 9.50 |  |      | $       | 10.20 |  |      | $       | 7.85  |   |   | $       | 10.31 |  |   | $       | 15.44 |  
|                                                                                        | Low                      |                                       | $       | 6.75 |  |      | $       | 5.40  |  |      | $       | 3.06  |   |   | $       | 3.56  |  |   | $       | 6.56  |  
|                                                                                        | Year-end closing price   |                                       | $       | 8.50 |  |      | $       | 8.78  |  |      | $       | 5.87  |   |   | $       | 4.44  |  |   | $       | 7.50  |  
|Number of employees from continuing operations                                          |                          |                                       | 929     |      |  |      | 1,026   |       |  |      | 971     |       |   |   | 1,140   |       |  |   | 729     |      
|Average common shares outstanding                                                       |                          |                                       | 5,869   |      |  |      | 5,783   |       |  |      | 5,696   |       |   |   | 5,649   |       |  |   | 5,718   |      



---



|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 14 to our Consolidated Financial
    Statements for Selected Quarterly Financial Data required under
    Item 302 of Regulation S-K.
|   
|(2) | See Note 2 to our Consolidated Financial
    Statements for a description of business changes relevant to
    this data.                     
|   
|(3) | Income (loss) is from continuing operations
    which includes:                                                                              

|                                                           |  |                       |     |         |  |         |    |         |  |         |     |         |  |         |    |         |  |         |     |         |  |  |     |   |  |   |      |  |  |  |     |   |  |   |      |   |  |  |    |  
|---------------------------------------------------------- |  | --------------------- | --- | ------- |  | ------- | -- | ------- |  | ------- | --- | ------- |  | ------- | -- | ------- |  | ------- | --- | ------- |  |  | --- | - |  | - | ---- |  |  |  | --- | - |  | - | ---- | - |  |  | -- | -
|                                                           |  |                       |     |         |  |         |    |         |  |        
|                                                           |  | 2003                  |     | 2002    |  | 2001    |    | 2000    |  | 1999   
|                                                           |  |                       |     |         |  |         |    |         |  |        
|                                                           |  | Dollars               |     | % Sales |  | Dollars |    | % Sales |  | Dollars |     | % Sales |  | Dollars |    | % Sales |  | Dollars |     | % Sales
|                                                           |  |                       |     |         |  |         |    |         |  |         |     |         |  |         |    |         |  |         |     |        
|                                                           |  |                      
|                                                           |  | (Dollars in millions)
|Restructuring and other unusual (income)
    charges       |  | $                     | (.1 | )       |  |         | 0  | %       |  | $       | (.1 | )       |  |         | .1 | %       |  | $       | 3.0 |         |  |  | 1.1 | % |  | $ | 1.0  |  |  |  | .4  | % |  | $ | (1.3 | ) |  |  | .8 | %
|Net (gain)/loss on curtailment of postretirement
    plans |  | $                     | 1.6 |         |  |         | .1 | %       |  | $       | (.2 | )       |  |         | .1 | %       |  |         |    |         |  |  |    |   |  |   |     |  |  |  |    |   |  |   |     |   |  |  |   |  
|Pension settlement income                                  |  |                       |    |         |  |         |   |         |  |         |    |         |  |         |   |         |  |         |    |         |  |  |    |   |  | $ | 18.6 |  |  |  | 7.3 | % |  |   |     |   |  |  |   |  

12



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##### Table of Contents






Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Our Management Discussion and Analysis should be
read in conjunction with Item 1: Business; Item 6:
Selected Financial Data; and Item 8: Financial Statements
and Supplementary Data.

OVERVIEW

During the past few years we believe we continued
to strengthen our operating base in order to deliver more
favorable results as the economy improves. Our strategy
continues to focus on value-added propositions, cost containment
and the resolution of legacy issues.

The value-added propositions have been enhanced
by the following:



| |   |                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exiting non-strategic businesses.                                                                                                                                                                                                                                                                                
|
| |  | Acquiring businesses that provide differentiated
    products to our product mix, additional customers, and
    enhancements to our manufacturing plants and to our existing
    businesses through increased volumes.                                                                                           
|
| |  | Investing in research and development projects
    that provide new or enhanced products to our customers and have
    the capability to develop products that may provide a future
    competitive edge, such as toners and developers, thermal
    products and radio frequency identification (RFID) products.
|
| |  | Improving our information technology systems to
    facilitate customer interfaces for ordering products and
    tracking orders through our manufacturing process such as our
    Nashua Advantage program.                                                                                                     
|
| |  | Developing strategic alliances that enhance our
    value.                                                                                                                                                                                                                                                       

As we move ahead with the continued update and
implementation of our strategies, we will continue to focus on
adding value by assessing the profitability of each of our
businesses and the overall strategic fit within our business
model. We will continue to examine acquisitions which add value,
but we will not become over leveraged to obtain the added value.
Our research efforts will focus on new product development that
may enhance our future competitive edge. For example, we expect
to introduce four new toners in 2004 and continue the
development of RFID products. We plan to encourage our customers
to utilize Nashua Advantage, our web-based ordering system. We
plan to seek alliances which will enhance our overall strategies
and profitability.

We will continue to focus on cost containment.
During 2003, we reduced our workforce at a cost of
$1.6 million. While savings of approximately
$2.1 million were obtained in 2003, we expect incremental
savings of approximately $3.9 million in 2004 exclusively
from the workforce reductions taken in 2003. We will continue to
review our cost structure for areas where additional savings can
be obtained. We will review opportunities to reduce the amount
of space currently leased by us and seek to either consolidate
administrative space or eliminate excess leased space if
possible. Also, we will continue to invest in equipment designed
to reduce or contain labor cost, reduce waste and thereby reduce
our overall cost structure.

In the past three years, we have continued to
address legacy issues related to tax matters, employee benefits
and environmental and various other litigation. We have been
successful in resolving the federal tax matters for 1992 through
1994 and addressing employee benefit costs such as pensions and
other postretirement benefits relative to a company of our size.
We plan to continue to address and work to resolve these
outstanding matters.

Our net sales increased 2.0 percent to
$288.9 million in 2003 compared to 2002. Our gross margin
percentage decreased from 19.8 percent in 2002 to 18.6
percent in 2003. Our selling and distribution expenses
decreased, while our administrative expenses increased in 2003.
Our Label Products, Specialty Paper Products and Imaging
Supplies segments all operated profitably in 2003. These
financial results are further discussed in the Consolidated
Results of Operations.

Our 2003 results include contributions from our
strategic acquisitions which consist of the April 2002
acquisition of the assets of Computer Imaging Supplies, known as
CIS, used in the fraud prevention business, the June 2002
acquisition of certain assets of Dietzgen LLC, used in the
wide-format business, and the

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February 2003 acquisition of the assets of The
Label Company, a supplier of supermarket, promotional and
product identification labels. These acquisitions expanded our
product lines, increased our customer base and helped us
increase plant utilization.


During 2003, we experienced the following
significant developments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In December 2003, we acquired the assets of the
    Magellan wide-format graphics product line from PM Co.
    L.L.C.. This acquisition is consistent with our strategy of
    adding value with new products and services that leverage our
    converting and distribution capabilities. Operating activity
    relating to this product line will be reported in our Specialty
    Paper Products segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | In November 2003, we acquired the assets of the
    supermarket label product line from Zebra Technologies, Inc. The
    supermarket label business markets and distributes pressure
    sensitive direct thermal labels used solely for marking
    prepackaged meat, produce, deli and bakery items in
    supermarkets, grocery and convenience stores. Operating activity
    relating to this product line is reported under our Label
    Products segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Our 2003 results were negatively impacted by a
    fourth quarter one-time, non-cash charge of $1.6 million
    related to postretirement healthcare benefits for union
    employees located in New Hampshire. In December 2002, we
    eliminated a postretirement healthcare benefit for all union
    employees retiring after December 31, 2002. The benefit
    provided employees who had 10 years of service and retired
    at age 60 or older with access to medical insurance through
    age 65. In 2002, we recognized a $1.6 million non-cash
    gain for the termination of this postretirement healthcare
    benefit for hourly union employees located in New Hampshire. The
    unions subsequently filed a grievance against the termination of
    the postretirement healthcare benefits for union employees which
    was heard by an arbitrator in July 2003. The arbitrator ruled in
    favor of the unions on October 24, 2003, and we
    subsequently appealed the arbitrators opinion in the
    U.S. District Court in New Hampshire on November 24,
    2003. After filing the appeal of the arbitrators ruling,
    we held unsuccessful discussions with the unions in an attempt
    to resolve and mitigate the impact of the arbitrators
    ruling. Our appeal is currently pending. The postretirement
    benefit is accrued for all 138 union employees located in
    New Hampshire as required by the accounting rules. As of
    December 31, 2003, only 32 employees were eligible for
    the healthcare benefit prior to the expiration date of the
    current union contracts.
|
| |  | In connection with workforce reductions in 2003,
    we incurred severance charges of $1.6 million which were
    offset by approximately $2.1 million of current year
    savings. These workforce reductions reflect our initiatives to
    streamline processes and control costs. The table below shows
    the 2003 severance charges, 2003 savings and annualized
    projected savings by segment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                         |  |               |     |           |  |             |     |           |  |   |     |   |  |   |     | 
|------------------------ |  | ------------- | --- | --------- |  | ----------- | --- | --------- |  | - | --- | - |  | - | --- | 
|                         |  |               |     |          
|                         |  |               |     | Estimated
|                         |  |               |     |          
|                         |  | 2003          |     |           |  | Annualized 
|                         |  | Severance     |     | 2003      |  | 2003        |     | Projected
|Segment                  |  | Charges       |     | Savings   |  | Net Savings |     | Savings  
|                         |  |               |     |           |  |             |     |          
|                         |  |              
|                         |  | (In millions)
|Label Products           |  | $             | .3  |           |  | $           | .2  |           |  | $ | (.1 | ) |  | $ | 1.3 | 
|Specialty Paper Products |  | $             | 1.0 |           |  | $           | 1.6 |           |  | $ | .6  |   |  | $ | 4.0 | 
|Unallocated Corporate    |  | $             | .3  |           |  | $           | .3  |           |  | $ | 0   |   |  | $ | .7  | 
|                         |  |               |     |           |  |             |     |           |  |   |     |   |  |   |     | 
|Total                    |  | $             | 1.6 |           |  | $           | 2.1 |           |  | $ | .5  |   |  | $ | 6.0 | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the fourth quarter of 2003, we incurred a
    one-time $330,000 charge related to the settlement of
    future obligations under an employment contract in which we were
    required to fund a split dollar life insurance policy on behalf
    of our Chief Executive Officer, Andrew Albert. Future funding of
    these types of insurance policies is now prohibited under the
    Sarbanes-Oxley Act. As part of the agreement, Mr. Albert
    repaid Nashua $313,000, in January 2004, for insurance premiums
    previously paid by us. Therefore, the settlement had a
    negligible impact on our cash flow.
|
| |  | In February 2003, we entered into a strategic
    agreement with Parlex Corporation to cooperate in the
    development of flexible circuit technology incorporating
    proprietary printing and plating technologies.                                                                                                                                                                                                                                                                                                                                                                                                   

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | The agreement created an organization, Stratos
    Technology, LLC, of which we own 50 percent, that draws on
    both parties relative expertise in ink and printed circuit
    technology, label converting and the design, application and
    production of flexible circuits. Under the agreement, Stratos
    Technology is working to develop innovative products for use in
    the automotive, cellular and RFID markets. As of February
    2004, Stratos products are still in the development stage.                                                                                                                                                                                                                                                                                                                                        
|
| |  | In February 2003, we acquired the assets and
    assumed certain liabilities of The Label Company from Bunzl
    Distribution and signed a multi-year agreement to supply Bunzl
    with label products. The Label Company had primarily been a
    supplier of supermarket, promotional and product identification
    labels mainly for Bunzl and other customers. The acquisition
    added flexibility to our label manufacturing operations,
    provided additional volume to our coating facility within our
    Specialty Paper Products segment and enhanced our relationship
    with a valued and long-standing customer. The Label Company had
    2002 sales of approximately $9.0 million. Operating
    activity relating to the assets of The Label Company is reported
    under our Label Products segment from the date of acquisition.

During 2002, we experienced the following
significant developments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the fourth quarter of 2002, we recorded a
    non-cash charge of $11.4 million to shareholders
    equity because as of December 31, 2002, the accumulated
    benefit obligations of our company-sponsored pension plans
    exceeded the fair value of the assets of the plans due to
    declines in the fair market value of equities held by the plans
    and decreases in our expected return on plan assets and discount
    rate resulting from current economic trends. This charge was net
    of $7.5 million in tax benefits, which are included in
    other assets and reflect an increase in our deferred tax assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | In October 2002, our Board of Directors approved
    changes to The Nashua Corporation Retirement Plan for Salaried
    Employees, The Supplemental Executive Retirement Plan and
    postretirement benefit plans, which were effective as of
    December 31, 2002. As a result of these changes, we
    recognized a gain of $2.7 million related to the
    elimination of certain benefits related to our retiree medical
    and death benefit plans and a gain of $.2 million from the
    buy out of a portion of existing retirees death benefits,
    largely offset by a loss of $2.7 million related to
    freezing benefits provided by the salaried pension plans. This
    excluded the gain related to the buy out of additional existing
    retirees death benefits, which was completed in the first
    quarter of 2003. Employees impacted by the freeze in pension
    benefits are eligible to participate in Nashuas profit
    sharing plan beginning in 2003. Profit sharing contributions
    must be approved by our Board of Directors and are discretionary.
|
| |  | During the fourth quarter of 2002, we reached an
    agreement with the Appeals office of the United States Internal
    Revenue Service regarding the outstanding proposed assessment of
    federal income tax for the years 1992 to 1994 as more fully
    discussed in Note 7 to our Consolidated Financial
    Statements included in Item 8 of Part II of this
    Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In June 2002, we completed our
    shareholder-approved reincorporation from Delaware to
    Massachusetts. The reincorporation eliminated certain
    restrictions on our ability to borrow funds and our new
    corporate charter increased shareholder rights and reduced our
    corporate expenses. In connection with our reincorporation, our
    authorized capital was reduced from 40 million shares of
    common stock and 2 million shares of preferred stock, each
    with a par value of $1 per share, to 20 million shares
    of common stock, par value $1 per share. As part of the
    reincorporation, the 1,023,068 shares of common stock held
    in treasury were retired with their cost above par value
    allocated on a pro rata basis against additional paid-in capital
    and retained earnings.                                                                                                                                                                                                                                                          
|
| |  | In June 2002, we acquired out of bankruptcy some
    of the assets of Dietzgen LLC, including trademarks, trade
    names, customer lists and certain equipment and inventories.
    Dietzgen, an after-market provider of wide-format digital media
    and imaging supplies for the architectural, engineering and
    construction markets, filed for protection under Chapter 11
    of the U.S. Bankruptcy Code on January 31, 2002.
    Operating activity relating to the assets acquired from Dietzgen
    is reported as part of our Specialty Paper Products segment from
    the date of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In April 2002, we acquired the assets of CIS, a
    privately held manufacturer and marketer of security and fraud
    prevention products for the point-of-sale transaction industry
    and of inkjet and toner cartridges. The products of CIS include
    multi-color ribbons and specialized inks that prevent
    unauthorized duplication of cash register receipts. Operating
    activity relating to the assets acquired from CIS is reported as
    part of our Specialty Paper Products segment from the date of
    acquisition.
|
| |  | During the first quarter of 2002, we entered into
    a new three-year secured financing agreement with LaSalle Bank,
    NA and Fleet National Bank. This agreement provides us with a
    revolving line of credit of up to $30 million and a term
    loan of $10 million as more fully described in Note 5
    to our Consolidated Financial Statements included in Item 8
    of Part II of this Annual Report on Form 10-K.                                                                                                            
|
| |  | Effective January 1, 2002, we eliminated
    goodwill amortization in accordance with Financial Accounting
    Standard 142. Goodwill amortization was $1.7 million
    for 2001. We now evaluate goodwill for impairment under the
    guidelines set forth in FAS 142. We completed the initial
    and annual impairment tests required by FAS 142 and
    concluded that no impairment existed at January 1, 2002,
    November 1, 2002 and November 1, 2003.                                                                            

During 2001, we experienced the following
significant development:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the third quarter of 2001, we discontinued
    our lamination business within our Label Products segment. As a
    result, we recorded restructuring charges totaling
    $4.1 million, of which approximately $3.3 million
    represented non-cash charges relating to the write-off of fixed
    assets and the remainder represented severance and other costs
    associated with the shutdown of this business. In connection
    with this discontinuance, we entered into supply agreements for
    laminated and coated products with The Fasson Roll North America
    division of Avery Dennison. Under the terms of the agreements,
    we are committed to purchase a significant portion of the
    laminated materials we use in our Label Products segment from
    Avery Dennison through December 31, 2005. If we fail to
    meet the minimum purchase volumes specified in the agreements,
    we are subject to financial penalties. We acquired the required
    quantities and were in compliance with the agreements for 2002
    and 2003. Prior to our decision to exit the lamination business,
    we manufactured most of our laminated materials at our Omaha,
    Nebraska location. Our decision to enter into these supply
    agreements and to cease our manufacturing of laminated materials
    increased our reliance on outside suppliers, but eliminated a
    future need for significant capital investment in lamination
    equipment.

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##### Table of Contents



CONSOLIDATED RESULTS OF OPERATIONS



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | The consolidated results of operations
    should be read in conjunction with the individual segment
    results.

|                                                                          |                           |               |      |       |   |      |      |                |   |          |      |       |   |  |       |       |   |  |       |       |  
|------------------------------------------------------------------------- | ------------------------- | ------------- | ---- | ----- | - | ---- | ---- | -------------- | - | -------- | ---- | ----- | - |  | ----- | ----- | - |  | ----- | ----- | -
|                                                                          |                           |               |      |       |   |      |      |               
|                                                                          |                           |               |      |       |   |      |      | Percent Change
|                                                                          |                           |               |      |       |   |      |      |               
|                                                                          |                           |               |      |       |   |      |      | 2003 vs.       |   | 2002 vs.
|                                                                          |                           | 2003          |      | 2002  |   | 2001 |      | 2002           |   | 2001    
|                                                                          |                           |               |      |       |   |      |      |                |   |         
|                                                                          |                           |              
|                                                                          |                           | (In millions)
|Net sales                                                                 |                           |               |      |       |   |      |      |                |   |          |      |       |   |  |       |       |   |  |       |      
|                                                                          | Label Products            |               | $    | 101.8 |   |      | $    | 100.8          |   |          | $    | 107.9 |   |  |       | 1.0   |   |  |       | (6.6  | )
|                                                                          | Specialty Paper Products  |               |      | 169.0 |   |      |      | 160.7          |   |          |      | 150.4 |   |  |       | 5.2   |   |  |       | 6.9   |  
|                                                                          | Imaging Supplies          |               |      | 23.5  |   |      |      | 24.0           |   |          |      | 24.4  |   |  |       | (2.1  | ) |  |       | (1.6  | )
|                                                                          | Eliminating               |               |      | (5.4  | ) |      |      | (2.3           | ) |          |      | (10.2 | ) |  |       |      |   |  |       |      |  
|                                                                          |                           |               |      |       |   |      |      |                |   |          |      |       |   |  |       |       |   |  |       |      
|                                                                          | Consolidated Net Sales    |               |      | 288.9 |   |      |      | 283.2          |   |          |      | 272.5 |   |  |       | 2.0   |   |  |       | 3.9   |  
|Gross margin                                                              |                           |               |      |       |   |      |      |                |   |          |      |       |   |  |       |       |   |  |       |      
|                                                                          | Label Products            |               |      | 17.3  |   |      |      | 17.9           |   |          |      | 20.0  |   |  |       | (3.4  | ) |  |       | (10.5 | )
|                                                                          | Specialty Paper Products  |               |      | 31.9  |   |      |      | 32.6           |   |          |      | 29.2  |   |  |       | (2.1  | ) |  |       | 11.6  |  
|                                                                          | Imaging Supplies          |               |      | 4.6   |   |      |      | 5.6            |   |          |      | 6.5   |   |  |       | (17.9 | ) |  |       | (13.8 | )
|                                                                          | Eliminating               |               |      |      |   |      |      |               |   |          |      | .1    |   |  |       |      |   |  |       |      |  
|                                                                          |                           |               |      |       |   |      |      |                |   |          |      |       |   |  |       |       |   |  |       |      
|                                                                          | Consolidated Gross margin |               |      | 53.8  |   |      |      | 56.1           |   |          |      | 55.8  |   |  |       | (4.1  | ) |  |       | .4    |  
|Gross margin %                                                            |                           |               | 18.6 | %     |   |      | 19.8 | %              |   |          | 20.5 | %     |   |  |      |       |   |  |      |      
|Selling and distribution expenses                                         |                           |               | 27.2 |       |   |      | 28.1 |                |   |          | 28.8 |       |   |  | (3.2  | )     |   |  | (2.4  | )    
|General and administrative expenses                                       |                           |               | 20.6 |       |   |      | 19.7 |                |   |          | 19.3 |       |   |  | 4.3   |       |   |  | 2.1   |      
|Research and development expenses                                         |                           |               | 2.5  |       |   |      | 3.1  |                |   |          | 3.2  |       |   |  | (19.4 | )     |   |  | (3.1  | )    
|Net loss (gain) on curtailment of pension
    and postretirement benefits |                           |               | 1.6  |       |   |      | (.2  | )              |   |          |     |       |   |  |      |       |   |  |      |      
|Loss from equity investments                                              |                           |               | .5   |       |   |      | .1   |                |   |          |     |       |   |  |      |       |   |  |      |      
|Restructuring and other unusual
    (income) charges                      |                           |               | (.1  | )     |   |      | (.1  | )              |   |          | 3.0  |       |   |  |      |       |   |  |      |      
|Goodwill amortization                                                     |                           |               |     |       |   |      |     |                |   |          | 1.6  |       |   |  |      |       |   |  |      |      
|Interest expense, net                                                     |                           |               | 1.3  |       |   |      | 1.5  |                |   |          | 2.7  |       |   |  | (13.3 | )     |   |  | (44.4 | )    
|Income (loss) before income taxes                                         |                           |               | .2   |       |   |      | 3.8  |                |   |          | (2.8 | )     |   |  | (94.7 | )     |   |  | 235.7 |      
|Net income (loss)                                                         |                           | $             | .1   |       |   | $    | 2.3  |                |   | $        | (2.4 | )     |   |  | (95.7 | )     |   |  | 195.8 |      

Our net sales were $288.9 million in 2003,
an increase of $5.7 million compared to $283.2 million
in 2002, which increased $10.7 million compared to
$272.5 million in 2001.



| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The 2.0 percent increase from 2002 to 2003
    was primarily due to increased sales in our Specialty Paper
    Products segment partially offset by a slight decrease in sales
    in our Imaging Supplies segment.                                                                                                 
|
| |  | The 3.9 percent increase from 2001 to 2002
    was primarily due to increased sales in our Specialty Paper
    Products segment, which offset sales declines in our Imaging
    Supplies and Label Products segments, which are further
    discussed below under Results of Operations by Reportable
    Segment.

Our gross margin was $53.8 million in 2003
compared to $56.1 million in 2002 and $55.8 million in
2001. Our operating gross margin percentage decreased to
18.6 percent in 2003 from 19.8 percent in 2002 and
20.5 percent in 2001.



| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The margin percent decrease from 2002 to 2003 was
    a result of lower margins in all of our segments. The
    $2.3 million decrease in gross margin in 2003 was due
    primarily to an unfavorable product mix, pricing pressures, and
    volume declines within some of our product lines.

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##### Table of Contents





| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The decrease in the gross margin percentage in
    2002 was due to declines in our Label Products and Imaging
    Supplies segments, which was partially offset by an increase in
    gross margin percentage for our Specialty Paper Products segment.
|
| |  | Gross margin for each of our business segments is
    discussed in detail below under Results of Operations by
    Reportable Operating Segment.                                                                                                     

Selling and distribution expenses decreased to
$27.2 million in 2003 compared to $28.1 million in
2002 and $28.8 million in 2001. As a percent of sales,
selling and distribution expenses decreased to 9.4 percent
in 2003 from 9.9 percent in 2002 and 10.6 percent in
2001.



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increases of $.7 million in expenses in the
    Specialty Paper Products segment were more than offset by
    reductions of $.6 million in the Imaging Supplies segment
    and $1.0 million in the Label Products segment in 2003.
|
| |  | The $.7 million decline in 2002 was due to
    decreases in our Imaging Supplies and Label Products segments.                                                                                                                      
|
| |  | Selling and distribution expenses for each of our
    business segments is discussed in detail below under
    Results of Operations by Reportable Operating
    Segment.                                                        

General and administrative expenses increased
$.9 million to $20.6 million in 2003 compared to
$19.7 million in 2002, which increased $.4 million
compared to $19.3 million in 2001. As a percent of sales,
general and administrative expenses were 7.1 percent in
2003 compared to 7.0 percent in 2002 and 7.1 percent
in 2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The increase in 2003 was driven by increases of
    $1.2 million in expenses in our Specialty Paper Products
    segment offsetting a $.3 million decrease in corporate
    expenses. The decrease in corporate expenses in 2003 was
    primarily due to lower legal fees, training costs, staffing and
    pension administration costs which more than offset a
    $.3 million expense relating to severance costs associated
    with the reduction of corporate staff and a $.3 million
    expense pertaining to a settlement of obligations under our
    Chief Executive Officers employment contract.                                                 
|
| |  | In 2002 compared to 2001, a reduction in general
    and administrative expenses by our Imaging Supplies segment was
    more than offset by increases in our other segments and in our
    corporate administrative expenses. The 2002 increase in
    corporate expenses primarily resulted from increased legal and
    consulting fees associated with freezing our salaried pension
    plan benefits and eliminating certain postretirement benefits,
    our reincorporation in Massachusetts and our defense of the
    litigation discussed in Note 11 to our Consolidated
    Financial Statements included in Item 8 of Part II of
    this Form 10-K.
|
| |  | General and administrative expenses for each of
    our business segments is discussed below under Results of
    Operations by Reportable Operating Segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Research and development expenses decreased to
$2.5 million in 2003 compared to $3.1 million in 2002
and $3.2 million in 2001. As a percent of sales, research
and development expenses were .9 percent in 2003 compared
to 1.1 percent in 2002 and 1.2 percent in 2001.



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The $.7 million decrease in 2003 was
    primarily due to a shift in quality control related costs from
    research and development to manufacturing in our Specialty Paper
    Products segment.
|
| |  | Research and development remained primarily
    unchanged from 2001 to 2002.                                                                                                                      

Net interest expense declined slightly to
$1.3 million in 2003 compared to $1.5 million in 2002
and $2.7 million in 2001. Our weighted average annual
interest rate on long-term debt declined to 3.3 percent in

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##### Table of Contents



2003 and 4.6 percent in 2002, compared to
8.0 percent for 2001. Our average balance on long-term debt
increased $1.2 million from 2002 to 2003 and declined
$8.8 million from 2001 to 2002.




| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | The decline in 2003 from 2002 was primarily due
    to lower interest rates.             
|
| |  | The decline of $1.2 million in 2002 was due
    to reduced debt and lower interest rates.

During 2003, we recognized a $1.6 million
expense resulting from a reversal of a curtailment adjustment
related to postretirement healthcare benefits for union
employees located in New Hampshire as discussed above in the
significant developments section. During 2002, we recognized a
net gain of $.2 million resulting from our decision to freeze
our salaried pension plan benefits and eliminate certain
postretirement benefit plans.

Net restructuring and unusual income of $68,000
for 2003 and $88,000 for 2002 represent adjustments to our
previously established restructuring reserves.

