##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


Form 10-K


|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2002                                                 
|          
|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)


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

Registrants telephone number, including
area code:

(603) 880-2323


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

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

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

None


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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

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

As of June 28, 2002, the aggregate market
value of the registrants voting stock held by
non-affiliates was approximately $27,667,969. As of
March 13, 2003, the number of shares outstanding of the
registrants Common Stock was 5,883,784.

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, 2003 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                                  
|                                                                      | Item 5. Market for Registrants Common Stock and Related Stock-Holder Matters                
|                                                                      | Item 6. Selected Financial Data(1)                                                           
|                                                                      | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                      | Item 7A. Quantitive and Qualitative Disclosures About Market Risk                            
|                                                                      | Item 8. Financial Statements and Supplementary Data                                          
|CONSOLIDATED STATEMENT OF OPERATIONS                                 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                           
|NASHUA CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
|REPORT OF INDEPENDENT AUDITORS                                       
|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. Controls and Procedures                                                             
|                                                                      | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                                           
|CERTIFICATIONS                                                       
|Ex-10.10  Management Incentive Plan                                  
|Ex-21.01  Subsidiaries of the Registrant                             
|Ex-23.01  Consent of Ernst & Young  LLP                              
|Ex-24.01  Power of Attorney                                          
|Ex-99.1  Certification of Chief Executive Officer                    
|Ex-99.2  Certification of Chief Financial Officer                    



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

Operating Segments

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



| |     |                         
| | --- | ------------------------
| | (1) | Label Products          
|
| | (2) | Specialty Paper Products
|
| | (3) | Imaging Supplies        

Additional financial information regarding our
business segments is contained in Note 13 to our
Consolidated Financial Statements included in Item 8 of
Part II of this Annual Report on Form 10-K.

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

Label Products Segment

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

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

We depend on outside suppliers for most of the
raw materials used by our Label Products segment to produce
labels and ticket media. Primary materials used in producing our
products include laminated paper, inks and chemicals. Thermal
paper constitutes a large percentage of the raw material cost
for our and our competitors products, as a result our
costs and market pricing are heavily impacted by changes in
thermal paper costs. We purchase materials from multiple
suppliers and believe that adequate quantities of supplies are
available. However, for some important raw materials, such as
laminated paper and inks, we sole source or partner with a few
vendors. There is no current or anticipated supply disruption
but a future supply disruption could negatively impact our
operations until an alternate source of supply could be
qualified. Additionally, there can be no assurance that our
future operating results would not be adversely affected by
either future increases in the cost of raw materials or sourced
products or the curtailment of supply.

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During the third quarter of 2001, we discontinued
our lamination business within our Label Products segment. 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 that commit us to
purchase a significant portion of the laminated materials from
them through December 31, 2005. If we fail to meet the
minimum purchase volumes specified in the agreements, we would
be subject to financial penalties. We acquired the required
quantities and were in compliance with the requirements of these
agreements for 2002. Prior to our decision to exit the
lamination business, we manufactured most of our laminated
materials at our Omaha, Nebraska location. Our decision to enter
into these supply agreements and to cease our manufacturing of
laminated materials increased our reliance on outside suppliers,
but eliminated a potential future need for significant capital
investment in lamination equipment.

In February 2003, we acquired the assets of The
Label Company from Bunzl Distribution and signed a multi-year
agreement to supply Bunzl with label products. The Label Company
has primarily been a supplier of supermarket promotional, scale
and product identification labels for Bunzl and other customers.
We believe this acquisition provides flexibility to our label
manufacturing operations, adds additional volume to our coating
facility within our Specialty Paper Products segment and
enhances our relationship with a valued and long-standing
customer. The Label Company had 2002 sales of approximately
$9.0 million. Operating activity relating to The Label
Company will be reported under our Label Products segment from
the date of acquisition.

Specialty Paper Products Segment

Our Specialty Paper Products segment coats,
converts and sells papers and films. Products include: thermal
papers, dry-gummed papers, heat seal papers, large-format media
papers, carbonless papers, small rolls, financial 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, package identification
systems, gaming and airline ticketing systems, medical and
industrial recording charts and for conversion to labels. We
sell large roll thermal papers primarily to printers and
converters. Competitors in the large roll thermal papers market
include companies such as Appleton Papers, Inc. and Ricoh
Corporation, as well as other manufacturers in the United
States, Asia and Europe.

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

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

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

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

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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
Appleton Papers, Inc., MeadWestvaco 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. Paper
constitutes a large percentage of the raw material cost for our
and our competitors products, as a result our costs and
market pricing are heavily impacted by changes in paper costs.
We purchase materials from multiple suppliers. However, we
single source some raw materials for specific coated product
applications. There is no current or anticipated supply
disruption but a future supply disruption could negatively
impact our operations until an alternate source of supply could
be qualified. There can be no assurance that our future
operating results would not be adversely affected by future
increases in either the cost of raw materials or sourced
products or the curtailment of supply.

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

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

Imaging Supplies Segment

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

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

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

We depend on outside suppliers for most of the
raw materials used by our Imaging Supplies segment. One of our
major raw materials is resin, which is an oil based product that
is susceptible to price fluctuations.

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


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

Information About Major Customers

We have one group of customers under common
control that represents ten percent or more of our consolidated
revenues. Combined sales to Wal-Mart and Sams Club totaled
$30.6 million or 10.8 percent of our sales in 2002,
combining sales of $24.9 million for our Specialty Paper
Products segment and $5.7 million for our Label Products
segment. While no other customer represented ten percent of our
consolidated revenues, each of our segments has significant
customers. The loss of a significant customer could have a
material adverse effect on 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 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.

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Manufacturing Operations

We operate manufacturing facilities in the
following locations:



| |   |                          
| | - | -------------------------
| |  | Nashua, New Hampshire    
|
| |  | Merrimack, New Hampshire 
|
| |  | Omaha, Nebraska          
|
| |  | Jefferson City, Tennessee
|
| |  | Morristown, Tennessee    
|
| |  | Vernon, California       
|
| |  | Waco, Texas              
|
| |  | St. Louis, Missouri(1)   



---



|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | Represents manufacturing facilities associated
    with our February 2003 acquisition of The Label Company

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

Research and Development

Our research and development efforts have been
instrumental in the development of many of our products. We
direct our research efforts primarily toward developing new
products and processes and improving product performance, often
in collaboration with customers. Our research and development
efforts are focused primarily on new thermal coating
applications and in developing printed circuits technology for
our Specialty Paper Products segment and new toner and developer
formulations and toner cartridge designs for our Imaging
Supplies segment. Our research and development expenditures were
$3.1 million in 2002, $3.2 million in 2001 and
$4.2 million in 2000.

Environmental Matters

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

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, 2002, our reserves for potential environmental
liabilities were $.8 million for continuing operations and
$.1 million for discontinued operations. However, liability
of potentially responsible parties under CERCLA and RCRA, is
joint and several, and actual remediation

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expenses at sites where we are a potentially
responsible party could either exceed or be below our current
estimates. We believe, based on the facts currently known to us,
our insurance coverage and the environmental reserve recorded,
that our estimated remediation expense and on-going costs of
compliance with environmental laws and regulations are not
likely to have a material adverse effect on our consolidated
financial position or results of operations.


Executive Officers

Listed below are our executive officers as of
March 1, 2003. No family relationships exist between any of
our officers.

|                   |  |     |    |          |  |                                                                           
|------------------ |  | --- | -- | -------- |  | --------------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Andrew B. Albert   |  |     | 57 |          |  | Chairman, President and Chief Executive Officer                           
|John L. Patenaude  |  |     | 53 |          |  | Vice President  Finance, Chief
    Financial Officer and Treasurer       
|Joseph R. Matson   |  |     | 55 |          |  | Vice President, Corporate Controller                                      
|Robert S. Amrein   |  |     | 48 |          |  | Vice President  Human Resources,
    General Counsel and Clerk/ Secretary
|Margaret S. Adams  |  |     | 47 |          |  | Vice President, Chief Information Officer                                 
|John J. Ireland    |  |     | 51 |          |  | Vice President, President of the Specialty Paper
    Products Division    
|Donna J. DiGiovine |  |     | 41 |          |  | Vice President, President of the Toner Products
    Division              
|Thomas R. Pagel    |  |     | 46 |          |  | Vice President, President of the Label Products
    Division              

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

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

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

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

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.

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 1,026 full-time employees at
February 7, 2003. Approximately 335 of our employees are
members of one of several unions, principally the Paper, Allied
Industrial, Chemical and Energy Workers International Union. We
believe our employee relations are satisfactory.

Our significant labor agreements include:

|                                                                              |  |               |     |          |  |                 |  |               
|----------------------------------------------------------------------------- |  | ------------- | --- | -------- |  | --------------- |  | --------------
|                                                                              |  | Approximate # |     |          |  |                
|                                                                              |  | of Employees  |     |          |  |                
|Union                                                                         |  | Covered       |     | Location |  | Expiration Date
|                                                                              |  |               |     |          |  |                
|Paper, Allied Industrial, Chemical and Energy
    Workers International Union |  |               | 26  |          |  | Omaha, NE       |  | March 31, 2007
|Paper, Allied Industrial, Chemical and Energy
    Workers International Union |  |               | 119 |          |  | Omaha, NE       |  | March 31, 2007
|Paper, Allied Industrial, Chemical and Energy
    Workers International Union |  |               | 133 |          |  | Merrimack, NH   |  | April 2, 2006 
|United Commercial Food Workers Union                                          |  |               | 49  |          |  | Vernon, CA      |  | March 5, 2005 
|Other                                                                         |  |               | 8   |          |  | Merrimack, NH   |  | April 2, 2006 

Forward-Looking and Cautionary
Statements

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




Item 2.     Properties

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

8



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

Principal Properties

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



---



|    |                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our Specialty Paper Products segment and
    corporate staff share approximately 11,000 square feet of office
    space in Park Ridge, IL and 18,000 square feet of office space
    in Nashua, NH.
|   
|(2) | Our Specialty Paper Products segment utilizes
    approximately 315,000 square feet and the remaining space is
    leased to third parties.                                                        
|   
|(3) | Represents leased space associated with our
    February 2003 acquisition of The Label Company.                                                                                                    




Item 3.     Legal
Proceedings

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

9



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##### Table of Contents



by the defendants, dismissed with prejudice the
second amended consolidated complaint. The plaintiffs filed with
the Appellate Court an appeal of the Circuit Courts
ruling. On November 19, 1999, the Appellate Court reversed
the Circuit Courts ruling that dismissed the second
amended consolidated complaint. The Appellate Court ruled that
the second amended consolidated complaint represented a valid
claim and sent the case back to the Circuit Court for further
proceedings. On December 27, 1999, we filed a Petition with
the Supreme Court of Illinois. In that Petition, we asked the
Supreme Court of Illinois to determine whether the Circuit Court
or the Appellate Court is correct. Our Petition was denied and
the case was sent to the Circuit Court for trial. Discovery has
been completed, but no date has been set for trial and pre-trial
motions. Non-binding mediation discussions were held in November
2002 without resolving the dispute. We believe that the lawsuit
is without merit and will continue to defend ourselves in this
matter. We also believe that we will receive the value of our
37.1 percent ownership in the Cerion liquidating trust
which was valued at $.9 million on an after-tax basis at
December 31, 2002. Our investment in Cerion is included
under other assets in our Consolidated Balance Sheet.


On September 14, 2000, Edward G.
Krasnecki and EGK Realty Corporation filed suit against Nashua
Corporation in the Superior Court of the Commonwealth of
Massachusetts, Middlesex County. The plaintiffs are the owners
of real property, formerly leased by us, located at
260 Billerica Road, Chelmsford, Massachusetts. The
plaintiffs allege that when we vacated the premises in 1997, we
failed to remove improvements we had made to the property,
failed to clean the premises as required by our lease, and left
contamination on the property resulting in lost opportunities to
the plaintiffs, for which the plaintiffs seek damages. We
responded to their complaint, denying all liability and
asserting affirmative defenses. We maintain that when we vacated
the premises, we removed three underground tanks that we were
entitled to remove under the terms of our lease, we detected
soil contamination, reported and took prompt remedial action all
in accordance with Massachusetts law, and are not liable to the
plaintiffs. We also deny that we failed to remove improvements
or that we failed to clean the premises in accordance with the
terms of our lease. The matter has been scheduled for a jury
trial in April 2003. 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,
referred to as the EPA, as a potentially responsible party for
certain hazardous waste sites. In addition, we have been
notified by certain state environmental agencies that some of
our sites not addressed by the EPA require remedial action.
These sites are in various stages of investigation and
remediation. Due to the unique physical characteristics of each
site, the technology employed, the extended timeframes of each
remediation, the interpretation of applicable laws and
regulations and the financial viability of other potential
participants, our ultimate cost of remediation is difficult to
estimate. Accordingly, estimates could either increase or
decrease in the future due to changes in such factors. At
December 31, 2002, 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 $.7 million to
$1.4 million for continuing operations and approximately
$.1 million for discontinued operations. These estimates
could increase if other potentially responsible parties or our
insurance carriers are unable or unwilling to bear their
allocated share and cannot be compelled to do so. At
December 31, 2002, our accrual balances relating to
environmental matters were $.8 million for continuing
operations and $.1 million for discontinued operations.
Based on information currently available, we believe that it is
probable that the major potentially responsible parties will
fully pay the costs apportioned to them. We believe that our
remediation expense is not likely to have a material adverse
effect on our consolidated financial position or results of
operations.

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

10



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##### Table of Contents








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

None.






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Stock
    and Related Stock-Holder Matters

Our common stock is listed and traded on the New
York Stock Exchange under the trading symbol NSH. As
of December 31, 2002, the number of holders of our common
stock was approximately 1,150. 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
|     |      |         |  |         |  |         |  |         |  |     
|2002 |      |         |  |         |  |         |  |         |  |      |  |       |  |  |  |      |  |  |  |      
|     | High |         |  | 7.54    |  |         |  | 7.25    |  |      |  | 10.20 |  |  |  | 9.60 |  |  |  | 10.20 | 
|     | Low  |         |  | 5.40    |  |         |  | 5.85    |  |      |  | 6.20  |  |  |  | 6.85 |  |  |  | 5.40  | 
|2001 |      |         |  |         |  |         |  |         |  |      |  |       |  |  |  |      |  |  |  |      
|     | High |         |  | 5.87    |  |         |  | 7.05    |  |      |  | 7.85  |  |  |  | 6.10 |  |  |  | 7.85  | 
|     | Low  |         |  | 3.06    |  |         |  | 3.95    |  |      |  | 5.35  |  |  |  | 4.80 |  |  |  | 3.06  | 

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. We did not declare or
pay a cash dividend on our common stock in 2002 or 2001 and do
not currently intend to pay dividends in the foreseeable future.

11



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##### Table of Contents








|        |                               
|------- | ------------------------------
|Item 6. | Selected Financial
    Data(1)

Nashua Corporation and Subsidiaries

Five Year Financial Review

|                                                                               |                                                              |      |         |       |  |      |         |       |   |      |         |       |  |   |         |       |   |   |         |       |  
|------------------------------------------------------------------------------ | ------------------------------------------------------------ | ---- | ------- | ----- |  | ---- | ------- | ----- | - | ---- | ------- | ----- |  | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                               |                                                              | 2002 |         | 2001  |  | 2000 |         | 1999  |   | 1998
|(In thousands, except per share data,                                          |                                                              |      |         |       |  |      |         |       |   |     
|number of employees and percentages)                                           |                                                              |      |         |       |  |      |         |       |   |     
|Operations(2)                                                                  |                                                              |      |         |       |  |      |         |       |   |      |         |       |  |   |         |       |   |   |         |      
|Net sales                                                                      |                                                              | $    | 283,190 |       |  | $    | 272,510 |       |   | $    | 253,122 |       |  | $ | 170,844 |       |   | $ | 167,831 |      
|Gross margin percentage                                                        |                                                              |      | 19.8    | %     |  |      | 20.5    | %     |   |      | 20.1    | %     |  |   | 24.0    | %     |   |   | 24.3    | %    
|Selling, distribution and administrative expenses
    as a percentage of sales |                                                              |      | 16.9    | %     |  |      | 18.3    | %     |   |      | 19.5    | %     |  |   | 20.3    | %     |   |   | 20.3    | %    
|Income (loss) before interest and income taxes as
    a percentage of sales(3) |                                                              |      | 1.9     | %     |  |      |        |       |   |      | 5.9     | %     |  |   | 2.1     | %     |   |   | (6.9    | )%   
|Income (loss) before income taxes as a percentage
    of sales(3)              |                                                              |      | 1.4     | %     |  |      | (1.0    | )%    |   |      | 5.1     | %     |  |   | 1.7     | %     |   |   | (7.1    | )%   
|Income (loss) as a percentage of sales(3)                                      |                                                              |      | .8      | %     |  |      | (0.9    | )%    |   |      | 2.1     | %     |  |   | (0.3    | )%    |   |   | (4.3    | )%   
|Effective tax provision (benefit) rate                                         |                                                              |      | 39.5    | %     |  |      | (12.0   | )%    |   |      | 58.3    | %     |  |   | 114.6   | %     |   |   | (39.5   | )%   
|Income (loss) before income taxes(3)                                           |                                                              | $    | 3,828   |       |  | $    | (2,782  | )     |   | $    | 12,914  |       |  | $ | 2,883   |       |   | $ | (11,950 | )    
|Income (loss) from continuing operations(3)                                    |                                                              | $    | 2,316   |       |  | $    | (2,448  | )     |   | $    | 5,386   |       |  | $ | (420    | )     |   | $ | (7,229  | )    
|Income (loss) from discontinued operations,
    net of taxes                   |                                                              |      |        |       |  |      |        |       |   |      |        |       |  | $ | (4,001  | )     |   | $ | (6,687  | )    
|Gain on disposal of discontinued operation, net
    of taxes                   |                                                              |      |        |       |  |      |        |       |   |      |        |       |  |   |        |       |   | $ | 1,052   |      
|Net income (loss)                                                              |                                                              | $    | 2,316   |       |  | $    | (2,448  | )     |   | $    | 5,386   |       |  | $ | (4,421  | )     |   | $ | (12,864 | )    
|Basic and diluted earnings (loss) per common
    share:                        |                                                              |      |         |       |  |      |         |       |   |      |         |       |  |   |         |       |   |   |         |      
|                                                                               | Continuing operations(3)                                     |      | $       | 0.40  |  |      | $       | (0.43 | ) |      | $       | .95   |  |   | $       | (0.07 | ) |   | $       | (1.15 | )
|                                                                               | Discontinued operations                                      |      |         |      |  |      |         |      |   |      |         |      |  |   | $       | (0.70 | ) |   | $       | (1.06 | )
|                                                                               | Gain on disposal of discontinued operation, net
    of taxes |      |         |      |  |      |         |      |   |      |         |      |  |   |         |      |   |   | $       | .17   |  
|                                                                               | Net income (loss)(3)                                         |      | $       | 0.40  |  |      | $       | (0.43 | ) |      | $       | .95   |  |   | $       | (0.77 | ) |   | $       | (2.04 | )
|Financial Position(2)                                                          |                                                              |      |         |       |  |      |         |       |   |      |         |       |  |   |         |       |   |   |         |      
|Working capital                                                                |                                                              | $    | 21,011  |       |  | $    | 16,528  |       |   | $    | 22,531  |       |  | $ | 35,562  |       |   | $ | 45,874  |      
|Total assets                                                                   |                                                              | $    | 146,188 |       |  | $    | 145,046 |       |   | $    | 170,471 |       |  | $ | 130,445 |       |   | $ | 134,095 |      
|Non-current portion of long-term debt                                          |                                                              | $    | 23,000  |       |  | $    | 23,280  |       |   | $    | 35,905  |       |  | $ | 511     |       |   | $ | 1,064   |      
|Total long-term obligations                                                    |                                                              | $    | 27,079  |       |  | $    | 25,740  |       |   | $    | 46,171  |       |  | $ | 1,022   |       |   | $ | 1,575   |      
|Total capital employed                                                         |                                                              | $    | 87,018  |       |  | $    | 95,677  |       |   | $    | 118,048 |       |  | $ | 67,848  |       |   | $ | 76,802  |      
|Total debt as a percentage of capital employed                                 |                                                              |      | 28.7    | %     |  |      | 26.4    | %     |   |      | 38.7    | %     |  |   | 1.5     | %     |   |   | 2.1     | %    
|Shareholders equity                                                           |                                                              | $    | 62,018  |       |  | $    | 70,397  |       |   | $    | 72,337  |       |  | $ | 66,826  |       |   | $ | 75,227  |      
|Shareholders equity per common share                                          |                                                              | $    | 10.66   |       |  | $    | 12.32   |       |   | $    | 12.79   |       |  | $ | 11.86   |       |   | $ | 12.59   |      
|Other Selected
    Data(2)                                                     |                                                              |      |         |       |  |      |         |       |   |      |         |       |  |   |         |       |   |   |         |      
|Investment in plant and equipment                                              |                                                              | $    | 4,349   |       |  | $    | 2,375   |       |   | $    | 9,625   |       |  | $ | 7,855   |       |   | $ | 6,702   |      
|Depreciation and amortization                                                  |                                                              | $    | 7,581   |       |  | $    | 9,748   |       |   | $    | 9,304   |       |  | $ | 6,381   |       |   | $ | 6,846   |      
|Dividends per common share                                                     |                                                              |      |        |       |  |      |        |       |   | $    | .01     |       |  |   |        |       |   |   |        |      
|Return on average shareholders equity                                         |                                                              |      | 3.5     | %     |  |      | (3.4    | )%    |   |      | 7.7     | %     |  |   | (6.2    | )%    |   |   | (15.1   | )%   
|Common stock price range:                                                      |                                                              |      |         |       |  |      |         |       |   |      |         |       |  |   |         |       |   |   |         |      
|                                                                               | High                                                         |      | $       | 10.20 |  |      | $       | 7.85  |   |      | $       | 10.31 |  |   | $       | 15.44 |   |   | $       | 17.50 |  
|                                                                               | Low                                                          |      | $       | 5.40  |  |      | $       | 3.06  |   |      | $       | 3.56  |  |   | $       | 6.56  |   |   | $       | 11.56 |  
|                                                                               | Year-end closing price                                       |      | $       | 8.78  |  |      | $       | 5.87  |   |      | $       | 4.44  |  |   | $       | 7.50  |   |   | $       | 13.31 |  
|Number of employees from continuing operations                                 |                                                              |      | 1,026   |       |  |      | 971     |       |   |      | 1,140   |       |  |   | 729     |       |   |   | 725     |      
|Average common shares outstanding                                              |                                                              |      | 5,783   |       |  |      | 5,696   |       |   |      | 5,649   |       |  |   | 5,718   |       |   |   | 6,320   |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 14 to our Consolidated Financial
    Statements for Selected Quarterly Financial Data required under
    Item 302 of Regulation S-K.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | See Note 2 to our Consolidated Financial
    Statements for a description of business changes relevant to
    this data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | Income (loss) is from continuing operations and
    includes restructuring and other unusual charges/ (income) of
    $(.1) million for 2002 (< .1% of sales),
    $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) and $13.8 million for 1998 (8.2% of sales). Income
    (loss) for 2002 also includes a net gain on curtailment/
    freeze of pension/ postretirement plans of $.2 million
    (< .1% of sales), while 2000 also includes
    $18.6 million of pension settlement income (7.3% of sales).

