SECURITIES AND EXCHANGE
COMMISSIONWashington, D. C. 20549

# FORM 10-K

|[X] | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT                OF
1934 For the fiscal year ended December 31, 2003
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

# OR

|[_] | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF
1934 For the transition period from _________________ to
               __________________
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Commission File No.
0-795

|BADGER PAPER MILLS, INC.                              
|------------------------------------------------------
|(Exact name of registrant as specified in its charter)

|200 West Front Street                   | Wisconsin                              
|--------------------------------------- | ---------------------------------------
|P.O. Box 149                            | (State of incorporation)               
|Peshtigo, Wisconsin 54157-0149          | 39-0143840                             
|(Address of principal executive office) | (I.R.S. Employer Identification Number)

Registrant s
telephone number, including area code: (715) 582-4551

Securities registered
pursuant to Section 12(b) of the Act: None

Securities registered
pursuant to Section 12(g) of the Act:  Common Stock, Without Nominal or Par Value

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

Indicate by checkmark 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 the 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.    [_]

Indicate by checkmark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)      Yes ___     No |X|

As of June 30, 2003 the aggregate
market value of the common stock (based upon the closing sale price of the common stock as
reported on the Nasdaq SmallCap Market) held by non-affiliates was approximately
$11,142,533. Determination of stock ownership by non-affiliates was made solely for the
purpose of responding to this requirement, and registrant is not bound by this
determination for any other purpose.

As of December 31, 2003, 2,039,155
shares of common stock were outstanding.

# DOCUMENTS INCORPORATED
BY REFERENCE

The Companys Proxy Statement
for its 2004 Annual Meeting of Shareholders to be filed with the Commission under
Regulation 14A is incorporated by reference into Part III of this Form 10-K to the extent
indicated in Part III hereof.

---

# Statement Regarding
Forward-Looking Information

This Annual Report Form 10-K, each of
Badger Paper Mills, Inc. s (the Company) annual reports to shareholders,
Forms 8-K and 10-Q, definitive proxy statements, and any other written or oral statement
made by or on behalf of the Company subsequent to the filing of this Annual Report on Form
10-K may include one or more forward-looking statements that may state the
Companys or managements intentions, hopes, beliefs, expectations or
predictions for the future. In the following discussion and elsewhere in this Annual
Report on Form 10-K, statements containing words such as expect,
anticipate, believe, estimate, goal,
objective or similar words are intended to identify forward-looking
statements. In making such forward-looking statements, the Company undertakes no
obligation to publicly update or revise any such statements.

Forward-looking statements of the
Company are based on information available to the Company as of the date of such
statements and reflect the Companys expectations as of such date, but are subject to
risks and uncertainties that may cause actual results to differ materially from those
projected, expressed or implied by such forward-looking statements. In addition to
specific factors, which may be described in connection with any of the Companys
forward-looking statements, factors that could cause actual results to differ materially
include:

| | Increased
competition from domestic or foreign paper producers, or providers of alternatives to the
Companys products, including increases in competitive production capacity and/or
weakness in demand for paper products. As a paper manufacturer, the Company, if it wants
to achieve acceptable production costs, must operate its paper mill at a relatively high
percentage of its available production capacity. The Companys competitors face the
same or similar situations. Therefore, when the overall market for paper products
softens, the Company (and other paper manufacturers) will generally accept lower selling
prices for its products in order to maintain acceptable production efficiencies and
costs.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the price of pulp, the Companys main raw material. The Company purchases all of
its pulp on the open market and price changes for pulp have a significant impact on the
Companys costs. Pulp price changes can occur due to changes in worldwide
consumption of pulp, pulp capacity additions, expansions or curtailments affecting the
supply of pulp, inventory building or depletion at pulp consumer levels which affect
short-term demand, and pulp producer cost changes related to wood availability,
environmental issues and other variables. During 2003, the market price for pulp
increased. The Company anticipates that the market price for pulp will continue to
increase into 2004.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interruptions
in the supply of, or increases and/or changes in the price of energy (principally natural
gas and electricity) that the Company needs to run manufacturing operations. During the
latter part of 2002 and early in 2003, energy prices rose significantly. The current
market price of natural gas has stabilized at historically high levels. Future energy
costs are uncertain.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in demand for the Companys products due to overall economic activity affecting the
rate of consumption of the Companys paper products, growth rates of the end markets
for the Companys products, technological or consumer preference changes and
acceptance of the Companys products by the markets it serves.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unforeseen
operational problems at any of the Companys facilities causing significant lost
production and/or higher operating costs.
|- | -------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in laws or regulations affecting the Company, particularly environmental laws and
regulations affecting air quality and wastewater discharges.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys profitability may be adversely affected by increases in interest rates
because a significant portion of the Companys debt bears interest at variable
interest rates.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-2-

