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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,
	2001                                              
|          
|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 1-5492-1

NASHUA CORPORATION


(Exact name of Registrant as Specified in its
Charter)


|                                                                                                  |  |                                   
|------------------------------------------------------------------------------------------------- |  | ----------------------------------
|Delaware                                                                                          |  | 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

As of March 14, 2002, the aggregate market value
of the registrants voting stock held by non-affiliates was
approximately $32,034,817. As of March 14, 2002, the number of
shares outstanding of the registrants Common Stock was
5,836,781 (excluding 1,023,068 shares held in treasury).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for
the Annual Meeting of Stockholders of the registrant to be held
on May 1, 2002 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 Stock and Related Stockholder Matters                
|                                                                                              | Item 6. Selected Financial Data                                                             
|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                                         
|CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS                                   
|CONSOLIDATED BALANCE SHEET                                                                   
|CONSOLIDATED STATEMENT OF CASH FLOWS                                                         
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                   
|NASHUA CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS                        
|REPORT OF INDEPENDENT AUDITORS                                                               
|REPORT OF INDEPENDENT ACCOUNTANTS                                                            
|REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE                            
|                                                                                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|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. Exhibits, Financial Statement Schedules and Reports on Form 8-K                    
|SIGNATURES                                                                                   
|Ex-11.01 Statement regarding computation of...                                               
|Ex-21.01 Subsidiaries of the Registrant                                                      
|Ex-23.01 Consent of Ernst & Young  LLP                                                       
|Ex-23.02 Consent of PricewaterhouseCoopers  LLP                                              
|Ex-24.01 Powers of Attorney                                                                  



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PART I




Item 1.     Business

General

Nashua Corporation is a premier manufacturer,
converter and marketer of labels, specialty papers and imaging
products. Our primary products include thermal coated papers,
pressure-sensitive labels, copier papers, bond papers, point of
sale receipts, ATM receipts and toners/developers for use in
photocopiers.

Our Company was incorporated in Massachusetts in
1904. We changed our state of incorporation to Delaware in 1957.
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. 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: (1) Label Products,
(2) Specialty Paper Products and (3) Imaging Supplies,
together with a description of their more significant products,
competitors and operations. Additional financial information
regarding our business segments is contained in the Note
entitled Information About Operations in our
Consolidated Financial Statements included in Item 8 of
Part II of this Form 10-K.

On April 17, 2000, we completed the
acquisition of all outstanding shares of Rittenhouse Paper
Company pursuant to a Stock Purchase Agreement dated
March 21, 2000. 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 and
in our Consolidated Statement of Operations and Retained
Earnings from the date of acquisition.

Label Products Segment

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

Pressure-sensitive labels and tags are used for
supermarket scale, retail shelf tags, childrens stickers,
inventory control, tracking, automatic identification and
address labels. We are a major supplier of labels to the
supermarket industry and of labels used in the distribution and
manufacture of a wide variety of other products. Our labels are
also utilized for such applications as poultry/meat processing,
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 Corporation
Ltd., Hobart Corporation, Wallace Computer Services, Inc. and
Corporate Express, as well as numerous small 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 include paper, inks
and chemicals used in producing our products. We purchase
materials from several suppliers and believe that adequate
quantities of supplies are available. However, there can be no
assurance that our future operating results would not be
adversely affected by 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. As a
result, we recorded restructuring charges in the third and
fourth quarters 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 (Avery Dennison). Under the terms
of the agreements, we are committed to purchase a significant
portion of the laminated materials we use in our

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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. 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 the need for significant capital investment in
lamination equipment.


Specialty Paper Products Segment

Our Specialty Paper Products segment manufactures
and sells coated and converted papers and films. Products
include: thermal papers, Davac® dry-gummed papers, heat
seal papers, large format media papers, carbonless papers, small
rolls, ATM receipts, retail consumer products and cut-sheet bond
papers.

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, airline and package
identification systems, gaming and ticketing systems, medical
and industrial recording charts and for conversion to labels.
Thermal papers are also used in thermal facsimile machines. We
sell thermal papers primarily to printers and converters.
Competitors in the thermal papers market include major
integrated companies such as Appleton Papers, Inc. and Ricoh
Corporation, as well as other manufacturers in the United
States, Japan and Europe.

Small rolls 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 and
casino/gambling. We sell converted small rolls to fine paper
merchants, superstores, warehouse clubs, resellers and
end-users. Our competitors in the small roll market include NCR
Corporation, Paper Systems, Inc. and Wallace Computer Systems,
Inc.

Davac® dry-gummed paper is a paper that is
coated with a moisture-activated adhesive. We sell Davac®
dry-gummed paper primarily to fine paper merchants and business
forms manufacturers, which ultimately convert it into various
types of labels and stamps. Our major competitor in the
dry-gummed label market is Ivex Corporation.

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.

Large format media papers are premium quality
heavy weight papers untreated or treated with either resin or
non-resin coatings. We sell large format media papers to
merchants, resellers and end-users for use in graphic
applications, signs, engineering drawings, posters and
presentations. Major competitors include Rexam PLC, Azon
Corporation and Océ N.V.

Carbonless paper is a coated paper used in the
production of multi-part business forms which produce multiple
copies without carbon paper. We 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 forms. Within the carbonless paper market, we generally
compete with large integrated manufacturers including Appleton
Papers, Inc., The Mead Corporation and Imation Corporation.

We also distribute cut-sheet bond papers under
the Nashua brand name for use in laser printers and photocopier
machines to resellers and end-users. Competitors for this
product line include large paper manufacturers. We rely heavily
on our relationships with large paper manufacturers to supply
this product to our customers. The market for cut-sheet bond
papers is price-sensitive and changes in economic conditions
within the paper industry could impact our ability to
competitively price our product.

We depend on outside suppliers for most of the
raw materials used by our Specialty Paper Products segment.
Primary raw materials include paper and chemicals used in
producing the various coatings that we apply and ribbons. We
purchase materials from several suppliers and believe that
adequate quantities of supplies are available. However, there
can be no assurance that our future operating results would not
be

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adversely affected by future increases in 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 Davac® dry-gummed papers, heat seal papers and
carbonless papers. Future sales and profitability for these
product lines depends on our ability to 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.

Imaging Supplies Segment

Our Imaging Supplies segment manufactures and
sells a variety of consumable products used in the process of
producing hard copy images. Our imaging supplies product line is
comprised primarily of high quality, competitively priced toners
and developers compatible with Xerox, Ricoh, Océ and IBM
photocopiers.

We market our products worldwide under both the
Nashua brand and major 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.

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 and marketing.
Additionally, strong patent protection for original equipment
manufacturers on toner and developer formulations and dispense
mechanisms requires us to closely monitor new product
development efforts in order to avoid patent infringement.

We depend on outside suppliers for most of the
raw materials used by our Imaging Supplies segment. We purchase
materials from several suppliers and believe that adequate
quantities of supplies are available. However, 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 the fourth quarter of 2001, we
announced our decision to outsource our toner filling operation
during the first half of 2002. Outsourcing this activity will
increase our reliance on outside suppliers in future years, but
is expected to reduce our toner filling costs.

Due to the continued decline in sales and
profitability of our remanufactured laser cartridge operation,
we discontinued this product line in the first quarter of 2000.
We recorded restructuring charges totaling $1.0 million
primarily comprised of severance and other exit costs related to
the discontinuance of this product line. The operations of the
remanufactured laser cartridge business are included in our
Imaging Supplies segment.

Information About Major Customers

We have one group of customers under common
control that represents ten percent or more of our consolidated
revenues. Combined sales to Wal-Mart and Sams Club totaled
$27.3 million in 2001, representing sales of
$20.4 million for our Specialty Paper Products segment and
$6.9 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 our
Company 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

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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 may 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.

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       
|
| |  | Hewitt, Texas            

All of these facilities are unionized, except for
the Tennessee and Texas locations. 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. While we believe that labor wage rates and
worker productivity at each of these manufacturing locations is
competitive, there can be no assurance that future operating
results will not be adversely affected by changes in 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 for our Specialty Paper Products segment and new
toner and developer formulations and toner cartridge design for
our Imaging Supplies segment. Nashuas research and
development expenditures were $3.2 million in 2001,
$4.2 million in 2000 and $5.1 million in 1999.

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

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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 attempted to remedy any alleged
environmental violation upon notification.


For the past five years, we have spent
approximately $1.0 million per year for compliance with
environmental laws and regulations. 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, 2001, our reserves for potential environmental
liabilities were $1.1 million for continuing operations and
$.2 million for discontinued 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 responsibly party could exceed our
current estimates. We believe, based on the facts currently
known to us 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.

Executive Officers

Listed below are our executive officers as of
March 15, 2002. No family relationships exist between any
of our officers.

|                   |  |     |    |          |  |                                                                    
|------------------ |  | --- | -- | -------- |  | -------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Andrew B. Albert   |  |     | 56 |          |  | Chairman, President and Chief Executive Officer                    
|John L. Patenaude  |  |     | 52 |          |  | Vice President  Finance, Chief
	Financial Officer and Treasurer   
|John J. Ireland    |  |     | 50 |          |  | Vice President, President of the Specialty Paper
	Products Division
|Joseph R. Matson   |  |     | 54 |          |  | Vice President, Corporate Controller                               
|Robert S. Amrein   |  |     | 47 |          |  | Vice President, General Counsel and Secretary                      
|Donna J. DiGiovine |  |     | 40 |          |  | Vice President, President of the Toner Products
	Division          
|Thomas R. Pagel    |  |     | 45 |          |  | 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, Chief Financial Officer and
Treasurer since May 1998. From July 1996 to May 1998, he served
as our Assistant Treasurer.

Mr. Ireland has been one of our Vice
Presidents since November 1995. He has also served as President
of our Specialty Paper Products division since April 1998 and as
its General Manager since April 1994.

Mr. Matson has been one of our Vice
Presidents since May 1998 and our Corporate Controller since
July 1988.

Mr. Amrein has been one of our Vice
Presidents, General Counsel and Secretary since December 2000.
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. DiGiovine has been one of our Vice
Presidents since December 1999. She has also served as President
of our Toner Products division since December 1999 and as its
General Manager since April 1999. 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.

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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.

Employees

We had 971 full-time employees at
February 13, 2002. Approximately 339 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 good. We have three labor
agreements with the Paper, Allied Industrial, Chemical and
Energy Workers International Union covering approximately
one-half of our hourly employees. These agreements had initial
durations of one to three years and expire on either
March 5, 2002, March 31, 2002 or March 30, 2003.
We are currently in negotiations to renew our agreements that
expire in March of 2002.

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 various tax issues, the
possibility of a final award of material damages in the Cerion
securities 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. 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 manufacturing facilities are listed
below by industry segment, location and principal products
produced. Except as otherwise noted, we own each of the
facilities listed.

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Principal Properties

|                                 |  |              |         |                             |  |                                         
|-------------------------------- |  | ------------ | ------- | --------------------------- |  | ----------------------------------------
|                                 |  | Total Square |         |                            
|Location                         |  | Footage      |         | Nature of Products Produced
|                                 |  |              |         |                            
|Corporate                        |  |              |         |                             |  |                                         
|Nashua, New Hampshire (leased)   |  |              | 18,000  |                             |  | none (corporate offices)                
|Specialty Paper Products Segment |  |              |         |                             |  |                                         
|Merrimack, New Hampshire         |  |              | 475,000 | (1)                         |  | coated paper products                   
|Jefferson City, Tennessee        |  |              | 145,000 |                             |  | converted paper products                
|Morristown, Tennessee (leased)   |  |              | 35,000  |                             |  | converted paper products and warehousing
|Vernon, California (leased)      |  |              | 61,000  |                             |  | converted paper products                
|Hewitt, Texas (leased)           |  |              | 20,000  |                             |  | converted paper products                
|Park Ridge, Illinois (leased)    |  |              | 17,000  |                             |  | none (administrative offices)           
|Label Products Segment           |  |              |         |                             |  |                                         
|Omaha, Nebraska                  |  |              | 170,000 |                             |  | label products                          
|Jefferson City, Tennessee        |  |              | 60,000  |                             |  | label products                          
|Imaging Supplies Segment         |  |              |         |                             |  |                                         
|Nashua, New Hampshire            |  |              | 209,000 |                             |  | dry toner and developer products        
|Merrimack, New Hampshire         |  |              | 112,000 |                             |  | dry toner and developer products        



---



|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our Specialty Paper Products division utilizes
	approximately 315,000 square feet and the remaining space is
	leased to 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 us, 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). 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 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 is
in process. We believe that the lawsuit is without merit and
will continue to defend ourselves in this matter.

We are involved in certain environmental matters
and have been designated by the Environmental Protection Agency
(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,

8



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##### Table of Contents



our ultimate cost of remediation is difficult to
estimate. At December 31, 2001, based on the facts
currently known and our prior experience with these matters, we
have concluded that there is at least a reasonable possibility
that site assessment, remediation and monitoring costs will be
incurred. We have estimated a range for these costs of
$1.0 million to $1.2 million for our continuing
operations and $.1 million to $.2 million for our
discontinued operations. These ranges could increase if other
potentially responsible parties are unable to bear their
allocated share. At December 31, 2001, our accrual balances
relating to environmental matters were $1.1 million for
continuing operations and $.2 million for discontinued
operations. In our view, these represent the most likely amounts
within the ranges stated above. 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 Stock
	and Related Stockholder Matters

Our common stock is listed and traded on the New
York Stock Exchange under the trading symbol NSH. As
of December 31, 2001, the number of holders of our common
stock was approximately 1,187. 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
|     |      |         |  |         |  |         |  |         |  |     
|2001 |      |         |  |         |  |         |  |         |  |      |  |       |  |  |  |      |  |  |  |      
|     | High |         |  | 5.87    |  |         |  | 7.05    |  |      |  | 7.85  |  |  |  | 6.10 |  |  |  | 7.85  | 
|     | Low  |         |  | 3.06    |  |         |  | 3.95    |  |      |  | 5.35  |  |  |  | 4.80 |  |  |  | 3.06  | 
|2000 |      |         |  |         |  |         |  |         |  |      |  |       |  |  |  |      |  |  |  |      
|     | High |         |  | 10.31   |  |         |  | 9.00    |  |      |  | 10.13 |  |  |  | 8.25 |  |  |  | 10.31 | 
|     | Low  |         |  | 7.19    |  |         |  | 7.63    |  |      |  | 7.81  |  |  |  | 3.56 |  |  |  | 3.56  | 

On April 24, 2000, our Board of Directors
voted to redeem the stock purchase rights issued pursuant to its
Shareholder Rights Plan. In redeeming the rights, a one-time
payment of $0.01 per common share was distributed to
shareholders of record on May 9, 2000.

Our ability to pay dividends is restricted to
$.6 million under the provisions of our debt agreement,
without the prior approval of our lenders.