Our net restructuring and unusual charge of
$3.0 million for 2001 included charges of $4.1 million
related to exiting the lamination business in our Label Products
segment, $.6 million associated with the outsourcing of our
toner filling operation within our Imaging Supplies segment and
a net $.3 million of other restructuring and unusual items,
partially offset by unusual income of $1.4 million
resulting from a favorable legal settlement associated with an
antitrust class action suit and $.6 million from the sale
of unutilized land in Merrimack, NH.

Details of our restructuring reserves during 2003
and 2002, which are included in accrued expenses, were as
follows:

|                                                             |  |                |     |             |  |          |     |          |  |   |     |   |  |   |    | 
|------------------------------------------------------------ |  | -------------- | --- | ----------- |  | -------- | --- | -------- |  | - | --- | - |  | - | -- | 
|                                                             |  | Reserve        |     |             |  |          |     | Reserve 
|                                                             |  | Balance        |     | Adjustments |  | Current  |     | Balance 
|                                                             |  | Dec. 31,       |     | to Prior    |  | Year     |     | Dec. 31,
|                                                             |  | 2002           |     | Provision   |  | Payments |     | 2003    
|                                                             |  |                |     |             |  |          |     |         
|                                                             |  |               
|                                                             |  | (In thousands)
|2003 Activity:                                               |  |                |     |             |  |          |     |          |  |   |     |   |  |   |    | 
|Provisions for severance related to workforce
    reductions |  | $              | 166 |             |  | $        | (68 | )        |  | $ | (37 | ) |  | $ | 61 | 
|                                                             |  |                |     |             |  |          |     |          |  |   |     |   |  |   |    | 
|Total                                                        |  | $              | 166 |             |  | $        | (68 | )        |  | $ | (37 | ) |  | $ | 61 | 
|                                                             |  |                |     |             |  |          |     |          |  |   |     |   |  |   |    | 

|                                                             |  |                |       |             |  |          |      |            |  |          |      |   |  |   |      |   |  |   |     | 
|------------------------------------------------------------ |  | -------------- | ----- | ----------- |  | -------- | ---- | ---------- |  | -------- | ---- | - |  | - | ---- | - |  | - | --- | 
|                                                             |  | Reserve        |       |             |  |          |      |            |  | Reserve 
|                                                             |  | Balance        |       | Adjustments |  | Current  |      |            |  | Balance 
|                                                             |  | Dec. 31,       |       | to Prior    |  | Year     |      | Non-cash   |  | Dec. 31,
|                                                             |  | 2001           |       | Provision   |  | Payments |      | Write-offs |  | 2002    
|                                                             |  |                |       |             |  |          |      |            |  |         
|                                                             |  |               
|                                                             |  | (In thousands)
|2002 Activity:                                               |  |                |       |             |  |          |      |            |  |          |      |   |  |   |      |   |  |   |     | 
|Provisions for severance related to workforce
    reductions |  | $              | 1,179 |             |  | $        | (133 | )          |  | $        | (880 | ) |  | $ |     |   |  | $ | 166 | 
|Provisions for assets to be sold or discarded                |  |                | 386   |             |  |          | 45   |            |  |          |     |   |  |   | (431 | ) |  |   |    | 
|Other                                                        |  |                | 422   |             |  |          |     |            |  |          | (24  | ) |  |   | (398 | ) |  |   |    | 
|                                                             |  |                |       |             |  |          |      |            |  |          |      |   |  |   |      |   |  |   |     | 
|Total                                                        |  | $              | 1,987 |             |  | $        | (88  | )          |  | $        | (904 | ) |  | $ | (829 | ) |  | $ | 166 | 
|                                                             |  |                |       |             |  |          |      |            |  |          |      |   |  |   |      |   |  |   |     | 

Our income before income taxes was
$.2 million in 2003, compared to $3.8 million in 2002
and loss before income taxes of $2.8 million in 2001. The
$3.6 million decrease in our pretax income from 2002 to
2003 was primarily due to lower profitability in our Specialty
Paper Products and Imaging Supplies segments and an incurred
expense resulting from the reversal of a curtailment adjustment
related to the postretirement healthcare benefits for union
employees located in New Hampshire, which were partially offset
by higher profitability in our Label segment.

The $6.6 million increase in income before
income taxes for 2002 compared to 2001 was primarily due to the
restructuring and unusual charge of $3.0 million included
in 2001, which is described above. Our 2002

19



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income before income taxes, goodwill
amortization, restructuring and other unusual items and a net
gain on freezing the salaried pension plan benefits and
eliminating certain postretirement benefits, improved by
$1.7 million compared to 2001. This $1.7 million
improvement was comprised primarily of increased profitability
in our Imaging Supplies segment of $.7 million and in our
Specialty Paper Products segment of $1.6 million, as well
as a reduction in net interest expense of $1.2 million,
partially offset by a decrease in the profitability of our Label
Products segment of $1.2 million and an increase in
corporate general and administrative expenses of
$.3 million. Pretax results for 2002 include a net
workers compensation refund of approximately
$.4 million relating to experience rate adjustments for
prior years. Pretax results for 2001 included pretax income of
$.5 million from the sale of part of our Projection
Systems technology.


Our annual effective income tax rate in 2003 was
53.4 percent and is higher than the U.S. statutory rate
principally due to the impact of state income taxes and
non-deductible expenses. The increase in the annual effective
income tax rate between 2003 and 2002 is primarily due to the
impact of lower income and non-deductible expenses. The change
in the estimated annual effective income tax rate from a benefit
of 12.0 percent for 2001 to a provision of
39.5 percent for 2002 is primarily due to the impact of
non-deductible goodwill amortization during 2001.

Net income for 2003 was $.1 million, or $.02
per share, a decrease from $2.3 million, or $.40 per share,
in 2002. Net income for 2002 improved $4.8 million, or
$0.83 per share, as compared to 2001 primarily due to
improved operating results and reductions in goodwill
amortization due to accounting changes and net interest expense
as detailed above. Net income for 2002 was $2.3 million, or
$0.40 per share, compared to a loss of $2.4 million, or
$0.43 per share, for 2001.

RESULTS OF OPERATIONS BY REPORTABLE OPERATING
SEGMENT

Label Products Segment

|                                                                    |  |               |       |      |  |      |       |                |  |          |       |   |  |  |       |   |  |  |       |  
|------------------------------------------------------------------- |  | ------------- | ----- | ---- |  | ---- | ----- | -------------- |  | -------- | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                                                    |  |               |       |      |  |      |       |               
|                                                                    |  |               |       |      |  |      |       | Percent Change
|                                                                    |  |               |       |      |  |      |       |               
|                                                                    |  |               |       |      |  |      |       | 2003 vs.       |  | 2002 vs.
|                                                                    |  | 2003          |       | 2002 |  | 2001 |       | 2002           |  | 2001    
|                                                                    |  |               |       |      |  |      |       |                |  |         
|                                                                    |  |              
|                                                                    |  | (In millions)
|Net sales                                                           |  | $             | 101.8 |      |  | $    | 100.8 |                |  | $        | 107.9 |   |  |  | 1.0   |   |  |  | (6.6  | )
|Gross margin                                                        |  |               | 17.3  |      |  |      | 17.9  |                |  |          | 20.0  |   |  |  | (3.4  | ) |  |  | (10.5 | )
|Gross margin %                                                      |  |               | 17.0  | %    |  |      | 17.7  | %              |  |          | 18.5  | % |  |  |      |   |  |  |      |  
|Selling and distribution expenses                                   |  |               | 7.4   |      |  |      | 8.4   |                |  |          | 9.6   |   |  |  | (11.9 | ) |  |  | (12.5 | )
|General and administrative expenses                                 |  |               | 3.8   |      |  |      | 3.8   |                |  |          | 3.6   |   |  |  |      |   |  |  | 5.6   |  
|Other                                                               |  |               | .3    |      |  |      | .2    |                |  |          | .1    |   |  |  | 33.3  |   |  |  | 50.0  |  
|Income from operations before interest, taxes and
    unusual items |  | $             | 5.8   |      |  | $    | 5.5   |                |  | $        | 6.7   |   |  |  | 5.5   |   |  |  | (17.9 | )

Net sales for our Label Products segment
increased to $101.8 million in 2003 from
$100.8 million in 2002, a decrease from $107.9 million
in 2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The increase in 2003 was driven by incremental
    supermarket sales of $7.7 million from the acquired Label
    Company business, which more than offset a decrease in sales of
    $5.7 million in the remaining supermarket thermal product
    line. The lower supermarket thermal sales were primarily due to
    the loss of a major customer, as well as continued pricing
    pressures due to overcapacity in the label industry. Other
    drivers include $2.5 million of increased sales in the
    automatic identification product line, offset by decreases of
    $.7 million in the retail shelf product line,
    $1.4 million in the EDP product line, $.4 million in
    the ticket product line, $.5 million in the inform product
    line and $1.5 million in other product lines. The increase
    in automatic identification label sales was the result of new
    business from a five-year contract executed in the fourth
    quarter of 2002. The decrease in retail shelf sales was due to
    the reduction of inventory by a major customer. The decrease in
    the ticket product line sales is primarily due to the loss of a
    major cinema customer due to customer consolidation within the
    theater

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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | industry. Our sales in the EDP product line were
    negatively impacted by a sluggish economy, changing technology
    and lower sales to charitable organizations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Our Label Products segment reported a
    $7.1 million, or 6.6 percent, decline in sales in 2002
    compared to 2001 due to our exiting the lamination business
    during the third quarter of 2001. Sales for our discontinued
    lamination business were $10.7 million for 2001. Excluding
    sales for the discontinued lamination business, sales for 2002
    improved by approximately $3.6 million compared to the
    prior year. Increased volume in our automatic identification,
    retail shelf, ticket and inform product lines was partially
    offset by overall pricing pressures stemming from current
    economic conditions and overcapacity in the label industry, as
    well as by volume declines in our supermarket thermal product
    line. Sales improvements in our automatic identification and
    inform product lines were driven by growth in the transportation
    label product used for automatic identification, as well as new
    business. Sales declines for our supermarket thermal product
    line were due to pricing pressures, the decision by a customer
    to produce labels internally and the movement of some existing
    customers to outsourced centralized meatpacking, partially
    offset by new lower margin business with other customers.

Gross margin for the Label Products segment
decreased $.6 million to $17.3 million in 2003
compared to $17.9 million in 2002 and $20.0 million in
2001. The gross margin percentage decreased to 17.0 percent
in 2003 compared to 17.7 percent in 2002 and
18.5 percent in 2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The gross margin decrease of $.6 million in
    2003 from 2002 was primarily due to unfavorable product mix and
    pricing pressures exacerbated by certain Internet auctions and
    the overcapacity in the label industry, partially offset by
    improved manufacturing efficiencies and material cost reductions.                                                                                                                                                                
|
| |  | Gross margin percentage for our Label Products
    segment declined in 2002 from 2001, primarily due to unabsorbed
    fixed manufacturing costs in our Omaha facility and pricing
    pressures stemming from economic conditions and industry
    overcapacity. Manufacturing costs for the year were negatively
    impacted by the decreased utilization and unfavorable fixed cost
    absorption at our Omaha, Nebraska plant caused by our exit from
    the lamination business.

Selling and distribution expenses for our Label
Products segment declined $1.0 million to $7.4 million
in 2003 compared to $8.4 million in 2002 and
$9.6 million in 2001. As a percentage of sales, selling and
distribution expenses declined to 7.3 percent in 2003
compared to 8.4 percent in 2002 and 8.9 percent in
2001. The decrease in 2003 resulted primarily from lower direct
selling expenses and lower distribution costs, which was
partially offset with severance costs. The decrease in 2002
resulted primarily from lower freight costs and bad debt
expense. Freight costs improved as we transitioned to a new
freight carrier in 2002. Bad debt expense was lower in 2002 due
to the recovery of receivables previously reserved as
uncollectible.

General and administrative expenses for our Label
Products segment remained unchanged at $3.8 million in 2003
and 2002 and increased from $3.6 million in 2001. As a
percent of sales, general and administrative expenses remained
unchanged at 3.8 percent for 2003 and 2002 and increased
from 3.3 percent in 2001. The $.2 million increase in
2002 was primarily due to incremental costs associated with the
integration of information systems during 2002 and higher bonus
expenses in 2002.

Our Label Products segments income from
operations before interest, taxes and unusual items increased to
$5.8 million in 2003 compared to $5.5 million in 2002
and decreased from $6.7 million in 2001.

It appears that a future trend in the label
business will be the conversion of barcode labels used in
warehousing and distribution into radio frequency identification
labels. This trend is being mandated by at least one major
retailer. As a Company, we are investing in technology and
know-how that will allow us to print and convert RFID labels. We
believe that the conversion from barcode to RFID will eventually
have a significant impact in the label markets.

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##### Table of Contents



Specialty Paper Products Segment

|                                                                    |  |               |       |      |  |      |       |                |  |          |       |   |  |  |       |   |  |  |      | 
|------------------------------------------------------------------- |  | ------------- | ----- | ---- |  | ---- | ----- | -------------- |  | -------- | ----- | - |  |  | ----- | - |  |  | ---- | 
|                                                                    |  |               |       |      |  |      |       |               
|                                                                    |  |               |       |      |  |      |       | Percent Change
|                                                                    |  |               |       |      |  |      |       |               
|                                                                    |  |               |       |      |  |      |       | 2003 vs.       |  | 2002 vs.
|                                                                    |  | 2003          |       | 2002 |  | 2001 |       | 2002           |  | 2001    
|                                                                    |  |               |       |      |  |      |       |                |  |         
|                                                                    |  |              
|                                                                    |  | (In millions)
|Net sales                                                           |  | $             | 169.0 |      |  | $    | 160.7 |                |  | $        | 150.4 |   |  |  | 5.2   |   |  |  | 6.9  | 
|Gross margin                                                        |  |               | 31.9  |      |  |      | 32.6  |                |  |          | 29.2  |   |  |  | (2.1  | ) |  |  | 11.6 | 
|Gross margin %                                                      |  |               | 18.9  | %    |  |      | 20.3  | %              |  |          | 19.4  | % |  |  |      |   |  |  |     | 
|Selling and distribution expenses                                   |  |               | 18.3  |      |  |      | 17.6  |                |  |          | 16.4  |   |  |  | 4.0   |   |  |  | 7.3  | 
|General and administrative expenses                                 |  |               | 8.0   |      |  |      | 6.8   |                |  |          | 6.3   |   |  |  | 17.6  |   |  |  | 7.9  | 
|Research and development expenses                                   |  |               | .9    |      |  |      | 1.7   |                |  |          | 1.5   |   |  |  | (47.1 | ) |  |  | 13.3 | 
|Other                                                               |  |               | .3    |      |  |      |      |                |  |          | .1    |   |  |  |      |   |  |  |     | 
|Income from operations before interest, taxes and
    unusual items |  | $             | 4.4   |      |  | $    | 6.5   |                |  | $        | 4.9   |   |  |  | (32.3 | ) |  |  | 32.7 | 

Our Specialty Paper Products segment reported an
$8.3 million, or 5.2 percent, increase in sales in
2003 and a $10.3 million, or 6.9 percent, increase in
sales in 2002 compared to 2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The increase in 2003 resulted from increased
    sales of $10.2 million of thermal products,
    $6.5 million of wide-format products and $1.7 million
    of our fraud prevention products which were partially offset by
    a $5.7 million decrease in sales of bond, dry gum,
    carbonless, ticket and tag, ribbon and fax paper products,
    $1.9 million decrease in sales volume of cut-sheet paper
    products, $1.2 million decrease in sales of heat seal
    products, and a net decrease in sales of $1.3 million of
    other product lines. The continued shift in printing
    technologies from impact to thermal printers resulted in lower
    sales of bond and carbonless products and increased thermal
    product sales. In addition, we gained incremental volume from an
    additional location from an existing thermal customer. The
    increase in sales of our wide-format products resulted from the
    Dietzgen product line acquired in June 2002, as well as gaining
    major customers during the third quarter of 2003. The increase
    in the fraud prevention product sales is related to the Computer
    Imaging Supplies acquisition in April 2002. The decline in
    carbonless, dry gum, and heat seal are due to movement to
    competing technologies as these products become mature. The
    movement to kiosk in the airline boarding pass market caused a
    decline in ticket and tag products. The lower cut-sheet paper
    products sales resulted from selling our customer list and
    exiting this product line during the third quarter of 2003. We
    expect to offset the decline in mature product lines with
    thermal growth through the introduction of new products with new
    applications.                                                 
|
| |  | The improvement in sales in 2002 was primarily
    due to the contribution of our acquisitions completed during the
    second quarter of 2002. Incremental sales for the Dietzgen
    wide-format business and Computer Imaging Supplies fraud
    prevention business were approximately $11.1 million in
    2002. Excluding sales for these newly acquired businesses, sales
    for our Specialty Paper Products segment declined
    $.8 million compared to the prior year as volume
    improvements in our thermal, dry gum and financial product
    lines, were more than offset by volume declines and pricing
    pressures for our bond paper, cut-sheet paper, ticket and tag,
    retail, heat seal, carbonless paper and ribbon product lines.
    Sales for our thermal products increased primarily as a result
    of higher volumes from a supply agreement we entered into as a
    result of exiting our lamination business. This product line
    also benefited from a continued shift in technology from impact
    to thermal transaction printers. Our dry gum sales were
    positively impacted by capturing the sales of a major dry gum
    manufacturer who ceased manufacturing. Sales volume for our
    financial product line improved with the addition of a
    significant new customer. Sales in our heat seal product line
    declined primarily due to technology changes. Sales for our
    cut-sheet paper product line declined due to competitive
    pricing. Our bond paper, retail fax paper, carbonless and ribbon
    product lines, also in mature markets, were negatively impacted
    by a transition to new printing technologies. Sales for our
    ticket and tag product line were impacted by competitive pricing
    and lower utilization of airline tickets.

22



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##### Table of Contents



Gross margin for our Specialty Paper Products
segment declined $.7 million in 2003 compared to an
increase of $3.4 million in 2002. The gross margin
percentage declined to 18.9 percent in 2003 compared to
20.3 percent in 2002 and 19.4 percent in 2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The gross margin percentage decline in 2003 was
    due to an unfavorable sales mix, competitive pricing pressure
    for thermal products, severance costs and workers compensation
    expenses. Margins declined due to increased sales of our lower
    margin thermal products, lower sales in our higher margin heat
    seal product line and lower absorption of production costs
    related to the decrease in production volume in our paper
    coating business. As indicated above in the segment sales
    section, mature product lines such as heat seal and dry gum,
    which provide significantly higher margins than thermal
    products, are declining. The rate of sales declines for these
    mature product lines may have an impact on the future margin in
    this segment.
|
| |  | The gross margin percentage improvement in 2002
    was favorably impacted by a larger percentage of higher margin
    dry gum, thermal and financial products sales and a smaller
    percentage of lower margin carbonless and cut-sheet paper
    products sales. During 2002, we were able to lower costs through
    significant raw material price decreases and process and
    reformulation improvements for existing products. We also made
    capital improvements that reduced manufacturing costs.
    Additionally, our plant utilization improved through increased
    volume from our acquisitions during the second quarter of 2002,
    and a supply agreement we entered into with a major customer
    during the third quarter of 2001.                                            

Selling and distribution expenses for our
Specialty Paper Products segment increased $.7 million in
2003 and $1.2 million in 2002. The increase in 2003 was
driven by higher freight expenses associated with the increase
in our wide-format sales, and a full-year impact of the Dietzgen
and Computer Imaging Supplies volumes and selling expenses,
which were partially offset by other cost reductions. The
increase in 2002 was driven by incremental volume and selling
expenses associated with the Dietzgen and Computer Imaging
Supplies businesses we acquired in the second quarter of 2002,
which were partially offset by decreased freight expense from
the transition to a new freight carrier in 2002.

General and administrative expenses for our
Specialty Paper Products segment increased $1.2 million in
2003 and $.5 million in 2002. The increase in 2003 was
primarily due to increased expenses associated with the two
acquired product lines and severance costs. The increase in 2002
was due to our acquisitions during the second quarter of 2002.

Research and development expenses decreased
$.7 million in 2003 and increased $.2 million in 2002.
The decrease in 2003 was primarily due to a shift in cost from
research and development to manufacturing. The increase in 2002
was primarily due to spending on printed circuits technology.

Our Specialty Paper Products segments
income from operations before interest, taxes and unusual items
decreased $2.2 million in 2003 compared to an increase of
$1.6 million in 2002. The decrease in 2003 was primarily
due to lower sales and gross margin percentage in our coating
business as well as higher operating expenses. The increase in
2002 was primarily due to increased sales and an improved gross
margin percentage, partially offset by increases in selling and
distribution expenses, administrative expenses and in research
and development costs.

23



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##### Table of Contents



Imaging Supplies Segment

|                                                                    |  |               |      |      |  |      |      |                |  |          |      |   |  |  |       |   |  |  |       |  
|------------------------------------------------------------------- |  | ------------- | ---- | ---- |  | ---- | ---- | -------------- |  | -------- | ---- | - |  |  | ----- | - |  |  | ----- | -
|                                                                    |  |               |      |      |  |      |      |               
|                                                                    |  |               |      |      |  |      |      | Percent Change
|                                                                    |  |               |      |      |  |      |      |               
|                                                                    |  |               |      |      |  |      |      | 2003 vs.       |  | 2002 vs.
|                                                                    |  | 2003          |      | 2002 |  | 2001 |      | 2002           |  | 2001    
|                                                                    |  |               |      |      |  |      |      |                |  |         
|                                                                    |  |              
|                                                                    |  | (In millions)
|Net sales                                                           |  | $             | 23.5 |      |  | $    | 24.0 |                |  | $        | 24.4 |   |  |  | (2.1  | ) |  |  | (1.6  | )
|Gross margin                                                        |  |               | 4.6  |      |  |      | 5.6  |                |  |          | 6.5  |   |  |  | (17.9 | ) |  |  | (13.8 | )
|Gross margin %                                                      |  |               | 19.6 | %    |  |      | 23.4 | %              |  |          | 26.7 | % |  |  |      |   |  |  |      |  
|Selling and distribution expenses                                   |  |               | 1.5  |      |  |      | 2.1  |                |  |          | 2.6  |   |  |  | (28.6 | ) |  |  | (19.2 | )
|General and administrative expenses                                 |  |               | 1.1  |      |  |      | 1.1  |                |  |          | 2.1  |   |  |  |      |   |  |  | (47.6 | )
|Research and development expenses                                   |  |               | 1.5  |      |  |      | 1.5  |                |  |          | 1.6  |   |  |  |      |   |  |  | (6.3  | )
|Other                                                               |  |               | .1   |      |  |      |     |                |  |          |     |   |  |  |      |   |  |  |      |  
|Income from operations before interest, taxes and
    unusual items |  | $             | .4   |      |  | $    | .9   |                |  | $        | .2   |   |  |  | (55.6 | ) |  |  | 350.0 |  

Our Imaging Supplies segment sales were
$23.5 million in 2003 compared to $24.0 million in
2002 and $24.4 million in 2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The $.5 million, or 2.1 percent,
    decline in sales in 2003 was driven by a decrease in sales
    volume of Ricoh, Xerox, Océ and Kodak compatible toners,
    which were partially offset by an increase in sales of IBM
    compatible toners and resin products. The lower volume of Ricoh,
    Xerox, Océ and Kodak compatible toners resulted both from
    products that are nearing the end of their life cycle and
    difficulties in commercializing certain toners. We expect that
    the end of life products will continue to deteriorate. We also
    expect that new Ricoh and Océ compatible toner products in
    2004 will help to replace eroding sales for older machines. The
    increase in IBM compatible toners and resin sales is the result
    of the addition of new customers in 2003.                                                                                
|
| |  | The $.4 million, or 1.6 percent,
    decline in sales in 2002 was driven by a decrease in sales
    volume of Xerox, IBM and Océ compatible toners, which were
    partially offset by an increase in sales of Ricoh compatible
    toners and resin products. The lower volume of Xerox and
    Océ compatible toners resulted from products nearing the
    end of their life cycle. The decrease in IBM compatible sales
    resulted from a loss of a customer in 2002. The increase in
    Ricoh compatible sales was driven by incremental sales of new
    products, which were partially offset by lower export sales. The
    increases in resin sales were driven by a new customer in 2002
    as well as new product offerings to existing customers. We also
    experienced a shift away from end-user customers and more
    towards value-added distributors with lower costs to serve.

The gross margin for our Imaging Supplies segment
declined to $4.6 million in 2003 compared to
$5.6 million in 2002 and $6.5 million in 2001. The
gross margin percentage decreased to 19.6 percent in 2003
compared to 23.4 percent in 2002 and 26.7 percent in
2001.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The $1.0 million decline in gross margin in
    2003 was primarily driven by unfavorable changes in our product
    mix. Our product mix was negatively impacted by lower sales
    volume of some higher margin toners.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The $.9 million decline in gross margin in
    2002 was primarily due to changes in product mix and
    distribution channel mix, offset partially by savings from
    outsourcing our filling operation. Our product mix was
    negatively impacted by a drop in sales for our higher margin
    Xerox compatible developers. A shift in distribution channels
    towards value-added distributors had an unfavorable impact on
    gross margin, however, it had a favorable impact on our
    distribution costs. The savings from outsourcing our filling
    operation which became mainly operational in the fourth quarter
    of 2002 were approximately $.3 million.

Selling and distribution expenses for our Imaging
Supplies segment declined $.6 million from 2002 to 2003 and
$.5 million from 2001 to 2002. Decreases in 2003 and 2002
were primarily driven by lower headcount

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as well as lower distribution costs. Decreases in
2002 were due to a shift in our distribution channels to
customers requiring lower selling and distribution costs, as
well as aggressive cost containment measures including cost
savings from the consolidation of our customer service
department.


General and administrative expenses for our
Imaging Supplies segment were unchanged at $1.1 million in
2003 and 2002 and declined $1.0 million in 2002 compared to
2001. The decrease in 2002 was due to a decrease in personnel
and lower retention bonuses.

Research and development expenses remained
unchanged at $1.5 million in 2003 and 2002 and declined
from $1.6 million in 2001.

Income from operations before interest, taxes and
unusual items for our Imaging Supplies segment was
$.4 million in 2003 compared to $.9 million in 2002
and $.2 million in 2001.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL
CONDITION

Our primary sources of liquidity are cash flow
provided by operations and our revolving credit facility with
Lasalle Bank, NA and Fleet National Bank. Set forth below is a
summary of our cash activity for the years ended
December 31, 2001, 2002 and 2003:

|                                      |  |                                 |       |      |  |      |      |   |  |   |       |  
|------------------------------------- |  | ------------------------------- | ----- | ---- |  | ---- | ---- | - |  | - | ----- | -
|                                      |  |                                
|                                      |  | For the Years Ended December 31
|                                      |  |                                
|Cash provided by (used in):           |  | 2003                            |       | 2002 |  | 2001
|                                      |  |                                 |       |      |  |     
|                                      |  |                                
|                                      |  | (In millions)                  
|Operating activities                  |  | $                               | 8.6   |      |  | $    | 6.1  |   |  | $ | 19.7  |  
|Investing activities                  |  |                                 | (10.6 | )    |  |      | (6.0 | ) |  |   | (1.0  | )
|Financing activities                  |  |                                 | 2.6   |      |  |      | 0    |   |  |   | (20.4 | )
|Activities of discontinued operations |  |                                 | (.5   | )    |  |      | (.1  | ) |  |   | 1.7   |  
|                                      |  |                                 |       |      |  |      |      |   |  |   |       |  
|Increase in cash and cash equivalents |  | $                               | 0.1   |      |  | $    | 0    |   |  | $ | 0     |  
|                                      |  |                                 |       |      |  |      |      |   |  |   |       |  

Cash provided by operating
activities

Cash from operations of $8.6 million during
2003 was generated from positive working capital changes that
included an increase in accounts payable primarily in our Label
Products segment partially offset by increases in inventory in
our Specialty Paper Products and Imaging Supplies segments.
Inventories in the Specialty Paper Products segment were higher
than 2002 primarily due to the purchase of thermal paper
inventories in anticipation of price increases in the first
quarter of 2004.