---

# Five-Year Comparison of
Selected Financial Data

|                                                  | Year ended December 31,
|------------------------------------------------- | -----------------------
|
|Operations (dollars in thousands):                |                        
|Net sales                                         |                        
|Cost of sales                                     |                        
|Gross profit                                      |                        
|Selling and administrative expenses               |                        
|Loss on write-off of trade credits                |                        
|Loss on disposal of property, plant and equipment |                        
|Operating income (loss)                           |                        
|Other income                                      |                        
|Gain on sale of non-core assets                   |                        
|Interest expense                                  |                        
|Income (loss) before income taxes *               |                        
|Provision (benefit) for income taxes              |                        
|Net income (loss) *                               |                        
|Common Stock:                                     |                        
|Number of shareholders of record                  |                        
|Weighted average of shares outstanding            |                        
|Net earnings (loss) per share basic               |                        
|Net earnings (loss) per share diluted             |                        
|Book value per share                              |                        
|Financial Position (dollars in thousands):        |                        
|Working capital                                   |                        
|Capital expenditures                              |                        
|Total assets                                      |                        
|Long-term debt                                    |                        
|Shareholders' equity                              |                        

|* | Includes
the gain on the sale of non-core assets of $1,125,000 in 2002 and $1,627,000 in 2001.
|- | ----------------------------------------------------------------------------------------------

-3-

---

# PART I

# Item 1. Business

Badger
Paper Mills, Inc. (Badger or the Company) has been producing paper
and paper products in Wisconsin since it was incorporated under the laws of the State of
Wisconsin in 1929.

The
Company has two operating facilities. In Peshtigo, Wisconsin and adjacent to the
Companys principal executive offices, the Company manufactures paper on two paper
machines (a Yankee paper machine and a Fourdrinier paper machine).
The Company also performs certain converting operations in Peshtigo. The Companys
physical facilities in Peshtigo are sometimes collectively referred to in this Annual
Report as the Peshtigo Facilities.

The
Company also has production facilities in Oconto Falls, Wisconsin (approximately 30 miles
from Peshtigo, Wisconsin), which consist of a Company-owned manufacturing facility and
certain leased warehouse space. The Companys owned and leased facilities in Oconto
Falls are sometimes collectively referred to in this Annual Report as the Oconto
Falls Facilities.

# Products and Distribution

At
the Peshtigo Facilities, the Company manufactures paper on its Yankee paper machine and
its Fourdrinier paper machine, and converts paper in accordance with customer
specifications. Converting operations include punching, sheeting, trimming, sealing,
perforating, rewinding, waxing and drilling of paper for uses in several applications.

Products
produced on the Yankee paper machine include converted printed and unprinted waxed papers
for quick service restaurants, grades used in laminating applications, colored papers,
specialty-coated papers and papers used in applications where twisting is required to seal
product. The Companys sales personnel and commissioned brokers sell these products
to manufacturers and converters.

The
Fourdrinier paper machine produces fine paper grades utilizing fiber purchased on the open
market, including pre- and post-consumer recycled fibers. Papers produced on the
Fourdrinier paper machine are used in several applications including business papers,
printing, high quality writing papers, book publishing stock, reply card, watermarked,
industrial and consumer papers that require water-oil-grease resistant attributes, copier
papers and specialty papers. The Company offers a wide range of colored papers and
specializes in color matching. A portion of the products produced by the Company are sold
under certain trademarks and trade names, including Ta-Non-Ka®, Copyrite®,
ENVIROGRAPHIC®, Northern Brights®, Artopaque®, Marks of
Distinction® and DuraEdge®. Other products are sold through paper merchants,
brokers and value-added converters who, in turn, sell to other value-adding entities or
direct to the consumer.

The
Companys two paper machines produce papers that have different features. Paper
produced on the Yankee paper machine has a very smooth surface on one side of the paper,
which is referred to as machine glazed (MG). The smooth finish on MG paper
allows the paper to work well in certain coating and printing applications.

Paper
produced on the Fourdrinier paper machine does not have a glazed finish, rather it is
machine finished (MF). MF paper works well in a broad range of applications
including publishing, writing paper and certain printing applications.

Products
produced at the Oconto Falls manufacturing facility complement the Companys overall
product offerings by adding value to certain paper grades through printing and converting
of paper and plastic substrates. At this facility, the Company produces a variety of
printed products on paper and plastic substrates and manufactures polyethylene bags.

-4-

---

Badger
sells its products produced at each facility to a wide range of converting companies
throughout the United States. These sales are conducted through the Companys sales
personnel. The largest concentration of the Companys customers can be found in the
Midwestern states including Wisconsin, Illinois, Michigan and Ohio. However, as a result
of expanded national sales efforts, the Company has made significant progress toward
expanding its customer base into other regions of the United States.