12



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##### Table of Contents






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

Overview

Over the past year, we have focused on
initiatives to more profitably utilize our manufacturing
resources, more fully utilize our national sales force, provide
a wider range of products to our customers, to streamline our
processes and control cost and enter new business areas through
selective acquisitions. Through our efforts we achieved both
top- and bottom-line growth in a challenging economic
environment. While our overall results were positive, our gross
margin percentage decreased during 2002 due to over-capacity in
the paper industry and competitive pricing. Our results for 2002
included the contributions of our strategic acquisitions of the
assets of Computer Imaging Supplies, known as CIS, used in the
fraud prevention business and certain assets of Dietzgen LLC
(Dietzgen), used in the wide format business. These
acquisitions expanded our product lines and helped us increase
plant utilization. Set forth below are details on our recent
acquisitions and other significant developments.

Recent Acquisitions



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In February 2003, we acquired the assets of The
    Label Company from Bunzl Distribution and signed a multi-year
    agreement to supply Bunzl with label products. The Label Company
    has primarily been a supplier of supermarket promotional, scale
    and product identification labels for Bunzl. We believe this
    acquisition provides flexibility to our label manufacturing
    operations, adds additional volume to our coating facility
    within our Specialty Paper Products segment and enhances our
    relationship with a valued and long-standing customer. The Label
    Company had 2002 sales of approximately $9.0 million.
    Operating activity relating to The Label Company will be
    reported under our Label Products segment from the date of
    acquisition.
|
| |  | In June 2002, we acquired out of bankruptcy
    certain assets of Dietzgen LLC, including trademarks,
    tradenames, customer lists and certain equipment and
    inventories. Dietzgen, an after-market provider of large-format
    digital media and imaging supplies for the architectural,
    engineering and construction markets, filed for protection under
    Chapter 11 of the U.S. Bankruptcy Code on
    January 31, 2002. Dietzgens sales for the three
    months ended March 31, 2002 were approximately
    $3.2 million. Operating activity relating to the assets
    acquired from Dietzgen is reported as part of our Specialty
    Paper Products segment from the date of acquisition.                                                                                       
|
| |  | In April 2002, we acquired the assets of CIS, a
    privately held manufacturer and marketer of security and fraud
    prevention products for the point-of-sale transaction industry
    and of inkjet and toner cartridges. The products of CIS include
    multi-color ribbons and specialized inks that prevent
    unauthorized duplication of cash register receipts. CIS had 2001
    net sales of approximately $6 million. Operating activity
    relating to the assets acquired from CIS is reported as part of
    our Specialty Paper Products segment from the date of
    acquisition.                                                                                                                                                                                                  

Other Significant Developments

During 2002, we experienced the following
significant developments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the fourth quarter of 2002, we recorded a
    non-cash charge of $11.4 million to shareholders
    equity because as of December 31, 2002, the accumulated
    benefit obligations exceeded the fair value of plan assets of
    company-sponsored pension plans due to declines in the fair
    market value of equities held by the plans and decreases in our
    expected return on plan assets and discount rate resulting from
    current economic trends. This charge was net of
    $7.5 million in tax benefits which are included in other
    assets and reflect an increase in our deferred tax assets.
|
| |  | In October 2002, our Board of Directors approved
    changes to The Nashua Corporation Retirement Plan for Salaried
    Employees, The Supplemental Executive Retirement Plan and
    postretirement benefit plans which were effective as of
    December 31, 2002. As a result of these changes, we
    recognized a gain of $2.7 million related to the
    elimination of certain benefits related to our retiree medical
    and death                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | benefit plans and a gain of $.2 million from
    the buy out of a portion of existing retirees death
    benefits, largely offset by a loss of $2.7 million related
    to freezing benefits of the salaried pension plans. This
    excludes any potential gain related to the buy out of additional
    existing retirees death benefits which were completed in
    the first quarter of 2003. Employees impacted by the freeze in
    pension benefits are eligible to participate in Nashuas
    profit sharing plan beginning in 2003. Profit sharing
    contributions must be approved by our Board of Directors and are
    discretionary and not defined.                                                                                                                                                                     
|
| |  | During the fourth quarter of 2002, we reached an
    agreement with the Appeals office of the United States Internal
    Revenue Service regarding the outstanding proposed assessment of
    federal income tax for the years 1992 to 1994 as more fully
    discussed in Note 7 to our Consolidated Financial
    Statements included in Item 8 of Part II of this
    Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | During the third quarter of 2002, we recognized a
    net workers compensation refund of approximately
    $.4 million relating to experience rate adjustments for
    prior years. Gross margin and pretax income for each of our
    operating segments were favorably impacted by this refund.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | In June 2002, we completed our
    shareholder-approved reincorporation from Delaware to
    Massachusetts. The reincorporation eliminated certain
    restrictions on our ability to borrow funds and our new
    corporate charter increases shareholder rights and reduces our
    corporate expenses. In connection with our reincorporation, our
    authorized capitalization was reduced from 40 million
    shares of common stock and 2 million shares of preferred
    stock, each with a par value of $1 per share, to 20 million
    shares of common stock, par value $1 per share. As part of the
    reincorporation, the 1,023,068 shares of common stock held in
    treasury were retired with their cost above par value allocated
    on a pro rata basis against additional paid-in capital and
    retained earnings.
|
| |  | During the first quarter of 2002, we entered into
    a new three-year secured financing agreement with LaSalle Bank,
    NA and Fleet National Bank. This agreement provides us with a
    revolving line of credit of up to $30 million and a term
    loan of $10 million as more fully described in Note 5
    to our Consolidated Financial Statements included in Item 8
    of Part II of this Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Effective January 1, 2002, we eliminated
    goodwill amortization in accordance with Financial Accounting
    Standard 142. Goodwill amortization was $1.7 million
    for 2001 and $1.1 million for 2000. We now evaluate
    goodwill for impairment under the guidelines set forth in
    FAS 142. We completed the initial and annual impairment
    tests required by FAS 142 and concluded that no impairment
    existed at January 1, 2002 and November 1, 2002.                                                                                                                                                                                                                                                                                                                                                                  

During 2001, we experienced the following
significant development:



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

During 2000, we experienced the following
significant developments:



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the fourth quarter of 2000, we settled a
    patent infringement case brought against Nashua Corporation by
    Ricoh Company, Ltd., Ricoh Electronics, Inc. and Ricoh
    Corporation. As a result, in

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | the fourth quarter of 2000 we paid Ricoh
    $15.8 million and recorded unusual income of
    $1.0 million resulting from the reversal of a loss accrual.                                                                                                                                                                                                                                                      
|
| |  | 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 our Consolidated
    Statement of Operations from the date of acquisition.
|
| |  | During the first quarter of 2000, we discontinued
    our remanufactured laser cartridge product line within our
    Imaging Supplies segment. As a result, we recorded restructuring
    charges totaling $1.0 million primarily comprised of
    severance and other exit costs related to the discontinuance of
    this product line.                                                                      
|
| |  | 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
    obligations for retired salaried and hourly employees covered
    under our pension plans and receiving pension benefits as of
    December 1, 1999.           

Results of Operations  2002
Compared to 2001

|                                    |  |      |       |      |  |   |       |  
|----------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                    |  | 2002 |       | 2001
|(In millions)                       |  |      |       |     
|Net sales                           |  | $    | 283.2 |      |  | $ | 272.5 |  
|Gross margin %                      |  |      | 19.8  | %    |  |   | 20.5  | %
|Selling and distribution expenses   |  | $    | 28.1  |      |  | $ | 28.8  |  
|General and administrative expenses |  | $    | 19.7  |      |  | $ | 19.3  |  
|Research and development expenses   |  | $    | 3.1   |      |  | $ | 3.2   |  
|Interest expense, net               |  | $    | 1.5   |      |  | $ | 2.7   |  
|Income (loss) before income taxes   |  | $    | 3.8   |      |  | $ | (2.8  | )
|Net income (loss)                   |  | $    | 2.3   |      |  | $ | (2.4  | )

A reconciliation of non-GAAP financial measures
which improve the comparability of our operating results between
periods is as follows:

|                                                                                                                                                                  |  |   |     |   |  |   |      |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | --- | - |  | - | ---- | -
|(In millions)                                                                                                                                                     |  |   |     |  
|Income (loss) before income taxes (as
    reported)                                                                                                               |  | $ | 3.8 |   |  | $ | (2.8 | )
|Goodwill amortization                                                                                                                                             |  |   |    |   |  |   | 1.7  |  
|Net gain on curtailment of pension and
    postretirement plans                                                                                                   |  |   | (.2 | ) |  |   |     |  
|Restructuring and other unusual charges (income)                                                                                                                  |  |   | (.1 | ) |  |   | 3.0  |  
|                                                                                                                                                                  |  |   |     |   |  |   |      |  
|Income before income taxes, goodwill
    amortization, restructuring and other unusual items and gain on
    curtailment/ freeze of pension/ postretirement plans |  | $ | 3.5 |   |  | $ | 1.9  |  
|                                                                                                                                                                  |  |   |     |   |  |   |      |  

Our net sales increased $10.7 million or
3.9 percent compared to the prior year. This increase was
primarily due to increased sales to external customers for our
Specialty Paper Products segment of $18.3 million that more
than offset sales declines in our Imaging Supplies segment of
$.4 million and Label Products segment of
$7.1 million, which are further discussed in the segment
sections.

Our gross margin percentage decreased compared to
the prior year as an increase in gross margin percentage for our
Specialty Paper Products segment was more than offset by
declines in our Label Products and Imaging Supplies segments
which are further discussed in the segment sections.

Selling and distribution expenses declined
$.7 million compared to the prior year, while selling and
distribution expenses as a percent of sales decreased to
9.9 percent for 2002 from 10.6 percent for 2001. Both
were due to decreases in our Imaging Supplies and Label Products
segments which are further discussed in the segment sections.

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General and administrative expenses increased
$.4 million compared to the prior year. A reduction in
these expenses by our Imaging Supplies segment was more than
offset by increases in our other segments and in our corporate
administrative expenses. The increase in corporate expenses
primarily resulted from increased legal and consulting fees
during 2002 associated with freezing our salaried pension plan
and eliminating certain postretirement benefits, our
re-incorporation in Massachusetts and our defense of the
litigation discussed in Note 11 to our Consolidated
Financial Statements included in Item 8 of Part II of
this Form 10-K.

Net interest expense declined $1.2 million,
compared to the prior year due to reduced debt and lower
interest rates. Our weighted average annual interest rate on
long-term debt declined to 4.6 percent for the year,
compared to 8.0 percent for 2001, while our average balance on
long-term debt declined by $8.8 million.

During 2002, we recognized a net gain of
$.2 million resulting from our decision to freeze benefits
related to our salaried pension plan and the elimination of
certain postretirement benefit plans.

Net restructuring and unusual income of $88,000
for 2002 represents a net reduction to our previously
established restructuring reserves. Our net restructuring and
unusual charge of $3.0 million for 2001 included charges of
$4.1 million related to exiting the lamination business in
our Label Products segment, $.6 million associated with the
outsourcing of our toner filling operation within our Imaging
Supplies segment and a net $.3 million of other
restructuring and unusual items, partially offset by unusual
income of $1.4 million resulting from a favorable legal
settlement associated with an anti-trust class action suit and
$.6 million from the sale of unutilized land in Merrimack,
NH.

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

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

Our pretax income was $3.8 million for 2002,
compared to a loss of $2.8 million for 2001. Our income before
income taxes, goodwill amortization, restructuring and other
unusual items and net gain on freezing benefits related to the
salaried pension plan and the elimination of certain
postretirement benefits, improved by $1.6 million compared
to the prior year. This $1.6 million improvement was comprised
primarily of increased profitability in our Imaging Supplies
segment of $.7 million and in our Specialty Paper Products
segment of $1.6 million, as well as a reduction in interest
expense of $1.2 million, partially offset by a decrease in the
profitability of our Label Products segment of $1.2 million
and an increase in corporate general and administrative expenses
of $.3 million.

Pretax results for 2002 include a net
workers compensation refund of approximately
$.4 million relating to experience rate adjustments for
prior years. Pretax results for 2001 included pretax income of
$.5 million from the sale of part of our Projection
Systems technology.

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

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Net income for 2002 improved $4.8 million,
or $0.83 per share, as compared to 2001 because of improved
operating results and reductions in goodwill amortization and
net interest expense as detailed above. Net income for 2002 was
$2.3 million, or $0.40 per share, compared to a loss of
$2.4 million, or $0.43 per share, for 2001.

Results of Operations by Reportable Operating
Segment  2002 Compared to 2001

Label Products Segment

|                                                               |  |      |       |      |  |   |       |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                               |  | 2002 |       | 2001
|(In millions)                                                  |  |      |       |     
|Net sales                                                      |  | $    | 100.8 |      |  | $ | 107.9 |  
|Gross margin %                                                 |  |      | 17.7  | %    |  |   | 18.5  | %
|Selling and distribution expenses                              |  | $    | 8.4   |      |  | $ | 9.6   |  
|General and administrative expenses                            |  | $    | 3.8   |      |  | $ | 3.6   |  
|Pretax income before restructuring and other
    unusual items |  | $    | 5.5   |      |  | $ | 6.7   |  

Our Label Products segment reported a
$7.1 million, or 6.6 percent, decline in sales
compared to 2001 due to our exiting the lamination business
during the third quarter of 2001. Sales for our discontinued
lamination business were $10.7 million for 2001. Excluding
sales for the discontinued lamination business, sales for 2002
improved by approximately $3.6 million compared to the
prior year. Increased volume in our automatic identification,
retail shelf, ticket and inform product lines was partially
offset by overall pricing pressures stemming from current
economic conditions and overcapacity in the label industry, as
well as by volume declines in our supermarket thermal product
line. Sales improvements in our automatic identification and
inform product lines were driven by growth in the transportation
label product used for automatic identification, as well as new
business. Sales declines for our supermarket thermal product
line were due to pricing pressures, the decision by a customer
to produce labels internally and the movement of some existing
customers to outsourced centralized meatpacking, partially
offset by new lower margin business with other customers. For
2003, we expect our acquisition of The Label Company to
contribute approximately $8.0 million to top line growth.
We also anticipate continued pricing pressures due to
overcapacity in the label industry. During the first quarter of
2003, our Label Products segment lost a major customer to
pricing. Sales to this customer will continue through the first
quarter of 2003 as this customer transitions to a new supplier.
We expect the loss in sales to be offset by new business.

Gross margin percentage for our Label Products
segment declined compared to the prior year, primarily due to
unabsorbed fixed manufacturing costs in our Omaha facility and
pricing pressures stemming from current economic conditions and
industry overcapacity. Manufacturing costs for the year were
negatively impacted by the decreased utilization and unfavorable
fixed cost absorption at our Omaha, Nebraska plant caused by our
exit from the lamination business. To reduce costs and improve
margins, we are currently planning capital improvements to
improve machine utilization and reduce manual manufacturing
processes.

Selling and distribution expenses for our Label
Products segment declined $1.2 million compared to the
prior year. As a percentage of sales, selling and distribution
expenses declined from 8.9 percent for 2001 to
8.4 percent for 2002. The reduction resulted primarily from
lower freight costs and bad debt expense. Freight costs improved
as we transitioned to a new freight carrier in 2002. Bad debt
expense was lower in 2002 due to the recovery of receivables
previously reserved as uncollectible.

General and administrative expenses for our Label
Products segment increased $.2 million compared to the
prior year, primarily due to incremental costs associated with
the integration of information systems during 2002 and higher
bonuses in 2002.

Our Label Products segments pretax income
decreased $1.2 million, or 17.1 percent, compared to the
prior year, primarily due to the decline in our gross margin and
the loss of lamination sales in 2002, partially offset by the
reduction in our selling and distribution expenses.

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Specialty Paper Products Segment

|                                                               |  |      |       |      |  |   |       |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                               |  | 2002 |       | 2001
|(In millions)                                                  |  |      |       |     
|Net sales                                                      |  | $    | 160.7 |      |  | $ | 150.4 |  
|Gross margin %                                                 |  |      | 20.3  | %    |  |   | 19.4  | %
|Selling and distribution expenses                              |  | $    | 17.6  |      |  | $ | 16.4  |  
|General and administrative expenses                            |  | $    | 6.8   |      |  | $ | 6.3   |  
|Research and development expenses                              |  | $    | 1.7   |      |  | $ | 1.5   |  
|Pretax income before restructuring and other
    unusual items |  | $    | 6.5   |      |  | $ | 4.9   |  

Our Specialty Paper Products segment reported a
$10.3 million, or 6.9 percent, improvement in sales
compared to the prior year, primarily due to the contribution of
our acquisitions completed during the second quarter of 2002.
Sales to external customers for our Specialty Paper Products
segment increased by $18.3 million compared to the prior
year. Incremental sales for the Dietzgen large-format business
and Computer Imaging Supplies fraud prevention business were
approximately $11.1 million in 2002. Excluding sales for
these newly acquired businesses, sales for our Specialty Paper
Products segment declined $.8 million compared to the prior
year as volume improvements in our thermal, dry gum and
financial product lines, were more than offset by volume
declines and pricing pressures for our bond paper, cut-sheet
paper, ticket and tag, retail sale, heat seal, carbonless paper
and ribbon product lines. Sales for our thermal products
increased primarily as a result of higher volumes from a supply
agreement we entered into as a result of exiting our lamination
business. This product line also benefited from a continued
shift in technology from impact to thermal transaction printers.
Our dry gum sales were positively impacted by capturing the
sales of a major dry gum manufacturer who ceased manufacturing.
Sales volume for our financial product line improved with the
addition of a significant new customer. Sales in our heat seal
product line declined primarily due to technology changes. Sales
for our cut-sheet paper product line declined due to competitive
pricing. Our bond paper, retail fax paper, carbonless and ribbon
product lines, also in mature markets, were negatively impacted
by a transition to new printing technologies. Sales for our
ticket and tag product line were impacted by competitive
pricing. Our overall sales mix was favorably impacted by a
larger percentage of higher margin dry gum, thermal and
financial products and a smaller percentage of lower margin
carbonless and cut-sheet paper products.

Gross margin percentage improved for our
Specialty Paper Products segment compared to the prior year due
to a favorable sales mix and cost containment, partially offset
by increased sales of our lower margin wide format products
primarily related to the acquisition of Dietzgen in June 2002.
During 2002, we were able to lower costs by negotiating
significant raw material price decreases and through process and
reformulation improvements for existing products. We also made
capital improvements that reduced manufacturing costs.
Additionally, our plant utilization improved through increased
volume from our acquisitions during the second quarter of 2002,
and a supply agreement we entered into with a major customer
during the third quarter of 2001.

Selling and distribution expenses for our
Specialty Paper Products segment increased $1.2 million
compared to the prior year due to sales increases associated
with our acquisitions. As a percentage of sales, selling and
distribution expenses were flat at 10.9 percent. Decreased
freight expense from the transition to a new freight carrier in
2002, was offset by higher selling and distribution expenses
associated with the Dietzgen and Computer Imaging Supplies
businesses we acquired in the second quarter of 2002.

General and administrative expenses for our
Specialty Paper Products segment increased by $.5 million
compared to the prior year due to our acquisitions during the
second quarter of 2002. As a percentage of sales, general and
administrative expenses were flat at 4.2 percent.

Research and development costs increased by
$.2 million, primarily due to spending on our printed
circuits technology.

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##### Table of Contents



Our Specialty Paper Products segments
pretax income increased $1.6 million compared to the prior
year, primarily due to increased sales and an improved gross
margin percentage, partially offset by increases in selling and
distribution expenses, administrative expenses and in research
and development costs.

Imaging Supplies Segment

|                                                               |  |      |      |      |  |   |      |  
|-------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                                               |  | 2002 |      | 2001
|(In millions)                                                  |  |      |      |     
|Net sales                                                      |  | $    | 24.0 |      |  | $ | 24.4 |  
|Gross margin %                                                 |  |      | 23.4 | %    |  |   | 26.7 | %
|Selling and distribution expenses                              |  | $    | 2.1  |      |  | $ | 2.6  |  
|General and administrative expenses                            |  | $    | 1.1  |      |  | $ | 2.1  |  
|Research and development expenses                              |  | $    | 1.5  |      |  | $ | 1.6  |  
|Pretax income before restructuring and other
    unusual items |  | $    | .9   |      |  | $ | .2   |  

Our Imaging Supplies segment reported a
$.4 million, or 1.6 percent, decline in sales compared
to the prior year primarily due to lower sales volumes of
high-speed products to end-user customers and Nashua brand
resellers, as well as lower volume and pricing on our export
sales, partially offset by higher sales volume of resin
products, Ricoh-compatible toners and high-speed toners to
value-added distributors. Changes in our distribution channel
mix were driven in part by an increased focus on value-added
distributors with lower cost to serve. We expect this trend to
continue. We also experienced delays in new high-speed product
launches that prevented us from replacing eroding sales in
toners for older machines.