The cash generated by operations of
$6.1 million during 2002 was primarily due to the positive
results of operations across all segments and a reduction of
inventories in our Specialty Paper Products and Imaging Supplies
segments partially offset by decreases in accrued expenses and
accounts payable in all of our segments. In 2001 our cash
generated by operations was primarily impacted by positive
changes in working capital and a reduction in taxes receivable.

Cash used in investing activities

Our 2003 cash used in investing activities of
$10.6 million is primarily the result of $6 million
used for the acquisition of the assets of The Label Company and
the acquisition of the supermarket thermal product line from
Zebra Technologies. We also used $4.3 million for
investments in plant and equipment across all of our segments.
Capital expenditures for 2004 are expected to be in the range
between $6 million to $7 million. The projected
increase in capital expenditures is expected to be funded
through operating cash flows.

During 2002, the cash used in investing
activities was primarily related to investments in plant and
equipment in addition to two small acquisitions including the
assets of Computer Imaging Supplies and certain assets of
Dietzgen LLC. In 2001, cash used in investing activities was
$1.0 million, which was primarily due to investments in
plant and equipment offset by the proceeds from the sale of
plant and equipment.

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Cash provided by and used in financing
activities

In addition to cash flows from operations, we
have a bank financing arrangement, at competitive rates, to
adequately conduct our operations. We had $10.0 million of
additional borrowing capacity at December 31, 2003 under
our revolving loan commitment with LaSalle Bank, NA and Fleet
National Bank. In February of 2003, we used approximately
$5.0 million of borrowing capacity to fund our acquisition
of The Label Company. At December 31, 2003, we had a
$2.7 million obligation under standby letters of credit
with LaSalle Bank, NA and Fleet National Bank. The weighted
average interest rate on long-term debt borrowings of
$24.2 million outstanding at December 31, 2003 was
3.3 percent.

On July 15, 2003, we entered into a first
amendment to our Credit Agreement dated March 1, 2002 with
LaSalle Bank, NA as Agent and Issuing Bank and Fleet National
Bank to increase the Term Loan under the Credit Agreement from
$10 million to $15 million and to adjust the amount of
the quarterly principal payments. The amended Credit Agreement
consists of a term loan of $15 million and a revolving loan
commitment of $30 million. Borrowings under this agreement
are collateralized by a security interest in our accounts
receivable, inventories, certain machinery and equipment and
real estate located in Merrimack, NH. Interest on loans
outstanding is, at our option, either at a rate per annum equal
to the base rate (prime) or LIBOR, plus applicable margin.
The initial applicable margin over the Base Rate was
..75 percent per annum through June 30, 2002, after
which it ranges from zero up to .75 percent per annum based
on our total debt to EBITDA ratio. The applicable margin over
LIBOR ranges from 1.75 percent per annum up to
2.75 percent per annum based on our total debt to EBITDA
ratio. We are also subject to a non-use fee for any unutilized
portion of our revolving loan that ranges from .25 percent
to .50 percent based on our total debt to EBITDA ratio. The
revolving loan commitment is subject to certain limitations,
such that the maximum principal amount of the revolving credit
agreement is the lesser of (1) $30 million, or
(2) our borrowing base. Our borrowing base is defined as
the sum of 80 percent of our eligible accounts receivable,
plus the lesser of (1) 50 percent of our eligible
inventory or (2) $12 million. Our borrowing base was
$30.0 million at December 31, 2003 and our
availability under the revolving loan commitment was
$10.0 million at December 31, 2003. The maturity date
of the Credit Agreement is February 28, 2005.

On July 24, 2003, we entered into a second
amendment to the Credit Agreement with the Lenders to waive our
non-compliance with the funded debt to EBITDA Ratio and the
minimum EBITDA financial covenants for the quarter ended
June 27, 2003 and to adjust the financial covenants related
to minimum EBITDA levels. On September 25, 2003, we entered
into a third amendment to the Credit Agreement with the Lenders
to amend the definition of EBITDA with respect to the minimum
EBITDA covenant. Adjusted EBITDA is now defined as EBITDA for
the period comprising the last four most recently completed
fiscal quarters, plus the following items:
(1) restructuring, non-recurring, one-time charges,
(2) non-cash expenses and (3) pro forma adjustments
for acquisitions, each as mutually agreed upon by us and the
Lenders. On December 30, 2003 we entered into a consent and
fourth amendment to the Credit Agreement adding the provision to
the funded debt to EBITDA ratio, for the computation period
ended December 31, 2003 only, to be computed as the funded
debt to adjusted EBITDA ratio.

We were in compliance with the financial
covenants and our compliance at December 31, 2003 under the
amended Credit Agreement is as follows:

|                                                                                                                                                                                                                                                                                                                                                         |  |             |              |                   |  |   |              | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------------ | ----------------- |  | - | ------------ | 
|                                                                                                                                                                                                                                                                                                                                                         |  |             |              | December 31, 2003
|Covenant                                                                                                                                                                                                                                                                                                                                                 |  | Requirement |              | Compliance       
|                                                                                                                                                                                                                                                                                                                                                         |  |             |              |                  
| Maintain a fixed charge coverage
    ratio of not less than:                                                                                                                                                                                                                                                                                           |  |             | 1.1 to 1.0   |                   |  |   | 1.2 to 1.0   | 
| Maintain a funded debt to adjusted
    EBITDA ratio of less than:                                                                                                                                                                                                                                                                                      |  |             | 2.75 to 1.0  |                   |  |   | 2.31 to 1.0  | 
| Maintain a minimum adjusted EBITDA
    level, as defined in the third amendment to our Credit Agreement
    which is noted above, of $12.0 million for our fourth
    quarter of 2003, increasing in increments of $250,000 during
    each quarter of 2004 to $13.0 million for the quarter
    ending December 31, 2004, and each quarter thereafter |  | $           | 12.0 million |                   |  | $ | 12.7 million | 

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Furthermore, without prior consent of our
lenders, the Credit Agreement limits, among other things, the
payment of dividends to $.6 million, capital expenditures
to $8.0 million, the incurrence of additional debt and
restricts the sale of certain assets and merger or acquisition
activities. While we were in compliance with the above financial
covenants as of December 31, 2003, should results of
operations fall short of our expectations and we fail to
maintain our covenants and be unable to obtain a waiver from our
lenders, our debt could become callable by our lenders.

We have net deferred tax assets of
$15.1 million on our balance sheet. We expect the tax
assets to be fully utilized in the future based on our
expectations of future taxable income. We expect future cash
expenditures to be less than taxes provided in the financial
statements. Should taxable income not meet our expectation in
future years, tax planning with respect to the sale of real
estate would provide us sufficient taxable income to absorb
unutilized tax assets. The fair market value of our real estate
significantly exceeds the book value.

As referenced in Note 12 to our Consolidated
Financial Statements, we maintain defined benefit pension plans.
We were not required to fund the qualified defined benefit plans
during 2003. Based on the law as of December 31, 2003, we
will be required to contribute approximately $.6 million to
the Hourly Employee Retirement Plan in 2004.

The 2003 cash payments for the Supplemental
Executive Retirement Plan was $.3 million. For 2004, the
estimated payments to retirees are $.3 million. The 2003
cash payments for postretirement benefits were $.6 million.
For 2004, the estimated cash payments are $.7 million.

We have operating leases primarily for office,
warehouse and manufacturing space, and electronic data
processing and transportation equipment. We also have capital
leases primarily for automobiles, computer equipment and office
equipment. The terms of these leases do not impose significant
restrictions or unusual obligations. Our obligations relating to
long-term debt, notes payable and leases at year-end 2003 were
as follows:

|                                    |  |                |       |      |  |      |        |      |  |      |       |        |  |       |     |  |  |   |     |  |  |   |   |  |  |   |        | 
|----------------------------------- |  | -------------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ----- | ------ |  | ----- | --- |  |  | - | --- |  |  | - | - |  |  | - | ------ | 
|                                    |  |                |       |      |  |      |        |      |  |      |       | Beyond |  |      
|                                    |  | 2004           |       | 2005 |  | 2006 |        | 2007 |  | 2008 |       | 2008   |  | Total
|                                    |  |                |       |      |  |      |        |      |  |      |       |        |  |      
|                                    |  |               
|                                    |  | (In thousands)
|Term portion of long-term debt      |  | $              | 3,400 |      |  | $    | 3,400  |      |  | $    | 3,400 |        |  | $     | 100 |  |  | $ |    |  |  | $ |  |  |  | $ | 10,300 | 
|Revolving portion of long-term debt |  |                |      |      |  |      | 17,300 |      |  |      |      |        |  |       |    |  |  |   |    |  |  |   |  |  |  |   | 17,300 | 
|Notes payable                       |  |                | 250   |      |  |      | 710    |      |  |      | 250   |        |  |       |    |  |  |   |    |  |  |   |  |  |  |   | 1,210  | 
|Capital leases                      |  |                | 190   |      |  |      | 195    |      |  |      | 59    |        |  |       | 5   |  |  |   |    |  |  |   |  |  |  |   | 449    | 
|Non-cancelable operating leases     |  |                | 978   |      |  |      | 594    |      |  |      | 325   |        |  |       | 280 |  |  |   | 194 |  |  |   |  |  |  |   | 2,371  | 
|                                    |  |                |       |      |  |      |        |      |  |      |       |        |  |       |     |  |  |   |     |  |  |   |   |  |  |   |        | 
|                                    |  | $              | 4,818 |      |  | $    | 22,199 |      |  | $    | 4,034 |        |  | $     | 385 |  |  | $ | 194 |  |  | $ |  |  |  | $ | 31,630 | 

Our liquidity is affected by many factors, some
based on the normal operations of our business and others
related to the uncertainties of the industry and global
economies. Although our cash requirements could fluctuate based
on the timing of these factors, we believe that our current cash
position, cash flows from operations and amounts available under
our revolving line of credit are sufficient to fund our cash
requirements.

LITIGATION AND OTHER MATTERS

In December 1998, the IRS completed an
examination of our corporate income tax returns for the years
1992 through 1994 and issued a Notice of Proposed Adjustment,
which assessed additional taxes of $4.6 million, excluding
interest. We disagreed with the positions taken by the IRS and
filed a formal protest of the proposed adjustment on
January 12, 1999. On October 10, 2002, we reached an
agreement with the Appeals office of the IRS regarding the
outstanding proposed assessment of federal income tax for the
years 1992 to 1994 subject to the approval of the Joint
Committee on Taxation of the United States Congress. The
agreement received final approval by the Joint Committee on
Taxation of the United States Congress as indicated in a letter
from the IRS Appeals Office dated December 24, 2002 and is
now final. Our agreement determined the tax liability for the
period 1989 through 1994 and resulted in a net tax refund in the
amount of

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$.3 million for that period. The agreement
impacted the earlier years due to the carryback of tax losses
and credits and the recomputation of alternative minimum taxes.


In December 1999, the IRS completed an
examination of our corporate income tax returns for the years
1995 through 1997 and issued a Notice of Proposed Adjustment
which assessed additional taxes of $5.2 million, excluding
interest. This assessment represents a total of
$14.0 million of adjustments to taxable income for the
years under review. The proposed adjustments relate to the
deductibility of restructuring and other reserves for continuing
and discontinued operations and the utilization of foreign net
operating losses associated with discontinued operations. We
disagreed with the position taken by the IRS and filed a formal
protest of their proposed adjustments on April 6, 2000. We
are working through the IRS appeals process to resolve open
issues.

On October 28, 2003, the IRS completed an
examination of our corporate income tax returns for the years
1998 through 2000 and issued a Notice of Proposed Adjustment
which assessed additional taxes of $30,021 excluding interest.
While the amount assessed is immaterial, we have filed a protest
of the proposed adjustment since certain adjustments proposed by
the IRS for the years 1995 through 1997 could impact the tax
liability for the period 1998 through 2000. We are working with
the Appeals Office of the IRS to resolve issues relating to the
years 1997 through 2000.

We believe that we are adequately reserved for
potential liabilities that could arise from the resolution of
the IRS assessment for the years 1995 through 2000. While
we believe that we have adequately provided for tax liabilities
through December 31, 2003, we can provide no assurances
that we will prevail in our defense against adjustments proposed
in pending or future federal and state tax examinations. In
addition, we can provide no assurances that the ultimate
resolution of open tax matters will not be either in excess of
or less than current reserves.

In August and September 1996, two individual
plaintiffs filed lawsuits in the Circuit Court of Cook County,
Illinois against Nashua Corporation, Cerion Technologies, Inc.,
certain directors and officers of Cerion, and our underwriter,
on behalf of all persons who purchased the common stock of
Cerion between May 24, 1996 and July 9, 1996. These
two complaints were consolidated. In March 1997, the same
individual plaintiffs joined by a third plaintiff filed a
Consolidated Amended Class Action Complaint. The
consolidated complaint alleged that, in connection with
Cerions initial public offering, the defendants issued
materially false and misleading statements and omitted the
disclosure of material facts regarding, in particular, certain
significant customer relationships. In October 1997, the Circuit
Court on motion by the defendants, dismissed the consolidated
complaint. The plaintiffs filed a Second Amended Consolidated
Complaint alleging similar claims as the first consolidated
complaint seeking damages and injunctive relief. On May 6,
1998, the Circuit Court, on motion by the defendants, dismissed
with prejudice the second amended consolidated complaint. The
plaintiffs filed with the Appellate Court an appeal of the
Circuit Courts ruling. On November 19, 1999, the
Appellate Court reversed the Circuit Courts ruling that
dismissed the second amended consolidated complaint. The
Appellate Court ruled that the second amended consolidated
complaint represented a valid claim and sent the case back to
the Circuit Court for further proceedings. On December 27,
1999, we filed a Petition with the Supreme Court of Illinois. In
that Petition, we asked the Supreme Court of Illinois to
determine whether the Circuit Court or the Appellate Court is
correct. Our Petition was denied and the case was sent to the
Circuit Court for trial. Discovery has been completed, but no
date has been set for trial and pre-trial motions. On
October 8, 2003, the Circuit Court heard motions on a
Summary Judgment motion and a class action certification motion.
The Circuit Court is expected to rule on these motions in the
first quarter of 2004. We believe that the lawsuit is without
merit and will continue to defend ourselves in this matter. We
also believe that we will receive the value of our
37.1 percent ownership in the Cerion Liquidating Trust
which was valued at $.9 million on an after-tax basis at
December 31, 2003. Our investment in Cerion is included
under other assets in our Consolidated Balance Sheet.

On September 14, 2000, Edward G. Krasnecki
and EGK Realty Corporation filed suit against Nashua Corporation
in the Superior Court of the Commonwealth of Massachusetts,
Middlesex County. The plaintiffs are the owners of real
property, formerly leased by us, located at 260 Billerica Road,
Chelmsford, Massachusetts. The plaintiffs alleged that when we
vacated the premises in 1997, we failed to remove

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improvements we had made to the property, failed
to clean the premises as required by our lease, and left
contamination on the property resulting in lost opportunities to
the plaintiffs, for which the plaintiffs seek damages. We
responded to their complaint, denying all liability and
asserting affirmative defenses. We maintained that when we
vacated the premises, we removed three underground tanks that we
were entitled to remove under the terms of our lease, we
detected soil contamination, reported and took prompt remedial
action all in accordance with Massachusetts law, and were not
liable to the plaintiffs. We also denied that we failed to
remove improvements or that we failed to clean the premises in
accordance with the terms of our lease. The matter was settled
in 2003 and is now resolved.


On May 30, 2003, Ricoh Company, Ltd. and
affiliated companies filed a suit in the U.S. District Court for
the District of New Jersey against several defendants, including
the largest customer of Nashuas Imaging Supplies segment
and another company who is a supplier to the Imaging Supplies
segment. The Complaint alleges multiple counts of patent
infringement, trademark infringement, unfair competition, and
copyright infringement by the defendants. On October 17,
2003, Ricoh amended the Complaint and added Nashua as an
additional co-defendant in the suit. The allegations arose from
the sale and distribution of Ricoh compatible toner products.
Nashua filed a legal answer to the Complaint in December 2003.
The suit is at its earliest stages with the legal discovery
phase to continue in 2004. Attorneys for Nashua are in the
process of reviewing the background and history of the lawsuit
in order to fully develop our legal position and defenses in
this matter. The Company believes it has valid defenses and
potential recourse against certain other co-defendants in this
matter.

In December 2002, we eliminated the availability
of certain postretirement health benefits to certain union and
non-union employees of Nashua who had at least 10 years of
service and chose to retire between age 60 to 65 which provided
access to health benefits until age 65. The unions in New
Hampshire objected to the action and filed a grievance. The
final step of the grievance process is arbitration by the
American Arbitration Association. The subject of the Arbitration
was interpretation of the collective bargaining contract
language which we believe allows the modification of the
eligibility of those postretirement health benefits. The
unions position is that regardless of the contract
wording, these benefits cannot be eliminated without bargaining
with the unions. The Arbitration hearing occurred on
July 28, 2003 and the arbitrator ruled in favor of the
unions on October 24, 2003. On November 24, 2003, we
filed an appeal of the arbitration decision with the
U.S. District Court for the District of New Hampshire. We
believe the arbitrator erred in his decision process. We
anticipate the complete appeals process could take several years.

We are involved in certain environmental matters
and have been designated by the Environmental Protection Agency,
referred to as the EPA, as a potentially responsible party for
certain hazardous waste sites. In addition, we have been
notified by certain state environmental agencies that some of
our sites not addressed by the EPA require remedial action.
These sites are in various stages of investigation and
remediation. Due to the unique physical characteristics of each
site, the technology employed, the extended timeframes of each
remediation, the interpretation of applicable laws and
regulations and the financial viability of other potential
participants, our ultimate cost of remediation is difficult to
estimate. Accordingly, estimates could either increase or
decrease in the future due to changes in such factors. At
December 31, 2003, based on the facts currently known and
our prior experience with these matters, we have concluded that
it is probable that site assessment, remediation and monitoring
costs will be incurred. We have estimated a range for these
costs of $.7 million to $1.3 million for continuing
operations. This estimate could increase if other potentially
responsible parties or our insurance carriers are unable or
unwilling to bear their allocated share and cannot be compelled
to do so. At December 31, 2003, our accrual balance
relating to environmental matters was $.7 million for
continuing operations. Based on information currently available,
we believe that it is probable that the major potentially
responsible parties will fully pay the costs apportioned to
them. We believe that our remediation expense is not likely to
have a material adverse effect on our consolidated financial
position or results of operations.

We are involved in various other lawsuits, claims
and inquiries, most of which are routine to the nature of our
business. In the opinion of our management, the resolution of
these matters will not materially affect our Company.

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APPLICATION OF CRITICAL ACCOUNTING
POLICIES

The preparation of financial statements in
conformity with generally accepted accounting principles
requires that we make estimates and assumptions for the
reporting period and as of the financial statement date. Our
management has discussed our critical accounting estimates,
policies and related disclosures with the audit committee of our
Board of Directors. These estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those amounts.

Critical accounting policies are those that are
important to the portrayal of our financial condition and
results, and which require us to make difficult, subjective
and/or complex judgments. Critical accounting policies cover
accounting matters that are inherently uncertain because the
future resolution of such matters is unknown. We believe that
our critical accounting policies include:

Accounts Receivable  Allowance for
Doubtful Accounts

We evaluate the collectibility of our accounts
receivable based on a combination of factors. In circumstances
where we become aware of a specific customers inability to
meet its financial obligations to us, such as a bankruptcy
filing or a substantial downgrading of a customers credit
rating, we record a specific reserve to reduce our net
receivable to the amount we reasonably expect to collect. We
also record reserves for bad debts based on the length of time
our receivables are past due, the payment history of our
individual customers and the current financial condition of our
customers based on obtainable data and historical payment and
loss trends. After managements review of accounts
receivable, we increased the allowance for doubtful accounts to
$.9 million at December 31, 2003 from $.7 million
at December 31, 2002. Uncertainties affecting our estimates
include future industry and economic trends and the related
impact on the financial condition of our customers, as well as
the ability of our customers to generate cash flows sufficient
to pay us amounts due. If circumstances change, such as higher
than expected defaults or an unexpected material adverse change
in a customers ability to meet its financial obligations
to us, our estimates of the recoverability of the receivables
due us could be reduced by a material amount.

Inventories  Slow Moving and
Obsolescence

We estimate and reserve amounts related to slow
moving and obsolete inventories that result from changing market
conditions. We develop our estimates based on the quantity and
quality of individual classes of inventory compared to
historical and projected sales trends. Inventory at
December 31, 2003 has been reduced by a reserve of
$1.0 million, based on our assessment of the probable
exposure related to excess and obsolete inventories. Our
estimated reserve was also $1.0 million at
December 31, 2002. Major uncertainties in our estimation
process include future industry and economic trends, future
needs of our customers, our ability to retain or replace our
customer base and other competitive changes in the marketplace.
Significant changes in any of the uncertainties used in
estimating the loss exposure could result in a materially
different net realizable value for our inventory.

Goodwill

As of December 31, 2003, we had
$31.5 million of recorded goodwill. Effective
January 1, 2002, we adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets. Under FAS 142, goodwill and
indefinite lived intangible assets are no longer amortized but
are reviewed annually, or more frequently if impairment
indicators arise, for impairment. We have performed the annual
impairment tests required by FAS 142 and have concluded
that no impairment exists as of November 1, 2003. We
computed the fair value of our reporting units based on a
discounted cash flow model and compared the result to the book
value of each unit. The fair value exceeded book value for each
reporting unit as of our valuation date of November 1,
2003. Significant estimates included in our valuation included
future business results and the discount rate. Material changes
in our estimated future operating results or discount rate could
significantly impact our carrying value of goodwill.

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Pension and Other Postretirement
Benefits

The most significant elements in determining our
pension income or expense are the expected return on plan assets
and the discount rate. We assumed an expected long-term rate of
return on plan assets of 8.0 percent for the year ended
December 31, 2003, down from 8.5 percent for the year
ended December 31, 2002. The assumed long-term rate of
return on assets is applied to a calculated value of plan
assets, which recognizes changes in the fair value of plan
assets in a systematic manner over five years. This produces the
expected return on plan assets that is included in the
determination of our pension income or expense. The difference
between this expected return and the actual return on plan
assets is deferred. The net deferral of past asset gains or
losses affects the calculated value of plan assets and,
ultimately, our future pension income or expense. Should our
long-term return on plan assets either fall below or increase
above 8.0 percent, our future pension expense would either
increase or decrease.

Each year, we determine the discount rate to be
used to discount plan liabilities which reflects the current
rate at which our pension liabilities could be effectively
settled. The discount rate that we utilize for determining
future benefit obligations is based on a review of long-term
bonds, including published indices, which receive one of the two
highest ratings given by recognized ratings agencies. For the
year ended December 31, 2002, we used a discount rate of
6.50 percent. This rate was used to determine fiscal year
2003 expense. For the year ended December 31, 2003
disclosure purposes, we used a discount rate of 6.0 percent.
Should the discount rate either fall below or increase above 6.0
percent, our future pension expense would either increase or
decrease accordingly. Our policy is to defer the net effect of
changes in actuarial assumptions and experience. As discussed in
detail in Note 12 to our Consolidated Financial Statements, we
froze benefits under our salaried pension plans effective
December 31, 2002.

At December 31, 2003, our consolidated
pension liability was $17.1 million compared to a
consolidated pension liability of $15.5 million at the end
of 2002. This balance sheet change was principally due to
decreases in our expected return on plan assets and discount
rate resulting from interest rate trends. As a result, we
recognized an other comprehensive loss of $1.3 million, net
of a $.9 million tax benefit for 2003. We recognized pretax
pension income of $.1 million for the year ended
December 31, 2003, compared to a pretax pension expense of
$.9 million in 2002. Our 2002 pension expense excludes a
$2.7 million loss incurred as a result of freezing our
salaried pension plans. Future changes in our actuarial
assumptions and investment results due to future interest rate
trends could have a material adverse effect on our future costs
and pension obligations.

Assumed health care cost trend rates have a
significant effect on the amounts reported for our health care
plan. The assumed health care cost trend rate was
12 percent for 2004 and ranges from 10 percent to
4 percent for future years.

Deferred Tax Assets

As of December 31, 2003, we had
approximately $15.1 million of deferred tax assets. During
2003 and 2002, we added deferred tax assets of $.9 million
and $7.5 million, respectively, associated with minimum
pension liability adjustments as discussed in detail in Note 12
to our Consolidated Financial Statements. A portion of our
deferred tax assets relates to state loss carryforwards that
expire between 2004 and 2020. We have a valuation allowance of
$.6 million for our state loss carryforwards. Although
realization of our deferred tax assets is not assured,
management believes it is more likely than not that all of the
deferred tax asset will be realized. Significant changes in any
of the estimated future taxable income could impair our ability
to utilize our deferred tax assets. Additional disclosures
relating to income taxes and our deferred tax assets are
included in Note 7 to our Consolidated Financial Statements.

Environmental Reserves

We expense environmental expenditures relating to
ongoing operations unless the expenditures extend the life,
increase the capacity or improve the safety or efficiency of our
property, mitigate or prevent environmental contamination that
has yet to occur and improve our property compared with its
original condition or are incurred for property held for sale.
We record specific reserves related to site assessments,
remediation or

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monitoring when the costs are both probable and
the amount can be reasonably estimated. We base estimates on
in-house and third-party studies considering current
technologies, remediation alternatives and current environmental
standards. In addition, if there are other participants and the
site is joint and several, the financial stability of other
participants is considered in determining our accrual. At
December 31, 2003, we believe the probable range for future
expenditures is $.7 million to $1.3 million and have
accrued $.7 million. The decline in our accruals from
$.8 million at December 31, 2002 was due to current
year payments.


Uncertainties affecting our estimates include
changes in the type or degree of contamination uncovered during
assessment and actual clean-up; changes in available treatment
technologies; changes in the financial condition of other
participants for sites with joint and several responsibility;
changes in the financial condition of insurance carriers
financially responsible for our share of the remediation costs
at certain sites; and changes in local, state or federal
standards or the application of those standards by governmental
officials. We believe a material change in any of the
uncertainties described above could result in spending
materially different from the amounts accrued.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, Financial Accounting Standards
Board Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities was
issued. The interpretation provides guidance on consolidating
variable interest entities and applies immediately to variable
interests created after January 31, 2003. The guidelines of
the interpretation became applicable for us in our fourth
quarter 2003 for variable interest entities created before
February 1, 2003. The interpretation requires variable
interest entities to be consolidated if the equity investment at
risk is not sufficient to permit an entity to finance its
activities without support from other parties or the equity
investors lack certain specified characteristics.

The adoption of FIN 46 for variable interests
created after January 31, 2003 did not have an impact on
our consolidated financial condition, results of operation or
cash flows. We do not expect the provisions of FIN 46 to have a
material impact on future reporting periods with respect to
interests in variable interest entities created prior to
February 1, 2003, and do not currently anticipate any
material accounting or disclosure requirement under the
provisions of the interpretation.




Item 7A.     Quantitive
and Qualitative Disclosures About Market Risk

We are exposed to market risks from interest rate
fluctuations relating to our debt. We performed a sensitivity
analysis assuming a hypothetical 10 percent increase in interest
rates for our debt as of December 31, 2003. This analysis
indicated that a 10 percent increase in interest rates
would not have a material effect on our consolidated financial
position, results of operations or cash flows. Actual changes in
interest rates and their impact on us could differ materially
from this hypothetical analysis.