The
Companys foreign net sales are immaterial to its operations.

# Competition

Badgers
products are sensitive to competition from numerous sources, including other paper
products and products of other composition. Product quality, price, volume and service are
all competitive factors. Badgers paper production represents less than 1% of the
production capacity in the United States for these products. Competition for all grades of
paper manufactured by the Company includes International Paper Company, Georgia-Pacific
Corporation, Domtar, Inc., Wausau-Mosinee Paper Corporation and smaller, non-integrated
paper companies. Many of the Companys larger competitors have greater financial,
technical, marketing and public relation resources, larger client bases and greater brand
or name recognition than Badger.

# Raw Materials; Inventory

The
principal raw material used by the Company is pulp. Badger utilizes a variety of fibers to
meet the formulation requirements of the papers it produces. Northern and southern
softwood and hardwood pulps, pre-consumer and post-consumer recycled pulps, and hard white
rolls make up the total fiber requirements. Badger purchases all its fiber requirements on
the open market. Other raw materials used in the manufacturing process include inks and
polyethylene substrates. Other raw materials are purchased directly from manufacturers and
distributors.

Badger
has at least two sources of supply for major items. Shortages of pulp or certain chemicals
(including petrochemicals) could have an adverse effect on Badgers ability to
manufacture its products, and could adversely affect product mix. Although Badger does not
anticipate shortages of raw materials, it is anticipated that there will be near-term
increases in pulp prices and the cost of polyethylene.

# Energy

Badger
is a large consumer of energy, including electricity and natural gas. In 2003, 9.7% of
Badgers cost of sales represented energy costs compared to 7.8% of Badgers
cost of sales in 2002. Badger purchases electricity from local public utilities, and it
purchases natural gas from various sources in the United States and Canada. Two
dual-fueled boilers capable of burning natural gas or fuel oil and one natural gas boiler
supply the Peshtigo Facilities heating and manufacturing requirements. During 2002,
the Company removed its fuel oil storage tanks at its Peshtigo Facilities. As a result,
the Company will not have the flexibility to switch between natural gas and fuel oil as a
source of fuel.

Although
Badger experienced temporary interruptions of electrical service in the summer of 2002 due
to regional shortages of electricity during peak demand periods, the Company believes that
current sources of electricity and natural gas are adequate to meet its needs. Such
interruptions caused the Company to temporarily stop the manufacture of paper. There is no
damage to equipment during these temporary power interruptions. Badger could experience
similar interruptions in the future.

-5-

---

The
market price for natural gas stabilized at historically high levels during the second half
of 2003. In order to reduce the risk of fluctuating market prices for natural gas, the
Company has purchased a significant portion of its natural gas requirements for the first
half of 2004 at a fixed price.

# Patents

The
Company possesses certain patents and licenses used in connection with its business, none
of which individually, or in the aggregate, are material.

# Research and Development

The
Company maintains a dedicated technical staff of employees charged with the responsibility
of researching and developing new products. The Company also relies on outside consultants
from time to time for special research and development projects. The Companys
technical staff also refines and improves existing products in response to customer
requirements and market demands. The Company spent $673,000 in 2003, $769,000 in 2002 and
$469,000 in 2001 on product research and development activities.

A
significant percentage of the Companys research and development costs are spent
working on concepts and designs for new and/or improved paper products for customers.
Since many of the Companys customers for paper products are converters, these
customers need trial production runs of paper products to evaluate how the Companys
new or modified paper products perform in actual use on the customers paper
converting machinery and equipment. If such trial production runs are unsuccessful, the
Company charges the associated costs to research and development. If such trial production
runs are successful, the Company sells the product to the customers. Revenues from
successful trial production runs are included in sales and the associated costs are
accounted for in cost of sales.

# Backlog

As
of December 31, 2003, the value of the Companys order backlog was approximately
$2,221,000 as compared to $1,270,000 and $2,837,000 at December 31, 2002 and 2001,
respectively.

# Customers

In
2003, 2002 and 2001, no customer represented over 10% of Badgers net sales.

# Environmental Matters

In 2000,
the Company received final regulatory approval from the Wisconsin Department of Natural
Resources (WDNR) of its Title V air operating permit for its Peshtigo
Facilities. The permit does not require the Company to install new or additional pollution
control equipment, and as such, the Company is responsible for the costs associated with
routine monitoring, record keeping and reporting requirements. These costs are minimal.