9



---



##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

Nashua Corporation and Subsidiaries

Five Year Financial Review

|                                                                            |                                                           |      |         |       |   |      |         |       |  |      |         |       |   |   |         |       |   |   |         |       |  
|--------------------------------------------------------------------------- | --------------------------------------------------------- | ---- | ------- | ----- | - | ---- | ------- | ----- |  | ---- | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                            |                                                           | 2001 |         | 2000  |   | 1999 |         | 1998  |  | 1997
|                                                                            |                                                           |      |         |       |   |      |         |       |  |     
|                                                                           
|(In thousands, except per share data,                                      
|number of employees and percentages)                                       
|Operations(1)                                                               |                                                           |      |         |       |   |      |         |       |  |      |         |       |   |   |         |       |   |   |         |      
|Net sales                                                                   |                                                           | $    | 272,510 |       |   | $    | 253,122 |       |  | $    | 170,844 |       |   | $ | 167,831 |       |   | $ | 173,202 |      
|Gross margin percentage                                                     |                                                           |      | 20.5    | %     |   |      | 20.1    | %     |  |      | 24.0    | %     |   |   | 24.3    | %     |   |   | 23.1    | %    
|Selling, distribution and administrative expenses
	as a percentage of sales |                                                           |      | 18.3    | %     |   |      | 19.5    | %     |  |      | 20.3    | %     |   |   | 20.3    | %     |   |   | 22.3    | %    
|Income (loss) before interest and income
	taxes as a percentage of sales(2) |                                                           |      |        |       |   |      | 5.9     | %     |  |      | 2.1     | %     |   |   | (6.9    | )%    |   |   | (5.9    | )%   
|Income (loss) before income taxes as a
	percentage of sales(2)              |                                                           |      | (1.0    | )%    |   |      | 5.1     | %     |  |      | 1.7     | %     |   |   | (7.1    | )%    |   |   | (5.9    | )%   
|Income (loss) as a percentage of sales(2)                                   |                                                           |      | (0.9    | )%    |   |      | 2.1     | %     |  |      | (0.3    | )%    |   |   | (4.3    | )%    |   |   | (3.6    | )%   
|Effective tax provision (benefit) rate                                      |                                                           |      | (12.0   | )%    |   |      | 58.3    | %     |  |      | 114.6   | %     |   |   | (39.5   | )%    |   |   | (39.9   | )%   
|Income (loss) before income taxes(2)                                        |                                                           | $    | (2,782  | )     |   | $    | 12,914  |       |  | $    | 2,883   |       |   | $ | (11,950 | )     |   | $ | (10,300 | )    
|Income (loss) from continuing operations(2)                                 |                                                           | $    | (2,448  | )     |   | $    | 5,386   |       |  | $    | (420    | )     |   | $ | (7,229  | )     |   | $ | (6,190  | )    
|Income (loss) from discontinued operations,
	net of taxes                   |                                                           |      |        |       |   |      |        |       |  | $    | (4,001  | )     |   | $ | (6,687  | )     |   | $ | (2,632  | )    
|Gain on disposal of discontinued operation, net
	of taxes                   |                                                           |      |        |       |   |      |        |       |  |      |        |       |   | $ | 1,052   |       |   |   |        |      
|Net income (loss)                                                           |                                                           | $    | (2,448  | )     |   | $    | 5,386   |       |  | $    | (4,421  | )     |   | $ | (12,864 | )     |   | $ | (8,822  | )    
|Basic and diluted earnings (loss) per common
	share:                        |                                                           |      |         |       |   |      |         |       |  |      |         |       |   |   |         |       |   |   |         |      
|                                                                            | Continuing operations(2)                                  |      | $       | (0.43 | ) |      | $       | .95   |  |      | $       | (0.07 | ) |   | $       | (1.15 | ) |   | $       | (.97  | )
|                                                                            | Discontinued operations                                   |      |         |      |   |      |         |      |  |      | $       | (0.70 | ) |   | $       | (1.06 | ) |   | $       | (.41  | )
|                                                                            | Gain on disposal of discontinued operation, net
	of taxes |      |         |      |   |      |         |      |  |      |         |      |   |   | $       | .17   |   |   |         |      |  
|                                                                            | Net income (loss)                                         |      | $       | (0.43 | ) |      | $       | .95   |  |      | $       | (0.77 | ) |   | $       | (2.04 | ) |   | $       | (1.38 | )
|Financial Position(1)                                                       |                                                           |      |         |       |   |      |         |       |  |      |         |       |   |   |         |       |   |   |         |      
|Working capital                                                             |                                                           | $    | 16,528  |       |   | $    | 22,531  |       |  | $    | 35,562  |       |   | $ | 45,874  |       |   | $ | 18,892  |      
|Total assets                                                                |                                                           | $    | 145,046 |       |   | $    | 170,471 |       |  | $    | 130,445 |       |   | $ | 134,095 |       |   | $ | 146,762 |      
|Long-term debt                                                              |                                                           | $    | 23,280  |       |   | $    | 35,905  |       |  | $    | 511     |       |   | $ | 1,064   |       |   | $ | 3,489   |      
|Total debt                                                                  |                                                           | $    | 25,280  |       |   | $    | 45,711  |       |  | $    | 1,022   |       |   | $ | 1,575   |       |   | $ | 4,000   |      
|Total capital employed                                                      |                                                           | $    | 95,677  |       |   | $    | 118,048 |       |  | $    | 67,848  |       |   | $ | 76,802  |       |   | $ | 99,022  |      
|Total debt as a percentage of capital employed                              |                                                           |      | 26.4    | %     |   |      | 38.7    | %     |  |      | 1.5     | %     |   |   | 2.1     | %     |   |   | 4.0     | %    
|Shareholders equity                                                        |                                                           | $    | 70,397  |       |   | $    | 72,337  |       |  | $    | 66,826  |       |   | $ | 75,227  |       |   | $ | 95,022  |      
|Shareholders equity per common share                                       |                                                           | $    | 12.32   |       |   | $    | 12.79   |       |  | $    | 11.86   |       |   | $ | 12.59   |       |   | $ | 14.76   |      
|Other Selected
	Data(1)                                                     |                                                           |      |         |       |   |      |         |       |  |      |         |       |   |   |         |       |   |   |         |      
|Investment in plant and equipment                                           |                                                           | $    | 2,375   |       |   | $    | 9,625   |       |  | $    | 7,855   |       |   | $ | 6,702   |       |   | $ | 4,418   |      
|Depreciation and amortization                                               |                                                           | $    | 9,748   |       |   | $    | 9,304   |       |  | $    | 6,381   |       |   | $ | 6,846   |       |   | $ | 7,554   |      
|Dividends per common share                                                  |                                                           |      |        |       |   | $    | .01     |       |  |      |        |       |   |   |        |       |   |   |        |      
|Return on average shareholders equity                                      |                                                           |      | (3.4    | )%    |   |      | 7.7     | %     |  |      | (6.2    | )%    |   |   | (15.1   | )%    |   |   | (9.0    | )%   
|Common stock price range:                                                   |                                                           |      |         |       |   |      |         |       |  |      |         |       |   |   |         |       |   |   |         |      
|                                                                            | High                                                      |      | $       | 7.85  |   |      | $       | 10.31 |  |      | $       | 15.44 |   |   | $       | 17.50 |   |   | $       | 14.75 |  
|                                                                            | Low                                                       |      | $       | 3.06  |   |      | $       | 3.56  |  |      | $       | 6.56  |   |   | $       | 11.56 |   |   | $       | 9.50  |  
|                                                                            | Year-end closing price                                    |      | $       | 5.87  |   |      | $       | 4.44  |  |      | $       | 7.50  |   |   | $       | 13.31 |   |   | $       | 11.63 |  
|Number of employees from continuing operations                              |                                                           |      | 971     |       |   |      | 1,140   |       |  |      | 729     |       |   |   | 725     |       |   |   | 768     |      
|Number of employees from discontinued operations                            |                                                           |      |        |       |   |      |        |       |  |      |        |       |   |   |        |       |   |   | 1,273   |      
|Average common shares outstanding                                           |                                                           |      | 5,696   |       |   |      | 5,649   |       |  |      | 5,718   |       |   |   | 6,320   |       |   |   | 6,385   |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See the Business Changes Note to our
	Consolidated Financial Statements for a description of certain
	matters relevant to this data, including the acquisition of
	Rittenhouse Paper Company in April 2000.                                                                                                                                                                                                              
|   
|(2) | Income (loss) is from continuing operations
	and includes restructuring and other unusual charges/(income) of
	$3.0 million for 2001 (1.1% of sales), $1.0 million
	for 2000 (.4% of sales), $(1.3) million for 1999 (.8% of
	sales), $13.8 million for 1998 (8.2% of sales) and
	$4.3 million for 1997 (2.5% of sales). Income
	(loss) for 2000 also includes $18.6 million of pension
	settlement income (7.3% of sales).

10



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##### Table of Contents








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

Corporate Matters

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.

On April 17, 2000, we completed the
acquisition of all outstanding shares of Rittenhouse Paper
Company (Rittenhouse), pursuant to a Stock Purchase
Agreement, dated March 21, 2000. The acquisition of
Rittenhouse was accounted for using the purchase method of
accounting and the operations of Rittenhouse are included in our
Consolidated Statement of Operations and Retained Earnings from
the date of acquisition.

Due to the continued decline in sales and
profitability of our remanufactured laser cartridge operation,
we discontinued this product line in the first quarter of 2000.
We recorded restructuring charges totaling $1.0 million
primarily comprised of severance and other exit costs related to
the discontinuance of this product line. The operations of the
remanufactured laser cartridge business are included in our
Imaging Supplies segment.

In the first quarter of 2000, we recorded pretax
income of $18.6 million associated with the purchase of
non-participating annuity contracts from Principal Life
Insurance Company. These contracts settled our pension benefit
obligation for retired salaried and hourly employees covered
under our pension plans and receiving pension benefits as of
December 1, 1999.

Results of Operations  2001
Compared to 2000

Our net sales improved to $272.5 million in
2001, a $19.4 million or 7.7 percent increase over 2000
sales of $253.1 million. Our 2001 sales included a full
year of Rittenhouse operations, while our 2000 sales included
Rittenhouse operations as of the acquisition date of
April 17, 2000. Increased sales from our Rittenhouse
operations within our Label Products and Specialty Paper
Products segments were partially offset by the discontinuance of
our lamination business in our Label Products segment in the
third quarter of 2001, the discontinuance of our remanufactured
laser cartridge product line in the first quarter of 2000 and a
decrease in toner sales within our Imaging Supplies segment. Our
gross margin percentage increased to 20.5 percent in 2001
from 20.1 percent in 2000. This improvement was primarily
attributable to margin improvements in our Label Products and
Imaging Supplies segments.

Selling and distribution expenses increased by
$1.5 million or 5.5 percent to $28.8 million for
2001, compared to $27.3 million for 2000. This increase was
primarily attributable to increased sales due to the acquisition
of Rittenhouse. Selling and distribution expenses as a
percentage of sales decreased from 10.8 percent in 2000 to
10.6 percent in 2001. Administrative expenses decreased
4.4 percent from $21.9 million or 8.7 percent of
sales in 2000 to $21.0 million or 7.7 percent of sales
in 2001. Slight increases in administrative expenses for our
operating segments were more than offset by a decline in
corporate expenses mainly attributable to lower integration
costs, proxy related costs and staff reductions. Research and
development expense for 2001 decreased $1.0 million to
$3.2 million or 1.2 percent of sales from $4.2 million
or 1.7 percent of sales for 2000. This decline is primarily
attributable to the discontinuance of our remanufactured laser
cartridge business in our Imaging Supplies segment in the first
quarter of 2000, staff reductions in the Toner division of our
Imaging Supplies segment during the fourth quarter of 2000 and
the first quarter of 2001 and the discontinuance of our
lamination business in our Label products segment in the third
quarter of 2001. Net interest expense was $2.7 million for
2001, compared to $2.0 million for 2000. Increased interest
expense is due to a full year of borrowings incurred to finance
our acquisition of Rittenhouse. Our profit before income taxes,
pension settlement income and restructuring and unusual charges
was $.2 million for 2001, compared to a loss of
$4.7 million for 2000. Improvements in the profitability of
our Imaging Supplies and Label Products segments and a reduction
in corporate expenses were partially offset by a decrease in the
profitability of our Specialty Paper Products segment and
increases in net interest expense and goodwill amortization.

11



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##### Table of Contents



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, $.6 million
associated with the outsourcing of our toner filling operation
within our Imaging Supplies segment, and $.2 million
related to the downsizing of Corporate and Toner Division
employees, partially offset by unusual income of
$1.4 million resulting from a legal settlement associated
with the acquired Rittenhouse businesses and unusual income of
$.6 million from the sale of land in Merrimack, NH. The
2001 provision for workforce reductions included severance for
141 employees. 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 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 | 
|                                                          |  |          |     |           |  |             |       |          |  |   |        |   |  |   |       | 

We recorded a net loss for 2001 of
$2.4 million or $.43 per share, compared to net income of
$12.9 million or $.95 per share in 2000. Our net loss for
2001 included a net pretax restructuring charge of
$3.0 million, while our net income for 2000 included
pension settlement income of $18.6 million, partially
offset by a net pretax restructuring charge of $1.0 million.

Our effective income tax rate was a benefit of
12.0 percent for 2001 compared to a provision of
58.3 percent for 2000. Our 2001 effective income tax rate
is lower than the U.S. federal statutory rate principally due to
the impact of non-deductible goodwill.

Results of Operations by Reportable Operating
Segment

2001 Compared to 2000


Label Products Segment

Our Label Products segment reported a
$2.8 million, or 2.7 percent, increase in sales to
$107.9 million for 2001, compared to $105.1 million
for 2000. This increase was primarily the result of a full year
of operations during 2001 for the acquired Rittenhouse business.
Our Label Products segment also benefited from increased volume
in transportation labels and retail shelf labels and was
negatively impacted by the discontinuance of our lamination
business and declines in EDP and other product lines.

Gross margin percentage for 2001 increased to
18.5 percent from 17.2 percent in 2000. Gross margin
increased by $1.9 million to $20.0 million for 2001
due to increased sales revenues and an increased gross margin
percentage. The improvement in gross margin percentage is due to
synergies realized through the integration of the Nashua and
Rittenhouse businesses and improved manufacturing and cost
controls.

Pretax income for our Label Products segment
increased by $1.3 million to $6.7 million for 2001,
compared to $5.4 million for 2000. This improvement was
primarily due to the contribution of the acquired Rittenhouse
business. Increased gross margin was partially offset by
increased selling, distribution and administrative expenses.
Selling, distribution and administrative expenses as a
percentage of sales increased slightly to 12.3 percent from
11.8 percent.

12



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##### Table of Contents



Specialty Paper Products Segment

As a result of the Rittenhouse acquisition, our
Specialty Paper Products segment reported a $11.6 million
or 8.3 percent increase in sales for 2001 to
$150.4 million, compared to $138.8 million for 2000.
Increased sales from our Rittenhouse paper converting business
were partially offset by volume declines in our cut sheet paper
and thermal tag product lines.

While gross margin increased by $.9 million
or 3.1 percent to $29.2 million for 2001, the
segments gross margin percentage declined from 20.4
percent for 2000 to 19.4 percent for 2001. The decline in
gross margin percentage resulted from pricing pressures in our
converting and thermal tag product lines.

Pretax income for our Specialty Paper Products
segment for 2001 decreased $2.6 million or
34.8 percent to $4.9 million, compared to
$7.5 million for 2000. Increases in selling, distribution
and administrative expenses more than offset an increase in
gross margin dollars. As a percentage of sales, selling,
distribution and administrative expenses increased from
13.8 percent in 2000 to 15.1 percent in 2001. This
increase is mainly attributable to a freight allowance provided
to a major customer.

Imaging Supplies Segment

Our Imaging Supplies segment reported a
$3.5 million or 12.4 percent decline in sales to
$24.4 million for 2001, compared to $27.9 million for
2000. This decline was primarily attributable to the
discontinuance of our remanufactured laser cartridge product
line in the first quarter of 2000. Sales for our discontinued
laser cartridge product line were $2.5 million for 2000. We
also experienced decreased sales of Xerox-compatible toners in
our end-user and value-added reseller channels and lower sales
volumes for a large international customer.

Gross margin percentage for our Imaging Supplies
segment increased from 15.4 percent for 2000 to
26.7 percent for 2001, resulting in a $2.2 million
improvement in gross margin to $6.5 million for 2001,
compared to $4.3 million for 2000. Part of the improvement
in gross margin percentage is attributable to the discontinuance
of our remanufactured laser cartridge product line. The gross
margin percentage for our Toner product line improved due to
manufacturing yield, productivity improvements and staff
reductions.

Pretax income before restructuring and unusual
items for our Imaging Supplies segment was $.2 million for
2001, an improvement of $4.4 million, from a 2000 pretax
loss before restructuring and unusual items of
$4.2 million. Improved results were mainly due to lower
selling and distribution and research and development expenses
and an improved gross margin percentage. Research and
development expenses decreased by $.5 million compared to
2000 mainly due to the discontinuance of our remanufactured
laser cartridge business and staff reductions. Selling and
distribution expenses decreased by $2.1 million compared to
2000 mainly due to lower sales revenues and staff and cost
reductions. As a percentage of sales, selling, distribution and
administrative sales decreased from 22.9 percent in 2000 to
19.2 percent in 2001. The segment also benefited from the
discontinuance of its remanufactured laser cartridge product
line, which had a loss of $.8 million for 2000.

Results of Operations  2000
Compared to 1999

Our sales improved to $253.1 million in
2000, a 48.2 percent increase over 1999 due to our
acquisition of Rittenhouse. Excluding Rittenhouse, sales
declined 9.6 percent in 2000 to $154.4 million,
primarily due to the discontinuance of our remanufactured laser
cartridge product line and a decrease in toner sales within our
Imaging Supplies segment. Gross margin decreased to
20.1 percent in 2000 from 24.0 percent in 1999.
Excluding Rittenhouse, gross margin declined to
20.6 percent for 2000. The decline was primarily
attributable to margin declines in our Label Products and
Imaging Supplies segments.

We recorded net income from continuing operations
of $5.4 million in 2000, compared to a net loss from
continuing operations of $.4 million in 1999. Our 2000
results included pension settlement pretax income of
$18.6 million and net restructuring and unusual charges of
$1.0 million. Our 1999 results included net restructuring
and unusual pretax income of $1.3 million. Our pretax
income, before restructuring and other

13



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##### Table of Contents



unusual charges and pension settlement income,
declined $6.3 million from income of $1.6 million in
1999 to a loss of $4.7 million in 2000. The
$6.3 million decrease in 2000 resulted from an increase in
profitability of $2.0 million in our operating segments
offset by an increase of $8.3 million in Corporate
expenses. The $2.0 million improvement in our operating
segments resulted from increased profitability in our Specialty
Paper Products segment of $4.9 million and in our
Projection Systems business of $1.2 million,
partially offset by profitability declines of $2.6 million
in our Imaging Supplies segment and $1.5 million in our
Label segment. The increase in the profitability of our
Projection Systems business was related to the sale of
technology. The increase in Corporate expenses was driven
primarily by our acquisition of Rittenhouse, including increased
net interest of $2.7 million, amortization of goodwill and
deferred financing costs of $1.3 million, additional
corporate overhead expenses of $1.7 million and integration
costs of approximately $1.0 million. Corporate
administrative expenses were also impacted by an increase in
proxy related costs.


Restructuring and other unusual charges for 2000
of $1.0 million consisted primarily of $1.0 million of
exit costs associated with the discontinuance of our laser
cartridge product line, $.5 million from a 15 percent
workforce reduction in our Imaging Supplies segment and
$.5 million of workforce reductions resulting from
acquisition synergies, partially offset by unusual income of
$1.0 million resulting from the reversal of a loss accrual
relating to our settlement of the Ricoh Company, Ltd., Ricoh
Electronics, Inc., and Ricoh Corporation patent infringement
lawsuit against us. Our 2000 provision for workforce reductions
included amounts payable to 122 employees. The restructuring
activities provided for in the balance at December 31, 1999
were completed during 2000 and the amounts charged against the
reserve did not change materially from our beginning reserve
balance of $.2 million.

Details of our restructuring reserves related to
continuing operations and activity recorded during 2000 were as
follows:

|                                                          |       |          |     |           |  |             |       |          |  |   |      |        |   |   |     |     | 
|--------------------------------------------------------- | ----- | -------- | --- | --------- |  | ----------- | ----- | -------- |  | - | ---- | ------ | - | - | --- | --- | 
|                                                          |       | Reserve  |     |           |  |             |       | Reserve 
|                                                          |       | Balance  |     | Current   |  | Current     |       | Balance 
|                                                          |       | Dec. 31, |     | Year      |  | Year        |       | Dec. 31,
|                                                          |       | 1999     |     | Provision |  | Utilization |       | 2000    
|(In thousands)                                            |       |          |     |           |  |             |       |         
|2000 Activity:                                            |       |          |     |           |  |             |       |          |  |   |      |        |   |   |     |    
|Provisions for severance related to workforce
	reductions |       | $        | 123 |           |  | $           | 1,445 |          |  | $ | (854 | )      |   | $ | 714 |    
|Provisions for assets to be sold or discarded             |       |          |    |           |  |             | 216   |          |  |   | (216 | )      |   |   |    |    
|Other                                                     |       |          | 86  |           |  |             | 184   |          |  |   | (270 | )      |   |   |    |    
|                                                          |       |          |     |           |  |             |       |          |  |   |      |        |   |   |     |    
|                                                          | Total |          | $   | 209       |  |             | $     | 1,845    |  |   | $    | (1,340 | ) |   | $   | 714 | 
|                                                          |       |          |     |           |  |             |       |          |  |   |      |        |   |   |     |    

Selling and distribution expenses increased
27.5 percent from the prior year due to our acquisition of
Rittenhouse. Excluding Rittenhouse, these expenses declined
16.1 percent resulting from sales declines in our Imaging
Supplies segment. Administrative expenses increased
65.2 percent from the prior year primarily due to our
acquisition of Rittenhouse. Research and development expenses
decreased by 16.4 percent from the prior year primarily due
to a reduction in spending in our Imaging Supplies segment and a
reduction in Projection Systems development expenses. Interest
expense increased $2.1 million from 1999 due to the impact of
borrowings incurred to finance the Rittenhouse acquisition.
Interest income decreased by $.6 million due to the
decreased cash balance resulting from the Rittenhouse
acquisition.

Our effective tax rate for continuing operations
was a provision of 58.3 percent compared to a provision of
114.6 percent in 1999. Our 2000 effective tax rate was
higher than the U.S. federal statutory rate primarily due to
non-deductible goodwill and the write-off of a tax asset
associated with expired tax losses.