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Item 8.     Financial
Statements and Supplementary Data

NASHUA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                       |                                                           |                                       |         |       |  |      |         |       |  |   |         |       |  
|---------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ------- | ----- |  | ---- | ------- | ----- |  | - | ------- | ----- | -
|                                                                       |                                                           |                                      
|                                                                       |                                                           | Year Ended December 31,              
|                                                                       |                                                           |                                      
|                                                                       |                                                           | 2003                                  |         | 2002  |  | 2001
|                                                                       |                                                           |                                       |         |       |  |     
|                                                                       |                                                           |                                      
|                                                                       |                                                           | (In thousands, except per share data)
|Net sales                                                              |                                                           | $                                     | 288,906 |       |  | $    | 283,190 |       |  | $ | 272,510 |      
|Cost of products sold                                                  |                                                           |                                       | 235,101 |       |  |      | 227,102 |       |  |   | 216,669 |      
|                                                                       |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|Gross margin                                                           |                                                           |                                       | 53,805  |       |  |      | 56,088  |       |  |   | 55,841  |      
|                                                                       |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|Selling and distribution expenses                                      |                                                           |                                       | 27,208  |       |  |      | 28,119  |       |  |   | 28,797  |      
|General and administrative expenses                                    |                                                           |                                       | 20,560  |       |  |      | 19,720  |       |  |   | 19,309  |      
|Goodwill amortization                                                  |                                                           |                                       |        |       |  |      |        |       |  |   | 1,656   |      
|Research and development expense                                       |                                                           |                                       | 2,469   |       |  |      | 3,139   |       |  |   | 3,238   |      
|Net loss (gain) on curtailment of pension and
    postretirement plans |                                                           |                                       | 1,599   |       |  |      | (181    | )     |  |   |        |      
|Restructuring and other unusual
    (income) charges                   |                                                           |                                       | (68     | )     |  |      | (88     | )     |  |   | 2,963   |      
|Loss (income) from equity investment                                   |                                                           |                                       | 523     |       |  |      | 59      |       |  |   | (23     | )    
|Interest expense                                                       |                                                           |                                       | 1,295   |       |  |      | 1,494   |       |  |   | 2,875   |      
|Interest income                                                        |                                                           |                                       |        |       |  |      | (2      | )     |  |   | (192    | )    
|                                                                       |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|Income (loss) before income taxes                                      |                                                           |                                       | 219     |       |  |      | 3,828   |       |  |   | (2,782  | )    
|Provision (benefit) for income taxes                                   |                                                           |                                       | 117     |       |  |      | 1,512   |       |  |   | (334    | )    
|                                                                       |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|Net income (loss)                                                      |                                                           | $                                     | 102     |       |  | $    | 2,316   |       |  | $ | (2,448  | )    
|                                                                       |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|Per share amounts:                                                     |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|                                                                       | Net income (loss) per common share                        |                                       | $       | 0.02  |  |      | $       | .40   |  |   | $       | (.43  | )
|                                                                       |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|                                                                       | Net income (loss) per common share, assuming
    dilution |                                       | $       | 0.02  |  |      | $       | .39   |  |   | $       | (.43  | )
|                                                                       |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|Average shares outstanding:                                            |                                                           |                                       |         |       |  |      |         |       |  |   |         |      
|                                                                       | Common shares                                             |                                       |         | 5,869 |  |      |         | 5,783 |  |   |         | 5,696 |  
|                                                                       | Common shares, assuming dilution                          |                                       |         | 5,999 |  |      |         | 5,873 |  |   |         | 5,696 |  

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NASHUA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |         |         |         | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | 
|                                            |                                                                                                                                    |                                                 
|                                            |                                                                                                                                    | December 31,                                    
|                                            |                                                                                                                                    |                                                 
|                                            |                                                                                                                                    | 2003                                             |                                            | 2002   
|                                            |                                                                                                                                    |                                                  |                                            |        
|                                            |                                                                                                                                    |                                                 
|                                            |                                                                                                                                    | (In thousands,                                  
|                                            |                                                                                                                                    | except share data)                              
|ASSETS                                     
|Current assets                              |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            | Cash and cash equivalents                                                                                                          |                                                  | $                                          | 1,183   |         |         | $      | 1,085   |        
|                                            | Accounts receivable                                                                                                                |                                                  |                                            | 31,665  |         |         |        | 29,918  |        
|                                            | Inventories                                                                                                                        |                                                  |                                            |         |         |         |        |         |        
|                                            |                                                                                                                                    | Raw materials                                    |                                            |         | 11,399  |         |        |         | 9,460   |        
|                                            |                                                                                                                                    | Work in process                                  |                                            |         | 3,450   |         |        |         | 2,488   |        
|                                            |                                                                                                                                    | Finished goods                                   |                                            |         | 7,886   |         |        |         | 8,486   |        
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            |                                                                                                                                    |                                                  | 22,735                                     |         |         |         | 20,434 |        
|                                            | Other current assets                                                                                                               |                                                  |                                            | 5,205   |         |         |        | 4,985   |        
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            |                                                                                                                                    |                                                  | 60,788                                     |         |         |         | 56,422 |        
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|Plant and equipment                         |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            | Land                                                                                                                               |                                                  |                                            | 902     |         |         |        | 934     |        
|                                            | Buildings and improvements                                                                                                         |                                                  |                                            | 28,920  |         |         |        | 28,638  |        
|                                            | Machinery and equipment                                                                                                            |                                                  |                                            | 62,689  |         |         |        | 57,464  |        
|                                            | Construction in progress                                                                                                           |                                                  |                                            | 875     |         |         |        | 1,136   |        
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            |                                                                                                                                    |                                                  | 93,386                                     |         |         |         | 88,172 |        
|                                            | Accumulated depreciation                                                                                                           |                                                  |                                            | (52,609 | )       |         |        | (45,803 | )      
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            |                                                                                                                                    |                                                  | 40,777                                     |         |         |         | 42,369 |        
|Goodwill                                    |                                                                                                                                    |                                                  | 31,471                                     |         |         |         | 29,462 |        
|Intangibles, net of amortization            |                                                                                                                                    |                                                  | 1,781                                      |         |         |         | 1,672  |        
|Loans to related parties                    |                                                                                                                                    |                                                  | 1,208                                      |         |         |         | 973    |        
|Other assets                                |                                                                                                                                    |                                                  | 15,651                                     |         |         |         | 15,290 |        
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            |                                                                                                                                    |                                                  | Total assets                               |         | $       | 151,676 |        |         | $       | 146,188 | 
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY   
|Current liabilities                         |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            | Accounts payable                                                                                                                   |                                                  | $                                          | 20,474  |         |         | $      | 17,931  |        
|                                            | Accrued expenses                                                                                                                   |                                                  |                                            | 14,368  |         |         |        | 15,230  |        
|                                            | Current maturities of long-term debt                                                                                               |                                                  |                                            | 3,400   |         |         |        | 2,000   |        
|                                            | Current maturities of notes payable to related
    parties                                                                         |                                                  |                                            | 250     |         |         |        | 250     |        
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            |                                                                                                                                    |                                                  | 38,492                                     |         |         |         | 35,411 |        
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|Long-term debt, less current portion        |                                                                                                                                    |                                                  | 24,200                                     |         |         |         | 23,000 |        
|Notes payable to related parties            |                                                                                                                                    |                                                  | 960                                        |         |         |         | 1,210  |        
|Other long-term liabilities                 |                                                                                                                                    |                                                  | 26,827                                     |         |         |         | 24,549 |        
|Commitments and contingencies (see Note 11) |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|Shareholders equity                        |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            | Common stock, par value $1.00; authorized
    20,000,000 shares; Issued 5,902,734 shares in 2003 and
    5,870,609 shares in 2002. |                                                  |                                            | 5,903   |         |         |        | 5,871   |        
|                                            | Additional paid-in capital                                                                                                         |                                                  |                                            | 14,515  |         |         |        | 14,203  |        
|                                            | Retained earnings                                                                                                                  |                                                  |                                            | 53,477  |         |         |        | 53,375  |        
|                                            | Accumulated other comprehensive loss:                                                                                              |                                                  |                                            |         |         |         |        |         |        
|                                            |                                                                                                                                    | Minimum pension liability adjustment, net of tax |                                            |         | (12,698 | )       |        |         | (11,431 | )      
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            |                                                                                                                                    |                                                  | 61,197                                     |         |         |         | 62,018 |        
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        
|                                            |                                                                                                                                    |                                                  | Total liabilities and shareholders equity |         | $       | 151,676 |        |         | $       | 146,188 | 
|                                            |                                                                                                                                    |                                                  |                                            |         |         |         |        |        

The accompanying notes are an integral part of
these consolidated financial statements.

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NASHUA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |         |  
|----------------------------------------------- | ------------------------------------------------ | --------------------------------- | ---------- | --------- |  | -------------- | ------ | ------------- |  | -------- | ------ | ---- |  | -------- | ---------- | ----- |  | - | ------- | - |  | - | ------- | ------- | - | - | ------- | ----- |  | - | ------ | ------- | -
|                                                |                                                  |                                   |            |           |  |                |        | Accumulated   |  |          |        |     
|                                                |                                                  | Common Stock                      |            | Addl     |  | Treasury Stock |        | Other         |  |          |        |     
|                                                |                                                  |                                   |            | Paid-In   |  |                |        | Comprehensive |  | Retained |        |     
|                                                |                                                  | Shares                            |            | Par Value |  | Capital        |        | Shares        |  | Cost     |        | Loss |  | Earnings |            | Total
|                                                |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |      
|                                                |                                                  |                                  
|                                                |                                                  | (In thousands, except share data)
|Balance, December 31, 2000                      |                                                  |                                   | 7,011,601  |           |  | $              | 7,012  |               |  | $        | 15,268 |      |  |          | (1,023,818 | )     |  | $ | (14,922 | ) |  |   |        |         |   | $ | 64,979  |       |  | $ | 72,337 |        
|Stock issued for director compensation          |                                                  |                                   | 17,948     |           |  |                | 18     |               |  |          | 87     |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 105    |        
|Stock options exercised and related tax benefit |                                                  |                                   | 11,100     |           |  |                | 11     |               |  |          | 62     |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 73     |        
|Restricted stock forfeiture                     |                                                  |                                   | (154,000   | )         |  |                | (154   | )             |  |          | (530   | )    |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (684   | )      
|Deferred compensation                           |                                                  |                                   |           |           |  |                |       |               |  |          | 330    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 330    |        
|Deferred compensation forfeiture                |                                                  |                                   |           |           |  |                |       |               |  |          | 684    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 684    |        
|Net loss                                        |                                                  |                                   |           |           |  |                |       |               |  |          |       |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   | (2,448  | )     |  |   | (2,448 | )      
|                                                |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Balance, December 31, 2001                      |                                                  |                                   | 6,886,649  |           |  | $              | 6,887  |               |  | $        | 15,901 |      |  |          | (1,023,818 | )     |  | $ | (14,922 | ) |  |   |        |         |   | $ | 62,531  |       |  | $ | 70,397 |        
|Stock issued for director compensation          |                                                  |                                   | 13,428     |           |  |                | 13     |               |  |          | 77     |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 90     |        
|Stock issued for executive compensation         |                                                  |                                   |           |           |  |                |       |               |  |          | (6     | )    |  |          | 750        |       |  |   | 11      |   |  |   |        |         |   |   |        |       |  |   | 5      |        
|Stock options exercised and related tax benefit |                                                  |                                   | 53,600     |           |  |                | 54     |               |  |          | 259    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 313    |        
|Restricted stock forfeiture                     |                                                  |                                   | (60,000    | )         |  |                | (60    | )             |  |          | (295   | )    |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (355   | )      
|Deferred compensation                           |                                                  |                                   |           |           |  |                |       |               |  |          | 328    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 328    |        
|Deferred compensation forfeiture                |                                                  |                                   |           |           |  |                |       |               |  |          | 355    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 355    |        
|Retirement of treasury shares                   |                                                  |                                   | (1,023,068 | )         |  |                | (1,023 | )             |  |          | (2,416 | )    |  |          | 1,023,068  |       |  |   | 14,911  |   |  |   |        |         |   |   | (11,472 | )     |  |   |       |        
|Comprehensive income (loss):                    |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|                                                | Net income                                       |                                   |            |          |  |                |        |              |  |          |        |     |  |          |            |      |  |   |         |  |  |   |         |        |   |   |         | 2,316 |  |   |        | 2,316   |  
|                                                | Minimum pension liability adjustment, net of tax |                                   |            |          |  |                |        |              |  |          |        |     |  |          |            |      |  |   |         |  |  |   | $       | (11,431 | ) |   |         |      |  |   |        | (11,431 | )
|                                                |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Comprehensive loss                              |                                                  |                                   |           |           |  |                |       |               |  |          |       |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (9,115 | )      
|                                                |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Balance, December 31, 2002                      |                                                  |                                   | 5,870,609  |           |  | $              | 5,871  |               |  | $        | 14,203 |      |  |          |           |       |  |   |        |   |  | $ | (11,431 | )       |   | $ | 53,375  |       |  | $ | 62,018 |        
|Stock options exercised and related tax benefit |                                                  |                                   | 52,125     |           |  |                | 52     |               |  |          | 282    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 334    |        
|Restricted stock forfeiture                     |                                                  |                                   | (20,000    | )         |  |                | (20    | )             |  |          | (306   | )    |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (326   | )      
|Deferred compensation                           |                                                  |                                   |           |           |  |                |       |               |  |          | 10     |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 10     |        
|Deferred compensation forfeiture                |                                                  |                                   |           |           |  |                |       |               |  |          | 326    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 326    |        
|Comprehensive income (loss):                    |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|                                                | Net income                                       |                                   |            |          |  |                |        |              |  |          |        |     |  |          |            |      |  |   |         |  |  |   |         |        |   |   |         | 102   |  |   |        | 102     |  
|                                                | Minimum pension liability adjustment, net of tax |                                   |            |          |  |                |        |              |  |          |        |     |  |          |            |      |  |   |         |  |  |   | $       | (1,267  | ) |   |         |      |  |   |        | (1,267  | )
|                                                |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Comprehensive loss                              |                                                  |                                   |           |           |  |                |       |               |  |          |       |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (1,165 | )      
|                                                |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Balance, December 31, 2003                      |                                                  |                                   | 5,902,734  |           |  | $              | 5,903  |               |  | $        | 14,515 |      |  |          |           |       |  | $ |        |   |  | $ | (12,698 | )       |   | $ | 53,477  |       |  | $ | 61,197 |        
|                                                |                                                  |                                   |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        

The accompanying notes are an integral part of
these consolidated financial statements.

35



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |        |        |         |  
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ----------------------------------------------- | ----- | ------ | ------- | ------- | ----- | ------ | ------ | ------- | ------ | ------ | ------- | -
|                                                                                                    |                                                                                                             |                                                                    
|                                                                                                    |                                                                                                             | Year Ended December 31,                                            
|                                                                                                    |                                                                                                             |                                                                    
|                                                                                                    |                                                                                                             | 2003                                                                |                                                 | 2002  |        | 2001   
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |        
|                                                                                                    |                                                                                                             |                                                                    
|                                                                                                    |                                                                                                             | (In thousands)                                                     
|Cash Flows from Operating Activities of
    Continuing Operations                                   |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Net income (loss)                                                                                   |                                                                                                             | $                                                                   | 102                                             |       |        | $       | 2,316   |       |        | $      | (2,448  | )     
|Adjustments to reconcile net income
    (loss) to cash provided by continuing operating activities: |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|                                                                                                    | Depreciation and amortization                                                                               |                                                                     |                                                 | 7,942 |        |         |         | 7,581 |        |        |         | 9,748  |       
|                                                                                                    | Deferred income taxes                                                                                       |                                                                     |                                                 | 281   |        |         |         | 1,603 |        |        |         | (1,566 | )     
|                                                                                                    | Stock based compensation                                                                                    |                                                                     |                                                 | 92    |        |         |         | 423   |        |        |         | 435    |       
|                                                                                                    | Net loss (gain) on curtailment of pension
    and postretirement plans                                      |                                                                     |                                                 | 1,599 |        |         |         | (181  | )      |        |         |       |       
|                                                                                                    | Loss on sale/disposal of fixed assets                                                                       |                                                                     |                                                 | 45    |        |         |         | 42    |        |        |         | 2,250  |       
|                                                                                                    | Equity in loss (income) from unconsolidated
    joint ventures                                              |                                                                     |                                                 | 523   |        |         |         | 59    |        |        |         | (23    | )     
|                                                                                                    | Change in operating assets and liabilities, net
    of effects from acquisition and disposal of businesses: |                                                                     |                                                 |       |        |         |         |       |        |        |         |        |       
|                                                                                                    |                                                                                                             | Accounts receivable                                                 |                                                 |       | (733   | )       |         |       | (2,554 | )      |         |        | 1,207  |        
|                                                                                                    |                                                                                                             | Inventories                                                         |                                                 |       | (1,588 | )       |         |       | 1,418  |        |         |        | 4,019  |        
|                                                                                                    |                                                                                                             | Tax receivable                                                      |                                                 |       |       |         |         |       | (517   | )      |         |        | 8,474  |        
|                                                                                                    |                                                                                                             | Other assets, other current assets and loans to
    related parties |                                                 |       | (658   | )       |         |       | (1,433 | )      |         |        | 245    |        
|                                                                                                    |                                                                                                             | Accounts payable                                                    |                                                 |       | 2,423  |         |         |       | (1,623 | )      |         |        | (70    | )      
|                                                                                                    |                                                                                                             | Accrued expenses                                                    |                                                 |       | (454   | )       |         |       | (3,207 | )      |         |        | (2,283 | )      
|                                                                                                    |                                                                                                             | Other long-term liabilities                                         |                                                 |       | (969   | )       |         |       | 2,156  |        |         |        | (334   | )      
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|                                                                                                    |                                                                                                             |                                                                     | Cash provided by operating activities           |       |        | 8,605   |         |       |        | 6,083  |         |        |        | 19,654  |  
|Cash Flows from Investing Activities of
    Continuing Operations                                   |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Investment in plant and equipment                                                                   |                                                                                                             |                                                                     | (4,307                                          | )     |        |         | (4,349  | )     |        |        | (2,375  | )     
|Investment in unconsolidated joint venture                                                          |                                                                                                             |                                                                     | (325                                            | )     |        |         |        |       |        |        |        |       
|Proceeds from sale of plant and equipment                                                           |                                                                                                             |                                                                     | 21                                              |       |        |         | 90      |       |        |        | 1,391   |       
|Business acquisitions, net of cash acquired                                                         |                                                                                                             |                                                                     | (6,020                                          | )     |        |         | (1,700  | )     |        |        |        |       
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|                                                                                                    |                                                                                                             |                                                                     | Cash used in investing activities               |       |        | (10,631 | )       |       |        | (5,959 | )       |        |        | (984    | )
|Cash Flows from Financing Activities of
    Continuing Operations                                   |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Net proceeds from revolving portion of long-term
    debt                                           |                                                                                                             |                                                                     | 300                                             |       |        |         | 1,662   |       |        |        |        |       
|Principal repayments on term portion of long-term
    debt                                          |                                                                                                             |                                                                     | (2,700                                          | )     |        |         | (2,000  | )     |        |        | (20,431 | )     
|Principal repayment on note payable to related
    parties                                          |                                                                                                             |                                                                     | (250                                            | )     |        |         |        |       |        |        |        |       
|Repayment on refinancing                                                                            |                                                                                                             |                                                                     |                                                |       |        |         | (27,630 | )     |        |        |        |       
|Proceeds from refinancing                                                                           |                                                                                                             |                                                                     | 5,000                                           |       |        |         | 27,688  |       |        |        |        |       
|Proceeds from shares exercised under stock option
    plans                                         |                                                                                                             |                                                                     | 272                                             |       |        |         | 239     |       |        |        | 73      |       
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|                                                                                                    |                                                                                                             |                                                                     | Cash provided by (used in) financing activities |       |        | 2,622   |         |       |        | (41    | )       |        |        | (20,358 | )
|Cash (used in) provided by activities of
    discontinued operations                                |                                                                                                             |                                                                     | (498                                            | )     |        |         | (61     | )     |        |        | 1,716   |       
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Increase in cash and cash equivalents                                                               |                                                                                                             |                                                                     | 98                                              |       |        |         | 22      |       |        |        | 28      |       
|Cash and cash equivalents at beginning of year                                                      |                                                                                                             |                                                                     | 1,085                                           |       |        |         | 1,063   |       |        |        | 1,035   |       
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Cash and cash equivalents at end of year                                                            |                                                                                                             | $                                                                   | 1,183                                           |       |        | $       | 1,085   |       |        | $      | 1,063   |       
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Supplemental Disclosures of Cash Flow
    Information                                               |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Interest paid (net of amount capitalized)                                                           |                                                                                                             | $                                                                   | 1,198                                           |       |        | $       | 1,452   |       |        | $      | 2,862   |       
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Income taxes paid for continuing operations, net                                                    |                                                                                                             | $                                                                   | 94                                              |       |        | $       | 203     |       |        | $      | (4,800  | )     
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Supplemental Schedule of Non-Cash Investing
    and Financing Activities                            |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Fair value of assets acquired in acquisitions                                                       |                                                                                                             | $                                                                   | 6,314                                           |       |        | $       | 4,694   |       |        |        |        |       
|Accrued liability to purchase Dietzgen inventories                                                  |                                                                                                             |                                                                     |                                                |       |        |         | (1,052  | )     |        |        |        |       
|Note payable with Computer Imaging Supplies, Inc.                                                   |                                                                                                             |                                                                     |                                                |       |        |         | (1,000  | )     |        |        |        |       
|Liabilities assumed in acquisitions                                                                 |                                                                                                             |                                                                     | (294                                            | )     |        |         | (942    | )     |        |        |        |       
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       
|Cash paid for acquisitions                                                                          |                                                                                                             | $                                                                   | 6,020                                           |       |        | $       | 1,700   |       |        | $      |        |       
|                                                                                                    |                                                                                                             |                                                                     |                                                 |       |        |         |         |       |        |        |         |       

The accompanying notes are an integral part of
these consolidated financial statements.

36



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|        |                                               
|------- | ----------------------------------------------
|Note 1: | Summary of Significant Accounting
    Policies



| |                           
| | --------------------------
| | Description of the Company

Nashua Corporation is a manufacturer, converter
and marketer of labels, specialty papers and imaging products.
Our primary products include thermal and other coated papers,
wide-format papers, pressure-sensitive labels and tags,
transaction and financial receipts and toners/developers for use
in photocopiers.



| |                                    
| | -----------------------------------
| | Segment and Related
    Information

We have three reportable segments as discussed in
detail in Note 13:

(1) Label Products

(2) Specialty Paper Products

(3) Imaging Supplies



| |                       
| | ----------------------
| | Basis of Consolidation

Our consolidated financial statements include the
accounts of Nashua Corporation and its wholly-owned
subsidiaries. All significant intercompany transactions and
balances have been eliminated.



| |                    
| | -------------------
| | Revenue Recognition

We recognize revenue from product sales or
services rendered when the following four revenue recognition
criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the
selling price is fixed or determinable, and collectibility is
reasonably assured.



| |                           
| | --------------------------
| | Environmental Expenditures

We expense environmental expenditures relating to
ongoing operations unless the expenditures extend the life,
increase the capacity or improve the safety or efficiency of our
property, mitigate or prevent environmental contamination that
has yet to occur and improve our property compared with its
original condition, or are incurred for property held for sale.

Expenditures relating to site assessment,
remediation and monitoring are accrued and expensed when the
costs are both probable and the amount can be reasonably
estimated. We base estimates on in-house and third-party studies
considering current technologies, remediation alternatives and
current environmental standards. In addition, if there are other
participants and the liability is joint and several, the
financial stability of the other participants is considered in
determining our accrual.



| |               
| | --------------
| | Shipping Costs

We classify third-party shipping costs as a
component of selling and distribution expenses in our
Consolidated Statement of Operations. Third-party shipping costs
totaled $11.3 million, $10.0 million and
$11.1 million for the years ended December 31, 2003,
2002 and 2001, respectively.



| |                         
| | ------------------------
| | Research and Development

We expense research and development costs as
incurred.



| |                 
| | ----------------
| | Use of Estimates

The preparation of our consolidated financial
statements requires us to make estimates and assumptions that
affect the amounts reported in our financial statements and
accompanying notes. Significant estimates

37



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

include tax contingency reserves, allowances for
obsolete inventory and uncollectible receivables, environmental
obligations, pension and other postretirement benefits,
valuation allowances for deferred tax assets, future cash flows
associated with assets and useful lives for depreciation and
amortization. Actual results could differ from our estimates.



| |                 
| | ----------------
| | Cash Equivalents

We consider all highly liquid investment
instruments purchased with a maturity of three months or less to
be cash equivalents.



| |                    
| | -------------------
| | Accounts Receivable

Our consolidated accounts receivable balance is
net of allowances for doubtful accounts of $.9 million at
December 31, 2003 and $.7 million at December 31,
2002.



| |            
| | -----------
| | Inventories

Our inventories are carried at the lower of cost
or market. Cost is determined by the first-in, first-out or
commonly known as FIFO method for approximately 83 percent
of our inventories at December 31, 2003 and 2002 and by the
last-in, first-out or commonly known as LIFO method for the
balance. If the FIFO method had been used to cost all
inventories, the balances would have been approximately
$1.7 million and $1.8 million higher at
December 31, 2003 and 2002.



| |                    
| | -------------------
| | Plant and Equipment

Our plant and equipment are stated at cost. We
charge expenditures for maintenance and repairs to operations as
incurred, while additions, renewals and betterments of plant and
equipment are capitalized. Items which are fully depreciated,
sold, retired or otherwise disposed of, together with related
accumulated depreciation, are removed from our accounts and,
where applicable, the related gain or loss is recognized.

Depreciation expense was $7.5 million for
2003, $7.3 million for 2002 and $8.1 million for 2001.
For financial reporting purposes, we compute depreciation
expense using the straight-line method over the following
estimated useful lives:

|                           |  |           
|-------------------------- |  | ----------
|Buildings and improvements |  | 5-40 years
|Machinery and equipment    |  | 3-20 years

We review the value of our plant and equipment
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.



| |         
| | --------
| | Goodwill

Goodwill represents the excess of the cost of
acquired businesses over the fair value of identifiable net
assets acquired. Through 2001, we amortized goodwill on a
straight-line basis over 20 years. Amortization of goodwill
was $1.7 million for 2001. Effective January 1, 2002,
we no longer amortize goodwill in accordance with Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. We now evaluate our goodwill for
impairment under the new guidelines of FAS 142.



| |                         
| | ------------------------
| | Stock-Based Compensation

At December 31, 2003, we had three stock
compensation plans, which are described more fully in Note 9. We
account for those plans under the recognition and measurement
principles of APB No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Under APB
No. 25, no stock-based employee

38



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

compensation cost relating to stock option awards
is reflected in our net income, as all options under our plans
had an exercise price equal to the market value of our common
stock on their date of grant. Stock-based compensation,
representing grants to non-employee directors and vesting of
performance-based restricted stock awards, was $.1 million
for 2003 and $.4 million for 2002 and 2001. The following
table illustrates the effect on net income and earnings per
share if we had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based
Compensation, as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, to
stock-based employee compensation:

|                                                                                                                                                  |                       |                                       |      |      |  |      |       |     |  |   |        |      |  
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------- | ---- | ---- |  | ---- | ----- | --- |  | - | ------ | ---- | -
|                                                                                                                                                  |                       |                                      
|                                                                                                                                                  |                       | Year Ended December 31,              
|                                                                                                                                                  |                       |                                      
|                                                                                                                                                  |                       | 2003                                  |      | 2002 |  | 2001
|                                                                                                                                                  |                       |                                       |      |      |  |     
|                                                                                                                                                  |                       |                                      
|                                                                                                                                                  |                       | (In thousands, except per share data)
|Net income (loss), as reported                                                                                                                    |                       | $                                     | 102  |      |  | $    | 2,316 |     |  | $ | (2,448 | )   
|Add: Stock-based employee compensation expense
    included in the determination of net income (loss) as reported,
    net of related tax effects |                       |                                       | 43   |      |  |      | 259   |     |  |   | 435    |     
|Deduct: Stock-based employee compensation expense
    determined under the fair value based method for all awards, net
    of related tax effects |                       |                                       | (107 | )    |  |      | (683  | )   |  |   | (1,471 | )   
|                                                                                                                                                  |                       |                                       |      |      |  |      |       |     |  |   |        |     
|Pro forma net income (loss)                                                                                                                       |                       | $                                     | 38   |      |  | $    | 1,892 |     |  | $ | (3,484 | )   
|                                                                                                                                                  |                       |                                       |      |      |  |      |       |     |  |   |        |     
|Earnings (loss) per share:                                                                                                                        |                       |                                       |      |      |  |      |       |     |  |   |        |     
|                                                                                                                                                  | Basic  as reported   |                                       | $    | .02  |  |      | $     | .40 |  |   | $      | (.43 | )
|                                                                                                                                                  |                       |                                       |      |      |  |      |       |     |  |   |        |     
|                                                                                                                                                  | Basic  pro forma     |                                       | $    | .01  |  |      | $     | .33 |  |   | $      | (.61 | )
|                                                                                                                                                  |                       |                                       |      |      |  |      |       |     |  |   |        |     
|                                                                                                                                                  | Diluted  as reported |                                       | $    | .02  |  |      | $     | .39 |  |   | $      | (.43 | )
|                                                                                                                                                  |                       |                                       |      |      |  |      |       |     |  |   |        |     
|                                                                                                                                                  | Diluted  pro forma   |                                       | $    | .01  |  |      | $     | .32 |  |   | $      | (.61 | )
|                                                                                                                                                  |                       |                                       |      |      |  |      |       |     |  |   |        |     



| |             
| | ------------
| | Income Taxes

Deferred income taxes result principally from the
use of different methods of depreciation and amortization for
income tax and financial reporting purposes, the recognition of
expenses for financial reporting purposes in years different
from those in which the expenses are deductible for income tax
purposes, and the recognition of the tax benefit of net
operating losses and other tax credits.