The decline in the segments gross margin
percentage was primarily due to changes in product mix and
distribution channel mix, offset partially by savings from
outsourcing our filling operation. Our product mix was
negatively impacted by a drop in sales for our higher margin
Xerox compatible developer. A shift in distribution channels
towards value-added distributors had an unfavorable impact on
gross margin, however, it had a favorable impact on our selling
and distribution costs. The savings from outsourcing our filling
operation which became mainly operational in the fourth quarter
of 2002 were approximately $.3 million.

Selling and distribution expenses for our Imaging
Supplies segment declined $.5 million compared to the prior
year and declined as a percentage of sales, from
10.8 percent for 2001 to 8.8 percent for 2002. Both
decreases were due to a shift in our distribution channels to
customers requiring lower selling and distribution costs, as
well as aggressive cost containment measures including cost
savings from the consolidation of our customer service
department.

General and administrative expenses for our
Imaging Supplies segment declined $1.0 million compared to
the prior year, due to a decrease in personnel and lower bonuses
in 2002.

Pretax income for our Imaging Supplies segment
improved by $.7 million, compared to 2001, due primarily to
lower selling and distribution and general and administrative
expenses, partially offset by lower sales and a lower gross
margin percentage.

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##### Table of Contents



Results of Operations  2001
Compared to 2000

|                                    |  |      |       |      |  |   |       |  
|----------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                    |  | 2001 |       | 2000
|(In millions)                       |  |      |       |     
|Net sales                           |  | $    | 272.5 |      |  | $ | 253.1 |  
|Gross margin %                      |  |      | 20.5  | %    |  |   | 20.1  | %
|Selling and distribution expenses   |  | $    | 28.8  |      |  | $ | 27.3  |  
|General and administrative expenses |  | $    | 19.3  |      |  | $ | 20.8  |  
|Research and development expenses   |  | $    | 3.2   |      |  | $ | 4.2   |  
|Interest expense, net               |  | $    | 2.7   |      |  | $ | 2.0   |  
|Income before income taxes          |  | $    | (2.8  | )    |  | $ | 12.9  |  
|Net income (loss)                   |  | $    | (2.4  | )    |  | $ | 5.4   |  

A reconciliation of non-GAAP financial measures
which improve the comparability of our operating results between
periods is as follows:

|                                                                                                                               |  |   |      |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------ |  | - | ---- | - |  | - | ----- | -
|(In millions)                                                                                                                  |  |   |      |  
|Income (loss) before income taxes (as
    reported)                                                                            |  | $ | (2.8 | ) |  | $ | 12.9  |  
|Goodwill amortization                                                                                                          |  |   | 1.7  |   |  |   | 1.1   |  
|Restructuring and other unusual charges                                                                                        |  |   | 3.0  |   |  |   | 1.0   |  
|Pension settlement income                                                                                                      |  |   |     |   |  |   | (18.6 | )
|                                                                                                                               |  |   |      |   |  |   |       |  
|Income before income taxes, goodwill
    amortization, restructuring and other unusual items and pension
    settlement income |  | $ | 1.9  |   |  | $ | (3.6  | )
|                                                                                                                               |  |   |      |   |  |   |       |  

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
which are further discussed in the segment section.

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 which are
further discussed in the segment section.

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.

General and administrative expenses decreased
7.2 percent from $20.8 million or 8.2 percent of
sales in 2000 to $19.3 million or 7.1 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 and
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.

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

Our income before income taxes, goodwill
amortization, restructuring and unusual charges and pension
settlement income was $1.9 million for 2001, compared to a
loss of $3.6 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 an increase in net interest expense.

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
benefit was lower than the U.S. federal statutory rate
principally due to the impact of non-deductible goodwill.

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 annuitization income of $18.6 million, partially
offset by a net pretax restructuring charge of $1.0 million.

Results of Operations by Reportable Operating
Segment

2001 Compared to 2000


Label Products Segment

|                                                               |  |      |       |      |  |   |       |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                               |  | 2001 |       | 2000
|(In millions)                                                  |  |      |       |     
|Net sales                                                      |  | $    | 107.9 |      |  | $ | 105.1 |  
|Gross margin %                                                 |  |      | 18.5  | %    |  |   | 17.2  | %
|Selling and distribution expenses                              |  | $    | 9.6   |      |  | $ | 9.0   |  
|General and administrative expenses                            |  | $    | 3.6   |      |  | $ | 3.4   |  
|Pretax income before restructuring and other
    unusual items |  | $    | 6.7   |      |  | $ | 5.4   |  

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, primarily the result of a full year of operations
during 2001 for the acquired Rittenhouse business and increased
volumes in transportation labels and retail shelf labels. These

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increases were partially offset by lower sales of
$6.3 million due to the discontinuance of our lamination
business beginning in the third quarter of 2001 and lower
volumes of bar code labels and other product lines.


Gross margin percentage for 2001 increased to
18.5 percent from 17.2 percent in 2000. The
improvement in gross margin percentage was due to synergies
realized through the integration of the Nashua and Rittenhouse
businesses and improved manufacturing and cost controls. These
improvements were partially offset by decreased utilization and
unfavorable fixed cost absorption at our Omaha, Nebraska plant
caused by our exit from the lamination business and increased
costs associated with switching to an external supplier of
laminated paper.

Selling and distribution expenses for our Label
Products segment increased $.6 million compared to the
prior year primarily due to increased sales. As a percentage of
sales, selling and distribution expenses increased slightly from
8.6 percent for 2000 to 8.9 percent for 2001.

General and administrative expenses for our Label
Products segment increased $.2 million compared to the
prior year, primarily due to the inclusion of a full year of
Rittenhouse expenses during 2001.

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 primarily due to the
contribution of the acquired Rittenhouse business.

Specialty Paper Products Segment

|                                                               |  |      |       |      |  |   |       |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                               |  | 2001 |       | 2000
|(In millions)                                                  |  |      |       |     
|Net sales                                                      |  | $    | 150.4 |      |  | $ | 138.8 |  
|Gross margin %                                                 |  |      | 19.4  | %    |  |   | 20.4  | %
|Selling and distribution expenses                              |  | $    | 16.4  |      |  | $ | 13.5  |  
|General and administrative expenses                            |  | $    | 6.3   |      |  | $ | 5.6   |  
|Research and development expenses                              |  | $    | 1.5   |      |  | $ | 1.6   |  
|Pretax income before restructuring and other
    unusual items |  | $    | 4.9   |      |  | $ | 7.5   |  

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 a full year inclusion of our Rittenhouse
paper converting business were partially offset by volume
declines in our cut-sheet paper and thermal tag product lines.

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 primarily from
pricing pressures in our converting and thermal ticket and tag
product lines.

Selling and distribution expenses for our
Specialty Paper Products segment increased $2.9 million
compared to the prior year while selling and distribution
expenses as a percentage of sales increased from
9.7 percent to 10.9 percent. Both changes were mainly
attributable to a change in freight terms with a major customer
in 2001.

General and administrative expenses for our
Specialty Paper Products segment increased by $.7 million
compared to the prior year primarily due to a full year of
Rittenhouse expenses during 2001.

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
because increases in selling, distribution and administrative
expenses more than offset an increase in gross margin dollars.

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Imaging Supplies Segment

|                                                               |  |      |      |      |  |   |      |  
|-------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                                               |  | 2001 |      | 2000
|                                                               |  |      |      |     
|(In millions)                                                  |  |      |      |     
|Net sales                                                      |  | $    | 24.4 |      |  | $ | 27.9 |  
|Gross margin %                                                 |  |      | 26.7 | %    |  |   | 15.4 | %
|Selling and distribution expenses                              |  | $    | 2.6  |      |  | $ | 4.7  |  
|General and administrative expenses                            |  | $    | 2.1  |      |  | $ | 1.7  |  
|Research and development expenses                              |  | $    | 1.6  |      |  | $ | 2.1  |  
|Pretax income before restructuring and other
    unusual items |  | $    | .2   |      |  | $ | (4.2 | )

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. Part of the improvement in gross
margin percentage was attributable to the discontinuance of our
remanufactured laser cartridge product line. Gross margin
percentage was also favorably impacted by productivity
improvements in our toner product line and staff reductions.

Selling and distribution expenses decreased by
$2.1 million compared to 2000 mainly due to lower sales
revenues. As a percentage of sales, selling and distribution
expenses declined from 16.8 percent to 10.7 percent
due to staff and cost reductions.

General and administrative expenses for our
Imaging Supplies segment increased $.4 million mainly from
increased bonuses.

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.

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. The segment also
benefited from the discontinuance of its remanufactured laser
cartridge product line, which had a loss of $.8 million for
2000.

Liquidity, Capital Resources and Financial
Condition

Cash and cash equivalents remained unchanged in
2002 compared to the prior year at $1.1 million. Cash
provided by continuing operating activities of $6.1 million
consisted primarily of cash flow from operations, including
reductions in inventory and an increase in other long-term
liabilities, excluding the increase in pension liabilities,
partially offset by decreases in accrued expenses and accounts
payable and an increase in accounts receivable. Cash used in
investing activities, financing activities and for discontinued
operations for the year of $6.0 million, $41,000 and
$61,000, respectively, was offset by cash provided by continuing
operating activities. Net cash used in investing activities
consisted primarily of capital expenditures of $4.3 million
across all segments, and cash used for acquisitions of
$1.7 million.

Working capital increased $4.5 million from
$16.5 million at December 31, 2001 to
$21.0 million at December 31, 2002. An increase in
accounts receivable of $3.2 million and decreases in
accounts payable and accrued expenses of $1.1 million and
$2.2 million, respectively, more than offset decreases in
other current assets of $1.6 million and inventories of
$.3 million.

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In addition to cash flows from operations, we
have a bank financing arrangement, at competitive rates, to
adequately conduct our operations. We had $10.0 million of
additional borrowing capacity at December 31, 2002 under
our revolving loan commitment with Fleet National Bank and
LaSalle Bank, NA. In February of 2003, we used approximately
$5.0 million of this borrowing capacity to fund our
acquisition of The Label Company. At December 31, 2002, we
had a $3.0 million obligation under standby letters of
credit with Fleet National Bank and LaSalle Bank, NA. The
weighted average interest rate on long-term debt borrowings of
$25.0 million outstanding at December 31, 2002 was
3.5 percent.

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, 2002, the
approximate book value of these assets was $76.4 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 was .75 percent per annum through June 30,
2002, after which it ranges from zero up to .75 percent per
annum based on our total debt to EBITDA ratio. The initial LIBOR
margin was 2.75 percent per annum through June 30,
2002, after which it ranges from 1.75 percent per annum up
to 2.75 percent per annum based on our total debt to EBITDA
ratio. We are also subject to a non-use fee for any unutilized
portion of our revolving loan that ranges from .25 percent
to .50 percent based on our total debt to EBITDA ratio. The
revolving loan commitment is subject to certain limitations,
such as the maximum principal amount of the revolving credit
agreement is the lesser of (a) $30 million, or (b) our
borrowing base, which is defined as the sum of 80 percent
of our eligible accounts receivable, plus the lesser of
(i) 50 percent of our eligible inventory or
(ii) $12 million. Our Borrowing Base was
$30.9 million at December 31, 2002, which provided
additional borrowing capacity of $10.0 million at year end.
The maturity of this Credit Agreement is February 28, 2005.
For the twelve months ended December 31, 2002, the weighted
average annual interest rate on our long-term debt was
4.6 percent. 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. While we were in compliance with the above
quarterly financial covenants for 2002 and forecast future
compliance, should results of operations fall short of our
expectations and we fail to maintain our covenants and be unable
to obtain a waiver from our lenders, our debt could become
callable by our lenders.

We have operating leases primarily for office,
warehouse and manufacturing space, electronic data processing
and transportation equipment. We also have capital leases
primarily for automobiles, computer equipment and office
equipment. The terms of these leases do not impose significant
restrictions or unusual obligations. Our obligations relating to
long-term debt, notes payable, and leases at year end 2002 were
as follows:

|                                    |  |      |       |      |  |      |       |      |  |      |        |        |  |       |     |  |  |   |     |  |  |   |     |  |  |   |        | 
|----------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ------ | ------ |  | ----- | --- |  |  | - | --- |  |  | - | --- |  |  | - | ------ | 
|                                    |  |      |       |      |  |      |       |      |  |      |        | Beyond |  |      
|                                    |  | 2003 |       | 2004 |  | 2005 |       | 2006 |  | 2007 |        | 2007   |  | Total
|(In thousands)                      |  |      |       |      |  |      |       |      |  |      |        |        |  |      
|Term portion of long-term debt      |  | $    | 2,000 |      |  | $    | 2,300 |      |  | $    | 3,700  |        |  | $     |    |  |  | $ |    |  |  | $ |    |  |  | $ | 8,000  | 
|Revolving portion of long-term debt |  |      |      |      |  |      |      |      |  |      | 17,000 |        |  |       |    |  |  |   |    |  |  |   |    |  |  |   | 17,000 | 
|Notes payable                       |  |      | 250   |      |  |      | 250   |      |  |      | 710    |        |  |       | 250 |  |  |   |    |  |  |   |    |  |  |   | 1,460  | 
|Capital leases                      |  |      | 193   |      |  |      | 193   |      |  |      | 191    |        |  |       | 42  |  |  |   |    |  |  |   |    |  |  |   | 619    | 
|Non-cancelable operating leases     |  |      | 1,055 |      |  |      | 968   |      |  |      | 666    |        |  |       | 484 |  |  |   | 475 |  |  |   | 178 |  |  |   | 3,826  | 
|                                    |  |      |       |      |  |      |       |      |  |      |        |        |  |       |     |  |  |   |     |  |  |   |     |  |  |   |        | 
|                                    |  | $    | 3,498 |      |  | $    | 3,711 |      |  | $    | 22,267 |        |  | $     | 776 |  |  | $ | 475 |  |  | $ | 178 |  |  | $ | 30,905 | 
|                                    |  |      |       |      |  |      |       |      |  |      |        |        |  |       |     |  |  |   |     |  |  |   |     |  |  |   |        | 

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

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Litigation and Other Matters

In December 1998, the IRS completed an
examination of our corporate income tax returns for the years
1992 through 1994 and issued a Notice of Proposed Adjustment
which assessed additional taxes of $4.6 million, excluding
interest. We disagreed with the positions taken by the IRS and
filed a formal protest of the proposed adjustment on
January 12, 1999. On October 10, 2002, we reached an
agreement with the Appeals office of the IRS regarding the
outstanding proposed assessment of federal income tax for the
years 1992 to 1994 subject to the approval of the Joint
Committee on Taxation of the United States Congress. The
agreement received final approval by the Joint Committee on
Taxation of the United States Congress as indicated in a letter
from the IRS Appeals Office dated December 24, 2002 and is
now final. Our agreement determines the tax liability for the
period 1989 through 1994 and results in a net tax refund in the
amount of $.3 million for that period. The agreement
impacts the earlier years due to the carryback of tax losses and
credits and the recomputation of alternative minimum taxes.

In December 1999, the IRS completed an
examination of our corporate income tax returns for the years
1995 through 1997 and issued a Notice of Proposed Adjustment
which assessed additional taxes of $5.2 million, excluding
interest. This assessment represents a total of
$14.0 million of adjustments to taxable income for the
years under review. The proposed adjustments relate to the
deductibility of restructuring and other reserves for continuing
and discontinued operations and the utilization of foreign net
operating losses associated with discontinued operations. We
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 are adequately reserved for
potential liabilities that could arise from the resolution of
the IRS assessment for the years 1995 through 1997. While
we believe that we have adequately provided for tax liabilities
through December 31, 2002, we can provide no assurances
that we will prevail in our defense against adjustments proposed
in pending or future federal and state examinations. In
addition, we can provide no assurances that the ultimate
resolution of open tax matters will not be either in excess of
or less than current reserves.

In August and September 1996, two individual
plaintiffs filed lawsuits in the Circuit Court of Cook County,
Illinois against Nashua Corporation, Cerion, certain directors
and officers of Cerion, and our underwriter, on behalf of all
persons who purchased the common stock of Cerion between
May 24, 1996 and July 9, 1996. These two complaints
were consolidated. In March 1997, the same individual plaintiffs
joined by a third plaintiff filed a Consolidated Amended
Class Action Complaint. The consolidated complaint alleged
that, in connection with Cerions initial public offering,
the defendants issued materially false and misleading statements
and omitted the disclosure of material facts regarding, in
particular, certain significant customer relationships. In
October 1997, the Circuit Court on motion by the defendants,
dismissed the consolidated complaint. The plaintiffs filed a
Second Amended Consolidated Complaint alleging similar claims as
the first consolidated complaint seeking damages and injunctive
relief. On May 6, 1998, the Circuit Court, on motion by the
defendants, dismissed with prejudice the second amended
consolidated complaint. The plaintiffs filed with the Appellate
Court an appeal of the Circuit Courts ruling. On
November 19, 1999, the Appellate Court reversed the Circuit
Courts ruling that dismissed the second amended
consolidated complaint. The Appellate Court ruled that the
second amended consolidated complaint represented a valid claim
and sent the case back to the Circuit Court for further
proceedings. On December 27, 1999, we filed a Petition with
the Supreme Court of Illinois. In that Petition, we asked the
Supreme Court of Illinois to determine whether the Circuit Court
or the Appellate Court is correct. Our Petition was denied and
the case was sent to the Circuit Court for trial. Discovery has
been completed, but no date has been set for trial and pre-trial
motions. Non-binding mediation discussions were held in November
2002 without resolving the dispute. We believe that the lawsuit
is without merit and will continue to defend ourselves in this
matter. We also believe that we will receive the value of our
37.1 percent ownership in Cerion liquidating trust which
was valued at $.9 million on an after-tax basis at
December 31, 2002. Our investment in Cerion is included
under other assets in our Consolidated Balance Sheet.

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On September 14, 2000, Edward G. Krasnecki
and EGK Realty Corporation filed suit against Nashua Corporation
in the Superior Court of the Commonwealth of Massachusetts,
Middlesex County. The plaintiffs are the owners of real
property, formerly leased by us, located at 260 Billerica Road,
Chelmsford, Massachusetts. The plaintiffs allege that when we
vacated the premised in 1997, we failed to remove improvements
we had made to the property, failed to clean the premises as
required by our lease, and left contamination on the property
resulting in lost opportunities to the plaintiffs, for which the
plaintiffs seek damages. We responded to their complaint,
denying all liability and asserting affirmative defenses. We
maintain that when we vacated the premises, we removed three
underground tanks that we were entitled to remove under the
terms of our lease, we detected soil contamination, reported and
took prompt remedial action all in accordance with Massachusetts
law, and are not liable to the plaintiffs. We also deny that we
failed to remove improvements or that we failed to clean the
premises in accordance with the terms of our lease. The matter
has been scheduled for a jury trial in April 2003. 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,
referred to as the EPA, as a potentially responsible party for
certain hazardous waste sites. In addition, we have been
notified by certain state environmental agencies that some of
our sites not addressed by the EPA require remedial action.
These sites are in various stages of investigation and
remediation. Due to the unique physical characteristics of each
site, the technology employed, the extended timeframes of each
remediation, the interpretation of applicable laws and
regulations and the financial viability of other potential
participants, our ultimate cost of remediation is difficult to
estimate. Accordingly, estimates could either increase or
decrease in the future due to changes in such factors. At
December 31, 2002, 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 $.7 million to
$1.4 million for continuing operations and approximately
$.1 million for discontinued operations. These estimates
could increase if other potentially responsible parties or our
insurance carriers are unable or unwilling to bear their
allocated share and cannot be compelled to do so.

At December 31, 2002, our accrual balances
relating to environmental matters were $.8 million for
continuing operations and $.1 million for discontinued
operations. Based on information currently available, we believe
that it is probable that the major potentially responsible
parties will fully pay the costs apportioned to them. We believe
that our remediation expense is not likely to have a material
adverse effect on our consolidated financial position or results
of operations.

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

Application of Critical Accounting
Policies

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

Critical accounting policies are those that are
important to the portrayal of our financial condition and
results, and which require us to make difficult, subjective
and/or complex judgments. Critical accounting

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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 expect to collect. We
also record reserves for bad debts based on the length of time
our receivables are past due, the payment history of our
individual customers and the current financial condition of our
customers based on obtainable data and historical payment and
loss trends. Our allowance for doubtful accounts was
$.7 million at December 31, 2002 and $1.2 million
at December 31, 2001. The decrease in our estimate during
2002 resulted from the write-off of previously reserved accounts
receivables. Uncertainties affecting our estimates include
future industry and economic trends and the related impact on
the financial condition of our customers, as well as the ability
of our customers to generate cash flows sufficient to pay us
amounts due. If circumstances change, such as higher than
expected defaults or an unexpected material adverse change in a
customers ability to meet its financial obligations to us,
our estimates of the recoverability of the receivables due us
could be reduced by a material amount.

Inventories  Slow Moving and
Obsolescence

We estimate and reserve amounts related to slow
moving and obsolete inventories that result from changing market
conditions. We develop our estimates based on the quantity and
quality of individual classes of inventory compared to
historical and projected sales trends. Inventory at
December 31, 2002 has been reduced by a reserve of
$1.0 million, based on our assessment of the probable
exposure related to excess and obsolete inventories. Our
estimated reserve was $1.1 million at December 31,
2001. Major uncertainties in our estimation process include
future industry and economic trends, future needs of our
customers, our ability to retain or replace our customer base,
and other competitive changes in the marketplace. Significant
changes in any of the uncertainties used in estimating the loss
exposure could result in a materially different net realizable
value for our inventory.