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Results of Operations by Reportable Operating
Segment

2000 Compared to 1999


Label Products Segment

Our Label Products segment reported a
33.7 percent increase in sales in 2000 over 1999 due to the
Rittenhouse acquisition. Excluding Rittenhouse, sales for the
Label Products segment were unchanged from the prior year.
Increased volume in the roll stock and supermarket label product
lines experienced in 2000, offset decreased volume in the
segments EDP product lines. The segments pretax
income decreased 21.7 percent in 2000 to $5.4 million
compared to $6.9 million in 1999. Excluding Rittenhouse
pretax profit of $2.1 million, segment pretax profit
declined 52.2 percent from the prior year. This decline was
primarily due to a decline in the segments gross margin
and a charge related to an environmental clean-up at our Omaha,
Nebraska facility. An unfavorable mix of products sold,
increased raw material costs in its roll stock product line and
decreased volume in its EDP product lines were the primary
reasons for the segments decline in gross margin.

Specialty Paper Products Segment

Effective during the first quarter of 2000,
responsibility for the cut-sheet paper product line was
transferred from our Imaging Supplies segment to our Specialty
Paper Products segment. Segment information for the prior period
has been restated accordingly.

Our Specialty Paper Products segment reported a
109.4 percent increase in sales for 2000, as compared to
1999, as a result of the Rittenhouse acquisition. Excluding
Rittenhouse and sales for the fax paper product line which was
discontinued in the third quarter of 1999, sales increased 3.1
percent in 2000 due to increased volume in the segments
thermal and carbonless product lines, which more than offset
volume declines in its cut-sheet paper product line. Improved
customer retention and new product introductions were the
primary reasons for the sales improvement in 2000. Pretax profit
increased $4.9 million to $7.5 million for 2000, as a
result of the Rittenhouse acquisition. Excluding Rittenhouse
pretax profit of $3.3 million, segment pretax profit
improved 61.5 percent in 2000 due to improvements in gross
margin, resulting from lower manufacturing costs and higher
volume in the segments thermal product line.

Imaging Supplies Segment

Our Imaging Supplies segment reported a
32.1 percent decrease in sales in 2000 compared to 1999,
primarily the result of exiting the remanufactured laser
cartridge product line in the first quarter of 2000 and
decreased sales of Xerox-compatible toners. Sales for the
remanufactured laser cartridge product line were
$2.5 million in 2000, a decrease of $7.4 million from
1999. Sales for the toner and developer product line decreased
$5.5 million or 18.0 percent in 2000, compared to
1999, on lower volume of Xerox-compatible toners, resulting
primarily from the loss of a major customer. The segments
pretax loss for 2000 increased by $2.6 million to
$4.2 million. The increased pretax loss was primarily due
to a decline in the segments gross margin resulting from
lower sales volume and increased manufacturing costs associated
with underutilized capacity in the toner and developer product
line. We announced restructuring charges in the fourth quarter
of 2000 and the first quarter of 2001 of $.5 million and
$.2 million, respectively, relating primarily to workforce
reductions.

Liquidity, Capital Resources and Financial
Condition

Cash and cash equivalents increased slightly from
$1.0 million at December 31, 2000 to $1.1 million
at December 31, 2001. Cash provided by continuing operating
activities of $19.7 million consisted primarily of cash
flow from operations, proceeds from tax refunds and reductions
in inventory and accounts receivable, partially offset by a
decrease in accrued expenses. Cash used in investing and
financing activities for the year of $1.0 million and $20.4
million, respectively, was offset by cash provided by continuing
operating activities and discontinued operations. Cash provided
by discontinued operations of $1.7 million related
primarily to tax refunds. Net cash used in investing activities
consisted of capital expenditures of $2.4 million across all

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segments, partially offset by proceeds of
$1.4 million from the sale of property and equipment. Our
proceeds from the sale of property and equipment resulted
primarily from the sale of unutilized land in Merrimack, NH and
the sale of assets from our discontinued lamination business.
Net cash used in financing activities consisted of debt
repayments.


Working capital decreased $6.0 million from
$22.5 million at December 31, 2000 to
$16.5 million at December 31, 2001. Decreases in
accounts receivable, inventory, taxes receivable and other
current assets, more than offset decreases in the current
portion of long-term debt and accrued expenses.

In addition to cash flows from operations, we
have an adequate bank financing arrangement, at competitive
rates, to conduct our operations. We had $25.3 million of
borrowings outstanding at December 31, 2001 under our then
existing Loan Agreement with Fleet Bank-NH and LaSalle Bank, NA.
The weighted average interest rate on those outstanding
borrowings was 5.95 percent at December 31, 2001.

On March 1, 2002, we entered into a Credit
Agreement with LaSalle Bank, NA as Agent and Issuing Bank
and Fleet National Bank. The Credit Agreement consists of a term
loan of $10 million and a revolving loan commitment of
$30 million. Borrowings under this agreement are
collateralized by a security interest in our accounts
receivable, inventory, certain machinery and equipment and real
estate located in Merrimack, NH. At December 31, 2001, the
approximate book value of these assets was $73.4 million.
This Credit Agreement replaced our prior Loan Agreement dated
April 14, 2000. Interest on loans outstanding, at our
option, are either at a rate per annum equal to the Base Rate
(prime) or LIBOR, plus applicable margin. The initial Base
Rate margin is .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 LIBOR
margin is 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 as the maximum principle 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.
The maturity of this Credit Agreement is February 28, 2005.
We are required to maintain certain financial covenants, such as
a Funded Debt to EBITDA Ratio, Minimum EBITDA levels and a Fixed
Charge Coverage Ratio as defined in our Credit Agreement.
Furthermore, without prior consent of our lenders, the credit
agreement limits, among other things, the payment of dividends,
capital expenditures, the incurrence of additional debt and
restricts the sale of certain assets and merger or acquisition
activities. The credit agreement allows Fleet National Bank, at
its option, to terminate its commitment if, by December 31,
2002, we do not reincorporate in the Commonwealth of
Massachusetts and eliminate our current requirement for
shareholder approval for granting a mortgage or lien upon all or
substantially all of our property or assets.

We enter into operating leases primarily for
office, warehouse and manufacturing space, electronic data
processing and transportation equipment. The terms of these
leases do not impose significant restrictions or unusual
obligations. Our obligations relating to debt and leases at year
end 2001 were as follows:

|                                 |  |      |       |      |  |      |       |      |  |      |       |  |  |   |        |  |  |   |     | 
|-------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ------ |  |  | - | --- | 
|                                 |  | 2002 |       | 2003 |  | 2004 |       | 2005 |  | 2006
|(In thousands)                   |  |      |       |      |  |      |       |      |  |     
|Long-term debt                   |  | $    | 2,000 |      |  | $    | 2,000 |      |  | $    | 2,300 |  |  | $ | 18,980 |  |  | $ |    | 
|Non-cancellable operating leases |  |      | 1,070 |      |  |      | 532   |      |  |      | 365   |  |  |   | 289    |  |  |   | 118 | 
|                                 |  |      |       |      |  |      |       |      |  |      |       |  |  |   |        |  |  |   |     | 
|                                 |  | $    | 3,070 |      |  | $    | 2,532 |      |  | $    | 2,665 |  |  | $ | 19,269 |  |  | $ | 118 | 
|                                 |  |      |       |      |  |      |       |      |  |      |       |  |  |   |        |  |  |   |     | 

Our Loan Agreement in effect at December 31,
2001, required us to maintain certain quarterly financial
covenants such as Total Funded Debt to earnings before interest,
income taxes, depreciation and amortization and a Fixed Charge
Coverage Ratio. While we complied with these covenants as of
December 31, 2001 and forecast future compliance with the
covenants of our Credit Agreement dated March 1, 2002, if
our results of operations were to fall short of our expectations
and fail to meet our covenants and we were unable to obtain a
waiver from our lender, our debt would be in default and
callable by our lender.

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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 will fluctuate based
on the timing of these factors, we believe that current cash and
cash equivalents, cash flows from operations and amounts
available under our Credit Agreement are sufficient to fund our
planned capital expenditures, working capital needs and other
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. This assessment represents a total of
$18.2 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
discontinued operations as well as certain losses deducted in
connection with the divestiture of our Computer Products
Division. We disagree with the positions taken by the IRS and
filed a formal protest of the proposed adjustment on
January 12, 1999. We are working through the IRS appeals
process to resolve open issues.

In December 1999, the Internal Revenue Service
(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 disagree 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.

We believe that we will prevail in all material
respects against the IRS assertions related to the
corporate income tax returns filed for the years 1992 through
1994 and that we are adequately reserved for any potential
liability that could arise from the resolution of the IRS
assessment for the years 1995 through 1997. While we believe
that we have provided adequately for our tax liabilities through
December 31, 2001, 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, we can provide no assurances that the ultimate
resolution of these open tax matters will not be in excess of
current provisions.

In August and September 1996, two individual
plaintiffs filed lawsuits in the Circuit Court of Cook County,
Illinois against us, 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). 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 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 is
in process. We believe that the lawsuit is without merit and
will continue to defend ourselves in this matter.

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We are involved in certain environmental matters
and have been designated by the Environmental Protection Agency
(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. At
December 31, 2001, based on the facts currently known and
our prior experience with these matters, we have concluded that
there is at least a reasonable possibility that site assessment,
remediation and monitoring costs will be incurred. We have
estimated a range for these costs of $1.0 million to
$1.2 million for our continuing operations and
$.1 million to $.2 million for our discontinued
operations. These ranges could increase if other potentially
responsible parties are unable to bear their allocated share. At
December 31, 2001, our accrual balances relating to
environmental matters were $1.1 million for continuing
operations and $.2 million for discontinued operations. In our
view, these represent the most likely amounts within the ranges
stated above. 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.

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. 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 down-grading of a customers credit
rating, we record a specific reserve to reduce our net
receivable to the amount we reasonably believe will be
collected. We also recognize 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. Our allowance for doubtful accounts was
$1.2 million at December 31, 2001. 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 amounts due us could be reduced by a material amount.

Inventories  Slow Moving and
Obsolescence

We reserve estimated 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, 2001 has been reduced by a reserve of
$1.1 million, based on our assessment of the probable
exposure related to excess and obsolete inventories. 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

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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, 2001, we had
approximately $28.9 million of goodwill included in our
Balance Sheet. Through 2001, goodwill was being amortized on a
straight-line basis over 20 years and its carrying value
was being evaluated periodically in relation to the estimated
operating performance and undiscounted future cash flows of our
underlying segments.

On June 29, 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (FAS 142). FAS 142
supersedes APB Opinion No. 17, Intangible
Assets, which required that goodwill and intangible assets
be amortized over a life not to exceed forty years. 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.

The amortization provisions of FAS 142 apply to
goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, the amortization provisions of FAS
142 are effective upon adoption of FAS 142. FAS 142 is
effective for fiscal years beginning after December 15,
2001 (i.e., January 1, 2002 for calendar year companies)
and must be adopted as of the beginning of a fiscal year. We
plan to adopt FAS 142 in the first quarter of 2002. As of
December 31, 2001, the carrying value of goodwill included
in our balance sheet was $28.9 million. Adoption of FAS 142
will have a significant effect on our results of operations by
eliminating approximately $1.6 million of goodwill
amortization on an annual basis. We have performed the
impairment test required by FAS 142 and have concluded that
no impairment exists as of January 1, 2002. 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. Fair value exceeded book value for each reporting unit as
of our valuation date of January 1, 2002. Significant
estimates included in our valuation included future business
results and our discount rate. Material changes in our estimated
future operating results or discount rate could significantly
impact our carrying value of goodwill.

Pension Benefits

We account for our defined benefit pension plans
in accordance with Statement of Financial Accounting Standards
No. 87, Employers Accounting for Pensions
(FAS 87), which requires that amounts
recognized in financial statements be determined on an actuarial
basis. FAS 87 and our policies generally reduce the
volatility of our pension income (expense) resulting from
changes in pension liability discount rates and the performance
of our plan assets.

The most significant element in determining our
pension income or expense in accordance with FAS 87 is our
expected return on plan assets. We assumed an expected long-term
rate of return on plan assets of 9 percent at
December 31, 2001. 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 fall below 9 percent, our future pension expense
would likely increase.

At the end of each year, we determine the
discount rate to be used to discount plan liabilities. The
discount rate reflects the current rate at which our pension
liabilities could be effectively settled at the end of the year.
In estimating this rate, we look at rates of return on high
quality investments. At December 31, 2001, we determined
this rate to be 7.25 percent. Our discount rate was
7.25 percent for 2000 and 7.75 percent for 1999. Our
policy is to defer the net effect of changes in actuarial
assumptions and experience as allowed by FAS 87.

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At December 31, 2001, our consolidated
prepaid pension asset was $8.9 million down from
$9.2 million at the end of 2000. The decrease was
principally due to the recognition of pension expense. For the
year ended December 31, 2001, we recognized consolidated
pretax pension expense of $.6 million, down from
$.8 million in 2000. However, a change in our actuarial
assumptions resulting from future economic trends could have a
material adverse effect on our future costs and pension
obligations.

Postretirement Benefits

We provide health care and life insurance
benefits to eligible retired employees and their spouses. Our
post retirement plan shares the cost of benefits with all
retirees and is an unfunded plan.

We use various actuarial assumptions including
the discount rate and the expected trend in health care costs to
estimate the costs and benefit obligations for our post
retirement plan. Uncertainties effecting our estimates include
future economic trends. A change in our assumptions resulting
from future trends could have a material adverse effect on our
future costs and benefit obligations.

Our discount rate is developed with the
assistance of our actuaries. At December 31, 2001, we
assumed a discount rate of 7.25 percent. Our discount rate
was 7.25 percent for 2000 and 7.75 percent for 1999.
Our policy is to defer changes in actuarial assumptions in
accordance with the amortization provisions of Statement of
Financial Accounting Standards No. 106,
Employers Accounting for Postretirement Benefits
Other Than Pensions.

In 2001, our assumed health care cost trend rate
for the year immediately following the measurement date was
13.5 percent, an increase of 3.5 percent over the
prior year. This increase was primarily due to the recent
increases in the price of medical services provided by the plan.
The ultimate long-term trend rate was assumed to decrease
gradually to 5.0 percent over future years.

Deferred Tax Assets

As of December 31, 2001, we had
approximately $8.1 million of deferred tax assets. A
portion of our deferred tax assets relates to state loss
carryforwards that expire as follows: $1.2 million in 2002
and $2.1 million thereafter. We have established a
valuation allowance of $1.9 million for our state loss
carryforwards. The realization of our deferred tax assets is
based upon estimates of future taxable income and tax planning
strategies. In preparing estimates of future taxable income, we
have used the same assumptions and projections utilized in our
internal forecasts. Based on these projections and tax planning
strategies, we estimate that our unreserved loss carryforwards
and other deferred tax assets will be fully utilized.
Significant changes in any of the uncertainties used in
estimating our 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 the
Income Taxes Note to our Consolidated Financial
Statements.

Environmental Reserves

We expense environmental expenditures relating to
ongoing operations when incurred 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 assessment, remediation or 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, 2001, we believe the probable
range for future expenditures related to continuing operations
is $1.0 million to $1.2 million and have accrued
$1.1 million that we believe is the most likely amount
within the range. We believe the probable range for future
expenditures for discontinued operations is $.1 million to
$.2 million and have accrued $.2 million which we believe
is the most likely amount within the range.

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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
responsible for our clean-up at certain sites; 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.

Litigation and Tax Contingencies

As discussed in our Commitments and
Contingencies Note to our Consolidated Financial
Statements, we are a defendant in a legal proceeding associated
with the initial public offering of Cerion. We believe this
lawsuit is without merit and based on consultation with legal
counsel, no accrual is deemed necessary. Nor do we believe we
are a party to any other legal proceedings that will have a
material adverse effect on our consolidated financial position.
It is possible, however, that future results of operations for
any particular quarterly or annual period could be materially
affected by changes in our assumptions related to this or future
proceedings.

As discussed in the Income Taxes Note
to our Consolidated Financial Statements, the IRS has assessed
additional taxes of $5.2 million, excluding interest, for
the years 1995 through 1997 and $4.6 million, excluding
interest, for the years 1992 through 1994. We believe we will
prevail in all material respects against the IRS
assertions related to the years 1992 through 1994 and that we
are adequately reserved for any potential liability that could
arise from the resolution of the IRS assessment for the
years 1995 through 1997. Additionally, we periodically face
challenges from domestic and foreign tax authorities regarding
the amount of taxes due. These challenges include questions
regarding the timing and amount of deductions and the allocation
of income among various tax jurisdictions. Based on an
evaluation of our tax positions, we have accrued for potential
exposures. To the extent we were to prevail in matters for which
accruals have been established or be required to pay amounts in
excess of our reserves, our effective tax rate in a given
financial statement period may be materially impacted.

Impact of New Accounting
Pronouncements

In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141, Business Combinations,
(FAS 141) which supersedes Accounting
Principles Board (APB) Opinion No. 16, Business
Combinations. This Statement requires that all business
combinations be accounted for by the purchase method and
establishes specific criteria for the recognition of intangible
assets separately from goodwill. The provisions of the Statement
apply to business combinations initiated after June 30,
2001. For business combinations accounted for using the purchase
method before July 1, 2001, certain provisions relating to
the classification of intangible assets will be effective in the
first quarter of 2002. We have reviewed the specific criteria
for recognizing intangible assets separately from goodwill under
FAS 141 and concluded that they will not impact our
Consolidated Balance Sheet.

In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(FAS 142). FAS 142 supersedes APB Opinion
No. 17, Intangible Assets, which required that
goodwill and intangible assets be amortized over a life not to
exceed forty years. 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.

The amortization provisions of FAS 142 apply to
goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, the amortization provisions of
FAS 142 are effective upon adoption of FAS 142.
FAS 142 is effective for fiscal years beginning after
December 15, 2001 (i.e., January 1, 2002 for calendar
year companies) and must be adopted as of the beginning of a
fiscal year. We will adopt FAS 142 for our 2002 fiscal year.

Adoption of FAS 142 will have a significant
effect on our results of operations by eliminating approximately
$1.6 million of goodwill amortization on an annual basis.
FAS 142 will also require an annual

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review, or more frequently if impairment
indicators arise, of our goodwill for impairment. Goodwill at
December 31, 2001 was $28.9 million. We have completed
the impairment test required by FAS 142 and have concluded
that no impairment exists as of January 1, 2002.


In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144),
which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes
Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting
and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations for a disposal of a
segment of a business. FAS 144 is effective for
fiscal years beginning after December 15, 2001, with
earlier application encouraged. We expect to adopt FAS 144
as of January 1, 2002 and do not expect that the adoption
of FAS 144 will have a significant impact on our financial
position or results of operations.