Prior
to January 30, 2002, effluent flow from Badgers Peshtigo Facilities was directed
into a joint municipal wastewater treatment plant, which Badger operated under contract
with the City of Peshtigo, Wisconsin. Effective January 30, 2002, Badger sold this
wastewater treatment plant to the City of Peshtigo for approximately $1,250,000; however,
Badger continues to operate this wastewater treatment plant under contract with the City
of Peshtigo. Management believes that this wastewater treatment plant continues to meet or
exceed all currently applicable environmental requirements and that Badgers use of
the treatment plant is in compliance with all regulatory requirements. In 2000, Badger
renewed its wastewater discharge permit for this wastewater treatment plant.

-6-

---

In
January 2000, the WDNR approved a final closure report filed by the Company with respect
to its former Harbor Road Landfill. The WDNR will continue to review the effectiveness of
this closure. If the WDNR subsequently determines that the closure was ineffective, then
the WDNR may require the Company to undertake further remedial actions. Based on the
Companys consultants report (dated April 1999), the Company estimated that the
potential future cost of such future environmental remedial efforts (assuming that the
WDNR determines that the closure was ineffective) was approximately $300,000. The Company
has not subsequently updated this consultants report. Management believes that the
Company is in compliance with all WDNR Net Worth Financial Responsibility Tests as of
December 31, 2003.

Soil
contamination was identified at the Companys French Street location in Peshtigo
during the removal of four above ground storage tanks. The Company performed site
investigation work and in October 2003, requested that the case be transferred from the
WDNR to the Wisconsin Department of Commerce (Commerce) for case closure with
a soil Geographic Information System Registry and a Wisconsin Administrative Code Chapter
NR 140 Preventative Action Limit exemption. Commerce requested additional information in
February 2004. The requested documents and information were provided to Commerce. As of
the filing of this Annual Report on Form 10-K, the Company has not received a response
regarding closure from Commerce. It is not possible to determine the costs, if any, that
may be incurred in completing any additional investigation or required remediation.

The
Companys Peshtigo Facilities are located near the Lower Fox River/Green Bay Area of
Concern (AOC). Pursuant to the Great Lakes Water Quality Agreement, 43
AOCs have been identified and re-located throughout the Great Lakes Basin. The
Company has not been identified by WDNR or the United States Environmental Protection
Agency (EPA) as responsible for the environmental problems within the Lower
Fox/Green Bay AOC.

The
Company does not anticipate any material capital expenditures for pollution control
equipment during the next two fiscal years.

The
Company holds an air-operating permit by the WDNR for its Oconto Falls Facilities. The
permit expires on January 29, 2006. The permit limits emissions so that the facility is
considered a synthetic minor under the EPAs Title V air permit program.
The permit authorizes the operation of the flexographic printing process at the Oconto
Falls Facilities.

Badger
believes it has in force all of the necessary environmental permits from Federal, state
and local authorities to continue production of current business activities. The Company
began production on new foil laminating equipment in late 2003, which requires a permit
for additional volatile organic compounds emissions. The Company is currently operating
its laminating equipment under the construction permit it received in 2003. The
construction permit will expire in January 2005.

# Employees

As
of December 31, 2003, the Company had 292 employees, including 183 employees at the
Peshtigo Facilities covered by three-year collective bargaining agreements running through
May 2005. The Company has begun a process to redesign workflow in order to reduce the
number employees necessary to produce its products. Teams comprised of management and
union employees are working to redesign workflow with the objective of improving
efficiency and quality. Another result will be fewer employees required to meet
manufacturing requirements. It is anticipated that workforce reductions will begin during
the second quarter of 2004.

-7-

---

# Available Information

The
Company maintains a website with the address www.badgerpaper.com. Additional information
regarding the Company can be found on this website. The Company is not including the
information contained in the Companys website as a part of, or incorporating it by
reference into, this Form 10-K.

# Item 2. Properties*

|                 |                
|---------------- | ---------------
|Location         | Owned or Leased
|Peshtigo, WI     | Owned (1)      
|Peshtigo, WI     | Owned (1)      
|Oconto Falls, WI | Owned          
|Oconto Falls, WI | Leased (2)     

---

|(1) | As
a result of the November 2001 refinancing of its revolving and long-term           debt,
two of the Companys lenders hold mortgages on the Peshtigo           Facilities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
lease for the warehouse space is a five-year lease (triple net lease basis)
          which commenced on October 1, 2000. The current base rent is approximately
          $54,000 per year, increasing incrementally to $56,000 per year in the final
year           of the lease.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | The
Company leases equipment. Information related to these leases can be found in Note L to
the Companys 2003 audited financial statements.
|- | --------------------------------------------------------------------------------------------------------------------------------------------

# Item 3. Legal Proceedings

The
Company does not have any material legal proceedings pending, and does not have any
litigation or governmental proceedings with respect to environmental matters pending
(except to the extent identified under the Environmental Matters caption in
Item 1 of Part I of this Annual Report on Form 10-K).