Goodwill

As of December 31, 2002, we had
$29.5 million of goodwill included in our Balance Sheet.
Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. Under FAS 142, goodwill and
indefinite lived intangible assets are no longer amortized but
are reviewed annually, or more frequently if impairment
indicators arise, for impairment. We have performed the initial
and annual impairment tests required by FAS 142 and have
concluded that no impairment exists as of January 1, 2002
and November 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. The fair
value exceeded book value for each reporting unit as of our
valuation dates of January 1, 2002 and November 1,
2002. Significant estimates included in our valuation included
future business results and the discount rate. Material changes
in our estimated future operating results or discount rate could
significantly impact our carrying value of goodwill.

Pension Benefits

We account for our defined benefit pension plans
in accordance with Statement of Financial Accounting Standards
No. 87, Employers Accounting for
Pensions, and Statement of Financial Accounting Standards
No. 88, Employers Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, 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 or expense resulting from
changes in pension liability discount rates and the market
performance of our plan assets.

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The most significant elements in determining our
pension income or expense in accordance with FAS 87 are the
expected return on plan assets and the discount rate. We assumed
an expected long-term rate of return on plan assets of
8.5 percent for the year ended December 31, 2002, down
from 9.0 percent for the year ended 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 either fall below or
increase above 8.5 percent, our future pension expense
would either increase or decrease.

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. In estimating this rate, we look at rates
of return on high quality investments. For the years ended
December 31, 2001 and 2000, we used a discount rate of
7.25 percent. This rate was used to determine fiscal year
2002 and 2001 expense. For year ended December 31, 2002
disclosure purposes, we used a discount rate of
6.50 percent. Should the discount rate either fall below or
increase above 6.5%, our future pension expense would either
increase or decrease. Our policy is to defer the net effect of
changes in actuarial assumptions and experience as allowed by
FAS 87. As discussed in detail in Note 12 to our
Consolidated Financial Statements, we froze benefits under our
salaried pension plans at December 31, 2002.

At December 31, 2002, our consolidated
pension liability was $13.4 million compared to a prepaid
pension asset of $8.9 million at the end of 2001. This
balance sheet change was principally due to a decline in the
fair market values of assets held by company-sponsored pension
plans, as well as decreases in our expected return on plan
assets and discount rate resulting from interest rate trends. As
a result, we recognized an other comprehensive loss of
$11.4 million, net of a $7.5 million tax benefit for
2002. Excluding a $2.7 million loss incurred as a result of
freezing our salaried pension plans, we recognized consolidated
pretax pension expense of $.9 million for the year ended
December 31, 2002, up from $.6 million in 2001. Future
changes in our actuarial assumptions and investment results due
to future interest rate trends could have a material adverse
effect on our future costs and pension obligations.

Deferred Tax Assets

As of December 31, 2002, we had
approximately $14.0 million of deferred tax assets. During
2002, we added deferred tax assets of $7.5 million
associated with a minimum pension liability adjustment as
discussed in detail in Note 12 to our Consolidated
Financial Statements. A portion of our deferred tax assets
relates to state loss carryforwards that expire between 2004 and
2020. We have established a valuation allowance of
$.6 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
Note 7 to our Consolidated Financial Statements.

Environmental Reserves

We expense environmental expenditures relating to
ongoing operations unless the expenditures extend the life,
increase the capacity or improve the safety or efficiency of our
property, mitigate or prevent environmental contamination that
has yet to occur and improve our property compared with its
original condition, or are incurred for property held for sale.
We record specific reserves related to site assessments,
remediation or 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, 2002, we

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believe the probable range for future
expenditures related to continuing operations is
$.7 million to $1.4 million and have accrued
$.8 million. We believe the probable amount for future
expenditures for discontinued operations is $.1 million and
have accrued this amount. The decline in our accruals from
$1.1 million for continuing operations and $.2 million
for discontinued operations at December 31, 2001 were due
to current year payments.


Uncertainties affecting our estimates include
changes in the type or degree of contamination uncovered during
assessment and actual clean-up; changes in available treatment
technologies; changes in the financial condition of other
participants for sites with joint and several responsibility;
changes in the financial condition of insurance carriers
financially responsible for our share of the remediation costs
at certain sites; 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.




Item 7A.     Quantitive
and Qualitative Disclosures About Market Risk

We are exposed to market risks from interest rate
fluctuations relating to our debt. We performed a sensitivity
analysis assuming a hypothetical 10 percent increase in
interest rates for our debt as of December 31, 2002. This
analysis indicated that a 10 percent increase in interest
rates would not have a material effect on our consolidated
financial position, results of operations or cash flows. Actual
changes in interest rates and their impact on us could differ
materially from this hypothetical analysis.

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Item 8.     Financial
Statements and Supplementary Data

NASHUA CORPORATION AND SUBSIDIARIES






CONSOLIDATED STATEMENT OF OPERATIONS


|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |       | 
|--------------------------------------------------------------- | --------------------------------------------------------- | ----------------------- | ------- | ----- |  | ---- | ------- | ----- | - | - | ------- | ----- | 
|                                                                |                                                           |                        
|                                                                |                                                           | Year Ended December 31,
|                                                                |                                                           |                        
|                                                                |                                                           | 2002                    |         | 2001  |  | 2000
|(In thousands, except per share data)                           |                                                           |                         |         |       |  |     
|Net sales                                                       |                                                           | $                       | 283,190 |       |  | $    | 272,510 |       |   | $ | 253,122 |      
|Cost of products sold                                           |                                                           |                         | 227,102 |       |  |      | 216,669 |       |   |   | 202,357 |      
|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|Gross margin                                                    |                                                           |                         | 56,088  |       |  |      | 55,841  |       |   |   | 50,765  |      
|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|Selling and distribution expenses                               |                                                           |                         | 28,119  |       |  |      | 28,797  |       |   |   | 27,303  |      
|General and administrative expenses                             |                                                           |                         | 19,720  |       |  |      | 19,309  |       |   |   | 20,824  |      
|Goodwill amortization                                           |                                                           |                         |        |       |  |      | 1,656   |       |   |   | 1,142   |      
|Research and development expense                                |                                                           |                         | 3,139   |       |  |      | 3,238   |       |   |   | 4,224   |      
|Pension settlement income                                       |                                                           |                         |        |       |  |      |        |       |   |   | (18,606 | )    
|Net gain on curtailment of pension and
    postretirement plans |                                                           |                         | (181    | )     |  |      |        |       |   |   |        |      
|Restructuring and other unusual charges (income)                |                                                           |                         | (88     | )     |  |      | 2,963   |       |   |   | 966     |      
|(Income) loss from equity investment                            |                                                           |                         | 59      |       |  |      | (23     | )     |   |   | 5       |      
|Interest expense                                                |                                                           |                         | 1,494   |       |  |      | 2,875   |       |   |   | 2,852   |      
|Interest income                                                 |                                                           |                         | (2      | )     |  |      | (192    | )     |   |   | (859    | )    
|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|Income (loss) before income taxes                               |                                                           |                         | 3,828   |       |  |      | (2,782  | )     |   |   | 12,914  |      
|Provision (benefit) for income taxes                            |                                                           |                         | 1,512   |       |  |      | (334    | )     |   |   | 7,528   |      
|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|Net income (loss)                                               |                                                           | $                       | 2,316   |       |  | $    | (2,448  | )     |   | $ | 5,386   |      
|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|Per share amounts:                                              |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|                                                                | Net income (loss) per common share                        |                         | $       | .40   |  |      | $       | (.43  | ) |   | $       | .95   | 
|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|                                                                | Net income (loss) per common share, assuming
    dilution |                         | $       | .39   |  |      | $       | (.43  | ) |   | $       | .95   | 
|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|                                                                | Dividends per common share                                |                         | $       |      |  |      | $       |      |   |   | $       | .01   | 
|                                                                |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|Average shares outstanding:                                     |                                                           |                         |         |       |  |      |         |       |   |   |         |      
|                                                                | Common shares                                             |                         |         | 5,783 |  |      |         | 5,696 |   |   |         | 5,649 | 
|                                                                | Common shares, assuming dilution                          |                         |         | 5,873 |  |      |         | 5,696 |   |   |         | 5,667 | 

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,                                                    
|                                            |                                                                  |                                                                 
|                                            |                                                                  | 2002                                                             |                                            | 2001   
|(In thousands, except share data)           |                                                                  |                                                                  |                                            |        
|Assets                                      |                                                                  |                                                                  |                                            |         |         |         |        |        
|Current assets                              |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            | Cash and cash equivalents                                        |                                                                  | $                                          | 1,085   |         |         | $      | 1,063   |       
|                                            | Accounts receivable                                              |                                                                  |                                            | 29,918  |         |         |        | 26,708  |       
|                                            | Inventories                                                      |                                                                  |                                            |         |         |         |        |         |       
|                                            |                                                                  | Raw materials                                                    |                                            |         | 9,460   |         |        |         | 10,283 |        
|                                            |                                                                  | Work in process                                                  |                                            |         | 2,488   |         |        |         | 2,134  |        
|                                            |                                                                  | Finished goods                                                   |                                            |         | 8,486   |         |        |         | 8,290  |        
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            |                                                                  |                                                                  | 20,434                                     |         |         |         | 20,707 |        
|                                            | Other current assets                                             |                                                                  |                                            | 4,985   |         |         |        | 6,536   |       
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            |                                                                  |                                                                  | 56,422                                     |         |         |         | 55,014 |        
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|Plant and equipment                         |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            | Land                                                             |                                                                  |                                            | 934     |         |         |        | 890     |       
|                                            | Buildings and improvements                                       |                                                                  |                                            | 28,638  |         |         |        | 28,522  |       
|                                            | Machinery and equipment                                          |                                                                  |                                            | 57,464  |         |         |        | 55,733  |       
|                                            | Construction in progress                                         |                                                                  |                                            | 1,136   |         |         |        | 1,125   |       
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            |                                                                  |                                                                  | 88,172                                     |         |         |         | 86,270 |        
|                                            | Accumulated depreciation                                         |                                                                  |                                            | (45,803 | )       |         |        | (41,411 | )     
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            |                                                                  |                                                                  | 42,369                                     |         |         |         | 44,859 |        
|Goodwill, net of amortization               |                                                                  |                                                                  | 29,462                                     |         |         |         | 28,906 |        
|Intangibles, net of amortization            |                                                                  |                                                                  | 1,672                                      |         |         |         |       |        
|Loans to related parties                    |                                                                  |                                                                  | 973                                        |         |         |         | 723    |        
|Other assets                                |                                                                  |                                                                  | 15,290                                     |         |         |         | 15,544 |        
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            |                                                                  |                                                                  | Total assets                               |         | $       | 146,188 |        |         | $      | 145,046 | 
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|Liabilities and Shareholders
    Equity    |                                                                  |                                                                  |                                            |         |         |         |        |        
|Current liabilities                         |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            | Accounts payable                                                 |                                                                  | $                                          | 17,931  |         |         | $      | 19,034  |       
|                                            | Accrued expenses                                                 |                                                                  |                                            | 15,230  |         |         |        | 17,452  |       
|                                            | Current maturities of long-term debt                             |                                                                  |                                            | 2,000   |         |         |        | 2,000   |       
|                                            | Current maturities of notes payable                              |                                                                  |                                            | 250     |         |         |        |        |       
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            |                                                                  |                                                                  | 35,411                                     |         |         |         | 38,486 |        
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|Long-term debt, less current portion        |                                                                  |                                                                  | 23,000                                     |         |         |         | 23,280 |        
|Notes payable to related parties            |                                                                  |                                                                  | 1,210                                      |         |         |         | 460    |        
|Other long-term liabilities                 |                                                                  |                                                                  | 24,549                                     |         |         |         | 12,423 |        
|Commitments and contingencies (see Note 11) |                                                                  |                                                                  |                                            |         |         |         |        |        
|Shareholders equity                        |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            | Common stock, par value $1.00; authorized
    20,000,000 shares; |                                                                  |                                            |         |         |         |        |         |       
|                                            |                                                                  | Issued 5,870,609 shares in 2002 and 6,886,649
    shares in 2001 |                                            |         | 5,871   |         |        |         | 6,887  |        
|                                            | Additional paid-in capital                                       |                                                                  |                                            | 14,203  |         |         |        | 15,901  |       
|                                            | Retained earnings                                                |                                                                  |                                            | 53,375  |         |         |        | 62,531  |       
|                                            | Accumulated other comprehensive loss:                            |                                                                  |                                            |         |         |         |        |         |       
|                                            |                                                                  | Minimum pension liability adjustment, net of tax                 |                                            |         | (11,431 | )       |        |         |       |        
|                                            | Treasury stock, at cost                                          |                                                                  |                                            |        |         |         |        | (14,922 | )     
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            |                                                                  |                                                                  | 62,018                                     |         |         |         | 70,397 |        
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        
|                                            |                                                                  |                                                                  | Total liabilities and shareholders equity |         | $       | 146,188 |        |         | $      | 145,046 | 
|                                            |                                                                  |                                                                  |                                            |         |         |         |        |        

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

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NASHUA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY

|                                                |                                                  |              |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |         |  
|----------------------------------------------- | ------------------------------------------------ | ------------ | ---------- | --------- |  | -------------- | ------ | ------------- |  | -------- | ------ | ---- |  | -------- | ---------- | ----- |  | - | ------- | - |  | - | ------- | ------- | - | - | ------- | ----- |  | - | ------ | ------- | -
|                                                |                                                  |              |            |           |  |                |        | Accumulated   |  |          |        |     
|                                                |                                                  | Common Stock |            | Addl     |  | Treasury Stock |        | Other         |  |          |        |     
|                                                |                                                  |              |            | Paid-In   |  |                |        | Comprehensive |  | Retained |        |     
|                                                |                                                  | Shares       |            | Par Value |  | Capital        |        | Shares        |  | Cost     |        | Loss |  | Earnings |            | Total
|(In thousands, except share data)               |                                                  |              |            |           |  |                |        |               |  |          |        |      |  |          |            |      
|Balance, December 31, 1999                      |                                                  |              | 6,915,767  |           |  | $              | 6,916  |               |  | $        | 15,182 |      |  |          | (1,023,818 | )     |  | $ | (14,922 | ) |  |   |        |         |   | $ | 59,650  |       |  | $ | 66,826 |        
|Stock issued for director compensation          |                                                  |              | 16,834     |           |  |                | 17     |               |  |          | 88     |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 105    |        
|Restricted stock issuances                      |                                                  |              | 189,000    |           |  |                | 189    |               |  |          | 1,402  |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 1,591  |        
|Restricted stock forfeiture                     |                                                  |              | (110,000   | )         |  |                | (110   | )             |  |          | (1,223 | )    |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (1,333 | )      
|Deferred compensation                           |                                                  |              |           |           |  |                |       |               |  |          | (1,282 | )    |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (1,282 | )      
|Deferred compensation forfeiture                |                                                  |              |           |           |  |                |       |               |  |          | 1,101  |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 1,101  |        
|Cash dividends to common shareholders           |                                                  |              |           |           |  |                |       |               |  |          |       |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   | (57     | )     |  |   | (57    | )      
|Net income                                      |                                                  |              |           |           |  |                |       |               |  |          |       |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   | 5,386   |       |  |   | 5,386  |        
|                                                |                                                  |              |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Balance, December 31, 2000                      |                                                  |              | 7,011,601  |           |  | $              | 7,012  |               |  | $        | 15,268 |      |  |          | (1,023,818 | )     |  | $ | (14,922 | ) |  |   |        |         |   | $ | 64,979  |       |  | $ | 72,337 |        
|Stock issued for director compensation          |                                                  |              | 17,948     |           |  |                | 18     |               |  |          | 87     |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 105    |        
|Stock options exercised and related tax benefit |                                                  |              | 11,100     |           |  |                | 11     |               |  |          | 62     |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 73     |        
|Restricted stock forfeiture                     |                                                  |              | (154,000   | )         |  |                | (154   | )             |  |          | (530   | )    |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (684   | )      
|Deferred compensation                           |                                                  |              |           |           |  |                |       |               |  |          | 330    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 330    |        
|Deferred compensation forfeiture                |                                                  |              |           |           |  |                |       |               |  |          | 684    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 684    |        
|Net loss                                        |                                                  |              |           |           |  |                |       |               |  |          |       |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   | (2,448  | )     |  |   | (2,448 | )      
|                                                |                                                  |              |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Balance, December 31, 2001                      |                                                  |              | 6,886,649  |           |  | $              | 6,887  |               |  | $        | 15,901 |      |  |          | (1,023,818 | )     |  | $ | (14,922 | ) |  |   |        |         |   | $ | 62,531  |       |  | $ | 70,397 |        
|Stock issued for director compensation          |                                                  |              | 13,428     |           |  |                | 13     |               |  |          | 77     |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 90     |        
|Stock issued for executive compensation         |                                                  |              |           |           |  |                |       |               |  |          | (6     | )    |  |          | 750        |       |  |   | 11      |   |  |   |        |         |   |   |        |       |  |   | 5      |        
|Stock options exercised and related tax benefit |                                                  |              | 53,600     |           |  |                | 54     |               |  |          | 259    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 313    |        
|Restricted stock forfeiture                     |                                                  |              | (60,000    | )         |  |                | (60    | )             |  |          | (295   | )    |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (355   | )      
|Deferred compensation                           |                                                  |              |           |           |  |                |       |               |  |          | 328    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 328    |        
|Deferred compensation forfeiture                |                                                  |              |           |           |  |                |       |               |  |          | 355    |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | 355    |        
|Retirement of treasury shares                   |                                                  |              | (1,023,068 | )         |  |                | (1,023 | )             |  |          | (2,416 | )    |  |          | 1,023,068  |       |  |   | 14,911  |   |  |   |        |         |   |   | (11,472 | )     |  |   |       |        
|Comprehensive income (loss):                    |                                                  |              |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|                                                | Net income                                       |              |            |          |  |                |        |              |  |          |        |     |  |          |            |      |  |   |         |  |  |   |         |        |   |   |         | 2,316 |  |   |        | 2,316   |  
|                                                | Minimum pension liability adjustment, net of tax |              |            |          |  |                |        |              |  |          |        |     |  |          |            |      |  |   |         |  |  |   |         | (11,431 | ) |   |         |      |  |   |        | (11,431 | )
|                                                |                                                  |              |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Comprehensive loss                              |                                                  |              |           |           |  |                |       |               |  |          |       |      |  |          |           |       |  |   |        |   |  |   |        |         |   |   |        |       |  |   | (9,115 | )      
|                                                |                                                  |              |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        
|Balance, December 31, 2002                      |                                                  |              | 5,870,609  |           |  | $              | 5,871  |               |  | $        | 14,203 |      |  |          |           |       |  |   |        |   |  | $ | (11,431 | )       |   | $ | 53,375  |       |  | $ | 62,018 |        
|                                                |                                                  |              |            |           |  |                |        |               |  |          |        |      |  |          |            |       |  |   |         |   |  |   |         |         |   |   |         |       |  |   |        |        