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% increase in interest
rates for our debt as of December 31, 2001. This analysis
indicated that a 10% 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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##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data

NASHUA CORPORATION AND SUBSIDIARIES






CONSOLIDATED STATEMENT OF OPERATIONS AND
RETAINED EARNINGS


|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |      |  
|------------------------------------------------------------- | --------------------------------------------------- | ----------------------- | ------- | ---- | - | ---- | ------- | --- |  | - | ------- | ---- | -
|                                                              |                                                     |                        
|                                                              |                                                     | Year Ended December 31,
|                                                              |                                                     |                        
|                                                              |                                                     | 2001                    |         | 2000 |   | 1999
|                                                              |                                                     |                         |         |      |   |     
|                                                              |                                                     |                        
|(In thousands, except per share data)                         |                                                     |                        
|Net sales                                                     |                                                     | $                       | 272,510 |      |   | $    | 253,122 |     |  | $ | 170,844 |     
|Cost of products sold                                         |                                                     |                         | 216,669 |      |   |      | 202,357 |     |  |   | 129,872 |     
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|Gross margin                                                  |                                                     |                         | 55,841  |      |   |      | 50,765  |     |  |   | 40,972  |     
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|Selling, distribution and administrative expenses             |                                                     |                         | 49,762  |      |   |      | 49,269  |     |  |   | 34,696  |     
|Research and development expense                              |                                                     |                         | 3,238   |      |   |      | 4,224   |     |  |   | 5,051   |     
|Pension settlement income                                     |                                                     |                         |        |      |   |      | (18,606 | )   |  |   |        |     
|Restructuring and other unusual charges (income)              |                                                     |                         | 2,963   |      |   |      | 966     |     |  |   | (1,300  | )   
|(Income) loss from equity investment                          |                                                     |                         | (23     | )    |   |      | 5       |     |  |   | 320     |     
|Interest expense                                              |                                                     |                         | 2,875   |      |   |      | 2,852   |     |  |   | 743     |     
|Interest income                                               |                                                     |                         | (192    | )    |   |      | (859    | )   |  |   | (1,421  | )   
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|Income (loss) from continuing operations
	before income taxes |                                                     |                         | (2,782  | )    |   |      | 12,914  |     |  |   | 2,883   |     
|Provision (benefit) for income taxes                          |                                                     |                         | (334    | )    |   |      | 7,528   |     |  |   | 3,303   |     
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|Income (loss) from continuing operations                      |                                                     |                         | (2,448  | )    |   |      | 5,386   |     |  |   | (420    | )   
|Loss from discontinued operations, net of taxes               |                                                     |                         |        |      |   |      |        |     |  |   | (4,001  | )   
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|Net income (loss)                                             |                                                     |                         | (2,448  | )    |   |      | 5,386   |     |  |   | (4,421  | )   
|Retained earnings, beginning of year                          |                                                     |                         | 64,979  |      |   |      | 59,650  |     |  |   | 64,071  |     
|Dividends                                                     |                                                     |                         |        |      |   |      | (57     | )   |  |   |        |     
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|Retained earnings, end of year                                |                                                     | $                       | 62,531  |      |   | $    | 64,979  |     |  | $ | 59,650  |     
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|Basic and diluted earnings per share:                         |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|                                                              | Income (loss) from continuing operations per
	share |                         | $       | (.43 | ) |      | $       | .95 |  |   | $       | (.07 | )
|                                                              | Loss from discontinued operations per share         |                         |         |     |   |      |         |    |  |   |         | (.70 | )
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     
|                                                              | Net income (loss) per share                         |                         | $       | (.43 | ) |      | $       | .95 |  |   | $       | (.77 | )
|                                                              |                                                     |                         |         |      |   |      |         |     |  |   |         |     

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

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NASHUA CORPORATION AND SUBSIDIARIES






CONSOLIDATED BALANCE SHEET


|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |         |        |         | 
|------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | --------------- | ------------------------------------------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                                                                          |                                                                                                                      |                
|                                                                          |                                                                                                                      | December 31,   
|                                                                          |                                                                                                                      |                
|                                                                          |                                                                                                                      | 2001            |                                            | 2000   
|                                                                          |                                                                                                                      |                 |                                            |        
|(In thousands, except share data)                                         |                                                                                                                      |                 |                                            |        
|Assets                                                                    |                                                                                                                      |                 |                                            |         |        |         |        |        
|Current assets                                                            |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          | Cash and cash equivalents                                                                                            |                 | $                                          | 1,063   |        |         | $      | 1,035   |       
|                                                                          | Accounts receivable                                                                                                  |                 |                                            | 26,708  |        |         |        | 27,915  |       
|                                                                          | Inventories                                                                                                          |                 |                                            |         |        |         |        |         |       
|                                                                          |                                                                                                                      | Raw materials   |                                            |         | 10,283 |         |        |         | 12,112 |        
|                                                                          |                                                                                                                      | Work in process |                                            |         | 2,134  |         |        |         | 3,658  |        
|                                                                          |                                                                                                                      | Finished goods  |                                            |         | 8,290  |         |        |         | 8,956  |        
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          |                                                                                                                      |                 | 20,707                                     |         |        |         | 24,726 |        
|                                                                          | Taxes receivable                                                                                                     |                 |                                            | 212     |        |         |        | 10,708  |       
|                                                                          | Other current assets                                                                                                 |                 |                                            | 6,324   |        |         |        | 7,159   |       
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          |                                                                                                                      |                 | 55,014                                     |         |        |         | 71,543 |        
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|Plant and equipment                                                       |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          | Land                                                                                                                 |                 |                                            | 890     |        |         |        | 978     |       
|                                                                          | Buildings and improvements                                                                                           |                 |                                            | 28,522  |        |         |        | 28,787  |       
|                                                                          | Machinery and equipment                                                                                              |                 |                                            | 55,733  |        |         |        | 57,249  |       
|                                                                          | Construction in progress                                                                                             |                 |                                            | 1,125   |        |         |        | 4,004   |       
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          |                                                                                                                      |                 | 86,270                                     |         |        |         | 91,018 |        
|                                                                          | Accumulated depreciation                                                                                             |                 |                                            | (41,411 | )      |         |        | (36,465 | )     
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          |                                                                                                                      |                 | 44,859                                     |         |        |         | 54,553 |        
|Goodwill, net of amortization                                             |                                                                                                                      |                 | 28,906                                     |         |        |         | 30,490 |        
|Other assets                                                              |                                                                                                                      |                 | 16,267                                     |         |        |         | 13,885 |        
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          |                                                                                                                      |                 | Total assets                               |         | $      | 145,046 |        |         | $      | 170,471 | 
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|Liabilities and Shareholders
	Equity                                     |                                                                                                                      |                 |                                            |         |        |         |        |        
|Current liabilities                                                       |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          | Accounts payable                                                                                                     |                 | $                                          | 19,034  |        |         | $      | 19,104  |       
|                                                                          | Accrued expenses                                                                                                     |                 |                                            | 17,452  |        |         |        | 20,102  |       
|                                                                          | Current maturities of long-term debt                                                                                 |                 |                                            | 2,000   |        |         |        | 9,806   |       
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          |                                                                                                                      |                 | 38,486                                     |         |        |         | 49,012 |        
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|Long-term debt                                                            |                                                                                                                      |                 | 23,280                                     |         |        |         | 35,905 |        
|Other long-term liabilities                                               |                                                                                                                      |                 | 12,883                                     |         |        |         | 13,217 |        
|Commitments and contingencies (see
	Commitments and Contingencies Note) |                                                                                                                      |                 |                                            |         |        |         |        |        
|Shareholders equity                                                      |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          | Preferred stock, par value $1.00: 2,000,000
	shares authorized and unissued                                          |                 |                                            |        |        |         |        |        |       
|                                                                          | Common stock, par value $1.00: authorized
	40,000,000 shares: Issued 6,886,649 shares in 2001 and 7,011,601
	in 2000 |                 |                                            | 6,887   |        |         |        | 7,012   |       
|                                                                          | Additional paid-in capital                                                                                           |                 |                                            | 15,901  |        |         |        | 15,268  |       
|                                                                          | Retained earnings                                                                                                    |                 |                                            | 62,531  |        |         |        | 64,979  |       
|                                                                          | Treasury stock, at cost                                                                                              |                 |                                            | (14,922 | )      |         |        | (14,922 | )     
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          |                                                                                                                      |                 | 70,397                                     |         |        |         | 72,337 |        
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        
|                                                                          |                                                                                                                      |                 | Total liabilities and shareholders equity |         | $      | 145,046 |        |         | $      | 170,471 | 
|                                                                          |                                                                                                                      |                 |                                            |         |        |         |        |        

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

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES






CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |       |        |        |  
|----------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------- | ----------------------------------------------- | ------ | ------ | ------- | ------- | ------- | ------- | ------- | ------ | ----- | ------ | ------ | -
|                                                                                                            |                                                                                                          |                                      
|                                                                                                            |                                                                                                          | Year Ended December 31,              
|                                                                                                            |                                                                                                          |                                      
|                                                                                                            |                                                                                                          | 2001                                  |                                                 | 2000   |        | 1999   
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |        
|(In thousands)                                                                                              |                                                                                                          |                                       |                                                 |        |        |        
|Cash Flows from Operating Activities of
	Continuing Operations                                              |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|Net income (loss)                                                                                           |                                                                                                          | $                                     | (2,448                                          | )      |        | $       | 5,386   |         |         | $       | (4,421 | )    
|Adjustments to reconcile net income
	(loss) to cash provided by
	(used in) continuing operating activities: |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|                                                                                                            | Depreciation and amortization                                                                            |                                       |                                                 | 9,748  |        |         |         | 9,304   |         |         |        | 6,381 |       
|                                                                                                            | Deferred income taxes                                                                                    |                                       |                                                 | (1,566 | )      |         |         | 14,326  |         |         |        | 2,357 |       
|                                                                                                            | Stock based compensation                                                                                 |                                       |                                                 | 435    |        |         |         | 105     |         |         |        | 90    |       
|                                                                                                            | Pension settlement income                                                                                |                                       |                                                 |       |        |         |         | (18,606 | )       |         |        |      |       
|                                                                                                            | Loss on sale/disposal of fixed assets                                                                    |                                       |                                                 | 2,250  |        |         |         | 48      |         |         |        | 786   |       
|                                                                                                            | Loss from discontinued operations                                                                        |                                       |                                                 |       |        |         |         |        |         |         |        | 4,001 |       
|                                                                                                            | Equity in (income) loss from unconsolidated
	joint ventures                                              |                                       |                                                 | (23    | )      |         |         | 5       |         |         |        | 320   |       
|                                                                                                            | Change in operating assets and liabilities, net
	of effects from acquisition and disposal of businesses: |                                       |                                                 |        |        |         |         |         |         |         |        |       |       
|                                                                                                            |                                                                                                          | Restricted cash                       |                                                 |        |       |         |         |         | 5,000   |         |        |       |       |       
|                                                                                                            |                                                                                                          | Accounts receivable                   |                                                 |        | 1,207  |         |         |         | 2,475   |         |        |       | 784    |       
|                                                                                                            |                                                                                                          | Inventories                           |                                                 |        | 4,019  |         |         |         | 8,683   |         |        |       | (3,217 | )     
|                                                                                                            |                                                                                                          | Tax receivable                        |                                                 |        | 8,474  |         |         |         | (7,100  | )       |        |       |       |       
|                                                                                                            |                                                                                                          | Other assets and other current assets |                                                 |        | 245    |         |         |         | (2,105  | )       |        |       | 227    |       
|                                                                                                            |                                                                                                          | Accounts payable                      |                                                 |        | (70    | )       |         |         | (2,696  | )       |        |       | 1,918  |       
|                                                                                                            |                                                                                                          | Accrued expenses                      |                                                 |        | (2,283 | )       |         |         | (13,464 | )       |        |       | 1,603  |       
|                                                                                                            |                                                                                                          | Income taxes payable                  |                                                 |        |       |         |         |         | (2,295  | )       |        |       | 2,295  |       
|                                                                                                            |                                                                                                          | Other long-term liabilities           |                                                 |        | (334   | )       |         |         | (169    | )       |        |       | (1,228 | )     
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|                                                                                                            |                                                                                                          |                                       | Cash provided by (used in) operating activities |        |        | 19,654  |         |         |         | (1,103  | )      |       |        | 11,896 |  
|Cash Flows from Investing Activities of
	Continuing Operations                                              |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|Investment in plant and equipment                                                                           |                                                                                                          |                                       | (2,375                                          | )      |        |         | (9,625  | )       |         |         | (7,855 | )    
|Investment in unconsolidated joint venture                                                                  |                                                                                                          |                                       |                                                |        |        |         | (201    | )       |         |         | (499   | )    
|Proceeds from sale of property, plant and
	equipment                                                        |                                                                                                          |                                       | 1,391                                           |        |        |         | 1,854   |         |         |         | 16     |      
|Business acquisition, net of cash acquired                                                                  |                                                                                                          |                                       |                                                |        |        |         | (60,341 | )       |         |         |       |      
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|                                                                                                            |                                                                                                          |                                       | Cash used in investing activities               |        |        | (984    | )       |         |         | (68,313 | )      |       |        | (8,338 | )
|Cash Flows from Financing Activities of
	Continuing Operations                                              |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|Proceeds from borrowings                                                                                    |                                                                                                          |                                       |                                                |        |        |         | 45,200  |         |         |         |       |      
|Repayment of borrowings                                                                                     |                                                                                                          |                                       | (20,431                                         | )      |        |         | (511    | )       |         |         | (553   | )    
|Dividends paid                                                                                              |                                                                                                          |                                       |                                                |        |        |         | (57     | )       |         |         |       |      
|Proceeds from the exercise of stock options                                                                 |                                                                                                          |                                       | 73                                              |        |        |         |        |         |         |         |       |      
|Purchase of treasury stock                                                                                  |                                                                                                          |                                       |                                                |        |        |         |        |         |         |         | (4,083 | )    
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|                                                                                                            |                                                                                                          |                                       | Cash provided by (used in) financing activities |        |        | (20,358 | )       |         |         | 44,632  |        |       |        | (4,636 | )
|Cash provided by (used in) activities of
	discontinued operations                                           |                                                                                                          |                                       | 1,716                                           |        |        |         | 763     |         |         |         | (5,831 | )    
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|Increase (decrease) in cash and cash
	equivalents                                                           |                                                                                                          |                                       | 28                                              |        |        |         | (24,021 | )       |         |         | (6,909 | )    
|Cash and cash equivalents at beginning of year                                                              |                                                                                                          |                                       | 1,035                                           |        |        |         | 25,056  |         |         |         | 31,965 |      
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|Cash and cash equivalents at end of year                                                                    |                                                                                                          | $                                     | 1,063                                           |        |        | $       | 1,035   |         |         | $       | 25,056 |      
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|Supplemental Disclosures of Cash Flow
	Information                                                          |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|Interest paid                                                                                               |                                                                                                          | $                                     | 2,862                                           |        |        | $       | 2,937   |         |         | $       | 1,055  |      
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      
|Income tax payments (refunds), net                                                                          |                                                                                                          | $                                     | (4,800                                          | )      |        | $       | 2,579   |         |         | $       | 1,486  |      
|                                                                                                            |                                                                                                          |                                       |                                                 |        |        |         |         |         |         |         |        |      

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

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


Summary of Significant Accounting
Policies

Description of the Company

Nashua Corporation is a premier manufacturer,
converter and marketer of labels, specialty papers and imaging
products primarily in the United States and Canada. Our primary
products include thermal coated papers, pressure-sensitive
labels, copier papers, bond papers, point of sale receipts, ATM
receipts and toners/ developers for use in photocopiers.

Segment and Related Information

We have three reportable segments:

(1)     Our Label
Products segment, which includes pressure sensitive laminated
paper, stickers, retail shelf tags and thermosensitive label
product lines.

(2)     Our Specialty
Paper Products segment, whos product scope includes
thermal papers, bond papers, carbonless paper, specialty printed
papers, such as ATM receipts and point of sale receipts, wide
format papers, dry-gum papers, heat seal papers and ribbons.

(3)     Our Imaging
Supplies segment, which includes toner and developer products
for use in photocopiers. Results for the twelve months ended
December 31, 2000 and 1999 also included remanufactured
laser cartridges which were discontinued during the first
quarter of 2000.

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 sales when goods are shipped or when
title passes.

Environmental Expenditures

We expense environmental expenditures relating to
ongoing operations when incurred 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, distribution and administrative expenses
in our Consolidated Statement of Operations and Retained
Earnings. Third party shipping costs totaled $11.1 million,
$9.4 million and $5.6 million for the years ended
December 31, 2001, 2000 and 1999, respectively.

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 $1.2 million at
December 31, 2001 and $1.0 million at
December 31, 2000.

Inventories

Our inventories are carried at the lower of cost
or market. Cost is determined by the first-in, first-out
(FIFO) method for approximately 81 percent and
73 percent of our inventories at December 31, 2001 and
2000, respectively, and by the last-in, first-out
(LIFO) method for the balance. If the FIFO method
had been used to cost all inventories, the balances would have
been approximately $1.9 million higher at December 31,
2001 and 2000.

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 $8.1 million for
2001, $8.0 million for 2000 and $6.3 million for 1999.
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 $1.6 million for 2001 and $1.1 million for 2000.
Through 2001, we evaluated the carrying value of goodwill in
relation to our estimated operating performance and the
undiscounted future cash flows of our

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

underlying segments on an annual basis. Effective
January 1, 2002, we will no longer amortize goodwill in
accordance with Statement of Financial Accounting Standard
No. 142 (FAS 142). Instead, we will
evaluate our goodwill for impairment under the new guidelines of
FAS 142.

Stock Compensation

Our employee stock option plans are accounted for
in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees. We follow the disclosure requirements of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation.

Income Taxes

Prepaid or 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.

Financial Instruments

We occasionally enter into foreign currency
forward contracts to manage foreign exchange exposure related to
specific accounts receivable trade and accounts payable trade
transactions with certain customers and vendors who require
settlement in their local currency.

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 971 full-time employees at
February 13, 2002. Approximately 339 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 good. We have three labor
agreements with the Paper, Allied Industrial, Chemical and
Energy Workers International Union covering approximately
one-half of our hourly employees. These agreements had initial
durations of one to three years and expire on either
March 5, 2002, March 31, 2002 or March 30, 2003.
We are currently in negotiations to renew our agreements that
expire in March of 2002.