# Item 4.  Submission of
Matters to a Vote of Shareholders

No
matters were submitted to a vote of the Companys shareholders in the fourth quarter
of 2003.

# Executive Officers of
the Registrant

The
following table sets forth certain information as of December 31, 2003 concerning the
Companys executive officers.

|Name              | Age | Office                                       | Period Served
In This Office
|----------------- | --- | -------------------------------------------- | ----------------------------
|Ronald E. Swanson | 54  | President and Chief Executive Officer        | 2003 - Present              
|                  |     | of the Company, Director                    
|                  |     | Senior Vice President - SENA Magazine Papers | 2000-2002                   
|                  |     | Stora Enso North America                    
|                  |     | Senior Vice President                        | 1997-2000                   
|                  |     | Consolidated Papers, Inc.                   

-8-

---

|Name               | Age | Office                                              | Period Served
In This Office
|------------------ | --- | --------------------------------------------------- | ----------------------------
|William H. Peters  | 45  | Vice President, Chief Financial Officer, Secretary, |                             
|                   |     | and Treasurer                                       | 2001-Present                
|                   |     | of the Company                                     
|                   |     | Executive Vice President and Treasurer,            
|                   |     | North Shore Capital                                 | 1996-2001                   
|                   |     | (small market venture capital firm)                
|J. Glenn Davis     | 46  | Vice President-Sales and Marketing                 
|                   |     | of the Company                                      | 2002-Present                
|                   |     | Business Manager,                                  
|                   |     | International Papers (specialty papers)             | 2000-2001                   
|                   |     | President,                                         
|                   |     | JND Company, Inc. (food processing)                 | 1998-2000                   
|                   |     | Director, Specialty Products                       
|                   |     | Appleton Papers (carbonless papers)                 | 1998                        
|Robert J. Spannuth | 56  | Vice President, Operations                          | 2003-Present                
|                   |     | of the Company                                     
|                   |     | Director - Source & Support                         | 2001-2002                   
|                   |     | Mead Westvaco                                      
|                   |     | Vice President & Mill Manager                       | 1999-2001                   
|                   |     | Fraser Papers                                      

Officers
are elected to hold office until the next annual meeting of the Board of Directors
following the annual meeting of shareholders or until their successors are elected and
qualified. There is no arrangement or understanding among any of the above officers or any
other person pursuant to which such officer was selected for the office held. No family
relationship of any kind exists between the officers.

# PART II

# Item 5. Market For the
Registrants Common Stock and Related Shareholder Matters

The
Companys Common Stock trades on the Nasdaq SmallCap Market under the symbol
BPMI. As of December 31, 2003, the Company had 307 shareholders of record.
Information about the trading prices for shares of the Companys Common Stock and
dividends on the Common Stock is included in this Annual Report on Form 10-K under the
caption Stock Price and Dividend Information. Information about equity
compensation plans is included in this Annual Report on Form 10-K under Item 12.

# Item 6. Selected
Financial Data

Selected
Company financial data is presented in this Annual Report on Form 10-K under the caption
Five-Year Comparison of Selected Financial Data.

-9-

---

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

# Results of Operations

# Executive Overview

The
Company saw a decline in net sales during 2003 as a result of decreased shipment volume.
Reduced shipment volume can be attributed to declining market demand for certain products
manufactured by the Company. The Company also realized increases in costs for pulp and
natural gas in 2003 as compared to 2002.

The
combination of reduced shipment volume and higher manufacturing costs resulted in a
decrease in gross profit. In 2003, gross profit was $1,219,000 and 1.7% of net sales,
compared to $7,829,000 and 10.6% in 2002. As a result of lower gross profit, the Company
generated a net loss for 2003 of $3,091,000 as compared to net earnings of $1,899,000 in
the previous year. The results for 2002 include a pretax gain of $1,125,000 (after tax
gain of $747,000) from the sale of non-core assets. The Company did not have a similar
gain in 2003.

The
increases in the cost of pulp and natural gas are driven by market conditions outside of
the Companys control. In order to reduce internal costs, the Company has begun a
process to redesign workflow. Teams comprised of management and union employees are
redesigning workflow with the objective of improving efficiency and quality. Another
result will be fewer employees required to meet manufacturing requirements. The teams
began meeting in the first quarter of 2004. It is anticipated that workforce reductions
will begin during the second quarter of 2004.

# 2003 versus 2002

# Net Sales

Net
sales in 2003 were $71,691,000 compared to $73,772,000 in 2002, a decrease of $2,081,000
and 2.8%. The reduction in net sales can be attributed to decreased shipment volume of
paper products combined with increased sales of printed products. The shipment volume of
paper products in 2003 as compared to 2002 declined by 5.3% while the average price for
paper products increased 0.8%. The Company realized an increase in the sales of printed
and converted products of $1,487,000 in 2003 as compared to 2002.