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

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NASHUA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |         |         |         |  
|------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ----------------------------------------------- | ----- | ------ | ------ | ------- | ------ | ------ | ------- | ------- | ------- | ------- | ------- | -
|                                                                                                              |                                                                                                             |                                                                    
|                                                                                                              |                                                                                                             | Year Ended December 31,                                            
|                                                                                                              |                                                                                                             |                                                                    
|                                                                                                              |                                                                                                             | 2002                                                                |                                                 | 2001  |        | 2000  
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |       
|(In thousands)                                                                                                |                                                                                                             |                                                                     |                                                 |       |        |       
|Cash Flows from Operating Activities of
    Continuing Operations                                             |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Net income (loss)                                                                                             |                                                                                                             | $                                                                   | 2,316                                           |       |        | $      | (2,448  | )      |        | $       | 5,386   |        
|Adjustments to reconcile net income (loss) to
    cash provided by (used in) continuing operating activities: |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|                                                                                                              | Depreciation and amortization                                                                               |                                                                     |                                                 | 7,581 |        |        |         | 9,748  |        |         |         | 9,304   |        
|                                                                                                              | Deferred income taxes                                                                                       |                                                                     |                                                 | 1,603 |        |        |         | (1,566 | )      |         |         | 14,326  |        
|                                                                                                              | Stock based compensation                                                                                    |                                                                     |                                                 | 423   |        |        |         | 435    |        |         |         | 105     |        
|                                                                                                              | Pension settlement income                                                                                   |                                                                     |                                                 |      |        |        |         |       |        |         |         | (18,606 | )      
|                                                                                                              | Net gain on curtailment of pension and
    postretirement plans                                             |                                                                     |                                                 | (181  | )      |        |         |       |        |         |         |        |        
|                                                                                                              | Loss on sale/disposal of fixed assets                                                                       |                                                                     |                                                 | 42    |        |        |         | 2,250  |        |         |         | 48      |        
|                                                                                                              | Equity in (income) loss from unconsolidated
    joint ventures                                              |                                                                     |                                                 | 59    |        |        |         | (23    | )      |         |         | 5       |        
|                                                                                                              | Change in operating assets and liabilities, net
    of effects from acquisition and disposal of businesses: |                                                                     |                                                 |       |        |        |         |        |        |         |         |         |        
|                                                                                                              |                                                                                                             | Restricted cash                                                     |                                                 |       |       |        |         |        |       |         |         |         | 5,000   |        
|                                                                                                              |                                                                                                             | Accounts receivable                                                 |                                                 |       | (2,554 | )      |         |        | 1,207  |         |         |         | 2,475   |        
|                                                                                                              |                                                                                                             | Inventories                                                         |                                                 |       | 1,418  |        |         |        | 4,019  |         |         |         | 8,683   |        
|                                                                                                              |                                                                                                             | Tax receivable                                                      |                                                 |       | (517   | )      |         |        | 8,474  |         |         |         | (7,100  | )      
|                                                                                                              |                                                                                                             | Other assets, other current assets and loans to
    related parties |                                                 |       | (1,433 | )      |         |        | 245    |         |         |         | (2,105  | )      
|                                                                                                              |                                                                                                             | Accounts payable                                                    |                                                 |       | (1,623 | )      |         |        | (70    | )       |         |         | (2,696  | )      
|                                                                                                              |                                                                                                             | Accrued expenses                                                    |                                                 |       | (3,207 | )      |         |        | (2,283 | )       |         |         | (13,464 | )      
|                                                                                                              |                                                                                                             | Income taxes payable                                                |                                                 |       |       |        |         |        |       |         |         |         | (2,295  | )      
|                                                                                                              |                                                                                                             | Other long-term liabilities                                         |                                                 |       | 2,156  |        |         |        | (334   | )       |         |         | (169    | )      
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|                                                                                                              |                                                                                                             |                                                                     | Cash provided by (used in) operating activities |       |        | 6,083  |         |        |        | 19,654  |         |         |         | (1,103  | )
|Cash Flows from Investing Activities of
    Continuing Operations                                             |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Investment in plant and equipment                                                                             |                                                                                                             |                                                                     | (4,349                                          | )     |        |        | (2,375  | )      |        |         | (9,625  | )      
|Investment in unconsolidated joint venture                                                                    |                                                                                                             |                                                                     |                                                |       |        |        |        |        |        |         | (201    | )      
|Proceeds from sale of plant and equipment                                                                     |                                                                                                             |                                                                     | 90                                              |       |        |        | 1,391   |        |        |         | 1,854   |        
|Business acquisitions, net of cash acquired                                                                   |                                                                                                             |                                                                     | (1,700                                          | )     |        |        |        |        |        |         | (60,341 | )      
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|                                                                                                              |                                                                                                             |                                                                     | Cash used in investing activities               |       |        | (5,959 | )       |        |        | (984    | )       |         |         | (68,313 | )
|Cash Flows from Financing Activities of
    Continuing Operations                                             |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Net proceeds from revolving portion of long-term
    debt                                                     |                                                                                                             |                                                                     | 1,662                                           |       |        |        |        |        |        |         | 45,200  |        
|Principal repayments on term portion of long-term
    debt                                                    |                                                                                                             |                                                                     | (2,000                                          | )     |        |        | (20,431 | )      |        |         | (511    | )      
|Repayment on refinancing                                                                                      |                                                                                                             |                                                                     | (27,630                                         | )     |        |        |        |        |        |         |        |        
|Proceeds from refinancing                                                                                     |                                                                                                             |                                                                     | 27,688                                          |       |        |        |        |        |        |         |        |        
|Dividends paid                                                                                                |                                                                                                             |                                                                     |                                                |       |        |        |        |        |        |         | (57     | )      
|Proceeds from shares exercised under stock option
    plans                                                   |                                                                                                             |                                                                     | 239                                             |       |        |        | 73      |        |        |         |        |        
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|                                                                                                              |                                                                                                             |                                                                     | Cash provided by (used in) financing activities |       |        | (41    | )       |        |        | (20,358 | )       |         |         | 44,632  |  
|Cash provided by (used in) activities of
    discontinued operations                                          |                                                                                                             |                                                                     | (61                                             | )     |        |        | 1,716   |        |        |         | 763     |        
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Increase (decrease) in cash and cash equivalents                                                              |                                                                                                             |                                                                     | 22                                              |       |        |        | 28      |        |        |         | (24,021 | )      
|Cash and cash equivalents at beginning of year                                                                |                                                                                                             |                                                                     | 1,063                                           |       |        |        | 1,035   |        |        |         | 25,056  |        
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Cash and cash equivalents at end of year                                                                      |                                                                                                             | $                                                                   | 1,085                                           |       |        | $      | 1,063   |        |        | $       | 1,035   |        
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Supplemental Disclosures of Cash Flow
    Information                                                         |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Interest paid (net of amount capitalized)                                                                     |                                                                                                             | $                                                                   | 1,452                                           |       |        | $      | 2,862   |        |        | $       | 2,937   |        
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Income taxes paid for continuing operations, net                                                              |                                                                                                             | $                                                                   | 203                                             |       |        | $      | (4,800  | )      |        | $       | 2,579   |        
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Supplemental Schedule of Non-Cash Investing
    and Financing Activities                                      |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Fair value of assets acquired in acquisitions                                                                 |                                                                                                             | $                                                                   | 4,694                                           |       |        |        |        |        |        |         |        |        
|Accrued liability to purchase Dietzgen inventories                                                            |                                                                                                             |                                                                     | (1,052                                          | )     |        |        |        |        |        |         |        |        
|Note payable with Computer Imaging Supplies,
    Inc.                                                         |                                                                                                             |                                                                     | (1,000                                          | )     |        |        |        |        |        |         |        |        
|Liabilities assumed in acquisitions                                                                           |                                                                                                             |                                                                     | (942                                            | )     |        |        |        |        |        |         |        |        
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        
|Cash paid for acquisitions                                                                                    |                                                                                                             | $                                                                   | 1,700                                           |       |        | $      |        |        |        | $       |        |        
|                                                                                                              |                                                                                                             |                                                                     |                                                 |       |        |        |         |        |        |         |         |        

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

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NASHUA CORPORATION AND SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


Note 1:     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, transaction receipts and toners/developers for use in
photocopiers.

Segment and Related Information

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

(1)     Label Products

(2)     Specialty Paper
Products

(3)     Imaging Supplies

Basis of Consolidation

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

Revenue Recognition

Revenues are recognized when title passes and the
risks and rewards of ownership have passed to the customer,
based on the terms of sale.

Environmental Expenditures

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

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

Shipping Costs

We classify third-party shipping costs as a
component of selling and distribution expenses in our
Consolidated Statement of Operations. Third-party shipping costs
totaled $10.0 million, $11.1 million and
$9.4 million for the years ended December 31, 2002,
2001 and 2000, respectively.

Research and Development

We expense research and development costs as
incurred.

Use of Estimates

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

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Cash Equivalents

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

Accounts Receivable

Our consolidated accounts receivable balance is
net of allowances for doubtful accounts of $.7 million at
December 31, 2002 and $1.2 million at
December 31, 2001.

Inventories

Our inventories are carried at the lower of cost
or market. Cost is determined by the first-in, first-out or
commonly known as FIFO method for approximately 83 percent
and 81 percent of our inventories at December 31, 2002
and 2001, respectively, and by the last-in, first-out or
commonly known as LIFO method for the balance. If the FIFO
method had been used to cost all inventories, the balances would
have been approximately $1.8 million and $1.9 million
higher at December 31, 2002 and 2001.

Plant and Equipment

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

Depreciation expense was $7.3 million for
2002, $8.1 million for 2001 and $8.0 million for 2000.
For financial reporting purposes, we compute depreciation
expense using the straight-line method over the following
estimated useful lives:

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

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

Goodwill

Goodwill represents the excess of the cost of
acquired businesses over the fair value of identifiable net
assets acquired. Through 2001, we amortized goodwill on a
straight-line basis over 20 years. Amortization of goodwill
was $1.7 million for 2001 and $1.1 million for 2000.
Effective January 1, 2002, we no longer amortize goodwill
in accordance with Statement of Financial Accounting Standards
No. 142. We now evaluate our goodwill for impairment under
the new guidelines of FAS 142.

Stock-Based Compensation

At December 31, 2002, we had three stock
compensation plans, which are described more fully in
Note 9. We account for those plans under the recognition
and measurement principles of APB No. 25, Accounting
for Stock Issued to Employees, and related
interpretations. Under APB No. 25, no stock-based employee

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

compensation cost relating to stock option awards
is reflected in our net income, as all options under our plans
had an exercise price equal to the market value of our common
stock on their date of grant. Stock-based compensation,
representing grants to non-employee directors and vesting of
performance-based restricted stock awards was $.4 million
for 2002 and 2001 and $.1 million for 2000. The following
table illustrates the effect on net income and earnings per
share if we had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based
Compensation, as amended by Statement of Financial
Accounting Standards No. 148, Accounting for
Stock-based Compensation  Transition and
Disclosure, to stock-based employee compensation:

|                                                                                                                                                  |                       |                         |       |      |  |      |        |      |   |   |       |     | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | ----- | ---- |  | ---- | ------ | ---- | - | - | ----- | --- | 
|                                                                                                                                                  |                       |                        
|                                                                                                                                                  |                       | Year Ended December 31,
|                                                                                                                                                  |                       |                        
|                                                                                                                                                  |                       | 2002                    |       | 2001 |  | 2000
|(In thousands, except per share data)                                                                                                             |                       |                         |       |      |  |     
|Net income (loss), as reported                                                                                                                    |                       | $                       | 2,316 |      |  | $    | (2,448 | )    |   | $ | 5,386 |    
|Add: Stock-based employee compensation expense
    included in the determination of net income (loss) as
    reported, net of related tax effects |                       |                         | 259   |      |  |      | 435    |      |   |   | 44    |    
|Deduct: Stock-based employee compensation expense
    determined under the fair value based method for all awards, net
    of related tax effects |                       |                         | (683  | )    |  |      | (1,471 | )    |   |   | (449  | )  
|                                                                                                                                                  |                       |                         |       |      |  |      |        |      |   |   |       |    
|Pro forma net income (loss)                                                                                                                       |                       | $                       | 1,892 |      |  | $    | (3,484 | )    |   | $ | 4,981 |    
|                                                                                                                                                  |                       |                         |       |      |  |      |        |      |   |   |       |    
|Earnings (loss) per share:                                                                                                                        |                       |                         |       |      |  |      |        |      |   |   |       |    
|                                                                                                                                                  | Basic  as reported   |                         | $     | .40  |  |      | $      | (.43 | ) |   | $     | .95 | 
|                                                                                                                                                  |                       |                         |       |      |  |      |        |      |   |   |       |    
|                                                                                                                                                  | Basic  pro forma     |                         | $     | .33  |  |      | $      | (.61 | ) |   | $     | .88 | 
|                                                                                                                                                  |                       |                         |       |      |  |      |        |      |   |   |       |    
|                                                                                                                                                  | Diluted  as reported |                         | $     | .39  |  |      | $      | (.43 | ) |   | $     | .95 | 
|                                                                                                                                                  |                       |                         |       |      |  |      |        |      |   |   |       |    
|                                                                                                                                                  | Diluted  pro forma   |                         | $     | .32  |  |      | $      | (.61 | ) |   | $     | .88 | 
|                                                                                                                                                  |                       |                         |       |      |  |      |        |      |   |   |       |    

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.

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 1,026 full-time employees at
February 7, 2003. Approximately 335 of our employees are
members of one of several unions, principally the Paper, Allied
Industrial, Chemical and Energy Workers International Union. We
believe our employee relations are satisfactory. None of our
labor agreements, as disclosed in Item 1 of this Annual
Report on Form 10-K, expire in 2003.

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Concentrations of Supply

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

Fair Value of Financial Instruments

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

Earnings per Common and Common Equivalent
Share

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

Reclassification

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



|        |                 
|------- | ----------------
|Note 2: | Business Changes

Business Acquisition

In June 2002, we acquired certain assets of
Dietzgen LLC, including trademarks, tradenames, customer lists
and certain equipment and inventories out of bankruptcy.
Dietzgen, an after-market provider of large-format digital media
and imaging supplies for the architectural, engineering and
construction markets, filed for protection under Chapter 11
of the U.S. Bankruptcy Code on January 31, 2002.
Dietzgens sales for the three months ended March 31,
2002 were approximately $3.2 million. Operating activity
relating to the assets acquired from Dietzgen is reported as
part of our Specialty Paper Products segment from the date of
acquisition.

In April 2002, we acquired the assets of Computer
Imaging Supplies Inc., a privately held manufacturer and
marketer of security and fraud prevention products for the
point-of-sale transaction industry and of inkjet and toner
cartridges. The products of Computer Imaging Supplies include
multi-color ribbons and specialized inks that prevent
unauthorized duplication of cash register receipts. Computer
Imaging Supplies had 2001 net sales of approximately
$6 million. Operating activity relating to the assets
acquired from Computer Imaging Supplies is reported as part of
our Specialty Paper Products segment from the date of
acquisition.

In April 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 were
included in our Consolidated Statement of Operations 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. We began formulating
plans related to

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002 totaled
$2.0 million.

Restructuring and Other Unusual
Charges

Net restructuring and unusual income of $88,000
for 2002 represents a net reduction to our previously
established restructuring reserves.

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

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

Restructuring and other unusual charges for 2001
of approximately $3.0 million included restructuring
charges of $4.1 million related to the shutdown of our
lamination business in our Label Products segment completed
during 2001, $.6 million associated with the outsourcing of
our toner filling operation within our Imaging Supplies segment
completed in the first half of 2002, and a net $.3 million
of other restructuring and unusual items, partially offset by
unusual income of $1.4 million resulting from an anti-trust
settlement and $.6 million from the sale of land in
Merrimack, NH. Our 2001 provision for workforce reductions
included severance for 141 employees. Sales for our discontinued
lamination business were approximately $10.7 million for
2001 and $17.0 million for 2000. The restructuring
activities provided for in the balance at December 31, 2000
were completed during 2001 and the amounts charged against the
reserve did not change materially from our beginning reserve
balance of $.7 million.

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

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

38



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 within our Imaging Supplies segment,
$.5 million in connection with 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 partial reversal of a loss accrual relating
to the settlement of a 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.

Discontinued Operations

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

|                                                            |  |      |        |      |  |   |        |  
|----------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                            |  | 2002 |        | 2001
|                                                            |  |      |        |     
|(In thousands)                                              |  |      |        |     
|Assets                                                      |  | $    | 930    |      |  | $ | 1,055  |  
|Liabilities                                                 |  |      | (3,085 | )    |  |   | (3,270 | )
|                                                            |  |      |        |      |  |   |        |  
|Net assets and (liabilities) of discontinued
    operations |  | $    | (2,155 | )    |  | $ | (2,215 | )
|                                                            |  |      |        |      |  |   |        |  

Our asset balance as of December 31, 2002,
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.,
formerly a publicly held company. Cerion ceased operations
during the fourth quarter of 1998 and is currently in the
process of liquidation. We account for our investment in Cerion
based on its expected net realizable value, net of taxes.

Our liability balance consists primarily of tax,
environmental and workers compensation reserves relating to
discontinued operations.



|        |                  
|------- | -----------------
|Note 3: | Intangible Assets

Details of acquired intangible assets are as
follows:

|                                 |  |                      |       |              |  |              |     |  |  |  |         | 
|-------------------------------- |  | -------------------- | ----- | ------------ |  | ------------ | --- |  |  |  | ------- | 
|                                 |  |                     
|                                 |  | At December 31, 2002
|                                 |  |                     
|                                 |  |                      |       | Weighted    
|                                 |  | Gross                |       |              |  | Average     
|                                 |  | Carrying             |       | Accumulated  |  | Amortization
|                                 |  | Amount               |       | Amortization |  | Period      
|                                 |  |                      |       |              |  |             
|(In thousands)                   |  |                      |       |              |  |             
|Trademarks and tradenames        |  | $                    | 560   |              |  | $            | 57  |  |  |  | 9 years | 
|Licensing agreement              |  |                      | 230   |              |  |              | 35  |  |  |  | 5 years | 
|Customer relationships and lists |  |                      | 810   |              |  |              | 87  |  |  |  | 3 years | 
|Customer contracts               |  |                      | 170   |              |  |              | 81  |  |  |  | 2 years | 
|Non-competition agreements       |  |                      | 100   |              |  |              | 15  |  |  |  | 5 years | 
|Patented technology              |  |                      | 90    |              |  |              | 13  |  |  |  | 5 years | 
|                                 |  |                      |       |              |  |              |     |  |  |  |         | 
|                                 |  | $                    | 1,960 |              |  | $            | 288 |  |  |  |         | 
|                                 |  |                      |       |              |  |              |     |  |  |  |         | 

39



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                     |                                  |                      |  |              |  |              |     |     |  |  |  |  | 
|------------------------------------ | -------------------------------- | -------------------- |  | ------------ |  | ------------ | --- | --- |  |  |  |  | 
|                                     |                                  |                     
|                                     |                                  | At December 31, 2002
|                                     |                                  |                     
|                                     |                                  |                      |  | Weighted    
|                                     |                                  | Gross                |  |              |  | Average     
|                                     |                                  | Carrying             |  | Accumulated  |  | Amortization
|                                     |                                  | Amount               |  | Amortization |  | Period      
|                                     |                                  |                      |  |              |  |             
|(In thousands)                       |                                  |                      |  |              |  |             
|Amortization Expense:                |                                  |                      |  |              |  |              |     |     |  |  |  | 
|For the year ended December 31, 2002 |                                  |                      |  |              |  | $            | 288 |     |  |  |  | 
|Estimated for the year ending:       |                                  |                      |  |              |  |              |     |     |  |  |  | 
|                                     | December 31, 2003                |                      |  |              |  |              | $   | 391 |  |  |  |  | 
|                                     | December 31, 2004                |                      |  |              |  |              | $   | 333 |  |  |  |  | 
|                                     | December 31, 2005                |                      |  |              |  |              | $   | 265 |  |  |  |  | 
|                                     | December 31, 2006                |                      |  |              |  |              | $   | 247 |  |  |  |  | 
|                                     | December 31, 2007                |                      |  |              |  |              | $   | 107 |  |  |  |  | 
|                                     | December 31, 2008 and thereafter |                      |  |              |  |              | $   | 329 |  |  |  |  | 



|        |         
|------- | --------
|Note 4: | Goodwill

The carrying amount of goodwill by segment and
activity during the twelve months ended December 31, 2002
is as follows:

|                                                                                  |  |                  |        |                |  |       |        |  |  |   |        | 
|--------------------------------------------------------------------------------- |  | ---------------- | ------ | -------------- |  | ----- | ------ |  |  | - | ------ | 
|                                                                                  |  | Specialty Paper  |        | Label Products |  |      
|                                                                                  |  | Products Segment |        | Segment        |  | Total
|                                                                                  |  |                  |        |                |  |      
|(In thousands)                                                                    |  |                  |        |                |  |      
|Balance as of December 31, 2001                                                   |  | $                | 13,586 |                |  | $     | 15,320 |  |  | $ | 28,906 | 
|Goodwill resulting from the acquisition of
    Computer Imaging Supplies business |  |                  | 556    |                |  |       |       |  |  |   | 556    | 
|                                                                                  |  |                  |        |                |  |       |        |  |  |   |        | 
|Balance as of December 31, 2002                                                   |  | $                | 14,142 |                |  | $     | 15,320 |  |  | $ | 29,462 | 
|                                                                                  |  |                  |        |                |  |       |        |  |  |   |        | 

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

Adoption of Statement of Financial Accounting
Standard No. 142

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

|                                      |  |              |       |              |  |              |        |   |  |   |       | 
|------------------------------------- |  | ------------ | ----- | ------------ |  | ------------ | ------ | - |  | - | ----- | 
|                                      |  |             
|                                      |  | Year Ended  
|                                      |  |             
|                                      |  | December 31, |       | December 31, |  | December 31,
|                                      |  | 2002         |       | 2001         |  | 2000        
|                                      |  |              |       |              |  |             
|(In thousands, except per share data) |  |              |       |              |  |             
|Reported net income (loss)            |  | $            | 2,316 |              |  | $            | (2,448 | ) |  | $ | 5,386 | 
|Goodwill amortization                 |  |              |      |              |  |              | 1,656  |   |  |   | 1,142 | 
|                                      |  |              |       |              |  |              |        |   |  |   |       | 
|Adjusted net income (loss)            |  | $            | 2,316 |              |  | $            | (792   | ) |  | $ | 6,528 | 
|                                      |  |              |       |              |  |              |        |   |  |   |       | 
|Basic earnings per share              |  |              |       |              |  |              |        |   |  |   |       | 
|Reported net income (loss)            |  | $            | 0.40  |              |  | $            | (0.43  | ) |  | $ | .95   | 
|Goodwill amortization                 |  |              |      |              |  |              | 0.29   |   |  |   | .20   | 
|                                      |  |              |       |              |  |              |        |   |  |   |       | 
|Adjusted net income (loss)            |  | $            | 0.40  |              |  | $            | (0.14  | ) |  | $ | 1.15  | 
|                                      |  |              |       |              |  |              |        |   |  |   |       | 

40



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                      |  |              |      |              |  |              |       |   |  |   |      | 
|------------------------------------- |  | ------------ | ---- | ------------ |  | ------------ | ----- | - |  | - | ---- | 
|                                      |  |             
|                                      |  | Year Ended  
|                                      |  |             
|                                      |  | December 31, |      | December 31, |  | December 31,
|                                      |  | 2002         |      | 2001         |  | 2000        
|                                      |  |              |      |              |  |             
|(In thousands, except per share data) |  |              |      |              |  |             
|Diluted earnings per share            |  |              |      |              |  |              |       |   |  |   |      | 
|Reported net income (loss)            |  | $            | 0.39 |              |  | $            | (0.43 | ) |  | $ | .95  | 
|Goodwill amortization                 |  |              |     |              |  |              | 0.29  |   |  |   | .20  | 
|                                      |  |              |      |              |  |              |       |   |  |   |      | 
|Adjusted net income (loss)            |  | $            | 0.39 |              |  | $            | (0.14 | ) |  | $ | 1.15 | 
|                                      |  |              |      |              |  |              |       |   |  |   |      | 

Note
5:     Indebtedness

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, inventories, certain machinery and equipment and
real estate located in Merrimack, NH. At December 31, 2002,
the approximate book value of these assets was
$76.4 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 was .75 percent per annum through
June 30, 2002, after which it ranges from zero up to
..75 percent per annum based on our total debt to EBITDA
ratio. The initial LIBOR margin was 2.75 percent per annum
through June 30, 2002, after which it ranges from
1.75 percent per annum up to 2.75 percent per annum
based on our total debt to EBITDA ratio. We are also subject to
a non-use fee for any unutilized portion of our revolving loan
that ranges from .25 percent to .50 percent based on
our total debt to EBITDA ratio. The revolving loan commitment is
subject to certain limitations, such as the maximum principal
amount of the revolving credit agreement is the lesser of
(a) $30 million, or (b) our borrowing base, which
is defined as the sum of 80 percent of our eligible
accounts receivable, plus the lesser of (i) 50 percent
of our eligible inventory or (ii) $12 million. Our
Borrowing Base was $30.9 million at December 31, 2002,
which provided additional borrowing capacity of
$10.0 million at year-end. The maturity date of this Credit
Agreement is February 28, 2005. For the twelve months ended
December 31, 2002, the weighted average annual interest
rate on our long-term debt was 4.6 percent. 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. We were in
compliance with the above quarterly financial covenants for
2002. For future quarters, our covenants are as follows:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain a fixed charge coverage ratio of less
    than 1.10 to 1.00.                                                                                                                                     
|
| |  | Maintain a funded debt to EBITDA ratio of less
    than 3.00 to 1.00 through March 31, 2003 and less than 2.75
    to 1.00 thereafter.                                                                    
|
| |  | Maintain a minimum EBITDA level of
    $11.5 million for our first quarter of 2003 increasing each
    quarter in increments of $.5 million to $15.0 million
    for the quarter ending December 31, 2004.