Concentrations of Supply

The products of our Label Products segment,
include laminated materials that must meet certain quality
standards. We buy our laminated materials from a limited number
of manufacturers. Management believes that other suppliers could
adapt to provide similar laminated materials on comparable
terms. The time required to locate and qualify other suppliers,
however, could cause a delay in manufacturing that may be
disruptive to our Company.

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 approximates 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.

Impact of New Accounting
Pronouncements

In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141, Business Combinations,
(FAS 141) which supersedes Accounting
Principles Board (APB) Opinion No. 16, Business
Combinations. This Statement requires that all business
combinations be accounted for by the purchase method and
establishes specific criteria for the recognition of intangible
assets separately from goodwill. The provisions of the Statement
apply to business combinations initiated after June 30,
2001. For business combinations accounted for using the purchase
method before July 1, 2001, certain provisions relating to
the classification of intangible assets will be effective in the
first quarter of 2002. We have reviewed the specific criteria
for recognizing intangible assets separately from goodwill under
FAS 141 and concluded that they will not impact our
Consolidated Balance Sheet.

In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(FAS 142). FAS 142 supersedes APB Opinion
No. 17, Intangible Assets, which required that
goodwill and intangible assets be amortized over a life not to
exceed forty years. 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.

The amortization provisions of FAS 142 apply
to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, the amortization provisions of FAS
142 are effective upon adoption of FAS 142. FAS 142 is
effective for fiscal years beginning after December 15,
2001 (i.e., January 1, 2002 for calendar year companies)
and must be adopted as of the beginning of a fiscal year. We
will adopt FAS 142 for our 2002 fiscal year.

Adoption of FAS 142 will have a significant
effect on our results of operations by eliminating approximately
$1.6 million of goodwill amortization on an annual basis.
FAS 142 will also require an annual review of our goodwill
for impairment. Goodwill at December 31, 2001 was
$28.9 million. We have completed the impairment test
required by FAS 142 and have concluded that no impairment
exists as of January 1, 2002.

In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes Statement of
Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a
business. FAS 144 is effective for fiscal years beginning
after December 15, 2001, with earlier application
encouraged. We expect to adopt FAS 144 as of
January 1, 2002 and do not expect that the adoption of
FAS 144 will have a significant impact on our financial
position or results of operations.

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Reclassification

Certain amounts from the prior year have been
reclassified to conform to the present year presentation.

Business Changes

Business Acquisition:

On April 17, 2000, we completed the
acquisition of all outstanding shares of Rittenhouse Paper
Company, pursuant to a Stock Purchase Agreement, dated
March 21, 2000, by and among us, Rittenhouse and the
stockholders of Rittenhouse.

Total consideration, including direct acquisition
costs, was approximately $61.8 million. We funded
$35.0 million of the purchase price from borrowings under a
secured loan agreement and the remainder from our cash reserves.

The acquisition of Rittenhouse was accounted for
using the purchase method of accounting and the operations of
Rittenhouse are included in our Consolidated Statement of
Operations and Retained Earnings from the date of acquisition.
Purchase consideration was allocated to the assets acquired and
liabilities assumed based on their respective fair values, with
the excess of purchase consideration over the fair value of net
assets of $31.6 million allocated to goodwill. Through
2001, goodwill was amortized on a straight-line basis over
twenty years. Effective January 1, 2002, we will no longer
amortize goodwill in accordance with FAS 142. Instead, we
will evaluate our goodwill for impairment under the new
guidelines of FAS 142.

We began formulating plans related to workforce
reductions and plant closings prior to the purchase date.
Liabilities assumed included restructuring charges of
approximately $2.1 million related primarily to planned
workforce reductions in the acquired businesses. The provision
for planned workforce reductions included amounts for salary and
benefits for 67 employees. Payments for severance and other
plant closing costs through December 31, 2001 totaled
$2.0 million.

Restructuring and Other Unusual
Charges:

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
that will be completed in the first half of 2002, and
$.2 million related to the downsizing of Corporate and
Toner Division employees, partially offset by unusual income of
$1.4 million resulting from a legal settlement associated
with the acquired Rittenhouse businesses and unusual income of
$.6 million from the sale of land in Merrimack, NH. Our
2001 provision for workforce reductions includes severance for
141 employees. 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.

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Details of our restructuring reserves related to
continuing operations and activity recorded 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 | 
|                                                          |       |          |     |           |  |             |       |          |  |   |        |        |   |   |       |      

Restructuring and other unusual charges for 2000
of $1.0 million consisted primarily of $1.0 million in
exit costs associated with the discontinuance of the laser
cartridge product line, $.5 million in connection with a
15 percent workforce reduction in the Imaging Supplies
segment and $.5 million of workforce reductions resulting
from acquisition synergies, partially offset by unusual income
of $1.0 million resulting from the reversal of a loss
accrual relating to the settlement of the Ricoh patent
infringement lawsuit against us. Our 2000 provision for
workforce reductions included amounts payable to 122 employees.
Sales and pretax loss before restructuring charges for our
discontinued laser cartridge business were $2.5 million and
$.8 million for 2000 and $9.9 million and
$2.4 million for 1999. The restructuring activities
provided for in our reserve balance at December 31, 1999
were completed during 2000 and the amounts charged against the
reserve did not change materially from our beginning reserve
balance of $.2 million.

Details of our restructuring reserves related to
continuing operations and activity recorded during 2000 were as
follows:

|                                                          |       |          |     |           |  |             |       |          |  |   |      |        |   |   |     |     | 
|--------------------------------------------------------- | ----- | -------- | --- | --------- |  | ----------- | ----- | -------- |  | - | ---- | ------ | - | - | --- | --- | 
|                                                          |       | Reserve  |     |           |  |             |       | Reserve 
|                                                          |       | Balance  |     | Current   |  | Current     |       | Balance 
|                                                          |       | Dec. 31, |     | Year      |  | Year        |       | Dec. 31,
|                                                          |       | 1999     |     | Provision |  | Utilization |       | 2000    
|                                                          |       |          |     |           |  |             |       |         
|(In thousands)                                            |       |          |     |           |  |             |       |         
|2000 Activity:                                            |       |          |     |           |  |             |       |          |  |   |      |        |   |   |     |    
|Provisions for severance related to workforce
	reductions |       | $        | 123 |           |  | $           | 1,445 |          |  | $ | (854 | )      |   | $ | 714 |    
|Provisions for assets to be sold or discarded             |       |          |    |           |  |             | 216   |          |  |   | (216 | )      |   |   |    |    
|Other                                                     |       |          | 86  |           |  |             | 184   |          |  |   | (270 | )      |   |   |    |    
|                                                          |       |          |     |           |  |             |       |          |  |   |      |        |   |   |     |    
|                                                          | Total |          | $   | 209       |  |             | $     | 1,845    |  |   | $    | (1,340 | ) |   | $   | 714 | 
|                                                          |       |          |     |           |  |             |       |          |  |   |      |        |   |   |     |    

Restructuring and other unusual income for 1999
of $1.3 million consisted primarily of $1.3 million in
income from an insurance settlement related to environmental
matters, a gain of $.4 million from the sale of a portion
of our Microsharp imaging technology and $.2 million of
other miscellaneous gains, offset by a provision of
$.6 million resulting from our decision to cease
manufacturing of fax papers. The balance at December 31,
1999 for severance related to workforce reductions included
amounts payable to nine employees related to the discontinuance
of our fax manufacturing line in our Specialty Paper Products
segment.

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Discontinued Operations:

|                                                         |  |      |        |      |  |   |        |  
|-------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                         |  | 2001 |        | 2000
|                                                         |  |      |        |     
|(In thousands)                                           |  |      |        |     
|Assets                                                   |  | $    | 1,055  |      |  | $ | 2,801  |  
|Liabilities                                              |  |      | (3,270 | )    |  |   | (3,301 | )
|                                                         |  |      |        |      |  |   |        |  
|Net assets and (liabilities) of discontinued
	operations |  | $    | (2,215 | )    |  | $ | (500   | )
|                                                         |  |      |        |      |  |   |        |  

Our asset balance as of December 31, 2001,
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.
(Cerion), formerly a publicly held company. Our
asset balance at December 31, 2000, also included a tax
receivable relating to discontinued operations that was refunded
during 2001. 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,
environmental and workers compensation reserves relating to
discontinued operations. During the fourth quarter of 1999, we
recorded a charge of $4.0 million, net of taxes, related to
discontinued operations as described more fully in our
Income Taxes Note.

Indebtedness and Subsequent Event

On March 1, 2002, we entered into a Credit
Agreement with LaSalle Bank, NA as Agent and Issuing Bank and
Fleet National Bank. The Credit Agreement consists of a term
loan of $10 million and a revolving loan commitment of
$30 million. Borrowings under this agreement are
collateralized by a security interest in our accounts
receivable, inventory, certain machinery and equipment and real
estate located in Merrimack, NH. At December 31, 2001, the
approximate book value of these assets was $73.4 million.
This Credit Agreement replaced our prior Loan Agreement dated
April 14, 2000. Interest on loans outstanding, at our
option, are either at a rate per annum equal to the Base Rate
(prime) or LIBOR, plus applicable margin. The initial Base
Rate margin is .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 LIBOR
margin is 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 as the maximum principle amount 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. The maturity of this
Credit Agreement is February 28, 2005. We are required to
maintain certain financial covenants, such as a Funded Debt to
EBITDA Ratio, Minimum EBITDA levels and a Fixed Charge Coverage
Ratio as defined in our Credit Agreement. Furthermore, without
prior consent of our lenders, the Credit Agreement limits, among
other things, the payment of dividends, capital expenditures,
the incurrence of additional debt and restricts the sale of
certain assets and merger or acquisition activities. The Credit
Agreement allows Fleet National Bank, at its option, to
terminate its commitment if, by December 31, 2002, we do
not reincorporate in the Commonwealth of Massachusetts and
eliminate our current requirement for shareholder approval for
granting a mortgage or lien upon all or substantially all of our
property or assets.

The aggregate amounts of maturities on long-term
debt for each of the next five years based on our Credit
Agreement dated March 1, 2002 are as follows:
2002  $2.0 million; 2003 
$2.0 million; 2004  $2.3 million;
2005  $19.0 million. For the twelve months ended
December 31, 2001, the weighted average annual interest
rate on our long-term debt was 8.0 percent.

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On April 14, 2000, we entered into a
Revolving Credit Agreement and a Term Loan Agreement
(collectively the Loan Agreement) with Fleet
Bank  NH and LaSalle Bank, NA. This agreement was
replaced by our current Credit Agreement effective March 1,
2002. The Revolving Credit Agreement and the Term Loan Agreement
were in the amounts of $30.0 million and $20.0 million
at December 31, 2001. Borrowings under this facility were
collateralized by a security interest in our accounts
receivable, inventory, certain machinery and equipment and real
estate located in Merrimack, NH. Borrowings of
$15.1 million and $10.2 million were outstanding at
December 31, 2001 under the Revolving Credit Agreement and
the Term Loan Agreement. Interest on the loans outstanding, at
our option, were either at a rate per annum equal to the Base
Rate (prime) or LIBOR plus applicable margin. The Revolver
LIBOR margin was 3.0 percent and the Term LIBOR margin was
3.5 percent at December 31, 2001. The Revolving Credit
Agreement was subject to certain limitations such as, if the
aggregate principal amount at any one time outstanding under the
Revolving Credit Loan exceeded $15.0 million or the amount
of certain eligible accounts receivable, as defined in the Loan
Agreement, declined to $25.0 million or less, the maximum
principal amount of the Revolving Credit Loan would be the
lesser of (a) $30.0 million or (b) the Borrowing Base,
which is defined as the sum of 80 percent of the eligible
accounts receivable, plus 50 percent of the eligible
inventory, minus a reserve of $.5 million as defined in the
Loan Agreement. Our Borrowing Base was $27.3 million at
December 31, 2001. The Loan Agreement required us to
maintain certain financial covenants such as Total Funded Debt
to earnings before interest, income taxes, depreciation and
amortization and a Fixed Charge Coverage Ratio. We were in
compliance with the above quarterly financial covenants for 2001.

On December 26, 1996, we entered into a Note
Agreement under which we borrowed $2.6 million. We paid
back this note in sixty equal monthly payments which began in
January of 1997 and ended in December of 2001. Borrowings of
$.5 million were outstanding at December 31, 2000. The
note incurred interest at a rate per annum equal to
2.5 percent above the LIBOR rate and was collateralized by
a security interest in certain equipment.

Income Taxes

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

|               |                                   |      |        |        |   |      |        |        |  |   |       |       | 
|-------------- | --------------------------------- | ---- | ------ | ------ | - | ---- | ------ | ------ |  | - | ----- | ----- | 
|               |                                   | 2001 |        | 2000   |   | 1999
|               |                                   |      |        |        |   |     
|(In thousands) |                                   |      |        |        |   |     
|Domestic       |                                   | $    | (3,035 | )      |   | $    | 12,413 |        |  | $ | 2,599 |      
|Foreign        |                                   |      | 253    |        |   |      | 501    |        |  |   | 284   |      
|               |                                   |      |        |        |   |      |        |        |  |   |       |      
|               | Consolidated pretax income (loss) |      | $      | (2,782 | ) |      | $      | 12,914 |  |   | $     | 2,883 | 
|               |                                   |      |        |        |   |      |        |        |  |   |       |      

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|               |                 |                                      |   |        |        |      |   |        |        |   |   |       |       | 
|-------------- | --------------- | ------------------------------------ | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ----- | ----- | 
|               |                 | 2001                                 |   | 2000   |        | 1999
|               |                 |                                      |   |        |        |     
|(In thousands) |                 |                                      |   |        |        |     
|Current:       |                 |                                      |   |        |        |      |   |        |        |   |   |      
|               | United States   |                                      | $ | 1,131  |        |      | $ | (6,233 | )      |   | $ | 821   |      
|               | Foreign         |                                      |   | 101    |        |      |   | 291    |        |   |   | 99    |      
|               | State and local |                                      |   |       |        |      |   | (856   | )      |   |   | 26    |      
|               |                 |                                      |   |        |        |      |   |        |        |   |   |      
|               |                 | Total current                        |   |        | 1,232  |      |   |        | (6,798 | ) |   |       | 946   | 
|Deferred:      |                 |                                      |   |        |        |      |   |        |        |   |   |      
|               | United States   |                                      |   | (1,504 | )      |      |   | 12,632 |        |   |   | 1,426 |      
|               | Foreign         |                                      |   |       |        |      |   |       |        |   |   |      |      
|               | State and local |                                      |   | (62    | )      |      |   | 1,694  |        |   |   | 931   |      
|               |                 |                                      |   |        |        |      |   |        |        |   |   |      
|               |                 | Total deferred                       |   |        | (1,566 | )    |   |        | 14,326 |   |   |       | 2,357 | 
|               |                 |                                      |   |        |        |      |   |        |        |   |   |      
|               |                 | Provision (benefit) for income taxes |   | $      | (334   | )    |   | $      | 7,528  |   |   | $     | 3,303 | 
|               |                 |                                      |   |        |        |      |   |        |        |   |   |      

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

|                                        |                         |      |        |       |  |   |        |       | 
|--------------------------------------- | ----------------------- | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                        |                         | 2001 |        | 2000 
|                                        |                         |      |        |      
|(In thousands)                          |                         |      |        |      
|Depreciation                            |                         | $    | (1,560 | )     |  | $ | (2,822 | )    
|Pension                                 |                         |      | (3,488 | )     |  |   | (3,360 | )    
|Other                                   |                         |      | (582   | )     |  |   | (301   | )    
|                                        |                         |      |        |       |  |   |        |      
|Gross deferred tax liabilities          |                         |      | (5,630 | )     |  |   | (6,483 | )    
|                                       
|Restructuring                           |                         |      | 1,846  |       |  |   | 2,384  |      
|Pension and postretirement benefits     |                         |      | 4,253  |       |  |   | 4,076  |      
|State loss carryforwards                |                         |      | 3,316  |       |  |   | 3,204  |      
|Accrued expenses                        |                         |      | 3,273  |       |  |   | 1,248  |      
|Inventory reserve                       |                         |      | 504    |       |  |   | 724    |      
|Bad debt reserve                        |                         |      | 636    |       |  |   | 460    |      
|Other                                   |                         |      | 1,802  |       |  |   | 2,821  |      
|                                        |                         |      |        |       |  |   |        |      
|Gross deferred tax asset                |                         |      | 15,630 |       |  |   | 14,917 |      
|Deferred tax assets valuation allowance |                         |      | (1,885 | )     |  |   | (1,885 | )    
|                                        |                         |      |        |       |  |   |        |      
|                                        | Net deferred tax assets |      | $      | 8,115 |  |   | $      | 6,549 | 
|                                        |                         |      |        |       |  |   |        |      

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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:

|                                                          |                              |      |       |       |    |      |      |      |   |  |      |       |  
|--------------------------------------------------------- | ---------------------------- | ---- | ----- | ----- | -- | ---- | ---- | ---- | - |  | ---- | ----- | -
|                                                          |                              | 2001 |       | 2000  |    | 1999
|                                                          |                              |      |       |       |    |     
|United States federal statutory rate (benefit)            |                              |      | (35.0 | )%    |    |      | 35.0 | %    |   |  | 35.0 | %    
|State and local income taxes, net of federal tax
	benefit |                              |      | (1.3  | )     |    |      | 4.2  |      |   |  | 4.8  |      
|Change in valuation allowance                             |                              |      |      |       |    |      | 6.1  |      |   |  | 27.7 |      
|Expired net operating loss                                |                              |      |      |       |    |      | 13.8 |      |   |  |     |      
|Non-deductible goodwill                                   |                              |      | 21.7  |       |    |      | 3.4  |      |   |  |     |      
|Tax contingency reserve                                   |                              |      |      |       |    |      |     |      |   |  | 45.7 |      
|Other, net                                                |                              |      | 2.6   |       |    |      | (4.2 | )    |   |  | 1.4  |      
|                                                          |                              |      |       |       |    |      |      |      |   |  |      |      
|                                                          | Effective tax rate (benefit) |      |       | (12.0 | )% |      |      | 58.3 | % |  |      | 114.6 | %
|                                                          |                              |      |       |       |    |      |      |      |   |  |      |      

At December 31, 2001, $5.2 million and
$2.9 million of net tax assets were included in Other
Current Assets and Other Assets, respectively.
At December 31, 2000, $5.6 million and
$.9 million of net tax assets were included in Other
Current Assets and Other Assets, respectively.
At December 31, 2001 and 2000, $5.1 million and
$5.5 million of accrued taxes were included in
Accrued Expenses.