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

Financial instruments that potentially subject us
to concentrations of credit risk consist primarily of cash
equivalents and trade receivables.

We place our temporary cash investments with high
quality financial institutions and in high quality liquid
investments. Concentrations of credit risk with respect to
accounts receivable are limited because our customer base
consists of a large number of geographically diverse customers.
We perform ongoing credit evaluations of our customers
financial condition and maintain allowances for potential credit
losses. We generally do not require collateral or other security
to support customer receivables.



| |                        
| | -----------------------
| | Concentrations of Labor

We had 929 full-time employees at
February 1, 2004. Approximately 306 of our employees are
members of one of several unions, principally the Paper, Allied
Industrial, Chemical and Energy Workers International

39



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Union. We believe our employee relations are
satisfactory. None of our labor agreements, as disclosed in
Item 1 of this Annual Report on Form 10-K, expire in
2004.



| |                         
| | ------------------------
| | Concentrations of Supply

We purchase certain important raw materials from
a sole source or a limited number of manufacturers. Management
believes that other suppliers could qualify to provide similar
raw materials on comparable terms. The time required to locate
and qualify other suppliers, however, could cause a delay in
manufacturing that could be disruptive to our Company.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The recorded amounts for cash and cash
equivalents, other current assets, accounts receivable and
accounts payable and other current liabilities approximate fair
value due to the short-term nature of these financial
instruments. The fair values of amounts outstanding under our
debt instruments approximate their book values in all material
respects due to the variable nature of the interest rate
provisions associated with such instruments.



| |                                                    
| | ---------------------------------------------------
| | Earnings per Common and Common Equivalent
    Share

Earnings per common and common equivalent share
are computed based on the total of the weighted average number
of common shares and, when applicable, the weighted average
number of common equivalent shares outstanding during the period
presented.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

In January 2003, Financial Accounting Standards
Board Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities was
issued. The interpretation provides guidance on consolidating
variable interest entities and applies immediately to variable
interests created after January 31, 2003. The guidelines of
the interpretation as revised in December 2003 become applicable
for us in our first quarter 2004 for variable interest entities
created before February 1, 2003. The interpretation
requires variable interest entities to be consolidated if the
equity investment at risk is not sufficient to permit an entity
to finance its activities without support from other parties or
the equity investors lack certain specified characteristics.

The adoption of FIN 46 for variable interests
created after January 31, 2003 did not have an impact on
our consolidated financial condition, results of operation or
cash flows. We do not expect the provisions of FIN 46 to have a
material impact on future reporting periods with respect to
interests in variable interest entities created prior to
February 1, 2003, and do not currently anticipate any
material accounting or disclosure requirement under the
provisions of the interpretation.

Note 2:     Business
Changes



| |                      
| | ---------------------
| | Business Acquisitions

In December 2003, we acquired the assets of the
Magellan wide-format graphics product line from PM Co. L.L.C.
This acquisition is consistent with our strategy of adding value
with new products and services that leverage our converting and
distribution capabilities. Operating activity under this product
line will be reported in our Specialty Paper Products segment
from the date of acquisition.

In November 2003, we acquired the assets of the
supermarket label product line from Zebra Technologies, Inc. The
supermarket label business markets and distributes pressure
sensitive direct thermal labels used solely for marking
prepackaged meat, produce, deli and bakery items in
supermarkets, grocery and

40



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

convenience stores. Operating activity relating
to this line is reported under our Label Products segment from
the date of acquisition.

In February 2003, we acquired the operating
assets of The Label Company from Bunzl Distribution and signed a
multi-year agreement to supply Bunzl with label products. The
Label Company had primarily been a supplier of supermarket
promotional, scale and product identification labels mainly for
Bunzl and other customers. We believe this acquisition provides
flexibility to our label manufacturing operations, adds
additional volume to our coating facility within our Specialty
Paper Products segment and enhances our relationship with a
valued and long-standing customer. Operating activity relating
to The Label Company will be reported under our Label Products
segment from the date of acquisition.

In June 2002, we acquired out of bankruptcy
certain assets of Dietzgen LLC, including trademarks, trade
names, customer lists and certain equipment and inventories.
Dietzgen, an after-market provider of wide-format digital media
and imaging supplies for the architectural, engineering and
construction markets, filed for protection under Chapter 11
of the U.S. Bankruptcy Code on January 31, 2002.
Operating activity relating to the assets acquired from Dietzgen
is reported as part of our Specialty Paper Products segment from
the date of acquisition.

In April 2002, we acquired the assets of Computer
Imaging Supplies Inc., a privately held manufacturer and
marketer of security and fraud prevention products for the
point-of-sale transaction industry and of inkjet and toner
cartridges. The products of Computer Imaging Supplies include
multi-color ribbons and specialized inks that prevent
unauthorized duplication of cash register receipts. Operating
activity relating to the assets acquired from Computer Imaging
Supplies is reported as part of our Specialty Paper Products
segment from the date of acquisition.



| |                   
| | ------------------
| | Strategic Alliance

On February 25, 2003, we entered into a
strategic agreement with Parlex Corporation to cooperate in the
development of flexible circuit technology incorporating
proprietary printing and plating technologies. The agreement
creates an organization, Stratos Technology, LLC, of which we
own 50 percent, that will draw on both parties
relative expertise in ink and printed circuit technology, label
converting and the design, application and production of
flexible circuits. Under the agreement, Stratos Technology will
work to develop innovative products for use in the automotive,
cellular and radio identification (RFID) markets.



| |                                            
| | -------------------------------------------
| | Restructuring and Other Unusual
    Charges

Net restructuring and unusual income of $68,000
for 2003 and $88,000 for 2002 represent adjustments to our
previously established restructuring reserves.

Details of our restructuring reserves related to
continuing operations and activity recorded in accrued expenses
during 2003 and 2002 were as follows:

|                                                             |  |                |     |             |  |          |     |          |  |   |     |   |  |   |    | 
|------------------------------------------------------------ |  | -------------- | --- | ----------- |  | -------- | --- | -------- |  | - | --- | - |  | - | -- | 
|                                                             |  | Reserve        |     |             |  |          |     | Reserve 
|                                                             |  | Balance        |     | Adjustments |  | Current  |     | Balance 
|                                                             |  | Dec. 31,       |     | to Prior    |  | Year     |     | Dec. 31,
|                                                             |  | 2002           |     | Provision   |  | Payments |     | 2003    
|                                                             |  |                |     |             |  |          |     |         
|                                                             |  |               
|                                                             |  | (In thousands)
|2003 Activity:                                               |  |                |     |             |  |          |     |          |  |   |     |   |  |   |    | 
|Provisions for severance related to workforce
    reductions |  | $              | 166 |             |  | $        | (68 | )        |  | $ | (37 | ) |  | $ | 61 | 
|                                                             |  |                |     |             |  |          |     |          |  |   |     |   |  |   |    | 
|Total                                                        |  | $              | 166 |             |  | $        | (68 | )        |  | $ | (37 | ) |  | $ | 61 | 
|                                                             |  |                |     |             |  |          |     |          |  |   |     |   |  |   |    | 

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                             |  |                |       |             |  |          |      |            |  |          |      |   |  |   |      |   |  |   |     | 
|------------------------------------------------------------ |  | -------------- | ----- | ----------- |  | -------- | ---- | ---------- |  | -------- | ---- | - |  | - | ---- | - |  | - | --- | 
|                                                             |  | Reserve        |       |             |  |          |      |            |  | Reserve 
|                                                             |  | Balance        |       | Adjustments |  | Current  |      |            |  | Balance 
|                                                             |  | Dec. 31,       |       | to Prior    |  | Year     |      | Non-cash   |  | Dec. 31,
|                                                             |  | 2001           |       | Provision   |  | Payments |      | Write-offs |  | 2002    
|                                                             |  |                |       |             |  |          |      |            |  |         
|                                                             |  |               
|                                                             |  | (In thousands)
|2002 Activity:                                               |  |                |       |             |  |          |      |            |  |          |      |   |  |   |      |   |  |   |     | 
|Provisions for severance related to workforce
    reductions |  | $              | 1,179 |             |  | $        | (133 | )          |  | $        | (880 | ) |  | $ |     |   |  | $ | 166 | 
|Provisions for assets to be sold or discarded                |  |                | 386   |             |  |          | 45   |            |  |          |     |   |  |   | (431 | ) |  |   |    | 
|Other                                                        |  |                | 422   |             |  |          |     |            |  |          | (24  | ) |  |   | (398 | ) |  |   |    | 
|                                                             |  |                |       |             |  |          |      |            |  |          |      |   |  |   |      |   |  |   |     | 
|Total                                                        |  | $              | 1,987 |             |  | $        | (88  | )          |  | $        | (904 | ) |  | $ | (829 | ) |  | $ | 166 | 
|                                                             |  |                |       |             |  |          |      |            |  |          |      |   |  |   |      |   |  |   |     | 

Restructuring and other unusual charges for 2001
of approximately $3.0 million included restructuring
charges of $4.1 million related to the shutdown of our
lamination business in our Label Products segment completed
during 2001, $.6 million associated with the outsourcing of
our toner filling operation within our Imaging Supplies segment
completed in the first half of 2002, and a net $.3 million
of other restructuring and unusual items, partially offset by
unusual income of $1.4 million resulting from an anti-trust
settlement and $.6 million from the sale of land in
Merrimack, NH. Our 2001 provision for workforce reductions
included severance for 141 employees. Sales for our
discontinued lamination business were approximately
$10.7 million for 2001. The restructuring activities
provided for in the balance at December 31, 2000 were
completed during 2001 and the amounts charged against the
reserve did not change materially from our beginning reserve
balance of $.7 million.

Details of our restructuring reserves related to
continuing operations and activity recorded in accrued expenses
during 2001 were as follows:

|                                                             |  |                |     |           |  |             |       |          |  |   |        |   |  |   |       | 
|------------------------------------------------------------ |  | -------------- | --- | --------- |  | ----------- | ----- | -------- |  | - | ------ | - |  | - | ----- | 
|                                                             |  | Reserve        |     |           |  |             |       | Reserve 
|                                                             |  | Balance        |     | Current   |  | Current     |       | Balance 
|                                                             |  | Dec. 31,       |     | Year      |  | Year        |       | Dec. 31,
|                                                             |  | 2000           |     | Provision |  | Utilization |       | 2001    
|                                                             |  |                |     |           |  |             |       |         
|                                                             |  |               
|                                                             |  | (In thousands)
|2001 Activity:                                               |  |                |     |           |  |             |       |          |  |   |        |   |  |   |       | 
|Provisions for severance related to workforce
    reductions |  | $              | 714 |           |  | $           | 1,894 |          |  | $ | (1,429 | ) |  | $ | 1,179 | 
|Provisions for assets to be sold or discarded                |  |                |    |           |  |             | 386   |          |  |   |       |   |  |   | 386   | 
|Other                                                        |  |                |    |           |  |             | 615   |          |  |   | (193   | ) |  |   | 422   | 
|                                                             |  |                |     |           |  |             |       |          |  |   |        |   |  |   |       | 
|Total                                                        |  | $              | 714 |           |  | $           | 2,895 |          |  | $ | (1,622 | ) |  | $ | 1,987 | 
|                                                             |  |                |     |           |  |             |       |          |  |   |        |   |  |   |       | 



| |                        
| | -----------------------
| | Discontinued Operations

Details of balances outstanding related to
discontinued operations recorded prior to 2000 were as follows:

|                                                            |  |                |        |      |  |   |        |  
|----------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                            |  |               
|                                                            |  | At December 31
|                                                            |  |               
|                                                            |  | 2003           |        | 2002
|                                                            |  |                |        |     
|                                                            |  |               
|                                                            |  | (In thousands)
|Assets                                                      |  | $              | 930    |      |  | $ | 930    |  
|Liabilities                                                 |  |                | (3,727 | )    |  |   | (4,045 | )
|                                                            |  |                |        |      |  |   |        |  
|Net assets and (liabilities) of discontinued
    operations |  | $              | (2,797 | )    |  | $ | (3,115 | )
|                                                            |  |                |        |      |  |   |        |  

Our asset balance as of December 31, 2003,
consists primarily of our 37.1 percent interest in the
Cerion Technologies Liquidating Trust, a trust established
pursuant to the liquidation of Cerion Technologies Inc.,

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

formerly a publicly held company. Cerion ceased
operations during the fourth quarter of 1998 and is currently in
the process of liquidation. We account for our investment in
Cerion based on its expected net realizable value, net of taxes.

Our liability balance consists primarily of tax
reserves relating to discontinued operations.

Note
3:     Intangible Assets

Details of acquired intangible assets are as
follows:

|                                 |  |                      |       |              |  |              |     |  |  |  |         | 
|-------------------------------- |  | -------------------- | ----- | ------------ |  | ------------ | --- |  |  |  | ------- | 
|                                 |  |                     
|                                 |  | At December 31, 2003
|                                 |  |                     
|                                 |  |                      |       | Weighted    
|                                 |  | Gross                |       |              |  | Average     
|                                 |  | Carrying             |       | Accumulated  |  | Amortization
|                                 |  | Amount               |       | Amortization |  | Period      
|                                 |  |                      |       |              |  |             
|                                 |  |                     
|                                 |  | (In thousands)      
|Trademarks and trade names       |  | $                    | 560   |              |  | $            | 138 |  |  |  | 9 years | 
|Licensing agreement              |  |                      | 230   |              |  |              | 81  |  |  |  | 5 years | 
|Customer relationships and lists |  |                      | 950   |              |  |              | 251 |  |  |  | 7 years | 
|Customer contracts               |  |                      | 620   |              |  |              | 233 |  |  |  | 4 years | 
|Non-competition agreements       |  |                      | 100   |              |  |              | 35  |  |  |  | 5 years | 
|Patented technology              |  |                      | 90    |              |  |              | 31  |  |  |  | 5 years | 
|                                 |  |                      |       |              |  |              |     |  |  |  |         | 
|                                 |  | $                    | 2,550 |              |  | $            | 769 |  |  |  |         | 
|                                 |  |                      |       |              |  |              |     |  |  |  |         | 

Customer relationships and lists and customer
contracts increased from 2002 due to the net effect of
acquisitions made during 2003 and the removal of a contingent
liability related to the Dietzgen acquisition made during 2002.
The contingent liability related to the Dietzgen acquisition was
determined to not be required as of December 31, 2003 and
$.4 million was adjusted to reduce other long-term
liabilities and intangibles, net of amortization on the
Consolidated Balance Sheet.

|                                     |                                  |   |     |     | 
|------------------------------------ | -------------------------------- | - | --- | --- | 
|Amortization Expense:                |                                  |   |     |    
|For the year ended December 31, 2002 |                                  | $ | 288 |    
|For the year ended December 31, 2003 |                                  | $ | 481 |    
|Estimated for the year ending:       |                                  |   |     |    
|                                     | December 31, 2004                |   | $   | 406 | 
|                                     | December 31, 2005                |   | $   | 338 | 
|                                     | December 31, 2006                |   | $   | 321 | 
|                                     | December 31, 2007                |   | $   | 208 | 
|                                     | December 31, 2008                |   | $   | 88  | 
|                                     | December 31, 2009 and thereafter |   | $   | 420 | 

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
4:     Goodwill

The carrying amount of goodwill by segment and
activity during the twelve months ended December 31, 2003
is as follows:

|                                                                                      |  |                  |        |                |  |       |        |  |  |   |        | 
|------------------------------------------------------------------------------------- |  | ---------------- | ------ | -------------- |  | ----- | ------ |  |  | - | ------ | 
|                                                                                      |  | Specialty Paper  |        | Label Products |  |      
|                                                                                      |  | Products Segment |        | Segment        |  | Total
|                                                                                      |  |                  |        |                |  |      
|                                                                                      |  |                 
|                                                                                      |  | (In thousands)  
|Balance as of December 31, 2002                                                       |  | $                | 14,142 |                |  | $     | 15,320 |  |  | $ | 29,462 | 
|Goodwill resulting from the acquisition of The
    Label Company business             |  |                  |       |                |  |       | 1,962  |  |  |   | 1,962  | 
|Goodwill resulting from the acquisition of Zebra
    supermarket thermal product line |  |                  |       |                |  |       | 47     |  |  |   | 47     | 
|                                                                                      |  |                  |        |                |  |       |        |  |  |   |        | 
|Balance as of December 31, 2003                                                       |  | $                | 14,142 |                |  | $     | 17,329 |  |  | $ | 31,471 | 
|                                                                                      |  |                  |        |                |  |       |        |  |  |   |        | 

Accumulated amortization of goodwill prior to the
adoption of FAS 142 was $2.7 million.



| |                                                                   
| | ------------------------------------------------------------------
| | Adoption of Statement of Financial
    Accounting Standard No. 142

Reconciliations between reported net income
(loss) and earnings (loss) per share and adjusted net income
(loss) and earnings (loss) per share resulting from the
adoption of FAS No. 142 as of January 1, 2002, are as
follows:

|                           |  |                                       |      |              |  |              |       |  |  |   |        |  
|-------------------------- |  | ------------------------------------- | ---- | ------------ |  | ------------ | ----- |  |  | - | ------ | -
|                           |  |                                      
|                           |  | Year Ended                           
|                           |  |                                      
|                           |  | December 31,                          |      | December 31, |  | December 31,
|                           |  | 2003                                  |      | 2002         |  | 2001        
|                           |  |                                       |      |              |  |             
|                           |  |                                      
|                           |  | (In thousands, except per share data)
|Reported net income (loss) |  | $                                     | 102  |              |  | $            | 2,316 |  |  | $ | (2,448 | )
|Goodwill amortization      |  |                                       |     |              |  |              |      |  |  |   | 1,656  |  
|                           |  |                                       |      |              |  |              |       |  |  |   |        |  
|Adjusted net income (loss) |  | $                                     | 102  |              |  | $            | 2,316 |  |  | $ | (792   | )
|                           |  |                                       |      |              |  |              |       |  |  |   |        |  
|Basic earnings per share   |  |                                       |      |              |  |              |       |  |  |   |        |  
|Reported net income (loss) |  | $                                     | 0.02 |              |  | $            | 0.40  |  |  | $ | (0.43  | )
|Goodwill amortization      |  |                                       |     |              |  |              |      |  |  |   | 0.29   |  
|                           |  |                                       |      |              |  |              |       |  |  |   |        |  
|Adjusted net income (loss) |  | $                                     | 0.02 |              |  | $            | 0.40  |  |  | $ | (0.14  | )
|                           |  |                                       |      |              |  |              |       |  |  |   |        |  
|Diluted earnings per share |  |                                       |      |              |  |              |       |  |  |   |        |  
|Reported net income (loss) |  | $                                     | 0.02 |              |  | $            | 0.39  |  |  | $ | (0.43  | )
|Goodwill amortization      |  |                                       |     |              |  |              |      |  |  |   | 0.29   |  
|                           |  |                                       |      |              |  |              |       |  |  |   |        |  
|Adjusted net income (loss) |  | $                                     | 0.02 |              |  | $            | 0.39  |  |  | $ | (0.14  | )
|                           |  |                                       |      |              |  |              |       |  |  |   |        |  

Note
5:     Indebtedness

On July 15, 2003, we entered into a first
amendment to our Credit Agreement dated March 1, 2002 with
LaSalle Bank, NA as Agent and Issuing Bank and Fleet National
Bank (the Lenders) to increase the Term Loan under
the Credit Agreement from $10 million to $15 million
and to adjust the amount of the quarterly principal payments.
The amended Credit Agreement consists of a term loan of
$15 million and a revolving loan commitment of
$30 million. Borrowings under this agreement are
collateralized by a security interest in our accounts
receivable, inventories, certain machinery and equipment and
real estate located in Merrimack, NH. At December 31, 2003,
the approximate fair value of these assets was
$79.9 million. Interest on loans outstanding is, at our
option, either at a rate per annum equal to the Base Rate
(prime) or LIBOR, plus

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

applicable margin. The initial applicable margin
over the Base Rate was .75 percent per annum through
June 30, 2002, after which it ranges from zero up to
..75 percent per annum based on our total debt to EBITDA
ratio. The initial applicable margin over LIBOR was
2.75 percent per annum through June 30, 2002, after
which it ranges from 1.75 percent per annum up to
2.75 percent per annum based on our total debt to EBITDA
ratio. We are also subject to a non-use fee for any unutilized
portion of our revolving loan that ranges from .25 percent
to .50 percent based on our total debt to EBITDA ratio. The
revolving loan commitment is subject to certain limitations,
such that the maximum principal amount of the revolving credit
agreement is the lesser of (a) $30 million, or (b) our
borrowing base, which is defined as the sum of 80 percent
of our eligible accounts receivable, plus the lesser of
(i) 50 percent of our eligible inventory or
(ii) $12 million. Our borrowing base was
$30.0 million at December 31, 2003, and our availability
under the revolving loan commitment was $10.0 million at
December 31, 2003. The maturity date of the Credit
Agreement is February 28, 2005. For the twelve months ended
December 31, 2003, the weighted average annual interest
rate on our long-term debt was 3.3 percent.

On July 24, 2003, we entered into a second
amendment to the Credit Agreement with the Lenders, to waive our
non-compliance with the funded debt to EBITDA Ratio and the
minimum EBITDA financial covenants for the quarter ended
June 27, 2003, and to adjust the financial covenants
related to minimum EBITDA levels. On September 25, 2003, we
entered into a third amendment to the Credit Agreement with the
Lenders to amend the definition of EBITDA with respect to the
minimum EBITDA covenant. Adjusted EBITDA is now defined as
EBITDA for the period comprising the last four most recently
completed fiscal quarters, plus the following items:
(1) restructuring, non-recurring, one-time charges,
(2) non-cash expenses, and (3) pro forma adjustments
for acquisitions, each as mutually agreed upon by us and the
Lenders. On December 30, 2003, we entered into a consent
and fourth amendment to the Credit Agreement adding the
provision to the funded debt to EBITDA ratio, for the
computation period ended December 31, 2003 only, to be
computed as the funded debt to adjusted EBITDA ratio. Our
financial covenants under the amended Credit Agreement are as
follows:



| |   |                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain a fixed charge coverage ratio of not
    less than 1.10 to 1.00.                                                                                                                                                                                                                                                                            
|
| |  | Maintain a funded debt to adjusted EBITDA ratio
    of less than 2.75 to 1.00.                                                                                                                                                                                                                                                                       
|
| |  | Maintain a minimum adjusted EBITDA level, as
    defined in the third amendment to our Credit Agreement which is
    noted above, of $12.3 million for our first quarter of
    2004, increasing in increments of $250,000 during each quarter
    of 2004 to $13.0 million for the quarter ending
    December 31, 2004 and each quarter thereafter.

Furthermore, without prior consent of our
lenders, the Credit Agreement limits, among other things, the
payment of dividends to $.6 million, capital expenditures
to $8.0 million, the incurrence of additional debt and
restricts the sale of certain assets and merger or acquisition
activities. We were in compliance with the above financial
covenants as of December 31, 2003.

The aggregate amounts of maturities on our
long-term debt are as follows:

|                                    |  |                |       |      |  |      |        |      |  |       |       |  |  |   |     |  |  |   |        | 
|----------------------------------- |  | -------------- | ----- | ---- |  | ---- | ------ | ---- |  | ----- | ----- |  |  | - | --- |  |  | - | ------ | 
|                                    |  | 2004           |       | 2005 |  | 2006 |        | 2007 |  | Total
|                                    |  |                |       |      |  |      |        |      |  |      
|                                    |  |               
|                                    |  | (In thousands)
|Term portion of long-term debt      |  | $              | 3,400 |      |  | $    | 3,400  |      |  | $     | 3,400 |  |  | $ | 100 |  |  | $ | 10,300 | 
|Revolving portion of long-term debt |  |                |      |      |  |      | 17,300 |      |  |       |      |  |  |   |    |  |  |   | 17,300 | 
|                                    |  |                |       |      |  |      |        |      |  |       |       |  |  |   |     |  |  |   |        | 
|                                    |  | $              | 3,400 |      |  | $    | 20,700 |      |  | $     | 3,400 |  |  | $ | 100 |  |  | $ | 27,600 | 
|                                    |  |                |       |      |  |      |        |      |  |       |       |  |  |   |     |  |  |   |        | 

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6:     Notes
Payable to Related Parties

On April 1, 2002, we acquired the assets of
Computer Imaging Supplies, Inc. In connection with the
acquisition, we issued a promissory note payable to Computer
Imaging Supplies in the original principal amount of
$1 million. The outstanding principal balance on the
promissory note bears interest at the prime rate. Interest on
the promissory note is payable quarterly, and the principal is
payable in four annual installments of $250,000 through
April 1, 2006. As a result of the acquisition, the founders
and co-owners of Computer Imaging Supplies became Nashua
employees.

We also have two notes held by former Rittenhouse
and current Nashua employees that were assumed in connection
with our acquisition of Rittenhouse Paper Company. These notes
are in the original principal amount of $230,000 each, payable
on August 31, 2005. Interest on these notes is payable
quarterly and accrues at our incremental borrowing rate.