The
decrease in shipment volume in 2003 as compared to 2002 can be directly related to the
Companys decline in sales of fine paper products. Net sales in 2003 of fine paper
products declined 19.6% when measured in sales dollars, and declined 22.0% when measured
in tons shipped when compared to 2002. The reduction in fine paper volume resulted in
increased downtime on the Fourdrinier paper machine in 2003 as compared to 2002. The
decline in fine paper business can be attributed to difficult market conditions resulting
in lower pricing in the market.

# Cost of Sales

Cost
of sales in 2003 was $70,472,000 and 98.3% of net sales compared to $65,943,000 and 89.4%
of net sales in 2002. During 2003 the market price for pulp increased resulting in higher
pulp costs for the Company. The Company also incurred significantly higher costs for
natural gas in 2003 as compared to 2002. The increases in the cost of pulp and natural gas
combined with the inability to increase prices due to difficult market conditions resulted
in higher cost of sales when measured as a percentage of sales.

The
Companys overall cost for pulp increased $594,000 and 2.7% in 2003 as compared to
2002 on 6.7% lower production volume. The disproportionate increase in pulp costs is a
result of higher market prices for pulp.

-10-

---

The
Company anticipates that the market price of pulp will continue to increase into 2004. The
Company has entered into contracts with pulp suppliers to purchase a portion of its pulp
requirements at a fixed price. The Company anticipates that approximately half of its pulp
requirements in 2004 will be purchased under these agreements.

During
the first quarter of 2003, the market price for natural gas increased significantly. The
market price for natural gas stabilized at historically high levels during the second half
of 2003. Because of the increases in the market price of natural gas, the Companys
cost for natural gas in 2003 increased $1,649,000 and 57.3% from 2002. In order to reduce
the risk of fluctuating market prices for natural gas, the Company has purchased a
significant portion of its natural gas requirements for the first half of 2004 at a fixed
price.

# Gross Profit

Gross
profit in 2003 was $1,219,000 and 1.7% of net sales compared to $7,829,000 and 10.6% of
net sales in 2002. The decrease in gross profit is the result of higher costs for pulp and
natural gas combined with the Companys inability to increase pricing on fine paper
products due to difficult market conditions.

# Selling &Administrative
Expense

Selling
and administrative expenses in 2003 were $5,097,000 and 7.1% of net sales compared to
$5,779,000 and 7.8% in 2002. The reduction in selling and administrative expenses is the
result of lower employment related costs and reduced spending on outside professional
services.

# Income Tax

In
2003, the Company had an income tax benefit of $1,203,000 and 28% of the loss before
income taxes compared to income tax expense of $925,000 and 32.8% of income before taxes
in 2002. The differences between statutory rates and the Companys effective rate are
a largely the result of increases in the valuation allowance.

# Other Income & Expense

During
2003 other income and expense was a $416,000 expense compared to a $774,000 net income in
2002. In 2002, the Company recognized a gain on the sale of a wastewater treatment
facility of $1,125,000. The Company did not have a similar gain in 2003.

# 2002 versus 2001

# Net Sales

Net
sales in 2002 were $73,772,000 compared to $76,305,000 in 2001, a decrease of $2,533,000
and 3.3%. The reduction in net sales can be attributed to volume and pricing. The sale of
paper in 2002 as compared to 2001 increased by 4.5% while average pricing decreased by
3.7%. The Company also realized a decrease of $3,050,000 in the shipment of printed
products in 2002 versus 2001.

Net
sales volume as measured in weight increased on each paper machine, while total average
pricing decreased. The decrease in average pricing was driven entirely by pricing on
machine finished (MF) paper grades. The average selling price of machine glazed (MG)
products increased an average of 1.7%. The increase in the average price of MG products is
a result of shifting the product offering to specialty markets.

The
decrease in net sales of printed products is a result of losing business from a number of
customers through competitive bidding processes.

-11-

---

# Cost of Sales

The
cost of sales for 2002 was $65,943,000 and 89.4% of net sales compared to $66,463,000 and
87.1% in 2001. During 2002, the production volume of printed products declined when
compared to the previous year. This decline in business resulted in a portion of the
decline in the cost of sales as measured in dollars. The increase in cost of sales
relative to sales is driven primarily by the decrease in the average selling prices while,
at the same time, maintaining a relatively flat cost for pulp.

During
2002, production activity on the Companys two paper machines increased 4.2% compared
to 2001. Total cost for pulp in 2002 increased 5.1% when compared to 2001. The
disproportionate increase in pulp cost when compared to production activity is the
combined effect of the average cost for fiber and the utilization efficiency.