Furthermore, without prior consent of our
lenders, the Credit Agreement limits, among other things, the
payment of dividends to $.6 million, capital expenditures
to $8.0 million, the incurrence of additional debt and
restricts the sale of certain assets and merger or acquisition
activities.

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

|                                    |  |      |       |      |  |      |       |       |  |   |        |  |  |   |        | 
|----------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ----- |  | - | ------ |  |  | - | ------ | 
|                                    |  | 2003 |       | 2004 |  | 2005 |       | Total
|(In thousands)                      |  |      |       |      |  |      |       |      
|Term portion of long-term debt      |  | $    | 2,000 |      |  | $    | 2,300 |       |  | $ | 3,700  |  |  | $ | 8,000  | 
|Revolving portion of long-term debt |  |      |      |      |  |      |      |       |  |   | 17,000 |  |  |   | 17,000 | 
|                                    |  |      |       |      |  |      |       |       |  |   |        |  |  |   |        | 
|                                    |  | $    | 2,000 |      |  | $    | 2,300 |       |  | $ | 20,700 |  |  | $ | 25,000 | 
|                                    |  |      |       |      |  |      |       |       |  |   |        |  |  |   |        | 

41



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6:     Notes
Payable to Related Parties

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

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

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

|               |  |      |     |      |  |      |     |      |  |       |     |  |  |   |     |  |  |   |       | 
|-------------- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ----- | --- |  |  | - | --- |  |  | - | ----- | 
|               |  | 2003 |     | 2004 |  | 2005 |     | 2006 |  | Total
|(In thousands) |  |      |     |      |  |      |     |      |  |      
|Notes payable  |  | $    | 250 |      |  | $    | 250 |      |  | $     | 710 |  |  | $ | 250 |  |  | $ | 1,460 | 

Note 7:     Income
Taxes

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

|                                  |  |      |       |      |  |      |        |   |  |   |        | 
|--------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                  |  | 2002 |       | 2001 |  | 2000
|(In thousands)                    |  |      |       |      |  |     
|United States                     |  | $    | 3,828 |      |  | $    | (3,035 | ) |  | $ | 12,413 | 
|Foreign                           |  |      |      |      |  |      | 253    |   |  |   | 501    | 
|                                  |  |      |       |      |  |      |        |   |  |   |        | 
|Consolidated pretax income (loss) |  | $    | 3,828 |      |  | $    | (2,782 | ) |  | $ | 12,914 | 
|                                  |  |      |       |      |  |      |        |   |  |   |        | 

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

|               |               |                                      |   |       |       |      |   |        |        |   |   |        |        |  
|-------------- | ------------- | ------------------------------------ | - | ----- | ----- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|               |               | 2002                                 |   | 2001  |       | 2000
|(In thousands) |               |                                      |   |       |       |     
|Current:       |               |                                      |   |       |       |      |   |        |        |   |   |       
|               | United States |                                      | $ | (91   | )     |      | $ | 1,131  |        |   | $ | (6,233 | )     
|               | Foreign       |                                      |   |      |       |      |   | 101    |        |   |   | 291    |       
|               | State         |                                      |   |      |       |      |   |       |        |   |   | (856   | )     
|               |               |                                      |   |       |       |      |   |        |        |   |   |       
|               |               | Total current                        |   |       | (91   | )    |   |        | 1,232  |   |   |        | (6,798 | )
|Deferred:      |               |                                      |   |       |       |      |   |        |        |   |   |       
|               | United States |                                      |   | 1,362 |       |      |   | (1,504 | )      |   |   | 12,632 |       
|               | Foreign       |                                      |   |      |       |      |   |       |        |   |   |       |       
|               | State         |                                      |   | 241   |       |      |   | (62    | )      |   |   | 1,694  |       
|               |               |                                      |   |       |       |      |   |        |        |   |   |       
|               |               | Total deferred                       |   |       | 1,603 |      |   |        | (1,566 | ) |   |        | 14,326 |  
|               |               |                                      |   |       |       |      |   |        |        |   |   |       
|               |               | Provision (benefit) for income taxes |   | $     | 1,512 |      |   | $      | (334   | ) |   | $      | 7,528  |  
|               |               |                                      |   |       |       |      |   |        |        |   |   |       

42



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                             |                         |      |        |        |  |   |        |       | 
|------------------------------------------------------------ | ----------------------- | ---- | ------ | ------ |  | - | ------ | ----- | 
|                                                             |                         | 2002 |        | 2001  
|(In thousands)                                               |                         |      |        |       
|Depreciation                                                 |                         | $    | (561   | )      |  | $ | (1,560 | )    
|Other                                                        |                         |      | (367   | )      |  |   | (582   | )    
|                                                             |                         |      |        |        |  |   |        |      
|Gross deferred tax liabilities                               |                         |      | (928   | )      |  |   | (2,142 | )    
|                                                            
|Restructuring                                                |                         |      | 490    |        |  |   | 1,846  |      
|Pension and postretirement benefits                          |                         |      | 7,882  |        |  |   | 765    |      
|State loss carryforwards                                     |                         |      | 1,922  |        |  |   | 3,316  |      
|Federal net operating loss carryforwards and tax
    credits |                         |      | 1,370  |        |  |   | 1,220  |      
|Accrued expenses                                             |                         |      | 886    |        |  |   | 2,053  |      
|Inventory reserve                                            |                         |      | 925    |        |  |   | 504    |      
|Bad debt reserve                                             |                         |      | 409    |        |  |   | 636    |      
|Other                                                        |                         |      | 1,619  |        |  |   | 1,802  |      
|                                                             |                         |      |        |        |  |   |        |      
|Gross deferred tax asset                                     |                         |      | 15,503 |        |  |   | 12,142 |      
|Deferred tax assets valuation allowance                      |                         |      | (600   | )      |  |   | (1,885 | )    
|                                                             |                         |      |        |        |  |   |        |      
|                                                             | Net deferred tax assets |      | $      | 13,975 |  |   | $      | 8,115 | 
|                                                             |                         |      |        |        |  |   |        |      

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:

|                                               |                              |      |      |      |   |      |       |       |    |  |      |      |  
|---------------------------------------------- | ---------------------------- | ---- | ---- | ---- | - | ---- | ----- | ----- | -- |  | ---- | ---- | -
|                                               |                              | 2002 |      | 2001 |   | 2000
|                                               |                              |      |      |      |   |     
|United States federal statutory rate (benefit) |                              |      | 35.0 | %    |   |      | (35.0 | )%    |    |  | 35.0 | %   
|State taxes, net of federal tax benefit        |                              |      | 4.1  |      |   |      | (1.3  | )     |    |  | 4.2  |     
|Change in valuation allowance                  |                              |      |     |      |   |      |      |       |    |  | 6.1  |     
|Expired net operating loss                     |                              |      |     |      |   |      |      |       |    |  | 13.8 |     
|Non-deductible goodwill                        |                              |      |     |      |   |      | 21.7  |       |    |  | 3.4  |     
|Other, net                                     |                              |      | .4   |      |   |      | 2.6   |       |    |  | (4.2 | )   
|                                               |                              |      |      |      |   |      |       |       |    |  |      |     
|                                               | Effective tax rate (benefit) |      |      | 39.5 | % |      |       | (12.0 | )% |  |      | 58.3 | %
|                                               |                              |      |      |      |   |      |       |       |    |  |      |     

At December 31, 2002, other current assets
included $3.8 million of net deferred tax assets and
$.7 million of tax receivables, and other assets included
$10.2 million of net deferred tax assets. During 2002, we
added deferred tax assets of $7.5 million associated with a
minimum pension liability adjustment as discussed in detail in
Note 12 to our consolidated financial statements. At
December 31, 2001, $5.2 million and $2.9 million
of net deferred tax assets were included in other current assets
and other assets, respectively. At December 31, 2002 and
2001, $5.4 million and $5.1 million of accrued taxes
were included in accrued expenses.

At December 31, 2002, we had
$1.9 million of state net operating loss carryforwards and
$1.4 million of Federal tax credit carryforwards, which are
available to offset future domestic taxable earnings. The state
net operating loss carryforward benefits expire between 2004 and
2020. Included in the $1.4 million of Federal tax credit
carryforwards are business tax credits of $.6 million that
expire beginning in 2013 and $.8 million of tax credit
carryforwards for alternative minimum tax that have no
expiration date. In the fourth quarter of 2002, we evaluated the
realizability of state net operating loss carryforwards taking
into consideration current projections of future taxable income,
and changes in the forecasted timing for deductibility of certain

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

significant temporary differences. Based upon
this assessment, we believe that it is more likely than not that
$.6 million of state net operating loss carryforwards will
not be realized prior to their expiration. In the fourth
quarter, we decreased both the tax asset and related valuation
allowance by $1.3 million for state net operating loss
carryforwards.

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

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 related 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 disagreed with the position taken by the IRS and
filed a formal protest of the proposed adjustments on
January 12, 1999. On October 21, 2002, we reported
that the Company had reached an agreement with the Appeals
Office of the United States Internal Revenue Service regarding
an outstanding proposed assessment of federal income tax for the
years 1992 to 1994 subject to final review by the Joint
Committee on Taxation of the United States Congress. The
agreement with the IRS Appeals Office determines the
Companys tax liability for the years 1989 through 1994 and
result in a net tax refund in the amount of $331,000 for that
period. While the original adjustments proposed by the Internal
Revenue Service were for the years 1992 through 1994, the
agreement impacts the years 1989 through 1994 due to the
carryback of tax losses and credits and the recomputation of
alternative minimum taxes. The Company received a letter, dated
December 27, 2002, from the IRS Appeals Office indicating
that the Joint Committee on Taxation has taken no exception to
the conclusions reached by the IRS Appeals Office in the
agreement settling the Companys federal income tax
liability for the years 1989 through 1994. Accordingly, the
agreement with the IRS Appeals Office is now final.

We settled all outstanding issues for the years
1989 through 1992 with the New Hampshire Department of Revenue
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, 2002,
including liabilities related to matters in dispute with taxing
authorities, we can provide no assurances that we will prevail
in our defense against adjustments proposed in these pending or
future federal and state examinations. In addition, the ultimate
resolution of these open tax matters could be either in excess
of or less than current reserves.

Note 8:     Shareholders
Equity

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 credit agreement,
without the prior approval of our lenders. We did not declare or
pay a cash dividend on our common stock in 2002 or 2001 and do
not currently intend to pay dividends in the foreseeable future.

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002, no shares had been
purchased under this authorization.

Note 9:     Stock
Option and Stock Award Plans

We have three stock compensation plans at
December 31, 2002: the 1987 Stock Option Plan, the 1996
Stock Incentive Plan and the 1999 Shareholder Value Plan. Awards
may no longer be granted under the 1987 Plan. Awards under the
1996 Plan and the 1999 Plan are made at the discretion of our
Leadership and Compensation Committee of our Board of Directors.

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

Nonstatutory stock options have been awarded
under the 1996 and 1999 Plans. Of the 660,000 and
600,000 shares authorized by our Board of Directors for the
1996 and 1999 Plans, respectively, 17,418 and 750 shares
are available to be awarded as of December 31, 2002. Stock
options under the 1996 and 1999 Plans generally become
exercisable either (a) 50 percent on the first
anniversary of grant and the remainder on the second anniversary
of grant, (b) 100 percent at one year from the date of
grant, or (c) otherwise as determined by the Committee.
Certain options may become exercisable immediately under certain
circumstances and events as defined under these plans and option
agreements. Nonstatutory stock options under the 1996 Plan
expire 10 years and one day from the date of grant, and
incentive stock options expire 10 years from the date of
grant. Nonstatutory and incentive stock options granted under
the 1999 Plan expire 10 years from the date of grant.
Currently, there are no incentive stock options granted under
the 1996 and 1999 Plans.

Performance based restricted stock awards have
been granted to certain key executives under the 1996 and 1999
Plans. Restrictions on such shares lapse either (i) in
equal amounts when the average closing price of our common stock
reaches $19 and $21 for a consecutive 10 trading day period;
(ii) in equal amounts when the average closing price of our
common stock reaches $21 and $23 for a consecutive 10 trading
day period; or (iii) 33 1/3 percent per year on
each of the three anniversary dates following the date of grant.
Shares issued under the plans are initially recorded at their
fair market value on the date of grant with a corresponding
charge to additional paid-in capital representing the unearned
portion of these awards. During both 2002 and 2001, restrictions
lapsed on 33,333 shares. We recognized compensation expense
of $.3 million in 2002 and 2001 and $.1 million in
2000 in our Consolidated Statement of Operations, along with an
increase to additional paid-in capital, representing the earned
portion of these awards. Shares of performance based restricted
stock are forfeited if the specified closing prices of our
common stock are not met within five years of grant or the
executive leaves the Company.

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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, 2002, 2001 and 2000 and changes
during the years ended on those dates is presented below:

|                                                                                                        |  |        |         |          |  |        |       |          |  |        |          |          |  |   |       |  |  |  |         |   |  |   |       | 
|------------------------------------------------------------------------------------------------------- |  | ------ | ------- | -------- |  | ------ | ----- | -------- |  | ------ | -------- | -------- |  | - | ----- |  |  |  | ------- | - |  | - | ----- | 
|                                                                                                        |  |        |         |          |  |       
|                                                                                                        |  | 2002   |         | 2001     |  | 2000  
|                                                                                                        |  |        |         |          |  |       
|                                                                                                        |  |        |         | Weighted |  |        |       | Weighted |  |        |          | Weighted
|                                                                                                        |  |        |         | Average  |  |        |       | Average  |  |        |          | Average 
|                                                                                                        |  |        |         | Exercise |  |        |       | Exercise |  |        |          | Exercise
|                                                                                                        |  | Shares |         | Price    |  | Shares |       | Price    |  | Shares |          | Price   
|                                                                                                        |  |        |         |          |  |        |       |          |  |        |          |         
|Outstanding beginning of year                                                                           |  |        | 909,500 |          |  | $      | 7.68  |          |  |        | 649,735  |          |  | $ | 10.39 |  |  |  | 618,435 |   |  | $ | 11.94 | 
|Granted                                                                                                 |  |        | 61,200  |          |  |        | 6.72  |          |  |        | 470,700  |          |  |   | 4.88  |  |  |  | 206,200 |   |  |   | 7.06  | 
|Exercised                                                                                               |  |        | (53,600 | )        |  |        | 4.45  |          |  |        | (11,100  | )        |  |   | 6.63  |  |  |  |        |   |  |   |      | 
|Forfeited  non-vested                                                                                  |  |        | (4,025  | )        |  |        | 6.74  |          |  |        | (66,625  | )        |  |   | 5.78  |  |  |  | (86,500 | ) |  |   | 7.10  | 
|Forfeited  exercisable                                                                                 |  |        | (6,075  | )        |  |        | 11.00 |          |  |        | (131,710 | )        |  |   | 11.79 |  |  |  | (85,900 | ) |  |   | 16.21 | 
|Expired                                                                                                 |  |        | (1,500  | )        |  |        | 28.13 |          |  |        | (1,500   | )        |  |   | 34.63 |  |  |  | (2,500  | ) |  |   | 33.88 | 
|                                                                                                        |  |        |         |          |  |        |       |          |  |        |          |          |  |   |       |  |  |  |         |   |  |   |       | 
|Outstanding end of year                                                                                 |  |        | 905,500 |          |  | $      | 7.75  |          |  |        | 909,500  |          |  | $ | 7.68  |  |  |  | 649,735 |   |  | $ | 10.39 | 
|Options exercisable at end of year                                                                      |  |        | 732,000 |          |  | $      | 8.19  |          |  |        | 392,600  |          |  | $ | 10.94 |  |  |  | 356,785 |   |  | $ | 13.01 | 
|Weighted average fair value of options granted
    during the year (exercise price equals market price) |  |        |         |          |  | $      | 2.85  |          |  |        |          |          |  | $ | 1.99  |  |  |  |         |   |  | $ | 2.91  | 

The following table summarizes information about
stock options outstanding at December 31, 2002:

|                |  |                     |         |                     |  |          |           |             |  |          |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ------------------- | ------- | ------------------- |  | -------- | --------- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |                     |         |                    
|                |  | Options Outstanding |         | Options Exercisable
|                |  |                     |         |                    
|                |  |                     |         | Weighted            |  |          |           | Weighted   
|                |  | Number              |         | Weighted Average    |  | Average  |           | Number      |  | Average 
|Range of        |  | Outstanding         |         | Remaining           |  | Exercise |           | Exercisable |  | Exercise
|Exercise Prices |  | at 12/31/02         |         | Contractual Life    |  | Price    |           | at 12/31/02 |  | Price   
|                |  |                     |         |                     |  |          |           |             |  |         
|$ 4.01  $ 4.38 |  |                     | 234,200 |                     |  |          | 8.2 years |             |  | $        | 4.10  |  |  |  | 209,200 |  |  | $ | 4.11  | 
|$ 5.70  $ 6.63 |  |                     | 296,675 |                     |  |          | 8.3 years |             |  | $        | 6.08  |  |  |  | 206,675 |  |  | $ | 6.16  | 
|$ 6.65  $ 6.90 |  |                     | 61,200  |                     |  |          | 9.2 years |             |  | $        | 6.72  |  |  |  | 2,700   |  |  | $ | 6.70  | 
|$ 8.06  $ 8.63 |  |                     | 120,800 |                     |  |          | 7.4 years |             |  | $        | 8.18  |  |  |  | 120,800 |  |  | $ | 8.18  | 
|$ 9.87  $11.63 |  |                     | 54,300  |                     |  |          | 6.2 years |             |  | $        | 10.38 |  |  |  | 54,300  |  |  | $ | 10.38 | 
|$12.37  $19.75 |  |                     | 120,500 |                     |  |          | 4.2 years |             |  | $        | 15.19 |  |  |  | 120,500 |  |  | $ | 15.19 | 
|$22.63  $34.63 |  |                     | 17,825  |                     |  |          | 1.0 year  |             |  | $        | 26.00 |  |  |  | 17,825  |  |  | $ | 26.00 | 
|                |  |                     |         |                     |  |          |           |             |  |          |       |  |  |  |         |  |  |   |       | 
|$ 4.01  $34.63 |  |                     | 905,500 |                     |  |          | 7.4 years |             |  | $        | 7.75  |  |  |  | 732,000 |  |  | $ | 8.19  | 

A summary of the status of our restricted stock
plans as of December 31, 2002, 2001 and 2000 and changes
during the years ended on those dates is presented below:

|                                                                   |  |      |         |      |  |      |          |   |  |   |          |  
|------------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                                   |  | 2002 |         | 2001 |  | 2000
|                                                                   |  |      |         |      |  |     
|Restricted stock outstanding at beginning of year                  |  |      | 146,667 |      |  |      | 334,000  |   |  |   | 255,000  |  
|Granted                                                            |  |      |        |      |  |      |         |   |  |   | 189,000  |  
|Forfeited and converted                                            |  |      | (93,333 | )    |  |      | (187,333 | ) |  |   | (110,000 | )
|                                                                   |  |      |         |      |  |      |          |   |  |   |          |  
|Restricted stock outstanding at end of year                        |  |      | 53,334  |      |  |      | 146,667  |   |  |   | 334,000  |  
|Weighted average fair value per restricted share
    at grant date |  | $    |        |      |  | $    |         |   |  | $ | 8.46     |  
|Weighted average share price at grant date                         |  | $    |        |      |  | $    |         |   |  | $ | 8.46     |  

We follow the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation. We continue
to measure compensation cost using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25.
Stock-based compensation represent-

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ing grants to non-employee directors and vesting
of performance based restricted stock awards, recognized in our
Consolidated Statement of Operations was $.4 million for
2002 and 2001 and $.1 million for 2000. If we had elected
to recognize compensation cost based on the fair value of
options and restricted stock granted at grant date as prescribed
by FAS 123, net income (loss) and income
(loss) per share would have decreased (increased) as
disclosed in our summary of significant accounting policies
included as Note 1 to our consolidated financial statements.

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
|                           |                  |           
|                           |                  | 2002       |                                    | 2001 |   | 2000
|                           |                  |            |                                    |      |   |     
|Volatility of Share Price: |                  |            |                                    |      |   |      |            |     |   |  |            |    
|                           | Options          |            |                                    | 36   | % |      |            | 34  | % |  |            | 31  | %
|                           | Restricted stock |            |                                    |     |   |      |            |    |   |  |            |    |  
|Dividend yield:            |                  |            |                                    |      |   |      |            |     |   |  |            |    
|                           | Options          |            |                                    |     |   |      |            |    |   |  |            |    |  
|                           | Restricted stock |            |                                    |     |   |      |            |    |   |  |            |    |  
|Interest rate:             |                  |            |                                    |      |   |      |            |     |   |  |            |    
|                           | Options          |            |                                    | 4.7  | % |      |            | 4.8 | % |  |            | 6.3 | %
|                           | Restricted stock |            |                                    |     |   |      |            |    |   |  |            |    |  
|Expected life of options   |                  |            | 5.7  years                         |      |   |      | 5.7  years |     |   |  | 5.5  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.