The aggregate amounts of maturities on our notes
payable are as follows:

|                                 |  |                |     |      |  |      |     |       |  |   |     |  |  |   |       | 
|-------------------------------- |  | -------------- | --- | ---- |  | ---- | --- | ----- |  | - | --- |  |  | - | ----- | 
|                                 |  | 2004           |     | 2005 |  | 2006 |     | Total
|                                 |  |                |     |      |  |      |     |      
|                                 |  |               
|                                 |  | (In thousands)
|Notes payable to related parties |  | $              | 250 |      |  | $    | 710 |       |  | $ | 250 |  |  | $ | 1,210 | 
|                                 |  |                |     |      |  |      |     |       |  |   |     |  |  |   |       | 

Note 7:     Income
Taxes

The domestic and foreign components of income
(loss) from continuing operations before income taxes are
as follows:

|                                  |  |                |     |      |  |      |       |  |  |   |        |  
|--------------------------------- |  | -------------- | --- | ---- |  | ---- | ----- |  |  | - | ------ | -
|                                  |  | 2003           |     | 2002 |  | 2001
|                                  |  |                |     |      |  |     
|                                  |  |               
|                                  |  | (In thousands)
|United States                     |  | $              | 219 |      |  | $    | 3,828 |  |  | $ | (3,035 | )
|Foreign                           |  |                |    |      |  |      |      |  |  |   | 253    |  
|                                  |  |                |     |      |  |      |       |  |  |   |        |  
|Consolidated pretax income (loss) |  | $              | 219 |      |  | $    | 3,828 |  |  | $ | (2,782 | )
|                                  |  |                |     |      |  |      |       |  |  |   |        |  

The provision (benefit) for income taxes
relating to continuing operations consists of the following:

|          |               |                                      |   |      |      |      |   |       |       |   |   |        |        |  
|--------- | ------------- | ------------------------------------ | - | ---- | ---- | ---- | - | ----- | ----- | - | - | ------ | ------ | -
|          |               | 2003                                 |   | 2002 |      | 2001
|          |               |                                      |   |      |      |     
|          |               |                                     
|          |               | (In thousands)                      
|Current:  |               |                                      |   |      |      |      |   |       |       |   |   |       
|          | United States |                                      | $ | (147 | )    |      | $ | (91   | )     |   | $ | 1,131  |       
|          | Foreign       |                                      |   |     |      |      |   |      |       |   |   | 101    |       
|          | State         |                                      |   | (17  | )    |      |   |      |       |   |   |       |       
|          |               |                                      |   |      |      |      |   |       |       |   |   |       
|          |               | Total current                        |   |      | (164 | )    |   |       | (91   | ) |   |        | 1,232  |  
|Deferred: |               |                                      |   |      |      |      |   |       |       |   |   |       
|          | United States |                                      |   | 257  |      |      |   | 1,362 |       |   |   | (1,504 | )     
|          | Foreign       |                                      |   |     |      |      |   |      |       |   |   |       |       
|          | State         |                                      |   | 24   |      |      |   | 241   |       |   |   | (62    | )     
|          |               |                                      |   |      |      |      |   |       |       |   |   |       
|          |               | Total deferred                       |   |      | 281  |      |   |       | 1,603 |   |   |        | (1,566 | )
|          |               |                                      |   |      |      |      |   |       |       |   |   |       
|          |               | Provision (benefit) for income taxes |   | $    | 117  |      |   | $     | 1,512 |   |   | $      | (334   | )
|          |               |                                      |   |      |      |      |   |       |       |   |   |       

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Total net deferred tax assets
(liabilities) are comprised of the following:

|                                                         |                         |                |        |        |  |   |        |        | 
|-------------------------------------------------------- | ----------------------- | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                         |                         | 2003           |        | 2002  
|                                                         |                         |                |        |       
|                                                         |                         |               
|                                                         |                         | (In thousands)
|Depreciation                                             |                         | $              | (1,124 | )      |  | $ | (561   | )     
|Other                                                    |                         |                | (372   | )      |  |   | (367   | )     
|                                                         |                         |                |        |        |  |   |        |       
|Gross deferred tax liabilities                           |                         |                | (1,496 | )      |  |   | (928   | )     
|Restructuring                                            |                         |                | 496    |        |  |   | 490    |       
|Pension and postretirement benefits                      |                         |                | 8,818  |        |  |   | 7,882  |       
|State loss carryforwards                                 |                         |                | 1,922  |        |  |   | 1,922  |       
|Alternative minimum tax and general business
    credits |                         |                | 1,434  |        |  |   | 1,241  |       
|Accrued expenses                                         |                         |                | 931    |        |  |   | 886    |       
|Inventory reserves                                       |                         |                | 1,000  |        |  |   | 925    |       
|Bad debt reserves                                        |                         |                | 419    |        |  |   | 409    |       
|Other                                                    |                         |                | 2,175  |        |  |   | 1,748  |       
|                                                         |                         |                |        |        |  |   |        |       
|Gross deferred tax asset                                 |                         |                | 17,195 |        |  |   | 15,503 |       
|Deferred tax assets valuation allowance                  |                         |                | (600   | )      |  |   | (600   | )     
|                                                         |                         |                |        |        |  |   |        |       
|                                                         | Net deferred tax assets |                | $      | 15,099 |  |   | $      | 13,975 | 
|                                                         |                         |                |        |        |  |   |        |       

Reconciliations between income tax provision
(benefit) from continuing operations computed using the
United States statutory income tax rate and our effective tax
rate are as follows:

|                                               |                              |      |      |      |   |      |      |      |   |  |       |       |   
|---------------------------------------------- | ---------------------------- | ---- | ---- | ---- | - | ---- | ---- | ---- | - |  | ----- | ----- | --
|                                               |                              | 2003 |      | 2002 |   | 2001
|                                               |                              |      |      |      |   |     
|United States federal statutory rate (benefit) |                              |      | 35.0 | %    |   |      | 35.0 | %    |   |  | (35.0 | )%   
|State taxes, net of federal tax benefit        |                              |      | 2.0  |      |   |      | 4.1  |      |   |  | (1.3  | )    
|Non-deductible goodwill                        |                              |      |     |      |   |      |     |      |   |  | 21.7  |      
|Non-deductible meals and entertainment         |                              |      | 12.3 |      |   |      | .4   |      |   |  | 2.3   |      
|Other, net                                     |                              |      | 4.1  |      |   |      |     |      |   |  | .3    |      
|                                               |                              |      |      |      |   |      |      |      |   |  |       |      
|                                               | Effective tax rate (benefit) |      |      | 53.4 | % |      |      | 39.5 | % |  |       | (12.0 | )%
|                                               |                              |      |      |      |   |      |      |      |   |  |       |      

At December 31, 2003, other current assets
included $3.7 million of net deferred tax assets and
$.5 million of tax receivables, and other assets included
$11.4 million of net deferred tax assets. During 2002, we
added deferred tax assets of $7.5 million associated with a
minimum pension liability adjustment as discussed in detail in
Note 12 to our consolidated financial statements. At
December 31, 2002, $3.8 million and $.7 million
of net deferred tax assets were included in other current assets
and other assets, respectively. At December 31, 2003 and
2002, $5.3 million and $5.4 million of accrued taxes
were included in accrued expenses.

At December 31, 2003, we had
$1.9 million of state net operating loss carryforwards and
$1.4 million of Federal tax credit carryforwards, which are
available to offset future domestic taxable earnings. The state
net operating loss carryforward benefits expire between 2004 and
2020. Included in the $1.4 million of Federal tax credit
carryforwards are business tax credits of $.6 million that
expire beginning in 2013 and $.8 million of tax credit
carryforwards for alternative minimum tax that have no
expiration date. In the fourth quarter of 2002, we evaluated the
realizability of state net operating loss carryforwards taking
into consideration current projections of future taxable income
and changes in the forecasted timing for deductibility of
certain significant temporary differences. Based upon this
assessment, we believe that it is more likely than not that
$.6 million of state net operating loss carryforwards will
not be realized prior to their expiration. In the fourth

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

quarter of 2002, we decreased both the tax asset
and related valuation allowance by $1.3 million for state
net operating loss carryforwards.

In December 1999, the Internal Revenue Service
completed an examination of our corporate income tax returns for
the years 1995 through 1997 and issued a Notice of Proposed
Adjustment which assessed additional taxes of $5.2 million,
excluding interest. The assessment represents a total of
$14.0 million of adjustments to taxable income for the
years under review. The proposed adjustments relate to the
deductibility of restructuring and other reserves applicable to
continuing and discontinued operations as well as the
utilization of foreign net operating losses primarily associated
with discontinued operations. We disagreed with the position
taken by the IRS and filed a formal protest of the proposed
adjustments on April 6, 2000. We are working through the
IRS appeals process to resolve the issues.

On October 28, 2003, the IRS completed an
examination of our corporate income tax returns for the years
1998 through 2000 and issued a Notice of Proposed Adjustment
which assessed additional taxes of $30,021 excluding interest.
While the amount assessed is immaterial, we have filed a protest
of the proposed adjustment since certain adjustments proposed by
the IRS for the years 1995 through 1997 could impact the tax
liability for the period 1998 through 2000. We are working with
the Appeals Office of the IRS to resolve issues relating to the
years 1997 through 2000.

While we believe that we have provided adequately
for our tax liabilities through December 31, 2003,
including liabilities related to matters in dispute with taxing
authorities, we can provide no assurances that we will prevail
in our defense against adjustments proposed in these pending or
future federal and state examinations. In addition, the ultimate
resolution of these open tax matters could be either in excess
of or less than current reserves.

Note
8:     Shareholders
Equity

Our ability to pay dividends is restricted to
$.6 million under the provisions of our credit agreement,
without the prior approval of our lenders. We did not declare or
pay a cash dividend on our common stock in 2003 or 2002 and do
not currently intend to pay dividends in the foreseeable future.

Note 9:     Stock
Option and Stock Award Plans

We have three stock compensation plans at
December 31, 2003: the 1987 Stock Option Plan, the 1996
Stock Incentive Plan and the 1999 Shareholder Value Plan. Awards
may no longer be granted under the 1987 Plan. Awards under the
1996 Plan and the 1999 Plan are made at the discretion of our
Leadership and Compensation Committee of our Board of Directors.

Under the 1987 Plan, nonstatutory stock options
have been awarded and are currently exercisable. Nonstatutory
stock options expire 10 years and one day from the date of
grant.

Nonstatutory stock options have been awarded
under the 1996 and 1999 Plans. Of the 660,000 and 600,000 shares
authorized by our Board of Directors for the 1996 and 1999
Plans, respectively, 54,768 and 19,775 shares are available
to be awarded as of December 31, 2003. Stock options under
the 1996 and 1999 Plans generally become exercisable either
(a) 50 percent on the first anniversary of grant and
the remainder on the second anniversary of grant,
(b) 100 percent at one year from the date of grant, or
(c) otherwise as determined by the Committee. Certain
options may become exercisable immediately under certain
circumstances and events as defined under these plans and option
agreements. Nonstatutory stock options under the 1996 Plan
expire 10 years and one day from the date of grant, and
incentive stock options expire 10 years from the date of
grant. Nonstatutory and incentive stock options granted under
the 1999 Plan expire 10 years from the date of grant.
Currently, there are no incentive stock options granted under
the 1996 and 1999 Plans.

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Performance based restricted stock awards have
been granted to certain key executives under the 1996 and 1999
Plans. Restrictions on such shares lapse either (i) in
equal amounts when the average closing price of our common stock
reaches $19 and $21 for a consecutive 10 trading day
period; (ii) in equal amounts when the average closing
price of our common stock reaches $21 and $23 for a consecutive
10 trading day period; or
(iii) 33 1/3 percent per year on each of the
three anniversary dates following the date of grant. Shares
issued under the plans are initially recorded at their fair
market value on the date of grant with a corresponding charge to
additional paid-in capital representing the unearned portion of
these awards. During 2003, restrictions lapsed on
33,334 shares and during both 2002 and 2001, restrictions
lapsed on 33,333 shares. We recognized compensation expense
of $.1 million in 2003 and $.3 million in 2002 and
2001 in our Consolidated Statement of Operations, along with an
increase to additional paid-in capital, representing the earned
portion of these awards. Shares of performance based restricted
stock are forfeited if the specified closing prices of our
common stock are not met within five years of grant or the
executive leaves the Company. During 2003, 20,000 shares of
restricted stock were forfeited.

A summary of the status of our fixed stock option
plans as of December 31, 2003, 2002 and 2001 and changes
during the years ended on those dates is presented below:

|                                                                                                        |  |        |         |          |  |        |       |          |  |        |         |          |  |   |       |  |  |  |          |   |  |   |       | 
|------------------------------------------------------------------------------------------------------- |  | ------ | ------- | -------- |  | ------ | ----- | -------- |  | ------ | ------- | -------- |  | - | ----- |  |  |  | -------- | - |  | - | ----- | 
|                                                                                                        |  |        |         |          |  |       
|                                                                                                        |  | 2003   |         | 2002     |  | 2001  
|                                                                                                        |  |        |         |          |  |       
|                                                                                                        |  |        |         | Weighted |  |        |       | Weighted |  |        |         | Weighted
|                                                                                                        |  |        |         | Average  |  |        |       | Average  |  |        |         | Average 
|                                                                                                        |  |        |         | Exercise |  |        |       | Exercise |  |        |         | Exercise
|                                                                                                        |  | Shares |         | Price    |  | Shares |       | Price    |  | Shares |         | Price   
|                                                                                                        |  |        |         |          |  |        |       |          |  |        |         |         
|Outstanding beginning of year                                                                           |  |        | 905,500 |          |  | $      | 7.75  |          |  |        | 909,500 |          |  | $ | 7.68  |  |  |  | 649,735  |   |  | $ | 10.39 | 
|Granted                                                                                                 |  |        |        |          |  |        |      |          |  |        | 61,200  |          |  |   | 6.72  |  |  |  | 470,700  |   |  |   | 4.88  | 
|Exercised                                                                                               |  |        | (52,125 | )        |  |        | 5.23  |          |  |        | (53,600 | )        |  |   | 4.45  |  |  |  | (11,100  | ) |  |   | 6.63  | 
|Forfeited  non-vested                                                                                  |  |        | (17,175 | )        |  |        | 6.27  |          |  |        | (4,025  | )        |  |   | 6.74  |  |  |  | (66,625  | ) |  |   | 5.78  | 
|Forfeited  exercisable                                                                                 |  |        | (24,200 | )        |  |        | 15.47 |          |  |        | (6,075  | )        |  |   | 11.00 |  |  |  | (131,710 | ) |  |   | 11.79 | 
|Expired                                                                                                 |  |        | (5,825  | )        |  |        | 26.27 |          |  |        | (1,500  | )        |  |   | 28.13 |  |  |  | (1,500   | ) |  |   | 34.63 | 
|                                                                                                        |  |        |         |          |  |        |       |          |  |        |         |          |  |   |       |  |  |  |          |   |  |   |       | 
|Outstanding end of year                                                                                 |  |        | 806,175 |          |  | $      | 7.58  |          |  |        | 905,500 |          |  | $ | 7.75  |  |  |  | 909,500  |   |  | $ | 7.68  | 
|Options exercisable at end of year                                                                      |  |        | 791,175 |          |  | $      | 7.59  |          |  |        | 732,000 |          |  | $ | 8.19  |  |  |  | 392,600  |   |  | $ | 10.94 | 
|Weighted average fair value of options granted
    during the year (exercise price equals market price) |  |        |         |          |  |        |      |          |  |        |         |          |  | $ | 2.85  |  |  |  |          |   |  | $ | 1.99  | 

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding at December 31, 2003:

|                |  |                     |         |                     |  |          |          |             |  |          |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ------------------- | ------- | ------------------- |  | -------- | -------- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |                     |         |                    
|                |  | Options Outstanding |         | Options Exercisable
|                |  |                     |         |                    
|                |  |                     |         | Weighted            |  | Number   |          | Weighted   
|                |  | Number              |         | Weighted Average    |  | Average  |          | Exercisable |  | Average 
|Range of        |  | Outstanding         |         | Remaining           |  | Exercise |          | at          |  | Exercise
|Exercise Prices |  | at 12/31/03         |         | Contractual Life    |  | Price    |          | 12/31/03    |  | Price   
|                |  |                     |         |                     |  |          |          |             |  |         
|$ 4.01  $ 4.38 |  |                     | 205,400 |                     |  |          | 7.1 year |             |  | $        | 4.11  |  |  |  | 205,400 |  |  | $ | 4.11  | 
|$ 5.70  $ 6.63 |  |                     | 268,975 |                     |  |          | 7.3 year |             |  | $        | 6.07  |  |  |  | 268,975 |  |  | $ | 6.07  | 
|$ 6.65  $ 6.90 |  |                     | 53,700  |                     |  |          | 8.2 year |             |  | $        | 6.70  |  |  |  | 38,700  |  |  | $ | 6.72  | 
|$ 8.06  $ 8.63 |  |                     | 114,700 |                     |  |          | 6.4 year |             |  | $        | 8.18  |  |  |  | 114,700 |  |  | $ | 8.18  | 
|$ 9.87  $11.63 |  |                     | 50,400  |                     |  |          | 5.0 year |             |  | $        | 10.35 |  |  |  | 50,400  |  |  | $ | 10.35 | 
|$12.37  $19.75 |  |                     | 102,500 |                     |  |          | 3.1 year |             |  | $        | 15.03 |  |  |  | 102,500 |  |  | $ | 15.03 | 
|$25.75  $26.25 |  |                     | 10,500  |                     |  |          | 0.2 year |             |  | $        | 25.89 |  |  |  | 10,500  |  |  | $ | 25.89 | 
|                |  |                     |         |                     |  |          |          |             |  |          |       |  |  |  |         |  |  |   |       | 
|$ 4.01  $26.25 |  |                     | 806,175 |                     |  |          | 6.4 year |             |  | $        | 7.58  |  |  |  | 791,175 |  |  | $ | 7.59  | 

A summary of the status of our restricted stock
plans as of December 31, 2003, 2002 and 2001 and changes
during the years ended on those dates is presented below:

|                                                                   |  |      |         |      |  |      |         |   |  |   |          |  
|------------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | -------- | -
|                                                                   |  | 2003 |         | 2002 |  | 2001
|                                                                   |  |      |         |      |  |     
|Restricted stock outstanding at beginning of year                  |  |      | 53,334  |      |  |      | 146,667 |   |  |   | 334,000  |  
|Granted                                                            |  |      |        |      |  |      |        |   |  |   |         |  
|Forfeited and converted                                            |  |      | (53,334 | )    |  |      | (93,333 | ) |  |   | (187,333 | )
|                                                                   |  |      |         |      |  |      |         |   |  |   |          |  
|Restricted stock outstanding at end of year                        |  |      |        |      |  |      | 53,334  |   |  |   | 146,667  |  
|Weighted average fair value per restricted share
    at grant date |  | $    |        |      |  | $    |        |   |  | $ |         |  
|Weighted average share price at grant date                         |  | $    |        |      |  | $    |        |   |  | $ |         |  

We follow the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation. We continue
to measure compensation cost using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25.
Stock-based compensation representing grants to non-employee
directors and vesting of performance based restricted stock
awards, recognized in our Consolidated Statement of Operations,
was $.1 million for 2003 and $.4 million for 2002 and
2001. If we had elected to recognize compensation cost based on
the fair value of options and restricted stock granted at grant
date as prescribed by FAS 123, net income (loss) and
earnings (loss) per share would have decreased (increased) as
disclosed in our summary of significant accounting policies
included in Note 1 to our consolidated financial statements.

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The assumptions and methods used in estimating
the fair value at the grant date of options and restricted
shares granted are listed below:

|                           |                  |            |                                    |      |  |      |            |     |   |  |            |     |  
|-------------------------- | ---------------- | ---------- | ---------------------------------- | ---- |  | ---- | ---------- | --- | - |  | ---------- | --- | -
|                           |                  |           
|                           |                  | Grant Year
|                           |                  |           
|                           |                  | 2003       |                                    | 2002 |  | 2001
|                           |                  |            |                                    |      |  |     
|Volatility of Share Price: |                  |            |                                    |      |  |      |            |     |   |  |            |    
|                           | Options          |            |                                    | N/A  |  |      |            | 36  | % |  |            | 34  | %
|                           | Restricted stock |            |                                    |     |  |      |            |    |   |  |            |    |  
|Dividend yield:            |                  |            |                                    |      |  |      |            |     |   |  |            |    
|                           | Options          |            |                                    |     |  |      |            |    |   |  |            |    |  
|                           | Restricted stock |            |                                    |     |  |      |            |    |   |  |            |    |  
|Interest rate:             |                  |            |                                    |      |  |      |            |     |   |  |            |    
|                           | Options          |            |                                    | N/A  |  |      |            | 4.7 | % |  |            | 4.8 | %
|                           | Restricted stock |            |                                    |     |  |      |            |    |   |  |            |    |  
|Expected life of options   |                  |            | N/A                                |      |  |      | 5.7  years |     |   |  | 5.7  years |    
|Valuation methodology:     |                  |            |                                    |      |  |      |            |     |   |  |            |    
|                           | Options          |            | Black-Scholes Option Pricing Model
|                           | Restricted stock |            | Binomial Pricing Model            

Because the determination of the fair value of
all options granted includes vesting periods over several years
and additional option grants are expected to be made each year,
the pro forma disclosures included in Note 1, are not
representative of pro forma effects of reported net income for
future periods.

Note 10:     Earnings
Per Share

Reconciliations of the numerators and
denominators used in our 2003 and 2002 earnings per share
calculations are presented below. A reconciliation for 2001 is
not presented below because the weighted average shares
(denominator) was 5,696,298 for computing both Basic EPS and
Fully Diluted EPS resulting in identical EPS computations for
the year ended December 31, 2001. The effect of stock
options was excluded in computing Fully Diluted EPS for 2001 in
accordance with Statement of Financial Accounting Standards
No. 128 because the impact of stock options of 39,346
shares with an average market price below the average market
price of our stock would have been antidilutive to loss per
share computations for 2001.

|                                                                                    |  |                                       |     |               |  |           |       |  |  |   |     | 
|----------------------------------------------------------------------------------- |  | ------------------------------------- | --- | ------------- |  | --------- | ----- |  |  | - | --- | 
|                                                                                    |  |                                      
|                                                                                    |  | Year Ended December 31, 2003         
|                                                                                    |  |                                      
|                                                                                    |  | Income                                |     | Shares        |  | Per Share
|                                                                                    |  | (Numerator)                           |     | (Denominator) |  | Amount   
|                                                                                    |  |                                       |     |               |  |          
|                                                                                    |  |                                      
|                                                                                    |  | (In thousands, except per share data)
|Net income                                                                          |  | $                                     | 102 |               |  |           |      |  |  |   |    | 
|                                                                                    |  |                                       |     |               |  |           |       |  |  |   |     | 
|Basic EPS
    Net income available to common shareholders                           |  | $                                     | 102 |               |  |           | 5,869 |  |  | $ | .02 | 
|Effect of dilutive securities stock options                                         |  |                                       |    |               |  |           | 130   |  |  |   |    | 
|                                                                                    |  |                                       |     |               |  |           |       |  |  |   |     | 
|Diluted EPS
    Net income available to common shareholders,  assuming
    dilution |  | $                                     | 102 |               |  |           | 5,999 |  |  | $ | .02 | 
|                                                                                    |  |                                       |     |               |  |           |       |  |  |   |     | 

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                    |  |                                       |       |               |  |           |       |  |  |   |     | 
|----------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | ------------- |  | --------- | ----- |  |  | - | --- | 
|                                                                                    |  |                                      
|                                                                                    |  | Year Ended December 31, 2002         
|                                                                                    |  |                                      
|                                                                                    |  | Income                                |       | Shares        |  | Per Share
|                                                                                    |  | (Numerator)                           |       | (Denominator) |  | Amount   
|                                                                                    |  |                                       |       |               |  |          
|                                                                                    |  |                                      
|                                                                                    |  | (In thousands, except per share data)
|Net income                                                                          |  | $                                     | 2,316 |               |  |           |      |  |  |   |    | 
|                                                                                    |  |                                       |       |               |  |           |       |  |  |   |     | 
|Basic EPS
    Net income available to common shareholders                           |  | $                                     | 2,316 |               |  |           | 5,783 |  |  | $ | .40 | 
|Effect of dilutive securities Stock options                                         |  |                                       |      |               |  |           | 90    |  |  |   |    | 
|                                                                                    |  |                                       |       |               |  |           |       |  |  |   |     | 
|Diluted EPS
    Net income available to common shareholders,  assuming
    dilution |  | $                                     | 2,316 |               |  |           | 5,873 |  |  | $ | .39 | 
|                                                                                    |  |                                       |       |               |  |           |       |  |  |   |     | 

Performance based restricted stock of 0, 53,334
and 146,667 shares for the years ended December 31, 2003,
2002 and 2001, respectively, was not included in the above
computations. Such shares could have been issued in the future
subject to the occurrence of certain events as described in our
Stock Option and Stock Award Plans Note.

Note
11:     Commitments and
Contingencies

Our rent expense for office equipment, facilities
and vehicles was $1.8 million for 2003, $1.6 million
for 2002 and $1.8 million for the year ended
December 31, 2001. At December 31, 2003, we are
committed, under non-cancelable operating and capital leases, as
follows:

|                                |  |                |       |      |  |      |     |      |  |      |     |        |  |       |     |  |  |   |     |  |  |   |   |  |  |   |       | 
|------------------------------- |  | -------------- | ----- | ---- |  | ---- | --- | ---- |  | ---- | --- | ------ |  | ----- | --- |  |  | - | --- |  |  | - | - |  |  | - | ----- | 
|                                |  |                |       |      |  |      |     |      |  |      |     | Beyond |  |      
|                                |  | 2004           |       | 2005 |  | 2006 |     | 2007 |  | 2008 |     | 2008   |  | Total
|                                |  |                |       |      |  |      |     |      |  |      |     |        |  |      
|                                |  |               
|                                |  | (In thousands)
|Capital leases                  |  | $              | 190   |      |  | $    | 195 |      |  | $    | 59  |        |  | $     | 5   |  |  | $ |    |  |  | $ |  |  |  | $ | 449   | 
|Non-cancelable operating leases |  |                | 978   |      |  |      | 594 |      |  |      | 325 |        |  |       | 280 |  |  |   | 194 |  |  |   |  |  |  |   | 2,371 | 
|                                |  |                |       |      |  |      |     |      |  |      |     |        |  |       |     |  |  |   |     |  |  |   |   |  |  |   |       | 
|                                |  | $              | 1,168 |      |  | $    | 789 |      |  | $    | 384 |        |  | $     | 285 |  |  | $ | 194 |  |  | $ |  |  |  | $ | 2,820 | 
|                                |  |                |       |      |  |      |     |      |  |      |     |        |  |       |     |  |  |   |     |  |  |   |   |  |  |   |       | 

At December 31, 2003, we had a
$2.7 million obligation under standby letters of credit
with LaSalle Bank, NA and Fleet National Bank.

During the third quarter of 2001, we entered into
supply agreements for laminated and coated products with The
Fasson Roll North America division of Avery Dennison. Under the
terms of the agreements, we are committed to purchase a
significant portion of the laminated materials we use in our
Label Products segment from Avery Dennison through
December 31, 2005. If we fail to meet the minimum purchase
volumes specified in the agreements, we are subject to financial
penalties. We acquired the required quantities and were in
compliance with the agreements for 2002 and 2003.

In August and September 1996, two individual
plaintiffs filed lawsuits in the Circuit Court of Cook County,
Illinois against Nashua Corporation, Cerion, certain directors
and officers of Cerion, and our underwriter, on behalf of all
persons who purchased the common stock of Cerion between
May 24, 1996 and July 9, 1996. These two complaints
were consolidated. In March 1997, the same individual plaintiffs
joined by a third plaintiff filed a Consolidated Amended
Class Action Complaint. The consolidated complaint alleged
that, in connection with Cerions initial public offering,
the defendants issued materially false and misleading statements
and omitted the disclosure of material facts regarding, in
particular, certain significant customer relationships. In
October 1997, the Circuit Court, on motion by the defendants,
dismissed the consolidated complaint. The plaintiffs filed a
Second Amended Consolidated Complaint alleging similar claims as
the first consolidated complaint seeking damages and injunctive
relief. On May 6, 1998, the Circuit Court, on motion by the
defendants, dismissed with prejudice the second amended
consolidated complaint. The plaintiffs filed

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with the Appellate Court an appeal of the Circuit
Courts ruling. On November 19, 1999, the Appellate
Court reversed the Circuit Courts ruling that dismissed
the second amended consolidated complaint. The Appellate Court
ruled that the second amended consolidated complaint represented
a valid claim and sent the case back to the Circuit Court for
further proceedings. On December 27, 1999, we filed a
Petition with the Supreme Court of Illinois. In that Petition,
we asked the Supreme Court of Illinois to determine whether the
Circuit Court or the Appellate Court is correct. Our Petition
was denied and the case was sent to the Circuit Court for trial.
Discovery has been completed, but no date has been set for trial
and pre-trial motions. On October 8, 2003, the Circuit
Court heard motions on a Summary Judgment motion and a class
action certification motion. The Circuit Court is expected to
rule on these motions in the first quarter of 2004. We believe
that the lawsuit is without merit and will continue to defend
ourselves in this matter. We also believe that we will receive
the value of our 37.1 percent ownership in the Cerion
liquidating trust which was valued at $.9 million on an
after-tax basis at December 31, 2003. Our investment in
Cerion is included under other assets in our Consolidated
Balance Sheet.