# Gross Profit

Gross
profit during 2002 was $7,829,000 and 10.6% of net sales compared to $9,842,000 and 12.9%
of net sales in 2001. The decrease in gross profit is the combined result of the decrease
in net sales as it relates to pricing, while at the same time holding certain production
costs consistent with the previous year. The overall average selling price during 2002
decreased 3.7% when compared to 2001. The reduction in average pricing is the result of
pricing pressure on certain commodity grades still manufactured by the Company.

# Selling &Administrative
Expense

In
2002, selling and administrative expenses were $5,779,000 and 7.8% of net sales compared
to $5,559,000 and 7.3% in 2001. The increase in selling and administrative expenses is a
result of cost associated with additional resources necessary to develop and market
products for specialty markets that are consistent with the Companys strategy to
move from commodity grades to specialty paper markets. During 2002, the Company incurred
$252,000 associated with management restructuring costs. Had the Company not incurred
management restructuring costs, selling and administrative expenses would have been
$5,527,000 in 2002 compared to $5,559,000 the previous year.

# Income Tax

Income
taxes in 2002 were $925,000 and 32.8% of income before taxes and reflect the statutory tax
rates.

Income
taxes in 2001 were $1,374,000 and 26.3% of income before taxes. The difference between
statutory tax rates and the Companys effective tax rate is the realization of the
benefits related to the Federal net operating loss carryforward utilized in 2001.

# Other Income & Expense

During
2002, the Company realized a gain of $1,125,000 on the sale of a wastewater treatment
facility. The Company continues to manage the facility under an operating agreement with
the City of Peshtigo.

During
2001, the Company realized $1,627,000 in gains from the sale of timberland that was not
used in the day-to-day operations of the business since the Company closed its pulp mill
several years ago.

-12-

---

# Liquidity and Capital
Resources

# Capital Expenditures

Capital
expenditures in 2003 were $1,880,000 ($1,150,000 of which were financed through a capital
lease) compared to $3,165,000 in 2002. The largest project in 2003 was the purchase of
foil laminating equipment. The total cost of the project was $1,257,000. In 2002, the
Company purchased waxer / winder equipment with a total estimated cost of $2,822,000. As
of December 31, 2003, the Company had invested $2,319,000 into this equipment. The Company
will continue to purchase interchangeable components as necessary to keep the equipment
operating on a continuous basis.

The Company anticipates that total
capital expenditures in 2004 will not exceed $2,000,000.

# Capital Resources

In
November 2001, the Company obtained a revolving credit agreement with a commercial bank
providing for asset-based financing which was scheduled to expire in November 2004. In
November 2003, the Company received a two-year extension of the revolving credit
agreement. The financing is now scheduled to expire in November 2006. The line of credit
provides for maximum borrowings of $15,000,000, limited to certain percentages of
receivables and inventory, and reduced by outstanding letters of credit. The line of
credit bears interest at a variable rate based on alternative interest rate bases at the
Companys option (4.50% at December 31, 2003). A facility fee of 0.25% is payable for
unused amounts. The line of credit is collateralized by accounts receivable and inventory.

As
of December 31, 2003, the Companys capital resources included $656,000 in cash and
the Companys $15,000,000 revolving credit facility. Borrowings under this facility
totaled $2,756,000 as of December 31, 2003. Based on the balances in inventory and
accounts receivable, the Company had $4,555,000 of availability under the revolving credit
facility at December 31, 2004.

At
December 31, 2003, the revolving line of credit required, among other items, the Company
to maintain $3,500,000 in unused availability and a minimum tangible net worth. Capital
expenditures are limited to $3,000,000 in 2003 and each subsequent year while the
revolving line of credit is in effect.

The
Company obtained a variable rate term loan in November 2001. The agreement provides for
monthly payments of principal and interest, with interest at prime plus 0.25%. Borrowings
are collateralized by certain property, plant and equipment.

The
Urban Development Action Grant debt, including additional funding obtained in November
2001, is due in monthly installments of $17,931, including interest at 5.0%, through
maturity in November 2011. This loan is collateralized by certain property.

The
Company obtained a variable rate loan in September 2002 to finance capital expenditures.
This agreement provides for up to $2,000,000 in borrowings and was due in January 2004. In
May 2003, the Company refinanced this loan with variable rate term debt. The long-term
debt agreement provides for monthly payments of $17,336, including interest at 4.25%
through maturity in November 2015.

During
2003, the Company violated the fixed charge coverage ratio covenant contained in the
credit facility and the debt service coverage ratio included in the Companys
long-term debt agreement. As of December 31, 2003, the Company has obtained waivers for
these violations. The Company has also received waiver for the possible violation of the
fixed charge coverage ratio and the minimum tangible net worth covenants contained in its
credit facility for the first quarter of 2004. The Company believes that cash provided by
operations and its revolving credit facility are sufficient to meet its current and
anticipated working capital needs as well as to fund its planned capital expenditures.