Note 10:     Earnings
Per Share

Reconciliations of the numerators and
denominators used in our 2002 and 2000 earnings per share
calculations are presented below. A reconciliation for 2001 is
not presented below because the weighted average shares
(denominator) was 5,696,298 for computing both Basic EPS
and Fully Diluted EPS resulting in identical EPS computations
for the year ended December 31, 2001. The effect of stock
options was excluded in computing Fully Diluted EPS for 2001 in
accordance with Statement of Financial Accounting Standards
No. 128 because the impact of stock options of
39,346 shares with an average market price below the
average market price of our stock would have been antidilutive
to loss per share computations for 2001.

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

Performance based restricted stock of 53,334,
146,667 and 334,000 shares for the years ended
December 31, 2002, 2001 and 2000, 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.

Note 11:     Commitments
and Contingencies

Our rent expense for office equipment, facilities
and vehicles was $1.6 million for 2002 and
$1.8 million for the years ended December 31, 2001 and
2000. At December 31, 2002, we are committed, under
non-cancelable operating and capital leases, as follows:

|                                |  |      |       |      |  |      |       |      |  |      |     |        |  |       |     |  |  |   |     |  |  |   |     |  |  |   |       | 
|------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | --- | ------ |  | ----- | --- |  |  | - | --- |  |  | - | --- |  |  | - | ----- | 
|                                |  |      |       |      |  |      |       |      |  |      |     | Beyond |  |      
|                                |  | 2003 |       | 2004 |  | 2005 |       | 2006 |  | 2007 |     | 2007   |  | Total
|                                |  |      |       |      |  |      |       |      |  |      |     |        |  |      
|(In thousands)                  |  |      |       |      |  |      |       |      |  |      |     |        |  |      
|Capital leases                  |  | $    | 193   |      |  | $    | 193   |      |  | $    | 191 |        |  | $     | 42  |  |  | $ |    |  |  | $ |    |  |  | $ | 619   | 
|Non-cancelable operating leases |  |      | 1,055 |      |  |      | 968   |      |  |      | 666 |        |  |       | 484 |  |  |   | 475 |  |  |   | 178 |  |  |   | 3,826 | 
|                                |  |      |       |      |  |      |       |      |  |      |     |        |  |       |     |  |  |   |     |  |  |   |     |  |  |   |       | 
|                                |  | $    | 1,248 |      |  | $    | 1,161 |      |  | $    | 857 |        |  | $     | 526 |  |  | $ | 475 |  |  | $ | 178 |  |  | $ | 4,445 | 
|                                |  |      |       |      |  |      |       |      |  |      |     |        |  |       |     |  |  |   |     |  |  |   |     |  |  |   |       | 

At December 31, 2002, we had a
$3.0 million obligation under standby letters of credit
with Fleet National Bank 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. Under the
terms of the agreements, we are

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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

committed to purchase a significant portion of
the laminated materials we use in our Label Products segment
from Avery Dennison through December 31, 2005. If we fail
to meet the minimum purchase volumes specified in the
agreements, we are subject to financial penalties. We acquired
the required quantities and were in compliance with the
agreements for 2002.

In August and September 1996, two individual
plaintiffs filed lawsuits in the Circuit Court of Cook County,
Illinois against Nashua Corporation, Cerion, certain directors
and officers of Cerion, and our underwriter, on behalf of all
persons who purchased the common stock of Cerion between
May 24, 1996 and July 9, 1996. These two complaints
were consolidated. In March 1997, the same individual plaintiffs
joined by a third plaintiff filed a Consolidated Amended
Class Action Complaint. The consolidated complaint alleged
that, in connection with Cerions initial public offering,
the defendants issued materially false and misleading statements
and omitted the disclosure of material facts regarding, in
particular, certain significant customer relationships. In
October 1997, the Circuit Court on motion by the defendants,
dismissed the consolidated complaint. The plaintiffs filed a
Second Amended Consolidated Complaint alleging similar claims as
the first consolidated complaint seeking damages and injunctive
relief. On May 6, 1998, the Circuit Court, on motion by the
defendants, dismissed with prejudice the second amended
consolidated complaint. The plaintiffs filed with the Appellate
Court an appeal of the Circuit Courts ruling. On
November 19, 1999, the Appellate Court reversed the Circuit
Courts ruling that dismissed the second amended
consolidated complaint. The Appellate Court ruled that the
second amended consolidated complaint represented a valid claim
and sent the case back to the Circuit Court for further
proceedings. On December 27, 1999, we filed a Petition with
the Supreme Court of Illinois. In that Petition, we asked the
Supreme Court of Illinois to determine whether the Circuit Court
or the Appellate Court is correct. Our Petition was denied and
the case was sent to the Circuit Court for trial. Discovery has
been completed, but no date has been set for trial and pre-trial
motions. Non-binding mediation discussions were held in November
2002 without resolving the dispute. We believe that the lawsuit
is without merit and will continue to defend ourselves in this
matter. We also believe that we will receive the value of our
37.1 percent ownership in the Cerion liquidating trust
which was valued at $.9 million on an after-tax basis at
December 31, 2002. Our investment in Cerion is included
under other assets in our Consolidated Balance Sheet.

On September 14, 2000, Edward G. Krasnecki
and EGK Realty Corporation filed suit against Nashua Corporation
in the Superior Court of the Commonwealth of Massachusetts,
Middlesex County. The plaintiffs are the owners of real
property, formerly leased by us, located at 260 Billerica Road,
Chelmsford, Massachusetts. The plaintiffs allege that when we
vacated the premises in 1997, we failed to remove improvements
we had made to the property, failed to clean the premises as
required by our lease, and left contamination on the property
resulting in lost opportunities to the plaintiffs, for which the
plaintiffs seek damages. We responded to their complaint,
denying all liability and asserting affirmative defenses. We
maintain that when we vacated the premises, we removed three
underground tanks that we were entitled to remove under the
terms of our lease, we detected soil contamination, reported and
took prompt remedial action all in accordance with Massachusetts
law, and are not liable to the plaintiffs. We also deny that we
failed to remove improvements or that we failed to clean the
premises in accordance with the terms of our lease. The matter
has been scheduled for a jury trial in April 2003. 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,
referred to as the EPA, as a potentially responsible party for
certain hazardous waste sites. In addition, we have been
notified by certain state environmental agencies that some of
our sites not addressed by the EPA require remedial action.
These sites are in various stages of investigation and
remediation. Due to the unique physical characteristics of each
site, the technology employed, the extended timeframes of each
remediation, the interpretation of applicable laws and
regulations and the financial viability of other potential
participants, our ultimate cost of remediation is difficult to
estimate. Accordingly, estimates could either increase or
decrease in the future due to changes in such factors. At
December 31, 2002, based on the facts

49



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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 $.7 million to $1.4 million for
continuing operations and approximately $.1 million for
discontinued operations. These estimates could increase if other
potentially responsible parties or our insurance carriers are
unable or unwilling to bear their allocated share and cannot be
compelled to do so. At December 31, 2002, our accrual
balances relating to environmental matters were $.8 million
for continuing operations and $.1 million for discontinued
operations. Based on information currently available, we believe
that it is probable that the major potentially responsible
parties will fully pay the costs apportioned to them. We believe
that our remediation expense is not likely to have a material
adverse effect on our consolidated financial position or results
of operations.

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

Note
12:     Postretirement
Benefits

Defined Contribution Plan

Eligible employees may participate in the Nashua
Corporation Employees Savings Plan, a defined contribution
401k plan. We match participating employee contributions at
50 percent for the first 6 percent of base
compensation that a participant contributes to the Plan.
Additional amounts may be contributed at the option of our Board
of Directors. For 2002, 2001 and 2000 our contributions to this
Plan were $1.0 million, $1.1 million and
$.8 million. Participants are immediately vested in all
contributions, plus actual earnings thereon.

The Plan also provides that eligible employees
not covered under our pension plans may receive a profit sharing
contribution. This contribution, which is normally based on our
profitability, is discretionary and not defined. Profit sharing
contributions were $.2 million for 2002 and
$.1 million for 2001 and 2000. These contributions could
increase as a result of freezing our pension plan for salaried
employees and adding those employees to our profit sharing plan.

Pension Plans

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

Retiree Health Care and Other
Benefits

We also provide certain health care and death
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. During 2002, we eliminated these
benefits for active employees.

50



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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ---------------- | ------- | ----------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                       |  |                  |         |                        
|                                                                                       |  | Pension Benefits |         | Postretirement Benefits
|                                                                                       |  |                  |         |                        
|                                                                                       |  | 2002             |         | 2001                    |  | 2002 |        | 2001
|                                                                                       |  |                  |         |                         |  |      |        |     
|(In thousands)                                                                         |  |                  |         |                         |  |      |        |     
|Change in benefit obligation                                                           |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Projected benefit obligation at beginning of year                                      |  | $                | 61,542  |                         |  | $    | 56,458 |      |  | $ | 6,392  |   |  | $ | 6,619   |  
|Service cost                                                                           |  |                  | 1,473   |                         |  |      | 1,674  |      |  |   | 120    |   |  |   | 62      |  
|Interest cost                                                                          |  |                  | 4,459   |                         |  |      | 4,130  |      |  |   | 432    |   |  |   | 444     |  
|Amendments                                                                             |  |                  | 924     |                         |  |      |       |      |  |   | (249   | ) |  |   | (226    | )
|Curtailment/ Settlement                                                                |  |                  | (2,886  | )                       |  |      |       |      |  |   | (2,639 | ) |  |   |        |  
|Actuarial loss                                                                         |  |                  | 7,018   |                         |  |      | 396    |      |  |   | 786    |   |  |   | 148     |  
|Benefits paid                                                                          |  |                  | (1,613  | )                       |  |      | (1,116 | )    |  |   | (949   | ) |  |   | (655    | )
|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Projected benefit obligation at end of year                                            |  | $                | 70,917  |                         |  | $    | 61,542 |      |  | $ | 3,893  |   |  | $ | 6,392   |  
|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Change in plan assets                                                                  |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Fair value of plan assets at beginning of year                                         |  | $                | 61,318  |                         |  | $    | 60,473 |      |  | $ |       |   |  | $ |        |  
|Actual return on plan assets                                                           |  |                  | (4,617  | )                       |  |      | 1,685  |      |  |   |       |   |  |   |        |  
|Settlement                                                                             |  |                  |        |                         |  |      |       |      |  |   |       |   |  |   |        |  
|Employer contribution                                                                  |  |                  |        |                         |  |      |       |      |  |   | 949    |   |  |   | 655     |  
|Benefits paid                                                                          |  |                  | (1,333  | )                       |  |      | (840   | )    |  |   | (949   | ) |  |   | (655    | )
|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Fair value of plan assets at end of year                                               |  | $                | 55,368  |                         |  | $    | 61,318 |      |  | $ |       |   |  | $ |        |  
|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Reconciliation of funded status                                                        |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Funded status                                                                          |  | $                | (15,549 | )                       |  | $    | (224   | )    |  | $ | (3,893 | ) |  | $ | (6,392  | )
|Unrecognized net actuarial (gain)/loss                                                 |  |                  | 107     |                         |  |      | 4,538  |      |  |   | (2,479 | ) |  |   | (2,930  | )
|Unrecognized prior service cost                                                        |  |                  | 2,152   |                         |  |      | 4,826  |      |  |   |       |   |  |   | (693    | )
|Unrecognized net transition asset                                                      |  |                  | (107    | )                       |  |      | (230   | )    |  |   |       |   |  |   |        |  
|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Net amount of asset (liability) recognized                                             |  | $                | (13,397 | )                       |  | $    | 8,910  |      |  | $ | (6,372 | ) |  | $ | (10,015 | )
|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|The amount recognized in our consolidated
    balance sheet consists of the following: |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Pension/postretirement asset (liability)                                               |  | $                | (15,549 | )                       |  | $    | 8,910  |      |  | $ | (6,372 | ) |  | $ | (10,015 | )
|Other                                                                                  |  |                  |        |                         |  |      | (64    | )    |  |   |       |   |  |   |        |  
|Intangible asset                                                                       |  |                  | 2,152   |                         |  |      | 64     |      |  |   |       |   |  |   |        |  
|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Net amount of asset (liability) recognized                                             |  | $                | (13,397 | )                       |  | $    | 8,910  |      |  | $ | (6,372 | ) |  | $ | (10,015 | )
|                                                                                       |  |                  |         |                         |  |      |        |      |  |   |        |   |  |   |         |  

|                                                   |  |                  |      |                         |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|-------------------------------------------------- |  | ---------------- | ---- | ----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                   |  |                  |      |                        
|                                                   |  | Pension Benefits |      | Postretirement Benefits
|                                                   |  |                  |      |                        
|                                                   |  | 2002             |      | 2001                    |  | 2000 |      | 2002 |  | 2001 |      | 2000
|                                                   |  |                  |      |                         |  |      |      |      |  |      |      |     
|Weighted-average assumptions as of
    December 31 |  |                  |      |                         |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|Discount rate                                      |  |                  | 6.50 | %                       |  |      | 7.25 | %    |  |      | 7.25 | %    |  |  | 6.50 | % |  |  | 7.25 | % |  |  | 7.25 | %
|Expected return on plan assets                     |  |                  | 8.50 | %                       |  |      | 9.00 | %    |  |      | 9.70 | %    |  |  |     |   |  |  |     |   |  |  |     |  
|Average rate of compensation increase              |  |                  | 3.00 | %                       |  |      | 3.50 | %    |  |      | 4.00 | %    |  |  |     |   |  |  |     |   |  |  |     |  

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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 gains and losses from freezing and curtailing
pension and postretirement plans, includes the following
components:

|                                             |  |                  |        |                         |  |      |        |      |  |      |        |      |  |   |      |   |  |   |      |   |  |   |      |  
|-------------------------------------------- |  | ---------------- | ------ | ----------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                             |  |                  |        |                        
|                                             |  | Pension Benefits |        | Postretirement Benefits
|                                             |  |                  |        |                        
|                                             |  | 2002             |        | 2001                    |  | 2000 |        | 2002 |  | 2001 |        | 2000
|(In thousands)                               |  |                  |        |                         |  |      |        |      |  |      |        |     
|Components of net periodic (income)
    cost |  |                  |        |                         |  |      |        |      |  |      |        |      |  |   |      |   |  |   |      |   |  |   |      |  
|Service cost                                 |  | $                | 1,473  |                         |  | $    | 1,674  |      |  | $    | 1,600  |      |  | $ | 120  |   |  | $ | 62   |   |  | $ | 75   |  
|Interest cost                                |  |                  | 4,459  |                         |  |      | 4,130  |      |  |      | 3,729  |      |  |   | 432  |   |  |   | 444  |   |  |   | 481  |  
|Expected return on plan assets               |  |                  | (5,715 | )                       |  |      | (6,129 | )    |  |      | (5,624 | )    |  |   |     |   |  |   |     |   |  |   |     |  
|Amortization of prior service cost           |  |                  | 836    |                         |  |      | 742    |      |  |      | 1,001  |      |  |   | (106 | ) |  |   | (79  | ) |  |   | (56  | )
|Recognized net actuarial (gain)              |  |                  |       |                         |  |      |       |      |  |      | (76    | )    |  |   | (195 | ) |  |   | (231 | ) |  |   | (232 | )
|Amortization of transition obligation        |  |                  | (123   | )                       |  |      | 150    |      |  |      | 150    |      |  |   |     |   |  |   |     |   |  |   |     |  
|                                             |  |                  |        |                         |  |      |        |      |  |      |        |      |  |   |      |   |  |   |      |   |  |   |      |  
|Net periodic (income) cost                   |  | $                | 930    |                         |  | $    | 567    |      |  | $    | 780    |      |  | $ | 251  |   |  | $ | 196  |   |  | $ | 268  |  
|                                             |  |                  |        |                         |  |      |        |      |  |      |        |      |  |   |      |   |  |   |      |   |  |   |      |  

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

|                                                                 |  |      |      |      |  |             |      |     |  |     |      |             |  |   |      |  |  |   |      |  |  |   |      | 
|---------------------------------------------------------------- |  | ---- | ---- | ---- |  | ----------- | ---- | --- |  | --- | ---- | ----------- |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                                                                 |  |      |      |     
|                                                                 |  | 2002 |      | 2001
|                                                                 |  |      |      |     
|                                                                 |  | PBO  |      | ABO  |  | Plan Assets |      | PBO |  | ABO |      | Plan Assets
|(In millions)                                                    |  |      |      |      |  |             |      |     |  |     |      |            
|Supplemental Executive Retirement Plan                           |  | $    | 3.1  |      |  | $           | 3.1  |     |  | $   |     |             |  | $ | 2.9  |  |  | $ | 2.9  |  |  | $ |     | 
|Hourly Employees Retirement Plan of Nashua
    Corporation       |  | $    | 29.2 |      |  | $           | 29.2 |     |  | $   | 24.8 |             |  | $ | 22.9 |  |  | $ | 22.9 |  |  | $ | 27.4 | 
|Retirement Plan for Salaried Employees of Nashua
    Corporation |  | $    | 38.7 |      |  | $           | 38.7 |     |  | $   | 30.5 |             |  | $ | 35.7 |  |  | $ | 32.5 |  |  | $ | 33.9 | 

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 percent for 2003 and ranges from 10 percent to
4 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 |  | $              | 21  |                |  | $ | (19  | )
|Effect on accumulated postretirement benefit
    obligation |  | $              | 147 |                |  | $ | (135 | )

Approximately $15.5 million and
$2.9 million of our accrued pension cost and
$6.4 million and $9.4 million of our accrued
postretirement benefits for 2002 and 2001, respectively, are
included in other long-term liabilities in our accompanying
consolidated balance sheet. Pension assets of $2.2 million
and $11.8 million for 2002 and 2001, respectively, are
included in other assets in our accompanying consolidated
balance sheet. Additionally, approximately $0 and
$.6 million of our accrued postretirement benefits for 2002
and 2001, respectively, are included in accrued expenses in the
accompanying consolidated balance sheet.

During the fourth quarter of 2002, we recorded a
non-cash charge of $11.4 million to shareholders
equity because as of December 31, 2002, the accumulated
benefit obligations exceeded the fair value of plan assets of
company-sponsored pension plans due to declines in the fair
market value of equities held by the plans and decreases in our
expected return on plan assets and discount rate resulting from
current economic trends. This charge was net of
$7.5 million in taxes which are included in other assets
and reflect an increase in our deferred tax assets.

52



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NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In October 2002, our Board of Directors approved
changes to The Nashua Corporation Retirement Plan for Salaried
Employees, The Supplemental Executive Retirement Plan and
retiree medical and death benefit plans. As a result of these
changes, we recognized a gain of $2.7 million related to
the elimination of certain benefits related to our retiree
medical and death benefit plans and a gain of $.2 million
from the buy out of a portion of existing retirees death
benefits, partially offset by a loss of $2.7 million
related to freezing benefits of the salaried pension plans. This
excludes any potential gain on the buy out of additional
existing retirees death benefits which were completed in
the first quarter of 2003.

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.

Note
13:     Information About
Operations

We have three reportable segments:



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Label Products: which converts, prints and sells
    pressure sensitive labels and tags to distributors and end-users.                                                                                                                                                                                                                                                                                                                                                                    
|   
|(2) | Specialty Paper Products: which coats and
    converts various converted paper products sold primarily to
    domestic converters and re-sellers, end-users and private-label
    distributors. Our Specialty Paper segments product scope
    includes thermal papers, bond papers, carbonless paper,
    specialty printed papers, such as financial receipts and
    point-of-sale receipts, large-format media papers, dry-gum
    papers, heat seal papers, small rolls and ribbons.
|   
|(3) | Imaging Supplies: which produces and sells copier
    supplies (primarily toner and developer) to distributors,
    value-added resellers and end-users. Results for the twelve
    months ended December 31, 2000 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 year ended
December 31, 2000. Eliminations represent sales between our
Specialty Paper Products and Label Products segments. Excluding
sales between segments, reflected as eliminations in the table
below, external sales for our Specialty Paper Products segment
were $158.3 million, $140.0 million and
$119.6 million for the years ended December 31, 2002,
2001 and 2000. Sales between segments and between geographic
areas are negotiated based on what we believe to be market
pricing.

We have one group of customers under common
control that represents ten percent or more of our consolidated
revenues. Sales to Wal-Mart and Sams Club totaled
$30.6 million in 2002, representing sales of
$24.9 million for our Specialty Paper Products segment and
$5.7 million for our Label Products segment. While no other
customer represented ten percent of our consolidated revenues,
each of our segments has significant customers. The loss of a
significant customer could have a material adverse effect on us
or our segments.