At December 31, 2001, we had
$3.3 million of state net operating loss carryforwards and
$.6 million of alternative minimum tax credit
carryforwards, which are available to offset future domestic
taxable earnings. The net operating loss carryforward benefits
expire as follows: $1.2 million in 2002; and
$2.1 million thereafter. The tax credit carryforwards have
no expiration date. In the fourth quarter of 2000, we updated
our assessment of the realizability of state net operating loss
carryforwards taking into consideration current projections of
future taxable income, recent product line divestitures 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
$1.9 million of state net operating loss carryforwards will
not be realized prior to their expiration. As a result, we
recorded a $.8 million charge in the fourth quarter of 2000
to increase our valuation allowance for state net operating loss
carryforwards to $1.9 million.

In December 1999, the Internal Revenue Service
(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. 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 disagree 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 open issues.

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. The assessment represents a total of
$18.2 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
discontinued operations as well as certain losses deducted in
connection with the divestiture of our Computer Products
Division. We disagree with the position taken by the IRS and
filed a formal protest of the proposed adjustment on
January 12, 1999. We are working through the IRS appeals
process to resolve open issues.

We believe that we will prevail in all material
respects against the IRS assertions related to the
corporate income tax returns filed for the years 1992 through
1994 and that we are adequately reserved for any potential
liability that could arise from the resolution of the IRS
assessment for the years 1995 through 1997. In the

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fourth quarter of 1999, we recorded a charge of
$1.3 million in continuing operations, which included
$.8 million of interest, and a charge of $4.0 million
in discontinued operations primarily to provide for potential
liabilities for tax deficiencies that could arise from
resolution of the IRS examination of the corporate tax
returns filed for years 1995 through 1997 and for resolution of
the New Hampshire Department of Revenue Administrations
(DOR) examination of the corporate income tax
returns for the years 1989 through 1992. We settled all
outstanding issues for the years 1989 through 1992 with the DOR
during the second quarter of 2001 and paid $.5 million,
which included interest charges. While we believe that we have
provided adequately for our tax liabilities through
December 31, 2001, 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, we can provide no assurances that the ultimate
resolution of these open tax matters will not be in excess of
current provisions.

Shareholders Equity

On April 24, 2000, our Board of Directors
voted to redeem the stock purchase rights issued pursuant to its
Shareholder Rights Plan. In redeeming the rights, a one-time
payment of $0.01 per common share was distributed to
shareholders of record on May 9, 2000.

In 1999, our Board of Directors authorized us to
repurchase up to an additional 1,000,000 shares of our common
stock. As of December 31, 2001, no shares had been
purchased under this authorization.

The following summarizes the changes in selected
shareholders equity accounts for each of the three years
in the period ended December 31, 2001:

|                                                |  |              |           |           |  |                |       |        |  |      |        |   |  |  |            |   |  |   |         |  
|----------------------------------------------- |  | ------------ | --------- | --------- |  | -------------- | ----- | ------ |  | ---- | ------ | - |  |  | ---------- | - |  | - | ------- | -
|                                                |  |              |           |           |  |               
|                                                |  | Common Stock |           | Addl     |  | Treasury Stock
|                                                |  |              |           | Paid-In   |  |               
|                                                |  | Shares       |           | Par Value |  | Capital        |       | Shares |  | Cost
|                                                |  |              |           |           |  |                |       |        |  |     
|(In thousands, except share data)               |  |              |           |           |  |                |       |        |  |     
|Balance, January 1, 1999                        |  |              | 6,938,397 |           |  | $              | 6,938 |        |  | $    | 15,057 |   |  |  | (675,738   | ) |  | $ | (10,839 | )
|Stock issued for Director compensation          |  |              | 8,370     |           |  |                | 9     |        |  |      | 81     |   |  |  |           |   |  |   |        |  
|Restricted stock forfeiture                     |  |              | (31,000   | )         |  |                | (31   | )      |  |      | (416   | ) |  |  |           |   |  |   |        |  
|Deferred compensation forfeiture                |  |              |          |           |  |                |      |        |  |      | 460    |   |  |  |           |   |  |   |        |  
|Purchase of treasury shares                     |  |              |          |           |  |                |      |        |  |      |       |   |  |  | (348,080   | ) |  |   | (4,083  | )
|                                                |  |              |           |           |  |                |       |        |  |      |        |   |  |  |            |   |  |   |         |  
|Balance, December 31, 1999                      |  |              | 6,915,767 |           |  | $              | 6,916 |        |  | $    | 15,182 |   |  |  | (1,023,818 | ) |  | $ | (14,922 | )
|Stock issued for Director compensation          |  |              | 16,834    |           |  |                | 17    |        |  |      | 92     |   |  |  |           |   |  |   |        |  
|Restricted stock issuances                      |  |              | 189,000   |           |  |                | 189   |        |  |      | 1,398  |   |  |  |           |   |  |   |        |  
|Deferred compensation                           |  |              |          |           |  |                |      |        |  |      | (1,282 | ) |  |  |           |   |  |   |        |  
|Restricted stock forfeiture and conversion      |  |              | (110,000  | )         |  |                | (110  | )      |  |      | (1,223 | ) |  |  |           |   |  |   |        |  
|Deferred compensation forfeiture                |  |              |          |           |  |                |      |        |  |      | 1,101  |   |  |  |           |   |  |   |        |  
|                                                |  |              |           |           |  |                |       |        |  |      |        |   |  |  |            |   |  |   |         |  
|Balance, December 31, 2000                      |  |              | 7,011,601 |           |  | $              | 7,012 |        |  | $    | 15,268 |   |  |  | (1,023,818 | ) |  | $ | (14,922 | )
|Stock issued for Director compensation          |  |              | 17,948    |           |  |                | 18    |        |  |      | 87     |   |  |  |           |   |  |   |        |  
|Stock options exercised and related tax benefit |  |              | 11,100    |           |  |                | 11    |        |  |      | 62     |   |  |  |           |   |  |   |        |  
|Deferred compensation                           |  |              |          |           |  |                |      |        |  |      | 330    |   |  |  |           |   |  |   |        |  
|Restricted stock forfeiture                     |  |              | (154,000  | )         |  |                | (154  | )      |  |      | (530   | ) |  |  |           |   |  |   |        |  
|Deferred compensation forfeiture                |  |              |          |           |  |                |      |        |  |      | 684    |   |  |  |           |   |  |   |        |  
|                                                |  |              |           |           |  |                |       |        |  |      |        |   |  |  |            |   |  |   |         |  
|Balance, December 31, 2001                      |  |              | 6,886,649 |           |  | $              | 6,887 |        |  | $    | 15,901 |   |  |  | (1,023,818 | ) |  | $ | (14,922 | )
|                                                |  |              |           |           |  |                |       |        |  |      |        |   |  |  |            |   |  |   |         |  

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock Option and Stock Award Plans

We had three stock compensation plans at
December 31, 2001: the 1987 Stock Option Plan (1987
Plan), the 1996 Stock Incentive Plan (1996
Plan) and the 1999 Shareholder Value Plan (1999
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 (the Committee).

Under the 1987 Plan, nonqualified stock options
have been awarded and are currently exercisable. Nonqualified
stock options expire 10 years and one day from the date of
grant. In the event of a change in control, certain option
holders may have a limited right, with respect to options under
the plans, to elect to surrender the options and receive cash or
shares equal in value to the difference between the option price
and the larger of either the highest reported price per share on
the New York Stock Exchange during the sixty-day period before
the change in control or, if the change in control is the result
of certain defined transactions, the highest price per share
paid in such defined transactions.

Nonstatutory stock options and shares of
performance based restricted stock have been awarded under the
1996 Plan and the 1999 Plan. Of the 660,000 and 600,000 shares
authorized by our Board of Directors for the 1996 and 1999
Plans, respectively, 12,096 and 10,900 shares are available to
be awarded as of December 31, 2001. Stock options under the
1996 Plan and the 1999 Plan 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 in the event of a
change in control 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. Currently, there are no incentive stock options granted
under the 1996 Plan. Nonstatutory and incentive stock options
granted under the 1999 Plan expire 10 years from the date
of grant.

Performance based restricted stock awards under
the 1996 Plan and the 1999 Plan have been granted to certain key
executives and are earned only if the closing price of our
common stock meets specific target prices for certain defined
periods of time or if significant performance based events are
achieved. Restrictions on such shares lapse either (i) in
equal amounts when the average closing price of our common stock
reaches $20 and $25 for a consecutive 10 trading day period;
(ii) in equal amounts when the average closing price of our
common stock reaches $19 and $21 for a consecutive 10 trading
day period; (iii) in equal amounts when the average closing
price of our common stock reaches $21 and $23 for a consecutive
10 trading day period; (iv) 50% upon the occurrence of
certain significant performance based events and 50% one year
thereafter; or (v) 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 the award. 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, the
executive leaves the Company or if the significant performance
based events do not take place within the specified time period.

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of our fixed stock option
plans as of December 31, 2001, 2000 and 1999 and changes
during the years ended on those dates is presented below:

|                                                                                                     |  |        |          |          |  |        |       |          |  |        |         |          |  |   |       |  |  |  |          |   |  |   |       | 
|---------------------------------------------------------------------------------------------------- |  | ------ | -------- | -------- |  | ------ | ----- | -------- |  | ------ | ------- | -------- |  | - | ----- |  |  |  | -------- | - |  | - | ----- | 
|                                                                                                     |  |        |          |          |  |       
|                                                                                                     |  | 2001   |          | 2000     |  | 1999  
|                                                                                                     |  |        |          |          |  |       
|                                                                                                     |  |        |          | Weighted |  |        |       | Weighted |  |        |         | Weighted
|                                                                                                     |  |        |          | Average  |  |        |       | Average  |  |        |         | Average 
|                                                                                                     |  |        |          | Exercise |  |        |       | Exercise |  |        |         | Exercise
|                                                                                                     |  | Shares |          | Price    |  | Shares |       | Price    |  | Shares |         | Price   
|                                                                                                     |  |        |          |          |  |        |       |          |  |        |         |         
|Outstanding beginning of year                                                                        |  |        | 649,735  |          |  | $      | 10.39 |          |  |        | 618,435 |          |  | $ | 11.94 |  |  |  | 547,370  |   |  | $ | 15.47 | 
|Granted                                                                                              |  |        | 470,700  |          |  |        | 4.88  |          |  |        | 206,200 |          |  |   | 7.06  |  |  |  | 275,500  |   |  |   | 7.50  | 
|Exercised                                                                                            |  |        | (11,100  | )        |  |        | 6.63  |          |  |        |        |          |  |   |      |  |  |  |         |   |  |   |      | 
|Forfeited  non-vested                                                                               |  |        | (66,625  | )        |  |        | 5.78  |          |  |        | (86,500 | )        |  |   | 7.10  |  |  |  | (2,000   | ) |  |   | 9.88  | 
|Forfeited  exercisable                                                                              |  |        | (131,710 | )        |  |        | 11.79 |          |  |        | (85,900 | )        |  |   | 16.21 |  |  |  | (202,435 | ) |  |   | 15.47 | 
|Expired                                                                                              |  |        | (1,500   | )        |  |        | 34.63 |          |  |        | (2,500  | )        |  |   | 33.88 |  |  |  |         |   |  |   |      | 
|                                                                                                     |  |        |          |          |  |        |       |          |  |        |         |          |  |   |       |  |  |  |          |   |  |   |       | 
|Outstanding end of year                                                                              |  |        | 909,500  |          |  | $      | 7.68  |          |  |        | 649,735 |          |  | $ | 10.39 |  |  |  | 618,435  |   |  | $ | 11.94 | 
|Options exercisable at end of year                                                                   |  |        | 392,600  |          |  | $      | 10.94 |          |  |        | 356,785 |          |  | $ | 13.01 |  |  |  | 344,935  |   |  | $ | 15.48 | 
|Weighted average fair value of options granted
	during the year (exercise price equals market price) |  |        |          |          |  | $      | 1.99  |          |  |        |         |          |  | $ | 2.91  |  |  |  |          |   |  | $ | 3.41  | 

The following table summarizes information about
stock options outstanding at December 31, 2001:

|                |  |                     |         |                     |  |          |           |             |  |          |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ------------------- | ------- | ------------------- |  | -------- | --------- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |                     |         |                    
|                |  | Options Outstanding |         | Options Exercisable
|                |  |                     |         |                    
|                |  |                     |         | Weighted            |  |          |           | Weighted   
|                |  | Number              |         | Weighted Average    |  | Average  |           | Number      |  | Average 
|Range of        |  | Outstanding         |         | Remaining           |  | Exercise |           | Exercisable |  | Exercise
|Exercise Prices |  | at 12/31/01         |         | Contractual Life    |  | Price    |           | at 12/31/01 |  | Price   
|                |  |                     |         |                     |  |          |           |             |  |         
|$ 4.01  $ 4.38 |  |                     | 280,100 |                     |  |          | 9.2 years |             |  | $        | 4.08  |  |  |  | 30,000  |  |  | $ | 4.38  | 
|$ 5.70  $ 6.63 |  |                     | 303,000 |                     |  |          | 9.3 years |             |  | $        | 6.07  |  |  |  | 85,000  |  |  | $ | 6.58  | 
|$ 8.06  $11.63 |  |                     | 184,775 |                     |  |          | 8.0 years |             |  | $        | 8.84  |  |  |  | 135,975 |  |  | $ | 9.12  | 
|$12.38  $19.75 |  |                     | 122,300 |                     |  |          | 5.2 years |             |  | $        | 15.19 |  |  |  | 122,300 |  |  | $ | 15.19 | 
|$22.63  $34.63 |  |                     | 19,325  |                     |  |          | 1.8 years |             |  | $        | 26.17 |  |  |  | 19,325  |  |  | $ | 26.17 | 
|                |  |                     |         |                     |  |          |           |             |  |          |       |  |  |  |         |  |  |   |       | 
|$ 4.01  $34.63 |  |                     | 909,500 |                     |  |          | 8.3 years |             |  | $        | 7.68  |  |  |  | 392,600 |  |  | $ | 10.94 | 

A summary of the status of our restricted stock
plans as of December 31, 2001, 2000 and 1999 and changes
during the years ended on those dates is presented below:

|                                                                |  |      |          |      |  |      |          |   |  |   |         |  
|--------------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                                |  | 2001 |          | 2000 |  | 1999
|                                                                |  |      |          |      |  |     
|Restricted stock outstanding at beginning of year               |  |      | 334,000  |      |  |      | 255,000  |   |  |   | 286,000 |  
|Granted                                                         |  |      |         |      |  |      | 189,000  |   |  |   |        |  
|Forfeited and converted                                         |  |      | (187,333 | )    |  |      | (110,000 | ) |  |   | (31,000 | )
|                                                                |  |      |          |      |  |      |          |   |  |   |         |  
|Restricted stock outstanding at end of year                     |  |      | 146,667  |      |  |      | 334,000  |   |  |   | 255,000 |  
|Weighted average fair value per restricted share
	at grant date |  | $    |         |      |  | $    | 8.46     |   |  | $ |        |  
|Weighted average share price at grant date                      |  | $    |         |      |  | $    | 8.46     |   |  | $ |        |  

We have adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation
(FAS 123). We continue to measure compensation
cost using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25. Stock-based compensation
recognized in our Consolidated Statement of Operations and
Retained Earnings was $.4 million for 2001 and
$.1 million for 2000 and 1999. If we had elected to
recognize compensation cost based on the fair

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value of the options and restricted stock granted
at grant date as prescribed by FAS 123, net income (loss)
and income (loss) per share would have decreased (increased) to
the pro forma amounts indicated below:

|                                                           |  |      |        |      |  |      |       |  |  |   |        |  
|---------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ------ | -
|                                                           |  | 2001 |        | 2000 |  | 1999
|                                                           |  |      |        |      |  |     
|(In thousands, except per share amounts)                   |  |      |        |      |  |     
|Net income (loss)  as reported                            |  | $    | (2,448 | )    |  | $    | 5,386 |  |  | $ | (4,421 | )
|Net income (loss)  pro forma                              |  | $    | (3,484 | )    |  | $    | 4,981 |  |  | $ | (4,732 | )
|                                                          
|Basic and diluted net loss per common
	share  as reported |  | $    | (.43   | )    |  | $    | .95   |  |  | $ | (.77   | )
|Basic and diluted net loss per common
	share  pro forma   |  | $    | (.61   | )    |  | $    | .88   |  |  | $ | (.83   | )

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
|                           |                  |           
|                           |                  | 2001       |                                    | 2000 |   | 1999
|                           |                  |            |                                    |      |   |     
|Volatility of Share Price: |                  |            |                                    |      |   |      |           |      |   |  |           |     
|                           | Options          |            |                                    | 34.0 | % |      |           | 31.0 | % |  |           | 39.0 | %
|                           | Restricted stock |            |                                    |     |   |      |           |     |   |  |           |     |  
|Dividend yield:            |                  |            |                                    |      |   |      |           |      |   |  |           |     
|                           | Options          |            |                                    |     |   |      |           |     |   |  |           |     |  
|                           | Restricted stock |            |                                    |     |   |      |           |     |   |  |           |     |  
|Interest rate:             |                  |            |                                    |      |   |      |           |      |   |  |           |     
|                           | Options          |            |                                    | 4.8  | % |      |           | 6.3  | % |  |           | 6.2  | %
|                           | Restricted stock |            |                                    |     |   |      |           |     |   |  |           |     |  
|Expected life of options   |                  |            | 5.7 years                          |      |   |      | 5.5 years |      |   |  | 5.3 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 above pro forma disclosures are not representative of pro
forma effects of reported net income for future periods.

Earnings Per Share (EPS)

Since the effect of stock options which have an
exercise price below the average market price of our stock of
39,346 shares in 2001 and 9,900 shares in 1999 would be
antidilutive to loss per share computations, Basic EPS and
Diluted EPS are identical for the years ended December 31,
2001 and 1999. The computations of EPS for 2001 and 1999 include
weighted average shares (denominator) of 5,696,298 and
5,718,224, respectively.

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Reconciliation of the numerators and denominators
used in our 2000 earnings per share (EPS)
calculation is presented below:

|                                      |                                                                   |                              |       |               |  |           |   |       |  |  |   |     | 
|------------------------------------- | ----------------------------------------------------------------- | ---------------------------- | ----- | ------------- |  | --------- | - | ----- |  |  | - | --- | 
|                                      |                                                                   |                             
|                                      |                                                                   | Year Ended December 31, 2000
|                                      |                                                                   |                             
|                                      |                                                                   | Income                       |       | Shares        |  | Per Share
|                                      |                                                                   | (Numerator)                  |       | (Denominator) |  | Amount   
|                                      |                                                                   |                              |       |               |  |          
|(in thousands, except per share data) |                                                                   |                              |       |               |  |          
|Net income                            |                                                                   | $                            | 5,386 |               |  |           |  |       |  |  |  |    
|                                      |                                                                   |                              |       |               |  |           |   |       |  |  |   |    
|Basic EPS                             |                                                                   |                              |       |               |  |           |   |       |  |  |   |    
|                                      | Income available to common shareholders                           |                              | $     | 5,386         |  |           |   | 5,649 |  |  | $ | .95 | 
|Effect of dilutive securities         |                                                                   |                              |       |               |  |           |   |       |  |  |   |    
|                                      | Stock options                                                     |                              |       |              |  |           |   | 18    |  |  |   |    | 
|                                      |                                                                   |                              |       |               |  |           |   |       |  |  |   |    
|Diluted EPS                           |                                                                   |                              |       |               |  |           |   |       |  |  |   |    
|                                      | Income available to common shareholders plus
	assumed conversions |                              | $     | 5,386         |  |           |   | 5,667 |  |  | $ | .95 | 
|                                      |                                                                   |                              |       |               |  |           |   |       |  |  |   |    

Performance based restricted stock of 146,667,
334,000 and 255,000 shares for the years ended December 31,
2001, 2000 and 1999, respectively, was not included in the above
computations. Such shares may be issued in the future subject to
the occurrence of certain events as described in our Stock
Option and Stock Award Plans Note.