On September 14, 2000, Edward G.
Krasnecki and EGK Realty Corporation filed suit against Nashua
Corporation in the Superior Court of the Commonwealth of
Massachusetts, Middlesex County. The plaintiffs are the owners
of real property, formerly leased by us, located at 260
Billerica Road, Chelmsford, Massachusetts. The plaintiffs
alleged that when we vacated the premises in 1997, we failed to
remove improvements we had made to the property, failed to clean
the premises as required by our lease, and left contamination on
the property resulting in lost opportunities to the plaintiffs,
for which the plaintiffs seek damages. We responded to their
complaint, denying all liability and asserting affirmative
defenses. We maintained that when we vacated the premises, we
removed three underground tanks that we were entitled to remove
under the terms of our lease, we detected soil contamination,
reported and took prompt remedial action all in accordance with
Massachusetts law, and were not liable to the plaintiffs. We
also denied that we failed to remove improvements or that we
failed to clean the premises in accordance with the terms of our
lease. The matter was settled in 2003 and is now resolved.

On May 30, 2003, Ricoh Company, Ltd. and
affiliated companies filed a suit in the U.S. District Court for
the District of New Jersey against several defendants, including
the largest customer of Nashuas Imaging Supplies segment
and another company who is a supplier to the Imaging Supplies
segment. The Complaint alleged multiple counts of patent
infringement, trademark infringement, unfair competition, and
copyright infringement by the defendants. On October 17,
2003, Ricoh amended the Complaint and added Nashua as an
additional co-defendant in the suit. The allegations arose from
the sale and distribution of Ricoh compatible toner products.
Nashua filed a legal answer to the Complaint in December 2003.
The suit is at its earliest stages with the legal discovery
phase to continue in 2004. Attorneys for Nashua Corporation are
in the process of reviewing the background and history of the
lawsuit in order to fully develop our legal position and
defenses in this matter. The Company believes it has valid
defenses and potential recourse against certain other
co-defendants in this matter.

In December 2002, we eliminated the availability
of certain postretirement health benefits to certain union and
non-union employees of Nashua who had at least 10 years of
service and chose to retire between age 60 to 65 which provided
access to health benefits until age 65. The unions in New
Hampshire objected to the action and filed a grievance. The
final step of the grievance process is arbitration by the
American Arbitration Association. The subject of the Arbitration
was the interpretation of the collective bargaining contract
language which we believe allows the modification of the
eligibility of those postretirement health benefits. The
unions position is that regardless of the contract
wording, these benefits cannot be eliminated without bargaining
with the union. The Arbitration hearing occurred on
July 28, 2003 and the arbitrator ruled in favor of the
unions on October 24, 2003. On November 24, 2003, we
filed an appeal of the arbitration decision with the U.S.
District Court for the District of New Hampshire. We believe the
arbitrator erred in his decision process. We anticipate the
complete appeals process could take several years.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

We are involved in certain environmental matters
and have been designated by the Environmental Protection Agency,
referred to as the EPA, as a potentially responsible party for
certain hazardous waste sites. In addition, we have been
notified by certain state environmental agencies that some of
our sites not addressed by the EPA require remedial action.
These sites are in various stages of investigation and
remediation. Due to the unique physical characteristics of each
site, the technology employed, the extended timeframes of each
remediation, the interpretation of applicable laws and
regulations and the financial viability of other potential
participants, our ultimate cost of remediation is difficult to
estimate. Accordingly, estimates could either increase or
decrease in the future due to changes in such factors. At
December 31, 2003, based on the facts currently known and
our prior experience with these matters, we have concluded that
it is probable that site assessment, remediation and monitoring
costs will be incurred. We have estimated a range for these
costs of $.7 million to $1.3 million for continuing
operations. This estimate could increase if other potentially
responsible parties or our insurance carriers are unable or
unwilling to bear their allocated share and cannot be compelled
to do so. At December 31, 2003, our accrual balance
relating to environmental matters was $.7 million for
continuing operations. Based on information currently available,
we believe that it is probable that the major potentially
responsible parties will fully pay the costs apportioned to
them. We believe that our remediation expense is not likely to
have a material adverse effect on our consolidated financial
position or results of operations.

We are involved in various other lawsuits, claims
and inquiries, most of which are routine to the nature of our
business. In the opinion of our management, the resolution of
these matters will not materially affect our Company.

Note
12:     Postretirement
Benefits



| |                          
| | -------------------------
| | Defined Contribution Plan

Eligible employees may participate in the Nashua
Corporation Employees Savings Plan, a defined contribution
401k plan. We match participating employee contributions at
50 percent for the first 6 percent of base
compensation that a participant contributes to the Plan.
Contributions can be increased or decreased at the option of our
Board of Directors. For 2003, 2002 and 2001 our contributions to
this Plan were $1.0 million, $1.0 million and
$1.1 million, respectively. Participants are immediately
vested in all contributions, plus actual earnings thereon.

The Plan also provides that eligible employees
not covered under our defined benefit pension plans may receive
a profit sharing contribution. This contribution, which is
normally based on our profitability, is discretionary and not
defined. Profit sharing contributions were $0 million for
2003, $.2 million for 2002 and $.1 million for 2001.



| |              
| | -------------
| | Pension Plans

We have three pension plans, which cover portions
of our regular full-time employees. Benefits under these plans
are generally based on years of service and the levels of
compensation during those years. Our policy is to fund the
minimum amounts specified by regulatory statutes. Assets of the
plans are invested in common stocks, fixed-income securities and
interest-bearing cash equivalent instruments. As of
December 31, 2002, we froze benefits under two of these
pension plans: the Nashua Corporation Retirement Plan for
Salaried Employees and the Supplemental Executive Retirement
Plan.



| |                                           
| | ------------------------------------------
| | Retiree Health Care and Other
    Benefits

We also provide certain postretirement health
care and death benefits to eligible retired employees and their
spouses. Salaried participants generally became eligible for
retiree health care benefits after reaching age 60 with ten
years of service and retired prior to January 1, 2003.
Benefits, eligibility and cost-sharing provisions

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

for hourly employees vary by location or
bargaining unit. Generally, the medical plans are fully insured
managed care plans. In 1993, the postretirement benefit plan was
changed to share the cost of benefits with all retirees,
resulting in an unrecognized benefit, which is being amortized
over the future service period of the active employees. During
2002, we eliminated these benefits for active employees retiring
after December 31, 2002. The unions in New Hampshire filed
a grievance on the termination of the postretirement medical
benefits. The arbitration hearing was held on July 28, 2003
and the arbitrator ruled in favor of the unions on
October 24, 2003. On November 24, 2003, we filed an
appeal of the arbitrators decision in the
U.S. District Court for the District of New Hampshire.

|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ---------------- | ------- | -------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                       |  |                  |         |                |  |     
|                                                                                       |  |                  |         | Postretirement
|                                                                                       |  | Pension Benefits |         | Benefits      
|                                                                                       |  |                  |         |               
|                                                                                       |  | 2003             |         | 2002           |  | 2003 |         | 2002
|                                                                                       |  |                  |         |                |  |      |         |     
|                                                                                       |  |                 
|                                                                                       |  | (In thousands)  
|Change in benefit obligation                                                           |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Projected benefit obligation at beginning of year                                      |  | $                | 70,917  |                |  | $    | 61,542  |      |  | $ | 3,893  |   |  | $ | 6,392  |  
|Service cost                                                                           |  |                  | 771     |                |  |      | 1,473   |      |  |   | 60     |   |  |   | 120    |  
|Interest cost                                                                          |  |                  | 4,624   |                |  |      | 4,459   |      |  |   | 289    |   |  |   | 432    |  
|Amendments                                                                             |  |                  |        |                |  |      | 924     |      |  |   |       |   |  |   | (249   | )
|Curtailment/ Settlement                                                                |  |                  |        |                |  |      | (2,886  | )    |  |   | 944    |   |  |   | (2,639 | )
|Actuarial loss                                                                         |  |                  | 7,651   |                |  |      | 7,018   |      |  |   | 204    |   |  |   | 786    |  
|Benefits paid                                                                          |  |                  | (2,242  | )              |  |      | (1,613  | )    |  |   | (599   | ) |  |   | (949   | )
|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Projected benefit obligation at end of year                                            |  | $                | 81,721  |                |  | $    | 70,917  |      |  | $ | 4,791  |   |  | $ | 3,893  |  
|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Change in plan assets                                                                  |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Fair value of plan assets at beginning of year                                         |  | $                | 55,368  |                |  | $    | 61,318  |      |  | $ |       |   |  | $ |       |  
|Actual return on plan assets                                                           |  |                  | 11,249  |                |  |      | (4,617  | )    |  |   |       |   |  |   |       |  
|Employer contribution                                                                  |  |                  |        |                |  |      |        |      |  |   | 599    |   |  |   | 949    |  
|Benefits paid                                                                          |  |                  | (1,958  | )              |  |      | (1,333  | )    |  |   | (599   | ) |  |   | (949   | )
|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Fair value of plan assets at end of year                                               |  | $                | 64,659  |                |  | $    | 55,368  |      |  | $ |       |   |  | $ |       |  
|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Reconciliation of funded status                                                        |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Funded status                                                                          |  | $                | (17,062 | )              |  | $    | (15,549 | )    |  | $ | (4,790 | ) |  | $ | (3,893 | )
|Unrecognized net actuarial (gain)/loss                                                 |  |                  | 21,005  |                |  |      | 19,001  |      |  |   | (2,171 | ) |  |   | (2,479 | )
|Unrecognized prior service cost                                                        |  |                  | 1,883   |                |  |      | 2,152   |      |  |   | (448   | ) |  |   |       |  
|Unrecognized net transition asset                                                      |  |                  |        |                |  |      | (107    | )    |  |   |       |   |  |   |       |  
|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Net amount recognized                                                                  |  | $                | 5,826   |                |  | $    | 5,497   |      |  | $ | (7,409 | ) |  | $ | (6,372 | )
|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|The amount recognized in our consolidated
    balance sheet consists of the following: |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Pension/postretirement liability                                                       |  | $                | (17,062 | )              |  | $    | (15,549 | )    |  | $ | (7,409 | ) |  | $ | (6,372 | )
|Accumulated other comprehensive loss                                                   |  |                  | 21,005  |                |  |      | 18,894  |      |  |   |       |   |  |   |       |  
|Intangible asset                                                                       |  |                  | 1,883   |                |  |      | 2,152   |      |  |   |       |   |  |   |       |  
|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  
|Net amount recognized                                                                  |  | $                | 5,826   |                |  | $    | 5,497   |      |  | $ | (7,409 | ) |  | $ | (6,372 | )
|                                                                                       |  |                  |         |                |  |      |         |      |  |   |        |   |  |   |        |  

55



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Assumptions:

|                                                                      |  |                  |      |                         |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|--------------------------------------------------------------------- |  | ---------------- | ---- | ----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                                      |  |                  |      |                        
|                                                                      |  | Pension Benefits |      | Postretirement Benefits
|                                                                      |  |                  |      |                        
|                                                                      |  | 2003             |      | 2002                    |  | 2001 |      | 2003 |  | 2002 |      | 2001
|                                                                      |  |                  |      |                         |  |      |      |      |  |      |      |     
|Weighted-average assumptions used to determine
    net benefit costs: |  |                  |      |                         |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|Discount rate                                                         |  |                  | 6.50 | %                       |  |      | 7.25 | %    |  |      | 7.25 | %    |  |  | 6.50 | % |  |  | 7.25 | % |  |  | 7.25 | %
|Expected return on plan assets                                        |  |                  | 8.50 | %                       |  |      | 9.00 | %    |  |      | 9.70 | %    |  |  |     |   |  |  |     |   |  |  |     |  
|Average rate of compensation increase                                 |  |                  | 3.00 | %                       |  |      | 3.50 | %    |  |      | 4.00 | %    |  |  |     |   |  |  |     |   |  |  |     |  

|                                                                                    |  |                  |      |                         |  |      |      |      |  |      |      |      |  |  |     |   |  |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------- |  | ---------------- | ---- | ----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | --- | - |  |  | ---- | - |  |  | ---- | -
|                                                                                    |  |                  |      |                        
|                                                                                    |  | Pension Benefits |      | Postretirement Benefits
|                                                                                    |  |                  |      |                        
|                                                                                    |  | 2003             |      | 2002                    |  | 2001 |      | 2003 |  | 2002 |      | 2001
|                                                                                    |  |                  |      |                         |  |      |      |      |  |      |      |     
|Weighted-average assumptions used to determine
    benefit obligations at year end: |  |                  |      |                         |  |      |      |      |  |      |      |      |  |  |     |   |  |  |      |   |  |  |      |  
|Discount rate                                                                       |  |                  | 6.00 | %                       |  |      | 6.50 | %    |  |      | 7.25 | %    |  |  | 6.0 | % |  |  | 6.50 | % |  |  | 7.25 | %
|Average rate of compensation increase                                               |  |                  | N/A  |                         |  |      | 3.00 | %    |  |      | 3.50 | %    |  |  |    |   |  |  |     |   |  |  |     |  

The most significant elements in determining our
pension income or expense in accordance with FAS 87 are the
expected return on plan assets and the discount rate. We assumed
an expected long-term rate of return on plan assets of
8.0 percent for the year ended December 31, 2003, down
from 8.5 percent for the year ended December 31, 2002.
The assumed long-term rate of return on assets was developed
after evaluating input from our third party pension plan
investment advisor. The evaluation included their review of
asset return expectations and long-term inflation assumptions.
This long-term rate of return on assets is applied to a
calculated value of plan assets, which recognizes changes in the
fair value of plan assets. This produces the expected return on
plan assets that is included in the determination of our pension
income or expense. The difference between this expected return
and the actual return on plan assets is deferred. The net
deferral of past asset gains or losses affects the calculated
value of plan assets and, ultimately, our future pension income
or expense. Should our long-term return on plan assets either
fall below or increase above 8.0 percent, our future
pension expense would either increase or decrease. The historic
rate of returns for our pension plan assets are as follows:

|           |  |  |      |  
|---------- |  |  | ---- | -
|One year   |  |  | 22.1 | %
|Five years |  |  | 6.2  | %
|Ten years  |  |  | 9.7  | %

Our pension plan asset allocation at
December 31, 2003 and our target allocation for 2004 are:

|                  |  |      |    |        |  |  |    |  
|----------------- |  | ---- | -- | ------ |  |  | -- | -
|                  |  |      |    | 2004  
|                  |  | 2003 |    | Target
|                  |  |      |    |       
|Asset Category    |  |      |    |        |  |  |    |  
|Equity Securities |  |      | 59 | %      |  |  | 55 | %
|Fixed Income      |  |      | 41 | %      |  |  | 45 | %

Our pension plan investment strategy includes the
maximization of return on pension plan investment, at an
acceptable level of risk, assuring the fiscal health of the plan
and achieving a long-term real rate of return which will equal
or exceed the expected return on plan assets. To achieve these
objectives, we invest in a diversified portfolio of asset
classes consisting of U.S. domestic equities, international
equities, and high quality and high yield domestic fixed income
funds.

56



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2003, our pension plan
investments were diversified as follows:

|                              |  |               |      | 
|----------------------------- |  | ------------- | ---- | 
|                              |  | (In millions)
|Investments                   |  |               |      | 
|Large cap equities            |  | $             | 22.4 | 
|Small cap equities            |  |               | 10.1 | 
|International equities        |  |               | 5.4  | 
|High yield bonds              |  |               | 4.4  | 
|Fixed income/bond investments |  |               | 21.8 | 
|Cash                          |  |               | .6   | 
|                              |  |               |      | 
|Total                         |  | $             | 64.7 | 
|                              |  |               |      | 

Net periodic pension and postretirement benefit
(income) costs from continuing operations for the plans,
exclusive of gains and losses from freezing and curtailing
pension and postretirement plans, includes the following
components:



|                                             |  |                  |        |                         |  |      |        |      |  |      |        |      |  |   |      |   |  |   |      |   |  |   |      |  
|-------------------------------------------- |  | ---------------- | ------ | ----------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                             |  |                  |        |                        
|                                             |  | Pension Benefits |        | Postretirement Benefits
|                                             |  |                  |        |                        
|                                             |  | 2003             |        | 2002                    |  | 2001 |        | 2003 |  | 2002 |        | 2001
|                                             |  |                  |        |                         |  |      |        |      |  |      |        |     
|                                             |  |                 
|                                             |  | (In thousands)  
|Components of net periodic (income)
    cost |  |                  |        |                         |  |      |        |      |  |      |        |      |  |   |      |   |  |   |      |   |  |   |      |  
|Service cost                                 |  | $                | 771    |                         |  | $    | 1,473  |      |  | $    | 1,674  |      |  | $ | 60   |   |  | $ | 120  |   |  | $ | 62   |  
|Interest cost                                |  |                  | 4,624  |                         |  |      | 4,459  |      |  |      | 4,130  |      |  |   | 289  |   |  |   | 432  |   |  |   | 444  |  
|Expected return on plan assets               |  |                  | (5,760 | )                       |  |      | (5,715 | )    |  |      | (6,129 | )    |  |   |     |   |  |   |     |   |  |   |     |  
|Amortization of prior service cost           |  |                  | 268    |                         |  |      | 836    |      |  |      | 742    |      |  |   | (65  | ) |  |   | (106 | ) |  |   | (79  | )
|Recognized net actuarial (gain)              |  |                  | 159    |                         |  |      |       |      |  |      |       |      |  |   | (246 | ) |  |   | (195 | ) |  |   | (231 | )
|Amortization of transition obligation        |  |                  | (107   | )                       |  |      | (123   | )    |  |      | 150    |      |  |   |     |   |  |   |     |   |  |   |     |  
|                                             |  |                  |        |                         |  |      |        |      |  |      |        |      |  |   |      |   |  |   |      |   |  |   |      |  
|Net periodic (income) cost                   |  | $                | (45    | )                       |  | $    | 930    |      |  | $    | 567    |      |  | $ | 38   |   |  | $ | 251  |   |  | $ | 196  |  
|                                             |  |                  |        |                         |  |      |        |      |  |      |        |      |  |   |      |   |  |   |      |   |  |   |      |  

Our projected benefit obligation or PBO,
accumulated benefit obligation or ABO and fair value of plan
assets for our plans that have accumulated benefit obligations
in excess of plan assets are as follows:

|                                                                 |  |               |      |      |  |             |      |     |  |     |      |             |  |   |      |  |  |   |      |  |  |   |      | 
|---------------------------------------------------------------- |  | ------------- | ---- | ---- |  | ----------- | ---- | --- |  | --- | ---- | ----------- |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                                                                 |  |               |      |     
|                                                                 |  | 2003          |      | 2002
|                                                                 |  |               |      |     
|                                                                 |  | PBO           |      | ABO  |  | Plan Assets |      | PBO |  | ABO |      | Plan Assets
|                                                                 |  |               |      |      |  |             |      |     |  |     |      |            
|                                                                 |  |              
|                                                                 |  | (In millions)
|Supplemental Executive Retirement Plan                           |  | $             | 3.4  |      |  | $           | 3.4  |     |  | $   |     |             |  | $ | 3.1  |  |  | $ | 3.1  |  |  | $ |     | 
|Hourly Employees Retirement Plan of Nashua
    Corporation       |  | $             | 33.7 |      |  | $           | 33.7 |     |  | $   | 29.0 |             |  | $ | 29.2 |  |  | $ | 29.2 |  |  | $ | 24.8 | 
|Retirement Plan for Salaried Employees of Nashua
    Corporation |  | $             | 44.7 |      |  | $           | 44.7 |     |  | $   | 35.6 |             |  | $ | 38.7 |  |  | $ | 38.7 |  |  | $ | 30.5 | 

Assumed health care cost trend rates have a
significant effect on the amounts reported for our health care
plan. The assumed health care cost trend rate was
12 percent for 2004 and ranges from 10 percent to
4 percent

57



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

for future years. A one percentage-point change
in assumed health care cost trend rates would have the following
effects:

|                                                            |  |                |    |                |  |   |     |  
|----------------------------------------------------------- |  | -------------- | -- | -------------- |  | - | --- | -
|                                                            |  | 1-Percentage   |    | 1-Percentage  
|                                                            |  | Point Increase |    | Point Decrease
|                                                            |  |                |    |               
|                                                            |  |               
|                                                            |  | (In thousands)
|Effect on total of service and interest cost
    components |  | $              | 11 |                |  | $ | (7  | )
|Effect on accumulated postretirement benefit
    obligation |  | $              | 87 |                |  | $ | (81 | )

Our annual measurement dates for our pension
benefits and postretirement benefits are December 31.

Approximately $17.1 million and
$15.5 million of our accrued pension cost and
$7.4 million and $6.4 million of our accrued
postretirement benefits for 2003 and 2002, respectively, are
included in other long-term liabilities in our accompanying
consolidated balance sheet. Intangible pension assets of
$1.9 million and $2.2 million for 2003 and 2002,
respectively, are included in other assets in our accompanying
consolidated balance sheet. We estimate a contribution to our
hourly pension plan of approximately $.6 million in 2004.

During the fourth quarters of 2003 and 2002, we
recorded non-cash charges of $1.3 million and
$11.4 million, respectively, to shareholders equity
because as of December 31, 2003 and December 31, 2002,
the accumulated benefit obligations exceeded the fair value of
plan assets of company-sponsored pension plans due to declines
in the fair market value of equities held by the plans in 2002
and decreases in our expected return on plan assets and discount
rate resulting from current economic trends in 2003 and 2002.
The charges for 2003 and 2002 were net of $.9 million and
$7.5 million, respectively, in taxes which are included in
other assets and reflect increases in our deferred tax assets.

In October 2002, our Board of Directors approved
changes to The Nashua Corporation Retirement Plan for Salaried
Employees, The Supplemental Executive Retirement Plan and
retiree medical and death benefit plans. As a result of these
changes, we recognized a gain of $2.7 million related to
the elimination of certain benefits related to our retiree
medical and death benefit plans and a gain of $.2 million
from the buy out of a portion of existing retirees death
benefits, partially offset by a loss of $2.7 million
related to freezing benefits of the salaried pension plans.
During 2003, the unions in New Hampshire objected to the
elimination of the availability of certain postretirement health
benefits to certain union employees. A grievance was filed by
the unions and an arbitration hearing was held. The arbitrator
ruled in favor of the unions and we have appealed the
arbitrators decision. In December 2003 we recognized a
loss of $1.6 million related to our union retiree medical
plans.

Note
13:     Information About
Operations

We have three reportable segments:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Label Products: which converts,
    prints and sells pressure sensitive labels and tags to
    distributors and end-users.                                                                                                                                                                                                                                                                                                                                                               
|
| | (2) Specialty Paper Products: which
    coats and converts various converted paper products sold
    primarily to domestic converters and re-sellers, end-users and
    private-label distributors. Our Specialty Paper segments
    product scope includes thermal papers, bond papers, carbonless
    paper, specialty printed papers, such as financial receipts and
    point-of-sale receipts, wide-format media papers, dry-gum
    papers, heat seal papers, small rolls and ribbons.
|
| | (3) Imaging Supplies: which produces
    and sells copier supplies (primarily toner and developer) to
    distributors, value-added resellers and end-users.                                                                                                                                                                                                                                                                                                                                 

The accounting policies of our segments are the
same as those described in our Summary of Significant
Accounting Policies Note. Segment data does not include
restructuring and other unusual items, and we do

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

not allocate all corporate costs and assets to
our divisions. We evaluate the performance of our segments and
allocate resources to them based on pretax income before
restructuring and other unusual items.

Our Specialty Paper Products segment was a major
supplier of thermal roll stock to our Label Products segment
through the third quarter of 2001. Eliminations represent sales
between our Specialty Paper Products and Label Products
segments. Excluding sales between segments, reflected as
eliminations in the table below, external sales for our
Specialty Paper Products segment were $163.6 million,
$158.3 million, and $140.0 million for the years ended
December 31, 2003, 2002 and 2001. Sales between segments
and between geographic areas are negotiated based on what we
believe to be market pricing.

We have one group of customers under common
control that represents ten percent or more of our consolidated
revenues. Sales to Wal-Mart and Sams Club totaled
$31.8 million in 2003, representing sales of
$20.1 million for our Specialty Paper Products segment and
$11.7 million for our Label Products segment. While no
other customer represented ten percent of our consolidated
revenues, each of our segments has significant customers. The
loss of a significant customer could have a material adverse
effect on us or our segments.

Our reportable segments are strategic business
units grouped by product class. We manage them separately
because each business requires different technology and
marketing strategies.

The table below presents information about our
reported segments for the years ended December 31:

|                         |                                                                    |               |       |                      |       |                     |       |      |       |      |       |       |       |      |     |      |    |      |     |      |     |   |     |      |      |   |      |      |       |   |      |      |       |   |      |      |       | 
|------------------------ | ------------------------------------------------------------------ | ------------- | ----- | -------------------- | ----- | ------------------- | ----- | ---- | ----- | ---- | ----- | ----- | ----- | ---- | --- | ---- | -- | ---- | --- | ---- | --- | - | --- | ---- | ---- | - | ---- | ---- | ----- | - | ---- | ---- | ----- | - | ---- | ---- | ----- | 
|                         |                                                                    |               |       |                      |       |                     |       |      |       |      |       |       |       |     
|                         |                                                                    |               |       | Income (Loss) Before |       |                    
|                         |                                                                    | Net Sales     |       | Income Taxes         |       | Identifiable Assets
|                         |                                                                    |               |       |                      |       |                    
|                         |                                                                    | 2003          |       | 2002                 |       | 2001                |       | 2003 |       | 2002 |       | 2001  |       | 2003 |     | 2002 |    | 2001
|                         |                                                                    |               |       |                      |       |                     |       |      |       |      |       |       |       |      |     |      |    |     
|                         |                                                                    |              
|                         |                                                                    | (In millions)
|By Reportable Segment:   |                                                                    |               |       |                      |       |                     |       |      |       |      |       |       |       |      |     |      |    |      |     |      |     |   |     |      |      |   |      |      |       |   |      |      |       |   |      |     
|Label Products           |                                                                    | $             | 101.8 |                      |       | $                   | 100.8 |      |       | $    | 107.9 |       |       | $    | 5.8 |      |    | $    | 5.5 |      |     | $ | 6.7 |      |      | $ | 48.2 |      |       | $ | 41.3 |      |       | $ | 26.8 |     
|Specialty Paper Products |                                                                    |               | 169.0 |                      |       |                     | 160.7 |      |       |      | 150.4 |       |       |      | 4.4 |      |    |      | 6.5 |      |     |   | 4.9 |      |      |   | 63.9 |      |       |   | 66.7 |      |       |   | 47.4 |     
|Imaging Supplies         |                                                                    |               | 23.5  |                      |       |                     | 24.0  |      |       |      | 24.4  |       |       |      | .4  |      |    |      | .9  |      |     |   | .2  |      |      |   | 12.5 |      |       |   | 13.5 |      |       |   | 16.0 |     
|Reconciling Items:       |                                                                    |               |       |                      |       |                     |       |      |       |      |       |       |       |      |     |      |    |      |     |      |     |   |     |      |      |   |      |      |       |   |      |      |       |   |      |     
|                         | Eliminations                                                       |               |       | (5.4                 | )     |                     |       | (2.4 | )     |      |       | (10.4 | )     |      |     |     |    |      |     |     |     |   |     |     |      |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Other(1)                                                           |               |       |                      |       |                     |       | .1   |       |      |       | .2    |       |      |     |     |    |      |     |     |     |   |     | .4   |      |   |      |     |       |   |      |     |       |   |      | 1.1  |      
|                         | Unallocated corporate expenses and assets                          |               |       |                     |       |                     |       |     |       |      |       |      |       |      |     | (7.6 | )  |      |     | (7.9 | )   |   |     | (7.6 | )    |   |      | 27.1 |       |   |      | 24.7 |       |   |      | 52.7 |      
|                         | Amortization of goodwill                                           |               |       |                     |       |                     |       |     |       |      |       |      |       |      |     |     |    |      |     |     |     |   |     | (1.7 | )    |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Interest expense, net                                              |               |       |                     |       |                     |       |     |       |      |       |      |       |      |     | (1.3 | )  |      |     | (1.5 | )   |   |     | (2.7 | )    |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Net gain on curtailment/freeze of
    pension/postretirement plans |               |       |                     |       |                     |       |     |       |      |       |      |       |      |     | (1.6 | )  |      |     | .2   |     |   |     |     |      |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Restructuring and other unusual items                              |               |       |                     |       |                     |       |     |       |      |       |      |       |      |     | .1   |    |      |     | .1   |     |   |     | (3.0 | )    |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Discontinued operations                                            |               |       |                     |       |                     |       |     |       |      |       |      |       |      |     |     |    |      |     |     |     |   |     |     |      |   |      |     |       |   |      |     |       |   |      | 1.0  |      
|                         |                                                                    |               |       |                      |       |                     |       |      |       |      |       |       |       |      |     |      |    |      |     |      |     |   |     |      |      |   |      |      |       |   |      |      |       |   |      |     
|                         |                                                                    | Consolidated  |       | $                    | 288.9 |                     |       | $    | 283.2 |      |       | $     | 272.5 |      |     | $    | .2 |      |     | $    | 3.8 |   |     | $    | (2.8 | ) |      | $    | 151.7 |   |      | $    | 146.2 |   |      | $    | 145.0 | 
|                         |                                                                    |               |       |                      |       |                     |       |      |       |      |       |       |       |      |     |      |    |      |     |      |     |   |     |      |      |   |      |      |       |   |      |      |       |   |      |     



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | Includes activity from operations which falls
    below the quantitative thresholds for a reportable segment.