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

53



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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
|                         |                                                                    |                       |       |                       |       |                    
|                         |                                                                    | 2002                  |       | 2001                  |       | 2000                |       | 2002  |       | 2001 |       | 2000  |       | 2002 |     | 2001 |     | 2000
|                         |                                                                    |                       |       |                       |       |                     |       |       |       |      |       |       |       |      |     |      |     |     
|(In millions)            |                                                                    |                       |       |                       |       |                     |       |       |       |      |       |       |       |      |     |      |     |     
|By Reportable Segment    |                                                                    |                       |       |                       |       |                     |       |       |       |      |       |       |       |      |     |      |     |      |     |      |      |   |      |       |      |   |      |      |       |   |      |      |       |   |      |     
|Label Products           |                                                                    | $                     | 100.8 |                       |       | $                   | 107.9 |       |       | $    | 105.1 |       |       | $    | 5.5 |      |     | $    | 6.7 |      |      | $ | 5.4  |       |      | $ | 41.3 |      |       | $ | 26.8 |      |       | $ | 37.6 |     
|Specialty Paper Products |                                                                    |                       | 160.7 |                       |       |                     | 150.4 |       |       |      | 138.8 |       |       |      | 6.5 |      |     |      | 4.9 |      |      |   | 7.5  |       |      |   | 66.7 |      |       |   | 47.4 |      |       |   | 54.5 |     
|Imaging Supplies         |                                                                    |                       | 24.0  |                       |       |                     | 24.4  |       |       |      | 27.9  |       |       |      | .9  |      |     |      | .2  |      |      |   | (4.2 | )     |      |   | 13.5 |      |       |   | 16.0 |      |       |   | 16.3 |     
|                        
|Reconciling Items:       |                                                                    |                       |       |                       |       |                     |       |       |       |      |       |       |       |      |     |      |     |      |     |      |      |   |      |       |      |   |      |      |       |   |      |      |       |   |      |     
|                         | Eliminations                                                       |                       |       | (2.4                  | )     |                     |       | (10.4 | )     |      |       | (19.2 | )     |      |     |     |     |      |     |     |      |   |      |      |      |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Other(1)                                                           |                       |       | .1                    |       |                     |       | .2    |       |      |       | .5    |       |      |     |     |     |      |     | .4   |      |   |      | 1.0   |      |   |      |     |       |   |      | 1.1  |       |   |      | .7   |      
|                         | Unallocated corporate expenses and assets                          |                       |       |                      |       |                     |       |      |       |      |       |      |       |      |     | (7.9 | )   |      |     | (7.6 | )    |   |      | (11.1 | )    |   |      | 24.7 |       |   |      | 52.7 |       |   |      | 58.6 |      
|                         | Amortization of goodwill                                           |                       |       |                      |       |                     |       |      |       |      |       |      |       |      |     |     |     |      |     | (1.7 | )    |   |      | (1.3  | )    |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Interest (expense) income, net                                     |                       |       |                      |       |                     |       |      |       |      |       |      |       |      |     | (1.5 | )   |      |     | (2.7 | )    |   |      | (2.0  | )    |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Pension settlement income                                          |                       |       |                      |       |                     |       |      |       |      |       |      |       |      |     |     |     |      |     |     |      |   |      | 18.6  |      |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Net gain on curtailment/freeze of
    pension/postretirement plans |                       |       |                      |       |                     |       |      |       |      |       |      |       |      |     | .2   |     |      |     |     |      |   |      |      |      |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Restructuring and other unusual items                              |                       |       |                      |       |                     |       |      |       |      |       |      |       |      |     | .1   |     |      |     | (3.0 | )    |   |      | (1.0  | )    |   |      |     |       |   |      |     |       |   |      |     |      
|                         | Discontinued operations                                            |                       |       |                      |       |                     |       |      |       |      |       |      |       |      |     |     |     |      |     |     |      |   |      |      |      |   |      |     |       |   |      | 1.0  |       |   |      | 2.8  |      
|                         |                                                                    |                       |       |                       |       |                     |       |       |       |      |       |       |       |      |     |      |     |      |     |      |      |   |      |       |      |   |      |      |       |   |      |      |       |   |      |     
|                         |                                                                    | Consolidated          |       | $                     | 283.2 |                     |       | $     | 272.5 |      |       | $     | 253.1 |      |     | $    | 3.8 |      |     | $    | (2.8 | ) |      | $     | 12.9 |   |      | $    | 146.2 |   |      | $    | 145.0 |   |      | $    | 170.5 | 
|                         |                                                                    |                       |       |                       |       |                     |       |       |       |      |       |       |       |      |     |      |     |      |     |      |      |   |      |       |      |   |      |      |       |   |      |      |       |   |      |     



---



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

54



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |             |                      |     |                |     |      |    |      |     |      |     |      |     |   |     |    |     |   |     |     |     |   |     |     |     | 
|------------------------ | ----------- | -------------------- | --- | -------------- | --- | ---- | -- | ---- | --- | ---- | --- | ---- | --- | - | --- | -- | --- | - | --- | --- | --- | - | --- | --- | --- | 
|                         |             |                      |     |                |     |      |    |     
|                         |             |                      |     | Depreciation &
|                         |             | Capital Expenditures |     | Amortization  
|                         |             |                      |     |               
|                         |             | 2002                 |     | 2001           |     | 2000 |    | 2002 |     | 2001 |     | 2000
|                         |             |                      |     |                |     |      |    |      |     |      |     |     
|(In millions)            |             |                      |     |                |     |      |    |      |     |      |     |     
|Label Products           |             | $                    | 1.8 |                |     | $    | .7 |      |     | $    | 1.4 |      |     | $ | 2.2 |    |     | $ | 2.9 |     |     | $ | 2.9 |    
|Specialty Paper Products |             |                      | 1.6 |                |     |      | .9 |      |     |      | 4.7 |      |     |   | 3.3 |    |     |   | 3.2 |     |     |   | 2.7 |    
|Imaging Supplies         |             |                      | .5  |                |     |      | .5 |      |     |      | 3.1 |      |     |   | 1.5 |    |     |   | 1.5 |     |     |   | 2.0 |    
|Reconciling Items:       |             |                      |     |                |     |      |    |      |     |      |     |      |     |   |     |    |     |   |     |     |     |   |     |    
|                         | Intangibles |                      |     |               |     |      |    |     |     |      |     |     |     |   |     | .3 |     |   |     |    |     |   |     |    |    
|                         | Goodwill    |                      |     |               |     |      |    |     |     |      |     |     |     |   |     |   |     |   |     | 1.7 |     |   |     | 1.1 |    
|                         | Corporate   |                      |     | .4             |     |      |    | .3   |     |      |     | .4   |     |   |     | .3 |     |   |     | .4  |     |   |     | .6  |    
|                         |             |                      |     |                |     |      |    |      |     |      |     |      |     |   |     |    |     |   |     |     |     |   |     |    
|                         |             | Consolidated         |     | $              | 4.3 |      |    | $    | 2.4 |      |     | $    | 9.6 |   |     | $  | 7.6 |   |     | $   | 9.7 |   |     | $   | 9.3 | 
|                         |             |                      |     |                |     |      |    |      |     |      |     |      |     |   |     |    |     |   |     |     |     |   |     |    



---

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

|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |     |      |   |      |    |      | 
|------------------ | ----------------------- | --------------------- | ----- | ----------------- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | - | ---- | ---- | ---- | - | ---- | --- | ---- | - | ---- | -- | ---- | 
|                   |                         |                       |       |                   |       |      |       |     
|                   |                         | Net Sales From        |       |                  
|                   |                         | Continuing Operations |       | Long-Lived Assets
|                   |                         |                       |       |                  
|                   |                         | 2002                  |       | 2001              |       | 2000 |       | 2002 |       | 2001 |       | 2000
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |     
|(In millions)      |                         |                       |       |                   |       |      |       |      |       |      |       |     
|By Geographic Area |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |     |      |   |      |   
|United States      |                         | $                     | 283.2 |                   |       | $    | 272.4 |      |       | $    | 251.8 |      |       | $ | 78.7 |      |      | $ | 86.2 |     |      | $ | 97.2 |   
|Europe             |                         |                       |      |                   |       |      | .1    |      |       |      | 1.3   |      |       |   |     |      |      |   |     |     |      |   |     |   
|Reconciling Items: |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |     |      |   |      |   
|                   | Discontinued Operations |                       |       |                  |       |      |       |     |       |      |       |     |       |   |      | .9   |      |   |      | .9  |      |   |      | .8 |     
|                   | Deferred tax assets     |                       |       |                  |       |      |       |     |       |      |       |     |       |   |      | 10.2 |      |   |      | 2.9 |      |   |      | .9 |     
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |     |      |   |      |   
|                   |                         | Consolidated          |       | $                 | 283.2 |      |       | $    | 272.5 |      |       | $    | 253.1 |   |      | $    | 89.8 |   |      | $   | 90.0 |   |      | $  | 98.9 | 
|                   |                         |                       |       |                   |       |      |       |      |       |      |       |      |       |   |      |      |      |   |      |     |      |   |      |   

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.

55



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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                                            
|-------- | -------------------------------------------
|Note 14: | Quarterly Operating Results
    (Unaudited)

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

|                                     |                                     |         |   |         |      |         |   |         |      |      |   |        |       |  |   |        |      |  |   |         |       | 
|------------------------------------ | ----------------------------------- | ------- | - | ------- | ---- | ------- | - | ------- | ---- | ---- | - | ------ | ----- |  | - | ------ | ---- |  | - | ------- | ----- | 
|                                     |                                     | 1st     |   | 2nd     |      | 3rd     |   | 4th     |      |     
|                                     |                                     | Quarter |   | Quarter |      | Quarter |   | Quarter |      | Year
|                                     |                                     |         |   |         |      |         |   |         |      |     
|(In millions, except per share data) |                                     |         |   |         |      |         |   |         |      |     
|2002(1)                              |                                     |         |   |         |      |         |   |         |      |      |   |        |       |  |   |        |      |  |   |        
|                                     | Net sales                           |         | $ | 64,523  |      |         | $ | 70,885  |      |      | $ | 72,798 |       |  | $ | 74,984 |      |  | $ | 283,190 |      
|                                     | Gross margin                        |         |   | 12,520  |      |         |   | 14,869  |      |      |   | 14,551 |       |  |   | 14,148 |      |  |   | 56,088  |      
|                                     | Net income (loss)(2)                |         |   | 143     |      |         |   | 1,074   |      |      |   | 673    |       |  |   | 426    |      |  |   | 2,316   |      
|                                     | Earnings (loss) per common share(2) |         |   | .02     |      |         |   | .19     |      |      |   | .12    |       |  |   | .07    |      |  |   | .40     |      
|                                     | Market price:                       |         |   |         |      |         |   |         |      |      |   |        |       |  |   |        |      |  |   |         |      
|                                     |                                     | High    |   |         | 7.54 |         |   |         | 7.25 |      |   |        | 10.20 |  |   |        | 9.60 |  |   |         | 10.20 | 
|                                     |                                     | Low     |   |         | 5.40 |         |   |         | 5.85 |      |   |        | 6.20  |  |   |        | 6.85 |  |   |         | 5.40  | 
|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  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We acquired the assets of Computer Imaging
    Supplies, Inc. and certain assets of Dietzgen LLC during the
    second quarter of 2002, as described in Note 2. The
    operations of CIS and Dietzgen have been included in our
    quarterly operating results since their dates of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Our third quarter includes restructuring income
    of $24,000 resulting from a net reduction to previously
    established reserves. Our fourth quarter includes restructuring
    income of $64,000 resulting from a net reduction to previously
    established reserves and a gain of $.2 million resulting
    from the curtailment/ freeze of pension/ postretirement plans.                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(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.



|         |                         
|-------- | ------------------------
|Note 15: | Common Stock Information

Our stock is traded on the New York Stock
Exchange under the trading symbol NSH. At
December 31, 2002, there were 1,150 record holders of our
common stock.

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##### Table of Contents



NASHUA CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                
|-------- | ---------------
|Note 16: | Related Parties

Leases with Related Parties

We rent property and equipment under leases with
entities partially owned by either a family partnership of which
our Chief Executive Officer and his family have total interest
or by our Chief Executive Officer. Associated with these leases,
we incurred rent expense of approximately $.2 million
during 2002 and $.3 million during 2001 and 2000. We also
pay taxes and utilities and insure property occupied under these
leases.

Notes Payable to Related Parties

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

Loans to Related Parties

We have loans to our Chief Executive Officer and
a former owner of Rittenhouse Paper Company and current
consultant to Nashua relating to life insurance premiums paid on
their behalf. These loans are partially collateralized by the
cash surrender value of related life insurance policies and
fully covered by the death benefit payable under these policies.
These loans do not incur interest and are due upon death,
settlement or termination of related life insurance policies. At
December 31, 2002 and 2001, loans of $1.0 million and
$.7 million, respectively, are included in other assets in
our Consolidated Balance Sheet. Below is a summary of related
party loan activity:

|                                                                             |  |           |     |         |  |       |     |  |  |   |     | 
|---------------------------------------------------------------------------- |  | --------- | --- | ------- |  | ----- | --- |  |  | - | --- | 
|                                                                             |  | Chief     |     | Other   |  |      
|                                                                             |  | Executive |     | Related |  |      
|                                                                             |  | Officer   |     | Party   |  | Total
|                                                                             |  |           |     |         |  |      
|(In thousands)                                                               |  |           |     |         |  |      
|Acquired upon acquisition of Rittenhouse Paper
    Company on April 17, 2000 |  | $         | 160 |         |  | $     | 195 |  |  | $ | 355 | 
|Net premiums paid in 2000                                                    |  |           | 154 |         |  |       | 214 |  |  |   | 368 | 
|Net premiums paid in 2002                                                    |  |           |    |         |  |       | 250 |  |  |   | 250 | 
|                                                                             |  |           |     |         |  |       |     |  |  |   |     | 
|Balance at December 31, 2002                                                 |  | $         | 314 |         |  | $     | 659 |  |  | $ | 973 | 
|                                                                             |  |           |     |         |  |       |     |  |  |   |     | 
|Collateralized cash surrender value of life
    insurance policies           |  | $         | 246 |         |  | $     | 144 |  |  | $ | 390 | 
|                                                                             |  |           |     |         |  |       |     |  |  |   |     | 



|         |                 
|-------- | ----------------
|Note 17: | Subsequent Event

In February 2003, we acquired the assets of The
Label Company from Bunzl Distribution and signed a multi-year
agreement to supply Bunzl with label products. The Label Company
has primarily been a supplier of supermarket promotional and
product identification labels for Bunzl and other customers.
This acquisition adds flexibility to our label manufacturing
operations, adds additional volume to our coating facility
within our Specialty Paper Products segment and enhances our
relationship with a valued and long-standing customer. The Label
Company had 2002 sales of approximately $9.0 million.
Operating activity relating to The Label Company will be
reported under our Label Products segment from the date of
acquisition.

In February 2003, we signed a strategic agreement
with Parlex Corporation to cooperate in the development of
flexible circuit technology incorporating proprietary printing
and plating technologies.

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##### Table of Contents



SCHEDULE II






NASHUA CORPORATION AND SUBSIDIARIES


VALUATION AND QUALIFYING ACCOUNTS


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



---



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

58



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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,
2002 and 2001 and the related consolidated statements of
operations, shareholders equity, and cash flows for each
of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Nashua Corporation at
December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.

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



| |                  
| | -----------------
| | Ernst & Young LLP

Manchester, New Hampshire

February 7, 2003


59



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##### Table of Contents






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, 2003, 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, 2003, and is
incorporated herein by reference.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this Item will be
included in our definitive Proxy Statement for our Annual
Meeting of Stockholders to be held on May 1, 2003, and is
incorporated herein by reference.




Item 13.     Certain
Relationships and Related Transactions

The information required by this Item will be
included in our definitive Proxy Statement for our Annual
Meeting of Stockholders to be held on May 1, 2003, and is
incorporated herein by reference.




Item 14.     Controls
and Procedures



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Evaluation of disclosure controls and procedures.
    Based on their evaluation of our disclosure controls and
    procedures (as defined in Rules 13a-14(c) and 15d-14(c)
    under the Securities Exchange Act of 1934) as of a date within
    90 days of the filing date of this Annual Report on
    Form 10-K, our chief executive officer and chief financial
    officer have concluded that our disclosure controls and
    procedures are designed to ensure that information required to
    be disclosed by us in the reports that we file or submit under
    the Exchange Act is recorded, processed, summarized and reported
    within the time periods specified in the SECs rules and
    forms and are operating in an effective manner.
|
| | 2. | Changes in internal controls. There were no
    significant changes in our internal controls or in other factors
    that could significantly affect these controls subsequent to the
    date of their most recent evaluation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             




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

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



| |     |                      
| | --- | ---------------------
| | (1) | Financial statements:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Consolidated Statements of Operations for each of
    the three years ended December 31, 2002, 2001 and 2000              
|
| |  | Consolidated Statements of Shareholders
    Equity for each of the three years ended December 31, 2002,
    2001 and 2000
|
| |  | Consolidated Balance Sheets at December 31,
    2002 and December 31, 2001                                                
|
| |  | Consolidated Statements of Cash Flows for each of
    the three years ended December 31, 2002, 2001 and 2000              

60



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| |   |                                           
| | - | ------------------------------------------
| |  | Notes to Consolidated Financial Statements
|
| |  | Report of Independent Auditors            

(2) Financial statement schedule:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Schedule II  Valuation and
    qualifying accounts for each of the three years ended
    December 31, 2002, 2001 and 2000



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

(3) Exhibits:

|  |       |   |  |                                                                                                                                                                                                                                              
|- | ----- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | 2.01  |   |  | Agreement and Plan of Merger, dated as of
    March 25, 2002, between Nashua Corporation and Nashua MA
    Corporation. Incorporated by reference to our Definitive Proxy
    Statement filed on March 27, 2002.                             
|  | 3.01  |   |  | Articles of Organization, as amended.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended June 28, 2002.                                                                                            
|  | 3.02  |   |  | By-laws, as amended. Incorporated by reference to
    our Quarterly Report on Form 10-Q for the quarter ended
    June 28, 2002.                                                                                                             
|  | 4.01  |   |  | Credit Agreements, dated March 1, 2002 by
    and among Nashua Corporation, LaSalle Bank, 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 |   |  | Amended and Restated 1996 Stock Incentive Plan.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended April 2, 1999.                                                                                  
|+ | 10.03 |   |  | 1999 Shareholder Value Plan. Incorporated by
    reference to our Quarterly Report on Form 10-Q for the
    quarter ended April 2, 1999.                                                                                                     
|+ | 10.04 |   |  | Employment Agreement, dated as of April 14,
    2000 between Nashua Corporation and Andrew B. Albert.
    Incorporated by reference to our Current Report on Form 8-K
    dated April 14, 2000 and filed on April 18, 2000.                  
|+ | 10.05 |   |  | Change of Control and Severance Agreement, dated
    as of June 24, 1998 between Nashua Corporation and
    John L. Patenaude. Incorporated by reference to our
    Quarterly Report on Form 10-Q for the quarter ended
    July 3, 1998.    
|+ | 10.06 |   |  | Change of Control and Severance Agreement, dated
    as of 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.     
|+ | 10.07 |   |  | 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.  
|+ | 10.08 |   |  | 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.   
|+ | 10.09 |   |  | 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.
|+ | 10.10 | * |  | Management Incentive Plan                                                                                                                                                                                                                    
|+ | 10.11 |   |  | Form of Indemnification Agreement between Nashua
    Corporation and its directors and executive officers.
    Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended September 27, 2002.                  

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##### Table of Contents



|  |       |   |  |                                                                                                                                                                                                                                                                           
|- | ----- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|+ | 10.12 |   |  | 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.                                    
|  | 10.13 |   |  | 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.                                               
|  | 10.14 |   |  | 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.
|  | 21.01 | * |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                           
|  | 23.01 | * |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                             
|  | 24.01 | * |  | Power of Attorney.                                                                                                                                                                                                                                                        
|  | 99.1  | * |  | Certificate of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 dated March 19, 2003.                                                                                                                                                                       
|  | 99.2  | * |  | Certificate of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350 dated March 19, 2003.                                                                                                                                                                       



---

*  Filed herewith.



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

(4) Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 21, 2002, the Company filed a
    Current Report on Form 8-K, dated October 10, 2002,
    reporting under Item 5 that the Company had reached an
    agreement with the Appeals Office of the United States Internal
    Revenue Service regarding an outstanding proposed assessment of
    federal income tax for the years 1992 to 1994.

62



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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 19, 2003

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

|                                                                |  |                                                                                                      |  |               
|--------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                                       |  | Title                                                                                                |  | Date          
|                                                                |  |                                                                                                      |  |               
|/s/ ANDREW B. ALBERTAndrew B. Albert                            |  | Chairman, President and
    Chief Executive Officer
    (principal executive officer)                |  | March 19, 2003
|                                                               
|/s/ JOHN L. PATENAUDEJohn L. Patenaude                          |  | Vice President-Finance and
    Chief Financial Officer
    (principal financial officer)             |  | March 19, 2003
|                                                               
|/s/ JOSEPH R. MATSONJoseph R. Matson                            |  | Vice President, Corporate Controller and Chief
    Accounting Officer (principal accounting officer) |  | March 19, 2003
|                                                               
|*Avrum Gray                                                     |  | Director                                                                                             |  |               
|                                                               
|*Mark E. Schwarz                                                |  | Director                                                                                             |  |               
|                                                               
|*John M. Kucharski                                              |  | Director                                                                                             |  |               
|                                                               
|*George R. Mrkonic, Jr.                                         |  | Director                                                                                             |  |               
|                                                               
|*James F. Orr III                                               |  | Director                                                                                             |  |               
|                                                               
|By: /s/ JOHN L. PATENAUDEJohn L. Patenaude
    Attorney-In-Fact |  |                                                                                                      |  | March 19, 2003

63



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##### Table of Contents






CERTIFICATIONS

I, Andrew B. Albert, certify that:

1.     I have reviewed
this Annual Report on Form 10-K of Nashua Corporation;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operation and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants Board of Directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                        
| | -----------------------
| | /s/ ANDREW B. ALBERT   
| |                        
| | Andrew B. Albert       
| | Chairman, President and
| | Chief Executive Officer

Dated: March 19, 2003

64



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##### Table of Contents



CERTIFICATIONS

I, John L. Patenaude, certify that:

1.     I have reviewed
this annual report on Form 10-K of Nashua Corporation;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operation and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.     The
registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of
registrants Board of Directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.



| |                           
| | --------------------------
| | /s/ JOHN L. PATENAUDE     
| |                           
| | John L. Patenaude         
| | Vice President-Finance and
| | Chief Financial Officer   

Dated: March 19, 2003

65