Commitments and Contingencies

Rent expense for office equipment, facilities and
vehicles was $1.8 million for 2001 and $1.0 million
for the years ended December 31, 2000 and 1999. At
December 31, 2001, we are committed, under non-cancelable
operating leases, to minimum annual rentals as follows:
2002  $1.1 million; 2003 
$.5 million; 2004  $.4 million;
2005  $.3 million and 2006 
$.1 million.

At December 31, 2001, we had a
$1.4 million obligation under standby letters of credit
with Fleet Bank-NH and LaSalle Bank, NA.

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
(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.

In August and September 1996, two individual
plaintiffs filed lawsuits in the Circuit Court of Cook County,
Illinois against us, 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). 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 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

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 is
in process. We believe that the lawsuit is without merit and
will continue to defend ourselves in this matter.

We are involved in certain environmental matters
and have been designated by the Environmental Protection Agency
(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. At
December 31, 2001, based on the facts currently known and
our prior experience with these matters, we have concluded that
there is at least a reasonable possibility that site assessment,
remediation and monitoring costs will be incurred. We have
estimated a range for these costs of $1.0 million to
$1.2 million for our continuing operations and
$.1 million to $.2 million for our discontinued
operations. These ranges could increase if other potentially
responsible parties are unable to bear their allocated share. At
December 31, 2001, our accrual balances relating to
environmental matters were $1.1 million for continuing
operations and $.2 million for discontinued operations. In our
view, these represent the most likely amounts within the ranges
stated above. 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.

Postretirement Benefits

Pension Plans

We have two pension plans which cover a portion
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 amounts
deductible for income tax purposes. Assets of the plans are
invested in common stocks, fixed-income securities and
interest-bearing cash equivalent instruments.

Retiree Health Care and Other
Benefits

We also provide certain health care and life
insurance benefits to eligible retired employees and their
spouses. Salaried participants generally become eligible for
retiree health care benefits after reaching age 60 with ten
years of service. Benefits, eligibility and cost-sharing
provisions 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.

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ---------------- | ------ | ----------------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                    |  |                  |        |                        
|                                                                                    |  | Pension Benefits |        | Postretirement Benefits
|                                                                                    |  |                  |        |                        
|                                                                                    |  | 2001             |        | 2000                    |  | 2001 |         | 2000
|                                                                                    |  |                  |        |                         |  |      |         |     
|(In thousands)                                                                      |  |                  |        |                         |  |      |         |     
|Change in benefit obligation                                                        |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Benefit obligation at beginning of year                                             |  | $                | 56,458 |                         |  | $    | 121,421 |      |  | $ | 6,619   |   |  | $ | 6,133   |  
|Service cost                                                                        |  |                  | 1,674  |                         |  |      | 1,600   |      |  |   | 62      |   |  |   | 74      |  
|Interest cost                                                                       |  |                  | 4,130  |                         |  |      | 3,729   |      |  |   | 444     |   |  |   | 481     |  
|Amendments                                                                          |  |                  |       |                         |  |      | 2,494   |      |  |   | (226    | ) |  |   |        |  
|Settlement                                                                          |  |                  |       |                         |  |      | (75,621 | )    |  |   |        |   |  |   |        |  
|Actuarial loss                                                                      |  |                  | 396    |                         |  |      | 3,862   |      |  |   | 148     |   |  |   | 514     |  
|Benefits paid                                                                       |  |                  | (1,116 | )                       |  |      | (1,027  | )    |  |   | (655    | ) |  |   | (583    | )
|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Benefit obligation at end of year                                                   |  | $                | 61,542 |                         |  | $    | 56,458  |      |  | $ | 6,392   |   |  | $ | 6,619   |  
|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Change in plan assets                                                               |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Fair value of plan assets at beginning of year                                      |  | $                | 60,473 |                         |  | $    | 138,061 |      |  | $ |        |   |  | $ |        |  
|Actual return on plan assets                                                        |  |                  | 1,685  |                         |  |      | (1,600  | )    |  |   |        |   |  |   |        |  
|Settlement                                                                          |  |                  |       |                         |  |      | (75,218 | )    |  |   |        |   |  |   |        |  
|Employer contribution                                                               |  |                  |       |                         |  |      |        |      |  |   |        |   |  |   |        |  
|Benefits paid                                                                       |  |                  | (840   | )                       |  |      | (770    | )    |  |   |        |   |  |   |        |  
|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Fair value of plan assets at end of year                                            |  | $                | 61,318 |                         |  | $    | 60,473  |      |  | $ |        |   |  | $ |        |  
|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Reconciliation of funded status                                                     |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Funded status                                                                       |  | $                | (224   | )                       |  | $    | 4,016   |      |  | $ | (6,392  | ) |  | $ | (6,619  | )
|Unrecognized net actuarial (gain)/loss                                              |  |                  | 4,538  |                         |  |      | (301    | )    |  |   | (2,930  | ) |  |   | (3,310  | )
|Unrecognized prior service cost                                                     |  |                  | 4,826  |                         |  |      | 5,567   |      |  |   | (693    | ) |  |   | (545    | )
|Unrecognized net transition asset                                                   |  |                  | (230   | )                       |  |      | (80     | )    |  |   |        |   |  |   |        |  
|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Net amount of asset (liability) recognized                                          |  | $                | 8,910  |                         |  | $    | 9,202   |      |  | $ | (10,015 | ) |  | $ | (10,474 | )
|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|The amount recognized in our consolidated
	balance sheet consists of the following: |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Accrued benefit asset (liability)                                                   |  | $                | 8,910  |                         |  | $    | 9,202   |      |  | $ | (10,015 | ) |  | $ | (10,474 | )
|Additional minimum liability                                                        |  |                  | (64    | )                       |  |      | (25     | )    |  |   |        |   |  |   |        |  
|Intangible asset                                                                    |  |                  | 64     |                         |  |      | 25      |      |  |   |        |   |  |   |        |  
|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  
|Net amount of asset (liability) recognized                                          |  | $                | 8,910  |                         |  | $    | 9,202   |      |  | $ | (10,015 | ) |  | $ | (10,474 | )
|                                                                                    |  |                  |        |                         |  |      |         |      |  |   |         |   |  |   |         |  

|                                                |  |                  |      |                         |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|----------------------------------------------- |  | ---------------- | ---- | ----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                |  |                  |      |                        
|                                                |  | Pension Benefits |      | Postretirement Benefits
|                                                |  |                  |      |                        
|                                                |  | 2001             |      | 2000                    |  | 1999 |      | 2001 |  | 2000 |      | 1999
|                                                |  |                  |      |                         |  |      |      |      |  |      |      |     
|Weighted-average assumptions as of
	December 31 |  |                  |      |                         |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|Discount rate                                   |  |                  | 7.25 | %                       |  |      | 7.25 | %    |  |      | 7.75 | %    |  |  | 7.25 | % |  |  | 7.25 | % |  |  | 7.75 | %
|Expected return on plan assets                  |  |                  | 9.00 | %                       |  |      | 9.70 | %    |  |      | 9.70 | %    |  |  |     |   |  |  |     |   |  |  |     |  
|Average rate of compensation increase           |  |                  | 3.50 | %                       |  |      | 4.00 | %    |  |      | 4.50 | %    |  |  |     |   |  |  |     |   |  |  |     |  

42



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net periodic pension and postretirement benefit
(income) costs from continuing operations for the plans,
exclusive of enhanced early retirement and curtailment costs,
includes the following components:

|                                                  |  |                  |        |                         |  |      |        |      |  |      |         |      |  |   |      |   |  |   |      |   |  |   |      |  
|------------------------------------------------- |  | ---------------- | ------ | ----------------------- |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                                  |  |                  |        |                        
|                                                  |  | Pension Benefits |        | Postretirement Benefits
|                                                  |  |                  |        |                        
|                                                  |  | 2001             |        | 2000                    |  | 1999 |        | 2001 |  | 2000 |         | 1999
|                                                  |  |                  |        |                         |  |      |        |      |  |      |         |     
|(In thousands)                                    |  |                  |        |                         |  |      |        |      |  |      |         |     
|Components of net periodic benefit
	(income) cost |  |                  |        |                         |  |      |        |      |  |      |         |      |  |   |      |   |  |   |      |   |  |   |      |  
|Service cost                                      |  | $                | 1,674  |                         |  | $    | 1,600  |      |  | $    | 1,614   |      |  | $ | 62   |   |  | $ | 75   |   |  | $ | 57   |  
|Interest cost                                     |  |                  | 4,130  |                         |  |      | 3,729  |      |  |      | 8,512   |      |  |   | 444  |   |  |   | 481  |   |  |   | 417  |  
|Expected return on plan assets                    |  |                  | (6,129 | )                       |  |      | (5,624 | )    |  |      | (11,089 | )    |  |   |     |   |  |   |     |   |  |   |     |  
|Amortization of prior service cost                |  |                  | 742    |                         |  |      | 1,001  |      |  |      | 592     |      |  |   | (79  | ) |  |   | (56  | ) |  |   | (56  | )
|Recognized net actuarial (gain)                   |  |                  |       |                         |  |      | (76    | )    |  |      |        |      |  |   | (231 | ) |  |   | (232 | ) |  |   | (251 | )
|Amortization of transition obligation             |  |                  | 150    |                         |  |      | 150    |      |  |      | 151     |      |  |   |     |   |  |   |     |   |  |   |     |  
|                                                  |  |                  |        |                         |  |      |        |      |  |      |         |      |  |   |      |   |  |   |      |   |  |   |      |  
|Net periodic benefit (income) cost                |  | $                | 567    |                         |  | $    | 780    |      |  | $    | (220    | )    |  | $ | 196  |   |  | $ | 268  |   |  | $ | 167  |  
|                                                  |  |                  |        |                         |  |      |        |      |  |      |         |      |  |   |      |   |  |   |      |   |  |   |      |  

Our projected benefit obligation, accumulated
benefit obligation, and fair value of plan assets, for our
supplemental excess retirement plan that has accumulated benefit
obligations in excess of plan assets, were $2.9 million,
$2.9 million, and $0, respectively, as of December 31,
2001 and $2.8 million, $2.8 million, and $0,
respectively, as of December 31, 2000.

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
13.5 percent for 2002 and ranges from 9 percent to
5 percent 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 |  | $              | 17  |                |  | $ | (15  | )
|Effect on accumulated postretirement benefit
	obligation |  | $              | 160 |                |  | $ | (145 | )

Approximately $2.9 million and
$2.8 million of our accrued pension cost and
$9.4 million and $9.9 million of our accrued
postretirement benefits for 2001 and 2000, respectively, are
included in Other long-term liabilities in our
accompanying consolidated balance sheet. Pension assets of
$11.8 million and $12.0 million for 2001 and 2000,
respectively, are included in Other assets in our
accompanying consolidated balance sheet. Additionally,
approximately $.7 million and $.6 million of our
accrued postretirement benefits for 2001 and 2000, respectively,
are included in Accrued expenses in the accompanying
consolidated balance sheet.

In the first quarter of 2000, we recorded a
pretax gain of $18.6 million associated with the purchase
of non-participating annuity contracts from Principal Life
Insurance Company to settle our pension benefit obligation with
respect to retired salaried and hourly employees covered under
our pension plans and receiving pension benefits as of
December 1, 1999.

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information About Operations

We have three reportable segments:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Our Label Products segment converts and sells
	pressure sensitive labels and tags to distributors and end-users.                                                                                                                                                                                                                                                                                                                                              
|
| | (2) | Our Specialty Paper Products segment manufactures
	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 ATM receipts and point of sale
	receipts, large format media papers, dry-gum papers, heat seal
	papers, small rolls and ribbons.
|
| | (3) | Our Imaging Supplies segment produces and sells
	copier supplies (primarily toner and developer) to distributors,
	value-added resellers and end-users. Results for the twelve
	months ended December 31, 2000 and 1999 also included
	remanufactured laser cartridges, which were discontinued during
	the first quarter of 2000.                                                                                                                            

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 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 and for the years ended
December 31, 2000 and 1999. Eliminations primarily
represent sales between our Specialty Paper Products and Label
Products segments. Sales between segments and between geographic
areas are priced at the lowest price offered to unaffiliated
customers.

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
$27.3 million in 2001, representing sales of
$20.4 million for our Specialty Paper Products segment and
$6.9 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.

44



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |                                           |                       |       |                       |       |                     |       |       |       |      |      |       |       |      |     |      |      |      |      |       |      |   |      |      |     |   |      |      |       |   |      |      |       |   |      |      |       | 
|------------------------ | ----------------------------------------- | --------------------- | ----- | --------------------- | ----- | ------------------- | ----- | ----- | ----- | ---- | ---- | ----- | ----- | ---- | --- | ---- | ---- | ---- | ---- | ----- | ---- | - | ---- | ---- | --- | - | ---- | ---- | ----- | - | ---- | ---- | ----- | - | ---- | ---- | ----- | 
|                         |                                           |                       |       |                       |       |                     |       |       |       |      |      |       |       |     
|                         |                                           |                       |       | Pretax Income (Loss)  |       |                     |       |       |       |     
|                         |                                           | Net Sales From        |       | From                  |       |                    
|                         |                                           | Continuing Operations |       | Continuing Operations |       | Identifiable Assets
|                         |                                           |                       |       |                       |       |                    
|                         |                                           | 2001                  |       | 2000                  |       | 1999                |       | 2001  |       | 2000 |      | 1999  |       | 2001 |     | 2000 |      | 1999
|                         |                                           |                       |       |                       |       |                     |       |       |       |      |      |       |       |      |     |      |      |     
|(In millions)            |                                           |                       |       |                       |       |                     |       |       |       |      |      |       |       |      |     |      |      |     
|By Reportable Segment    |                                           |                       |       |                       |       |                     |       |       |       |      |      |       |       |      |     |      |      |      |      |       |      |   |      |      |     |   |      |      |       |   |      |      |       |   |      |     
|Label Products           |                                           | $                     | 107.9 |                       |       | $                   | 105.1 |       |       | $    | 78.6 |       |       | $    | 6.7 |      |      | $    | 5.4  |       |      | $ | 6.9  |      |     | $ | 26.8 |      |       | $ | 37.6 |      |       | $ | 31.0 |     
|Specialty Paper Products |                                           |                       | 150.4 |                       |       |                     | 138.8 |       |       |      | 66.3 |       |       |      | 4.9 |      |      |      | 7.5  |       |      |   | 2.6  |      |     |   | 47.4 |      |       |   | 54.5 |      |       |   | 19.8 |     
|Imaging Supplies         |                                           |                       | 24.4  |                       |       |                     | 27.9  |       |       |      | 41.1 |       |       |      | .2  |      |      |      | (4.2 | )     |      |   | (1.6 | )    |     |   | 16.0 |      |       |   | 16.3 |      |       |   | 21.6 |     
|                        
|Reconciling Items:       |                                           |                       |       |                       |       |                     |       |       |       |      |      |       |       |      |     |      |      |      |      |       |      |   |      |      |     |   |      |      |       |   |      |      |       |   |      |     
|                         | Eliminations                              |                       |       | (10.4                 | )     |                     |       | (19.2 | )     |      |      | (15.4 | )     |      |     |     |      |      |      |      |      |   |      |     |     |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Other(1)                                  |                       |       | .2                    |       |                     |       | .5    |       |      |      | .2    |       |      |     | .4   |      |      |      | 1.0   |      |   |      | (.2  | )   |   |      | 1.1  |       |   |      | .7   |       |   |      | .1   |      
|                         | Unallocated corporate expenses and assets |                       |       |                      |       |                     |       |      |       |      |      |      |       |      |     | (7.6 | )    |      |      | (11.1 | )    |   |      | (6.8 | )   |   |      | 52.7 |       |   |      | 58.6 |       |   |      | 54.0 |      
|                         | Amortization of goodwill                  |                       |       |                      |       |                     |       |      |       |      |      |      |       |      |     | (1.7 | )    |      |      | (1.3  | )    |   |      |     |     |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Interest (expense) income, net            |                       |       |                      |       |                     |       |      |       |      |      |      |       |      |     | (2.7 | )    |      |      | (2.0  | )    |   |      | .7   |     |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Pension settlement income                 |                       |       |                      |       |                     |       |      |       |      |      |      |       |      |     |     |      |      |      | 18.6  |      |   |      |     |     |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Restructuring and other unusual items     |                       |       |                      |       |                     |       |      |       |      |      |      |       |      |     | (3.0 | )    |      |      | (1.0  | )    |   |      | 1.3  |     |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Discontinued operations                   |                       |       |                      |       |                     |       |      |       |      |      |      |       |      |     |     |      |      |      |      |      |   |      |     |     |   |      | 1.0  |       |   |      | 2.8  |       |   |      | 3.9  |      
|                         |                                           |                       |       |                       |       |                     |       |       |       |      |      |       |       |      |     |      |      |      |      |       |      |   |      |      |     |   |      |      |       |   |      |      |       |   |      |     
|                         |                                           | Consolidated          |       | $                     | 272.5 |                     |       | $     | 253.1 |      |      | $     | 170.8 |      |     | $    | (2.8 | )    |      | $     | 12.9 |   |      | $    | 2.9 |   |      | $    | 145.0 |   |      | $    | 170.5 |   |      | $    | 130.4 | 
|                         |                                           |                       |       |                       |       |                     |       |       |       |      |      |       |       |      |     |      |      |      |      |       |      |   |      |      |     |   |      |      |       |   |      |      |       |   |      |     