59



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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Capital expenditures and depreciation and
amortization by reportable segment are set forth below for the
years ended December 31:

|                         |           |                      |     |                |     |      |     |      |     |      |    |      |     |   |     |    |     |   |     |    |     |   |     |     |     | 
|------------------------ | --------- | -------------------- | --- | -------------- | --- | ---- | --- | ---- | --- | ---- | -- | ---- | --- | - | --- | -- | --- | - | --- | -- | --- | - | --- | --- | --- | 
|                         |           |                      |     |                |     |      |     |     
|                         |           |                      |     | Depreciation &
|                         |           | Capital Expenditures |     | Amortization  
|                         |           |                      |     |               
|                         |           | 2003                 |     | 2002           |     | 2001 |     | 2003 |     | 2002 |    | 2001
|                         |           |                      |     |                |     |      |     |      |     |      |    |     
|                         |           |                     
|                         |           | (In millions)       
|Label Products           |           | $                    | 2.2 |                |     | $    | 1.8 |      |     | $    | .7 |      |     | $ | 2.4 |    |     | $ | 2.2 |    |     | $ | 2.9 |    
|Specialty Paper Products |           |                      | 1.0 |                |     |      | 1.6 |      |     |      | .9 |      |     |   | 3.8 |    |     |   | 3.6 |    |     |   | 3.2 |    
|Imaging Supplies         |           |                      | .4  |                |     |      | .5  |      |     |      | .5 |      |     |   | 1.4 |    |     |   | 1.5 |    |     |   | 1.5 |    
|Reconciling Items:       |           |                      |     |                |     |      |     |      |     |      |    |      |     |   |     |    |     |   |     |    |     |   |     |    
|                         | Goodwill  |                      |     |               |     |      |     |     |     |      |    |     |     |   |     |   |     |   |     |   |     |   |     | 1.7 |    
|                         | Corporate |                      |     | .7             |     |      |     | .4   |     |      |    | .3   |     |   |     | .3 |     |   |     | .3 |     |   |     | .4  |    
|                         |           |                      |     |                |     |      |     |      |     |      |    |      |     |   |     |    |     |   |     |    |     |   |     |    
|                         |           | Consolidated         |     | $              | 4.3 |      |     | $    | 4.3 |      |    | $    | 2.4 |   |     | $  | 7.9 |   |     | $  | 7.6 |   |     | $   | 9.7 | 
|                         |           |                      |     |                |     |      |     |      |     |      |    |      |     |   |     |    |     |   |     |    |     |   |     |    

The following is information by geographic area
as of and for the years ended December 31:

|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |      |      |   |      |     |      | 
|------------------ | ----------------------- | --------------------- | ----- | ----------------- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | - | ---- | ---- | ---- | - | ---- | ---- | ---- | - | ---- | --- | ---- | 
|                   |                         |                       |       |                   |       |      |       |     
|                   |                         | Net Sales from        |       |                  
|                   |                         | Continuing Operations |       | Long-Lived Assets
|                   |                         |                       |       |                  
|                   |                         | 2003                  |       | 2002              |       | 2001 |       | 2003 |       | 2002 |       | 2001
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |     
|                   |                         |                      
|                   |                         | (In millions)        
|By Geographic Area |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |      |      |   |      |    
|United States      |                         | $                     | 288.9 |                   |       | $    | 283.2 |      |       | $    | 272.5 |      |       | $ | 79.0 |      |      | $ | 78.7 |      |      | $ | 86.2 |    
|Reconciling Items: |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |      |      |   |      |    
|                   | Discontinued Operations |                       |       |                  |       |      |       |     |       |      |       |     |       |   |      | .9   |      |   |      | .9   |      |   |      | .9  |     
|                   | Deferred tax assets     |                       |       |                  |       |      |       |     |       |      |       |     |       |   |      | 11.4 |      |   |      | 10.2 |      |   |      | 2.9 |     
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |      |      |   |      |    
|                   |                         | Consolidated          |       | $                 | 288.9 |      |       | $    | 283.2 |      |       | $    | 272.5 |   |      | $    | 91.3 |   |      | $    | 89.8 |   |      | $   | 90.0 | 
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |      |      |   |      |    

Net sales from continuing operations by
geographic area are based upon the geographic location from
which the goods were shipped and not the customer location.

60



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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
14:     Quarterly Operating Results
(Unaudited)

Our quarterly operating results based on our use
of 13-week periods are as follows:

|        |                                     |                                      |   |         |      |         |   |         |      |      |   |        |       |  |   |        |      |  |   |         |       | 
|------- | ----------------------------------- | ------------------------------------ | - | ------- | ---- | ------- | - | ------- | ---- | ---- | - | ------ | ----- |  | - | ------ | ---- |  | - | ------- | ----- | 
|        |                                     | 1st                                  |   | 2nd     |      | 3rd     |   | 4th     |      |     
|        |                                     | Quarter                              |   | Quarter |      | Quarter |   | Quarter |      | Year
|        |                                     |                                      |   |         |      |         |   |         |      |     
|        |                                     |                                     
|        |                                     | (In millions, except per share data)
|2003(1) |                                     |                                      |   |         |      |         |   |         |      |      |   |        |       |  |   |        |      |  |   |        
|        | Net sales                           |                                      | $ | 67,193  |      |         | $ | 72,431  |      |      | $ | 74,075 |       |  | $ | 75,207 |      |  | $ | 288,906 |      
|        | Gross margin                        |                                      |   | 12,598  |      |         |   | 13,421  |      |      |   | 14,024 |       |  |   | 13,762 |      |  |   | 53,805  |      
|        | Net income (loss)(2)                |                                      |   | 176     |      |         |   | 118     |      |      |   | 697    |       |  |   | (889   | )    |  |   | 102     |      
|        | Earnings (loss) per common share(2) |                                      |   | .03     |      |         |   | .02     |      |      |   | .12    |       |  |   | (.15   | )    |  |   | .02     |      
|        | Market price:                       |                                      |   |         |      |         |   |         |      |      |   |        |       |  |   |        |      |  |   |         |      
|        |                                     | High                                 |   |         | 9.02 |         |   |         | 9.48 |      |   |        | 9.50  |  |   |        | 9.08 |  |   |         | 9.50  | 
|        |                                     | Low                                  |   |         | 8.65 |         |   |         | 8.73 |      |   |        | 6.75  |  |   |        | 7.93 |  |   |         | 6.75  | 
|2002(3) |                                     |                                      |   |         |      |         |   |         |      |      |   |        |       |  |   |        |      |  |   |        
|        | Net sales                           |                                      | $ | 64,523  |      |         | $ | 70,885  |      |      | $ | 72,798 |       |  | $ | 74,984 |      |  | $ | 283,190 |      
|        | Gross margin                        |                                      |   | 12,520  |      |         |   | 14,869  |      |      |   | 14,551 |       |  |   | 14,148 |      |  |   | 56,088  |      
|        | Net income (loss)(4)                |                                      |   | 143     |      |         |   | 1,074   |      |      |   | 673    |       |  |   | 426    |      |  |   | 2,316   |      
|        | Earnings (loss) per common share(4) |                                      |   | .02     |      |         |   | .19     |      |      |   | .12    |       |  |   | .07    |      |  |   | .40     |      
|        | Market price:                       |                                      |   |         |      |         |   |         |      |      |   |        |       |  |   |        |      |  |   |         |      
|        |                                     | High                                 |   |         | 7.54 |         |   |         | 7.25 |      |   |        | 10.20 |  |   |        | 9.60 |  |   |         | 10.20 | 
|        |                                     | Low                                  |   |         | 5.40 |         |   |         | 5.85 |      |   |        | 6.20  |  |   |        | 6.85 |  |   |         | 5.40  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We acquired the operations assets of The Label
    Company from Bunzl Distribution in February 2003, as described
    in Note 2. The operations of The Label Company have been
    included in our quarterly operating results since the date of
    acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | Our fourth quarter includes restructuring income
    of $68,000 resulting from a net reduction to previously
    established reserves and a loss of $1.6 million resulting from
    the adjustment to the curtailment of postretirement plans of our
    union employees located in New Hampshire, as described in Notes
    2 and 12, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | We acquired the assets of Computer Imaging
    Supplies, Inc. and certain assets of Dietzgen LLC during the
    second quarter of 2002, as described in Note 2. The operations
    of CIS and Dietzgen have been included in our quarterly
    operating results since their dates of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) | The first quarter includes a pretax restructuring
    charge of $.1 million related primarily to workforce
    reductions in our Toner division. The third quarter includes a
    net pretax restructuring charge of $3.0 million related to
    the shutdown of our Label lamination business, partially offset
    by unusual income from the sale of land in Merrimack, NH. The
    fourth quarter includes net pretax unusual income of
    $.2 million resulting from a legal settlement associated
    with the acquired Rittenhouse businesses, partially offset by a
    restructuring charge associated with outsourcing our toner
    filling operation and an additional restructuring charge
    resulting from the shutdown of our lamination business.

Note 15:     Common
Stock Information

Our stock is traded on the New York Stock
Exchange under the trading symbol NSH. At
December 31, 2003, there were 1,115 record holders of our
common stock.

61



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 16:     Related
Parties



| |                            
| | ---------------------------
| | Leases with Related Parties

We rent property and equipment under leases with
entities partially owned by either a family partnership of which
our Chief Executive Officer and his family have total interest
or by our Chief Executive Officer. Associated with these leases,
we incurred rent expense of approximately $.2 million
during 2003 and 2002 and $.3 million during 2001. We also
pay taxes and utilities and insure property occupied under these
leases.

In December 2003, our Board of Directors approved
the purchase of equipment previously leased from a related
party. Subsequently, we purchased the equipment and will no
longer incur lease expense on the equipment.



| |                                     
| | ------------------------------------
| | Notes Payable to Related
    Parties

We have a note payable to one of our executive
officers and two notes payable to Nashua employees as discussed
in detail in Note 6.



| |                         
| | ------------------------
| | Loans to Related Parties

We have loans to our Chief Executive Officer and
a former owner of Rittenhouse Paper Company and current
consultant to Nashua relating to life insurance premiums paid on
their behalf. These loans are partially collateralized by the
cash surrender value of related life insurance policies and
fully covered by the death benefit payable under these policies.
These loans do not incur interest and are due upon death,
settlement or termination of related life insurance policies. At
December 31, 2003 and 2002, loans of $1.2 million and
$1.0 million, respectively, are included in other assets in
our Consolidated Balance Sheet. Below is a summary of related
party loan activity:

|                                                                             |  |                |     |         |  |       |     |  |  |   |       | 
|---------------------------------------------------------------------------- |  | -------------- | --- | ------- |  | ----- | --- |  |  | - | ----- | 
|                                                                             |  | Chief          |     | Other   |  |      
|                                                                             |  | Executive      |     | Related |  |      
|                                                                             |  | Officer        |     | Party   |  | Total
|                                                                             |  |                |     |         |  |      
|                                                                             |  |               
|                                                                             |  | (In thousands)
|Acquired upon acquisition of Rittenhouse Paper
    Company on April 17, 2000 |  | $              | 160 |         |  | $     | 195 |  |  | $ | 355   | 
|Net premiums paid in 2001                                                    |  |                | 154 |         |  |       | 214 |  |  |   | 368   | 
|Net premiums paid in 2002                                                    |  |                |    |         |  |       | 250 |  |  |   | 250   | 
|Net premiums paid in 2003                                                    |  |                |    |         |  |       | 235 |  |  |   | 235   | 
|                                                                             |  |                |     |         |  |       |     |  |  |   |       | 
|Balance at December 31, 2003                                                 |  | $              | 314 |         |  | $     | 894 |  |  | $ | 1,208 | 
|                                                                             |  |                |     |         |  |       |     |  |  |   |       | 
|Collateralized cash surrender value of life
    insurance policies           |  | $              | 472 |         |  | $     | 482 |  |  | $ | 954   | 
|                                                                             |  |                |     |         |  |       |     |  |  |   |       | 

In the fourth quarter of 2003, we incurred a
one-time $330,000 charge related to the settlement of future
obligations under an employment contract in which we were
required to fund a split dollar life insurance policy on behalf
of our Chief Executive Officer, Andrew Albert. As part of the
agreement, Mr. Albert repaid Nashua $313,000, in January
2004, for insurance premiums previously paid by us.

62



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##### Table of Contents



SCHEDULE II

NASHUA CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

|                   |                                                                   |                |   |           |  |            |   |             |     |  |   |        |      |  |   |       | 
|------------------ | ----------------------------------------------------------------- | -------------- | - | --------- |  | ---------- | - | ----------- | --- |  | - | ------ | ---- |  | - | ----- | 
|                   |                                                                   | Balance at     |   |           |  |            |   |            
|                   |                                                                   | Previous       |   |           |  |            |   | Balance at 
|                   |                                                                   | End of Year    |   | Additions |  | Deductions |   | End of Year
|                   |                                                                   |                |   |           |  |            |   |            
|                   |                                                                   |               
|                   |                                                                   | (In thousands)
|DECEMBER 31, 2003: |                                                                   |                |   |           |  |            |   |             |     |  |   |        |      |  |   |      
|                   | Allowance for doubtful accounts                                   |                | $ | 677       |  |            | $ | 432         | (a) |  | $ | (248   | )(b) |  | $ | 861   | 
|                   | Valuation allowance on state net operating loss
    carryforwards |                | $ | 600       |  |            |   |            |     |  |   |       |      |  | $ | 600   | 
|DECEMBER 31, 2002: |                                                                   |                |   |           |  |            |   |             |     |  |   |        |      |  |   |      
|                   | Allowance for doubtful accounts                                   |                | $ | 1,241     |  |            | $ | 411         | (a) |  | $ | (975   | )(b) |  | $ | 677   | 
|                   | Valuation allowance on state net operating loss
    carryforwards |                | $ | 1,885     |  |            | $ |            |     |  | $ | (1,285 | )    |  | $ | 600   | 
|DECEMBER 31, 2001: |                                                                   |                |   |           |  |            |   |             |     |  |   |        |      |  |   |      
|                   | Allowance for doubtful accounts                                   |                | $ | 1,035     |  |            | $ | 1,296       | (a) |  | $ | (1,090 | )(b) |  | $ | 1,241 | 
|                   | Valuation allowance on state net operating loss
    carryforwards |                | $ | 1,885     |  |            | $ |            |     |  | $ |       |      |  | $ | 1,885 | 



---



|    |                                                                   
|--- | ------------------------------------------------------------------
|(a) | Includes recoveries and amounts charged to costs
    and expenses.
|   
|(b) | Includes accounts deemed uncollectible.                           

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
Nashua Corporation:

We have audited the accompanying consolidated
balance sheets of Nashua Corporation as of December 31,
2003 and 2002 and the related consolidated statements of
operations, shareholders equity, and cash flows for each
of the three years in the period ended December 31, 2003.
Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Nashua Corporation at
December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Notes 3 and 4 to the Consolidated
Financial Statements, in 2002 the Company adopted the provisions
of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

Manchester, New Hampshire

February 7, 2004


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##### Table of Contents






Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.




Item 9A.     Controls
and Procedures

1. Our Companys management, with the
participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of December 31, 2003. Based on
their evaluation, our chief executive officer and chief
financial officer concluded that as of December 31, 2003,
our disclosure controls and procedures were (1) designed to
ensure that material information related to our Company,
including our consolidated subsidiaries, is made known to our
chief executive officer and chief financial officer by others
within those entities, particularly during the period in which
this report was being prepared, and (2) effective, in that
they provided reasonable assurance that information required to
be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms.

2. No change in our internal controls over
financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




PART III






Item 10.     Directors
and Executive Officers of the Registrant




| |          
| | ---------
| | Directors

The information required by this Item with
respect to directors will be included in our definitive Proxy
Statement for our Annual Meeting of Stockholders to be held on
May 4, 2004, and is incorporated herein by reference.



| |                                         
| | ----------------------------------------
| | Executive Officers of the
    Registrant

The information required by this Item with
respect to our executive officers is contained in Part I of this
Form 10-K.



| |               
| | --------------
| | Code of Ethics

The information required by this Item with
respect to code of ethics will be included in our definitive
Proxy Statement for our Annual Meeting of Stockholders to be
held on May 4, 2004, and is incorporated herein by
reference. In accordance with Item 406 of
Regulation S-K, a copy of our code of ethics is available
on our website at www.nashua.com.




Item 11.     Executive
Compensation

The information required by this Item will be
included in our definitive Proxy Statement for our Annual
Meeting of Stockholders to be held on May 4, 2004, and is
incorporated herein by reference.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this Item will be
included in our definitive Proxy Statement for our Annual
Meeting of Stockholders to be held on May 4, 2004, and is
incorporated herein by reference.




Item 13.     Certain
Relationships and Related Transactions

The information required by this Item will be
included in our definitive Proxy Statement for our Annual
Meeting of Stockholders to be held on May 4, 2004, and is
incorporated herein by reference.

65



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##### Table of Contents






Item 14.     Principal
Accountant Fees and Services

The information required by this Item will be
included in our definitive Proxy Statement for our Annual
Meeting of Stockholders to be held on May 4, 2004, and is
incorporated herein by reference.




PART IV




Item 15.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

(a) The following documents are included in
Item 8 of Part II of this Form 10-K:

(1) Financial statements:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Consolidated Statements of Operations for each of
    the three years ended December 31, 2003, 2002 and 2001              
|
| |  | Consolidated Balance Sheets at December 31,
    2003 and December 31, 2002                                                
|
| |  | Consolidated Statements of Shareholders
    Equity for each of the three years ended December 31, 2003,
    2002 and 2001
|
| |  | Consolidated Statements of Cash Flows for each of
    the three years ended December 31, 2003, 2002 and 2001              
|
| |  | Notes to Consolidated Financial Statements                                                                                
|
| |  | Report of Independent Auditors                                                                                            



| |                                  
| | ---------------------------------
| | (2) Financial statement schedule:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Schedule II  Valuation and
    qualifying accounts for each of the three years ended
    December 31, 2003, 2002 and 2001

The financial statement schedule should be read
in conjunction with our financial statements included in
Item 8 of Part II of this Form 10-K. All other
schedules have been omitted as they are not applicable, not
required, or the information is included in the consolidated
financial statements or notes to the consolidated financial
statements.

(3) Exhibits:

| |      |   |  |                                                                                                                                                                                                                                                                                            
| | ---- | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.01 |   |  | Agreement and Plan of Merger, dated as of
    March 25, 2002, between Nashua Corporation and Nashua MA
    Corporation. Incorporated by reference to our Definitive Proxy
    Statement filed on March 27, 2002.                                                                           
| | 3.01 |   |  | Articles of Organization, as amended.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended June 28, 2002.                                                                                                                                          
| | 3.02 |   |  | By-laws, as amended. Incorporated by reference to
    our Quarterly Report on Form 10-Q for the quarter ended
    June 28, 2002.                                                                                                                                                           
| | 4.01 |   |  | Credit Agreements, dated March 1, 2002 by
    and among Nashua Corporation, LaSalle Bank, NA and Fleet
    National Bank. Incorporated by reference to our Current Report
    on Form 8-K dated March 14, 2002.                                                                            
| | 4.02 |   |  | First Amendment to Credit Agreement, dated as of
    July 15, 2003, by and among Nashua Corporation, Fleet
    National Bank and LaSalle Bank National Association.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended June 27, 2003.            
| | 4.03 |   |  | Waiver and Second Amendment to Credit Agreement,
    dated as of July 24, 2003, by and among Nashua Corporation,
    Fleet National Bank and LaSalle Bank National Association.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended June 27, 2003.
| | 4.04 |   |  | Third Amendment to Credit Agreement, dated as of
    September 25, 2003, by and among Nashua Corporation, Fleet
    National Bank and LaSalle Bank National Association.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended September 26,.       
| | 4.05 | * |  | Fourth Amendment to Credit Agreement, dated as of
    December 30, 2003, by and among Nashua Corporation, Fleet
    National Bank and LaSalle Bank National Association.                                                                                                                   

66



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##### Table of Contents



| |        |   |  |                                                                                                                                                                                                                                                                           
| | ------ | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | +10.01 |   |  | Amended and Restated 1987 Stock Option Plan.
    Incorporated by reference to our Annual Report on Form 10-K
    for the year ended December 31, 1997.                                                                                                                    
| | +10.02 |   |  | Amended and Restated 1996 Stock Incentive Plan.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended April 2, 1999.                                                                                                               
| | +10.03 |   |  | 1999 Shareholder Value Plan. Incorporated by
    reference to our Quarterly Report on Form 10-Q for the
    quarter ended April 2, 1999.                                                                                                                                  
| | +10.04 |   |  | Employment Agreement, dated as of April 14,
    2000 between Nashua Corporation and Andrew B. Albert.
    Incorporated by reference to our Current Report on Form 8-K
    dated April 14, 2000 and filed on April 18, 2000.                                               
| | +10.05 |   |  | Change of Control and Severance Agreement, dated
    as of June 24, 1998 between Nashua Corporation and John L.
    Patenaude. Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended July 3, 1998.                                     
| | +10.06 |   |  | Change of Control and Severance Agreement, dated
    as of December 15, 2000 between Nashua Corporation and
    Robert S. Amrein. Incorporated by reference to our Annual Report
    on Form 10-K for the year ended December 31, 2000.                                   
| | +10.07 |   |  | Change of Control and Severance Agreement, dated
    as of February 25, 2000 between Nashua Corporation and Donna J.
    DiGiovine. Incorporated by reference to our Annual Report on
    Form 10-K for the year ended December 31, 1999.                                 
| | +10.08 | * |  | Management Incentive Plan.                                                                                                                                                                                                                                                
| | +10.09 |   |  | Form of Indemnification Agreement between Nashua
    Corporation and its directors and executive officers.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended September 27, 2002.                                               
| | +10.10 |   |  | Deferred Compensation Agreement dated as of
    December 23, 1996 between Rittenhouse Paper Company and
    Thomas R. Pagel. Incorporated by reference to our Annual Report
    on Form 10-K for the year ended December 31, 2000.                                        
| | 10.11  |   |  | Lease Agreement, dated December 19, 1994
    between Nashua Corporation and Sun Life Assurance Company of
    Canada. Incorporated by reference to our Annual Report on
    Form 10-K for the year ended December 31, 2000.                                               
| | 10.12  |   |  | Master Agreement dated as of July 2, 2001,
    between Nashua Corporation and the Fasson Roll North America
    division of Avery Dennison Corporation. Incorporated by
    reference to our Current Report on Form 8-K dated
    July 9, 2001 and filed on July 12, 2001.
| | 14.01  | * |  | Code of Ethics.                                                                                                                                                                                                                                                           
| | 21.01  | * |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                           
| | 23.01  | * |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                             
| | 24.01  | * |  | Power of Attorney.                                                                                                                                                                                                                                                        
| | 31.01  | * |  | Certificate of Chief Executive Officer pursuant
    to Rule 13a-14(a) or Rule 15d-14(a), as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
    dated March 15, 2003.                                                                              
| | 31.02  | * |  | Certificate of Chief Financial Officer pursuant
    to Rule 13a-14(a) or Rule 15d-14(a), as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
    dated March 15, 2003.                                                                              
| | 32.01  | * |  | Certificate of the Chief Executive Officer
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
    dated March 15, 2003.                                                                                    
| | 32.02  | * |  | Certificate of the Chief Financial Officer
    pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, dated
    March 15, 2003.                                                                                    



---

*  Filed herewith.



|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|+  | Identifies exhibits constituting management
    contracts or compensatory plans or other arrangements required
    to be filed as an exhibit to this Annual Report on
    Form 10-K.

(4) Reports on Form 8-K:



| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 23, 2003, we filed a Current
    Report on Form 8-K, dated October 22, 2003,
    furnishing, under Item 12, a press release reporting
    financial results for the quarter ended September 26, 2003.

67



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.



| |                   
| | ------------------
| | NASHUA CORPORATION



| |     |                      
| | --- | ---------------------
| | BY: | /s/ JOHN L. PATENAUDE

| |                           
| | --------------------------
| |                           
| | JOHN L. PATENAUDE         
| | Vice President-Finance and
| | Chief Financial Officer   

Date: March 15, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                         |  |                                                                                          |  |                |  |               
|---------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | -------------- |  | --------------
|                                         |  |                                                                                          |  |               
|Signature                                |  | Title                                                                                    |  | Date          
|                                         |  |                                                                                          |  |               
|/s/ ANDREW B. ALBERTAndrew B. Albert     |  | Chairman, President and
    Chief Executive Officer
    (principal executive officer)    |  | March 15, 2004
|                                        
|/s/ JOHN L. PATENAUDEJohn L. Patenaude   |  | Vice President-Finance and
    Chief Financial Officer
    (principal financial officer) |  | March 15, 2004
|                                        
|/s/ MARGARET M. CALLANMargaret M. Callan |  | Corporate Controller and
    Chief Accounting Officer
    (principal accounting officer) |  | March 15, 2004
|                                        
|*Avrum Gray                              |  | Director                                                                                 |  |               
|                                        
|*Mark E. Schwarz                         |  | Director                                                                                 |  |               
|                                        
|*L. Scott Barnard                        |  | Director                                                                                 |  |               
|                                        
|*George R. Mrkonic, Jr.                  |  | Director                                                                                 |  |               
|                                        
|*James F. Orr III                        |  | Director                                                                                 |  |               
|                                        
|*By:                                     |  | /s/ JOHN L. PATENAUDEJohn L. Patenaude
    Attorney-In-Fact                              |  |                |  | March 15, 2004

68