---



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

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

|                         |           |                      |    |                |     |      |     |      |     |      |     |      |     |   |     |     |     |   |     |     |     |   |     |    |     | 
|------------------------ | --------- | -------------------- | -- | -------------- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | - | --- | --- | --- | - | --- | --- | --- | - | --- | -- | --- | 
|                         |           |                      |    |                |     |      |     |     
|                         |           |                      |    | Depreciation &
|                         |           | Capital Expenditures |    | Amortization  
|                         |           |                      |    |               
|                         |           | 2001                 |    | 2000           |     | 1999 |     | 2001 |     | 2000 |     | 1999
|                         |           |                      |    |                |     |      |     |      |     |      |     |     
|(In millions)            |           |                      |    |                |     |      |     |      |     |      |     |     
|Label Products           |           | $                    | .7 |                |     | $    | 1.4 |      |     | $    | 3.5 |      |     | $ | 2.9 |     |     | $ | 2.9 |     |     | $ | 2.0 |   
|Specialty Paper Products |           |                      | .9 |                |     |      | 4.7 |      |     |      | 1.2 |      |     |   | 3.2 |     |     |   | 2.7 |     |     |   | 1.9 |   
|Imaging Supplies         |           |                      | .5 |                |     |      | 3.1 |      |     |      | 3.0 |      |     |   | 1.5 |     |     |   | 2.0 |     |     |   | 1.9 |   
|                        
|Reconciling Items:       |           |                      |    |                |     |      |     |      |     |      |     |      |     |   |     |     |     |   |     |     |     |   |     |   
|                         | Other(1)  |                      |    |               |     |      |     |     |     |      |     |     |     |   |     |    |     |   |     |    |     |   |     | .1 |    
|                         | Goodwill  |                      |    |               |     |      |     |     |     |      |     |     |     |   |     | 1.7 |     |   |     | 1.1 |     |   |     |   |    
|                         | Corporate |                      |    | .3             |     |      |     | .4   |     |      |     | .2   |     |   |     | .4  |     |   |     | .6  |     |   |     | .5 |    
|                         |           |                      |    |                |     |      |     |      |     |      |     |      |     |   |     |     |     |   |     |     |     |   |     |   
|                         |           | Consolidated         |    | $              | 2.4 |      |     | $    | 9.6 |      |     | $    | 7.9 |   |     | $   | 9.7 |   |     | $   | 9.3 |   |     | $  | 6.4 | 
|                         |           |                      |    |                |     |      |     |      |     |      |     |      |     |   |     |     |     |   |     |     |     |   |     |   



---



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

45



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |     |      |   |      |    |      |   |      |     |      | 
|------------------ | ----------------------- | --------------------- | ----- | ----------------- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | - | ---- | --- | ---- | - | ---- | -- | ---- | - | ---- | --- | ---- | 
|                   |                         |                       |       |                   |       |      |       |     
|                   |                         | Net Sales From        |       |                  
|                   |                         | Continuing Operations |       | Long-Lived Assets
|                   |                         |                       |       |                  
|                   |                         | 2001                  |       | 2000              |       | 1999 |       | 2001 |       | 2000 |       | 1999
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |     
|(In millions)      |                         |                       |       |                   |       |      |       |      |       |      |       |     
|By Geographic Area |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |     |      |   |      |    |      |   |      |    
|United States      |                         | $                     | 272.4 |                   |       | $    | 251.8 |      |       | $    | 169.1 |      |       | $ | 86.2 |     |      | $ | 97.2 |    |      | $ | 40.4 |    
|Europe             |                         |                       | .1    |                   |       |      | 1.3   |      |       |      | 1.7   |      |       |   |     |     |      |   |     |    |      |   |     |    
|                  
|Reconciling Items: |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |     |      |   |      |    |      |   |      |    
|                   | Discontinued Operations |                       |       |                  |       |      |       |     |       |      |       |     |       |   |      | .9  |      |   |      | .8 |      |   |      | .8  |     
|                   | Deferred tax assets     |                       |       |                  |       |      |       |     |       |      |       |     |       |   |      | 2.9 |      |   |      | .9 |      |   |      | 9.7 |     
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |     |      |   |      |    |      |   |      |    
|                   |                         | Consolidated          |       | $                 | 272.5 |      |       | $    | 253.1 |      |       | $    | 170.8 |   |      | $   | 90.0 |   |      | $  | 98.9 |   |      | $   | 50.9 | 
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |     |      |   |      |    |      |   |      |    

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.

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) |                                     |         |   |         |       |         |   |         |      |     
|2001                                 |                                     |         |   |         |       |         |   |         |      |      |   |        |       |  |   |        |      |  |   |        
|                                     | Net sales                           |         | $ | 68,302  |       |         | $ | 69,069  |      |      | $ | 69,523 |       |  | $ | 65,616 |      |  | $ | 272,510 |      
|                                     | Gross margin                        |         |   | 13,723  |       |         |   | 14,359  |      |      |   | 14,620 |       |  |   | 13,139 |      |  |   | 55,841  |      
|                                     | Net income (loss)(3)                |         |   | (212    | )     |         |   | 171     |      |      |   | (1,784 | )     |  |   | (623   | )    |  |   | (2,448  | )    
|                                     | Earnings (loss) per common share(3) |         |   | (.04    | )     |         |   | .03     |      |      |   | (.31   | )     |  |   | (.11   | )    |  |   | (.43    | )    
|                                     | Market price:                       |         |   |         |       |         |   |         |      |      |   |        |       |  |   |        |      |  |   |         |      
|                                     |                                     | High    |   |         | 5.87  |         |   |         | 7.05 |      |   |        | 7.85  |  |   |        | 6.10 |  |   |         | 7.85  | 
|                                     |                                     | Low     |   |         | 3.06  |         |   |         | 3.95 |      |   |        | 5.35  |  |   |        | 4.80 |  |   |         | 3.06  | 
|2000(1)                              |                                     |         |   |         |       |         |   |         |      |      |   |        |       |  |   |        |      |  |   |        
|                                     | Net sales                           |         | $ | 44,010  |       |         | $ | 68,723  |      |      | $ | 73,310 |       |  | $ | 67,079 |      |  | $ | 253,122 |      
|                                     | Gross margin                        |         |   | 8,922   |       |         |   | 15,373  |      |      |   | 14,031 |       |  |   | 12,439 |      |  |   | 50,765  |      
|                                     | Net income (loss)(2)                |         |   | 9,841   |       |         |   | 202     |      |      |   | (1,035 | )     |  |   | (3,622 | )    |  |   | 5,386   |      
|                                     | Earnings (loss) per common share(2) |         |   | 1.75    |       |         |   | .04     |      |      |   | (.18   | )     |  |   | (0.64  | )    |  |   | .95     |      
|                                     | Market price:                       |         |   |         |       |         |   |         |      |      |   |        |       |  |   |        |      |  |   |         |      
|                                     |                                     | High    |   |         | 10.31 |         |   |         | 9.00 |      |   |        | 10.13 |  |   |        | 8.25 |  |   |         | 10.31 | 
|                                     |                                     | Low     |   |         | 7.19  |         |   |         | 7.63 |      |   |        | 7.81  |  |   |        | 3.56 |  |   |         | 3.56  | 



---



|    |                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We acquired Rittenhouse on April 17, 2000,
	as described in the Business Changes Note. The
	operations of Rittenhouse have been included in our quarterly
	operating results since the date of acquisition.                                                                                                                   
|   
|(2) | The first quarter includes a pretax gain of
	$18.6 million associated with the purchase of
	non-participating annuity contracts to settle our pension
	benefit obligation with respect to the retired salaried and
	hourly employees covered under our pension plans and receiving
	pension benefits as of December 1, 1999. The

46



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | first quarter also includes a pretax
	restructuring charge of $1.5 million related to the
	discontinuance of our remanufactured laser cartridge product
	line. The third quarter includes unusual pretax income of
	$.1 million resulting from a reduction in the reserve
	established in the first quarter for our discontinued cartridge
	product line. The fourth quarter includes a tax adjustment of
	$2.5 million relating to the write-off of expired net loss
	carryforwards and for non-deductible goodwill resulting from our
	decision in the fourth quarter to forego the treatment of the
	Rittenhouse acquisition as an asset purchase for tax purposes.
	The fourth quarter also includes net unusual pretax income of
	$.4 million consisting primarily of unusual income
	resulting from the reversal of a loss accrual relating to the
	settlement of a patent infringement lawsuit against us,
	partially offset by restructuring charges associated with
	workforce reductions at Corporate and in our Imaging Supplies
	segment.
|   
|(3) | 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.                                                                                                                                                                                                                                                                                                                  

Common Stock Information (Unaudited)

Our stock is traded on the New York Stock
Exchange under the trading symbol NSH. At
December 31, 2001, there were 1,187 record holders of our
common stock.

Related Parties

Rent expense incurred on property and equipment
leases with various entities owned by one of our directors and
executive officers and his affiliates was $.3 million in
2001 and 2000. There were no material related party transactions
in 1999.

47



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##### Table of Contents



SCHEDULE II






NASHUA CORPORATION AND SUBSIDIARIES


VALUATION AND QUALIFYING ACCOUNTS


|                   |                                                                |             |   |           |  |            |   |             |     |  |   |        |      |  |   |       | 
|------------------ | -------------------------------------------------------------- | ----------- | - | --------- |  | ---------- | - | ----------- | --- |  | - | ------ | ---- |  | - | ----- | 
|                   |                                                                | Balance at  |   |           |  |            |   |            
|                   |                                                                | Previous    |   |           |  |            |   | Balance at 
|Description        |                                                                | End of Year |   | Additions |  | Deductions |   | End of Year
|                   |                                                                |             |   |           |  |            |   |            
|(In thousands)     |                                                                |             |   |           |  |            |   |            
|DECEMBER 31, 2001: |                                                                |             |   |           |  |            |   |             |     |  |   |        |      |  |   |      
|                   | Allowance for doubtful accounts                                |             | $ | 1,035     |  |            | $ | 1,296       | (c) |  | $ | (1,090 | )(d) |  | $ | 1,241 | 
|                   | Valuation allowance on state net operating loss
	carryforwards |             |   | 1,885     |  |            |   |            |     |  |   |       |      |  |   | 1,885 | 
|DECEMBER 31, 2000: |                                                                |             |   |           |  |            |   |             |     |  |   |        |      |  |   |      
|                   | Allowance for doubtful accounts                                |             | $ | 1,327     |  |            | $ | 1,478       | (a) |  | $ | (1,770 | )(b) |  | $ | 1,035 | 
|                   | Valuation allowance on state net operating loss
	carryforwards |             |   | 1,100     |  |            |   | 785         |     |  |   |       |      |  |   | 1,885 | 
|DECEMBER 31, 1999: |                                                                |             |   |           |  |            |   |             |     |  |   |        |      |  |   |      
|                   | Allowance for doubtful accounts                                |             | $ | 866       |  |            | $ | 647         | (c) |  | $ | (186   | )(d) |  | $ | 1,327 | 
|                   | Valuation allowance on state net operating loss
	carryforwards |             |   | 300       |  |            |   | 800         |     |  |   |       |      |  |   | 1,100 | 



---



|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|(a) | Includes the impact of the Rittenhouse
	acquisition and amounts charged to costs and expenses.
|   
|(b) | Includes the impact of the Rittenhouse
	acquisition and accounts deemed uncollectible.        
|   
|(c) | Includes amounts charged to costs and expenses.                                               
|   
|(d) | Includes accounts deemed uncollectible.                                                       

48



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##### Table of Contents






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,
2001 and 2000 and the related consolidated statements of
operations and retained earnings, and cash flows for each of the
two years in the period ended December 31, 2001. Our audits
also included the financial statement schedule listed in the
Index at Item 14(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. The
financial statements and schedule of the Company for the year
ended December 31, 1999 were audited by other auditors
whose report dated February 18, 2000, expressed an
unqualified opinion on those statements.

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, 2001 and 2000, and the consolidated results of
its operations and retained earnings and its cash flows for each
of the two years then ended, 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.



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

Manchester, New Hampshire

February 6, 2002, except for the
Indebtedness and


Subsequent Event Note, as to which the date
is


March 1, 2002


49



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##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Nashua Corporation:

In our opinion, the consolidated statements of
operations and retained earnings and of cash flows for the year
ended December 31, 1999 present fairly, in all material
respects, the results of operations and cash flows of Nashua
Corporation and its subsidiaries for the year ended
December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.



| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP

Boston, Massachusetts

February 18, 2000


50



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##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULE


To the Board of Directors and Shareholders of
Nashua Corporation:

Our audit of the consolidated financial
statements referred to in our report dated February 18,
2000 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in
Item 14(a) of this Form 10-K. In our opinion, the
financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.



| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP

Boston, Massachusetts

February 18, 2000


51



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##### Table of Contents








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

On March 15, 2000, we filed a current report
on Form 8-K with respect to a change in our independent
auditors.




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 1, 2002, 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.




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 1, 2002, and is
incorporated herein by reference.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

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 1, 2002, and is incorporated herein by reference.




Item 13.     Certain
Relationships and Related Transactions

The information required by this Item with
respect to our directors will be included in our definitive
Proxy Statement for our Annual Meeting of Stockholders to be
held on May 1, 2002, and is incorporated herein by
reference.




Item 14.     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 and
retained earnings for each of the three years ended
December 31, 2001, 2000 and 1999


Consolidated balance sheets at December 31,
2001 and December 31, 2000

Consolidated statements of cash flows for each of
the three years ended December 31, 2001, 2000 and 1999

Notes to consolidated financial statements

Report of independent auditors



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

Report of independent auditors on financial
statement schedule

Schedule II  Valuation and
qualifying accounts for each of the three years ended
December 31, 2001, 2000 and 1999

52



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:

|  |       |  |  |                                                                                                                                                                                                                                                                         
|- | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | 3.01  |  |  | Certificate of Incorporation, as amended.
	Incorporated by reference to our Annual Report on Form 10-K
	for the year ended December 31, 1989.                                                                                                                           
|  | 3.02  |  |  | By-laws, as amended. Incorporated by reference to
	our Annual Report on Form 10-K for the year ended
	December 31, 2000.                                                                                                                                                
|  | 4.01  |  |  | Revolving Credit and Term Loan Agreement entered
	into as of April 14, 2000 by and among Nashua Corporation,
	Fleet Bank-NH and LaSalle Bank, NA. Incorporated by reference to
	our Current Report on Form 8-K dated April 14, 2000
	and filed on April 19, 2000.       
|  | 4.02  |  |  | Amendment to the Revolving Credit and Term Loan
	Agreement as of October 23, 2000 by and among Nashua
	Corporation, Fleet National Bank and LaSalle Bank, NA.
	Incorporated by reference to our Quarterly Report on
	Form 10-Q for the quarter ended September 29, 2000.
|  | 4.03  |  |  | Amendment to the Revolving Credit and Term Loan
	Agreement dated February 28, 2001 by and among Nashua
	Corporation, Fleet National Bank and LaSalle Bank, NA.
	Incorporated by reference to our Annual Report on Form 10-K
	for the year ended December 31, 2000.      
|  | 4.04  |  |  | Amendment to the Revolving Credit and Term Loan
	Agreement, dated May 31, 2001 by and among Nashua
	Corporation, Fleet National Bank and LaSalle Bank, NA.
	Incorporated by reference to our Quarterly Report on
	Form 10-Q for the quarter ended June 29, 2001.        
|  | 4.05  |  |  | Credit Agreements, dated March 1, 2002 by
	and among Nashua Corporation, LaSalle Bank, NH and Fleet
	National Bank. Incorporated by reference to our Current Report
	on Form 8-K dated March 14, 2002.                                                                  
|+ | 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 |  |  | 1993 Stock Incentive Plan. Incorporated by
	reference to our Proxy Statement filed on March 19, 1993.                                                                                                                                                                   
|+ | 10.03 |  |  | 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.                                                                                                                   
|+ | 10.04 |  |  | 1999 Shareholder Value Plan. Incorporated by
	reference to our Quarterly Report on Form 10-Q for the
	quarter ended April 2, 1999.                                                                                                                                      
|+ | 10.05 |  |  | 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.                                                      
|+ | 10.06 |  |  | 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.                                           
|+ | 10.07 |  |  | Change of Control and Severance Agreement, dated
	as of June 24, 1998 between Nashua Corporation and
	Joseph R. Matson. Incorporated by reference to our
	Quarterly Report on Form 10-Q for the quarter ended
	July 3, 1998.                                            
|+ | 10.08 |  |  | 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.                                         
|+ | 10.09 |  |  | Change of Control and Severance Agreement, dated
	as of July 19, 1999 between Nashua Corporation and
	John J. Ireland. Incorporated by reference to our Quarterly
	Report on Form 10-Q for the quarter ended October 1,
	1999.                                          

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##### Table of Contents



|  |       |   |  |                                                                                                                                                                                                                                                               
|- | ----- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|+ | 10.10 |   |  | 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.                             
|+ | 10.11 |   |  | Management Incentive Plan. Incorporated by
	reference to our Annual Report on Form 10-K for the year
	ended December 31, 1999.                                                                                                                                
|+ | 10.12 |   |  | Form of Indemnification Agreement between Nashua
	Corporation and its directors and executive officers.
	Incorporated by reference to our Annual Report on Form 10-K
	for the year ended December 31, 2000.                                                   
|+ | 10.13 |   |  | 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.                                    
|  | 10.14 |   |  | 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.                                            
|  | 10.15 |   |  | 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.
|  | 11.01 | * |  | Statement regarding Computation of Earnings Per
	Share and Common Equivalent Share.                                                                                                                                                                           
|  | 21.01 | * |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                               
|  | 23.01 | * |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                 
|  | 23.02 | * |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                        
|  | 24.01 | * |  | Powers of Attorney.                                                                                                                                                                                                                                           



---



|  |                  
|- | -----------------
|* |  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:



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | No reports on Form 8-K were filed by the
	Company during the three months ended December 31, 2001.

54



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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, 2002

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the 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, 2002
|/s/ JOHN L. PATENAUDEJohn L. Patenaude                       |  | Vice President-Finance and
	Chief Financial Officer
	(principal financial officer)                 |  | March 15, 2002
|/s/ JOSEPH R. MATSONJoseph R. Matson                         |  | Vice President, Corporate Controller
	and Chief Accounting Officer
	(principal accounting officer) |  | March 15, 2002
|                                                            
|*Sheldon A. Buckler                                          |  | Director                                                                                           |  |               
|*Avrum Gray                                                  |  | Director                                                                                           |  |               
|*Mark E. Schwarz                                             |  | Director                                                                                           |  |               
|*John M. Kucharski                                           |  | Director                                                                                           |  |               
|*George R. Mrkonic, Jr.                                      |  | Director                                                                                           |  |               
|*Peter J. Murphy                                             |  | Director                                                                                           |  |               
|*James F. Orr III                                            |  | Director                                                                                           |  |               
|By: /s/ JOHN L. PATENAUDEJohn L. Patenaude
	Attorney-In-Fact |  |                                                                                                    |  | March 15, 2002

55