-13-

---

In
November 2003, the Company entered into a lease purchase agreement for $1,150,000 to
finance the purchase of certain converting equipment. The monthly lease payments are
$14,913, including interest at an effective rate of 5.9% with a purchase option in
December 2010.

# Cash Flows

Net
cash required to support operations in 2003 was $2,110,000 compared to cash generated by
operations of $4,306,000 in 2002. The reduction of cash flow during 2003 relative to 2002
is the result of reduced profitability and reductions in accounts payable and accrued
liabilities.

Net
cash used in investing activities in 2003 was $730,000 compared to $1,627,000 in 2002.
During 2002, the Company realized proceeds from the sale of non-core assets of $1,374,000,
which it used to pay down debt. The Company did not have a similar gain in 2003. The
Company invested $730,000 in fixed assets in 2003 compared to $3,165,000 in 2002.

Cash
flow generated from financing activities in 2003 was $2,394,000 compared to using
$2,241,000 for financing activities in 2002. The increase in cash provided by financing
activities is the combined result of reduced cash flow from operations and investments in
property, plant and equipment.

In
November of 2003 the Company borrowed $1,150,000 under the terms of a lease purchase
agreement to finance the purchase of foil laminating equipment.

During
the first quarter of 2002, the Company sold its wastewater treatment facility. Proceeds
from the sale were used to reduce the outstanding advances under its revolving credit
facility.

The
Company believes that its cash flow from operations, together with available borrowings,
will be sufficient to allow the Company to meet its obligations in 2004.

# Contractual Obligations

The
following table of certain material contractual obligations at December 31, 2003
summarizes the effect that these obligations are expected to have on the Companys
cash flow in future periods set forth below:

|                            | Payments due by period
|--------------------------- | ----------------------
|
|Long-Term Debt              | $10,395,000           
|Capital Lease Obligations   | 1,116,000             
|Operating Leases            | 1,221,000             
|Purchase Obligations        | 17,082,000            
|Other Long-Term Liabilities | --                    
|                            |                       
|Total                       | $29,814,000           

# Application of Critical
Accounting Policies and Estimates

The
discussion and analysis of the Companys financial condition and results of
operations are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires Management to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities at the date of our
financial statements. Actual results may differ from these estimates under different
assumptions or conditions.

-14-

---

Critical
accounting policies are defined as those that involve significant judgments and
uncertainties and potentially result in materially different results under different
assumptions and conditions. Application of these policies is particularly important to the
portrayal of our financial condition and results of operations. Management believes the
accounting policies described below meet these characteristics.

# Revenue Recognition

Revenue
is recognized when goods are shipped. Terms of sale are generally free on board
destination. Estimated rates of return are fairly consistent and the Company has recorded
a reserve to account for such anticipated returns.

# Research and Product
Development Costs

The
Companys strategy is to expand its product offering into specialty and niche
markets. The costs associated with the development of new products are expensed when
incurred. To the extent that new product trials are successful, customers will pay for the
product and the products will be included in sales for the period.

# Bad Debt

Each accounting period, the Company
determines an amount to be set aside to cover potentially uncollectible accounts. The
Companys determination is based upon an evaluation of accounts receivable for risk
associated with a clients ability to make payments. These determinations require
considerable judgment in assessing the ultimate potential for realization of these
receivables, including reviewing the financial stability of the customer and gauging
current market conditions. If the Companys evaluation of a clients ability to
pay is incorrect, future charges may be incurred.

# Benefit Accruals

Each
accounting period, the Company estimates the amount to be accrued for medical costs
incurred but not yet reported under its self-funded employee medical insurance plans. The
Companys determination is based on an evaluation of past rates of claim payouts and
trends in the amount of payouts. This determination requires significant judgment and is
dependent upon the likelihood that past trends are representative of future payment
patterns. A significant shift in usage and payment patterns within the Companys
medical plans could necessitate significant adjustments to these accruals in future
accounting periods.

# Item 7A. Quantitative
and Qualitative Disclosures About Market Risk

The
Company is exposed to market risk from changes in interest on its debt. The revolving
credit facility provides for borrowings up to $15,000,000 (subject to a collateral
formula) and extends to November 2006. An annual commitment fee of 0.25% is payable for
unused amounts. The Companys interest rate floats, based on the lenders prime
rate. As of December 31, 2003, the Company was paying 4.5% annual rate on amounts borrowed
against this revolving credit facility.

A
majority of the Companys debt is at variable interest rates, and a hypothetical 1.0%
(100 basis point) change in interest rates would cause an estimated increase in annual
interest expense of $115,000.

The
Company does not use financial instruments for trading purposes and is not a party to any
leveraged derivatives.

-15-

---

# Item 8. Financial
Statements and Supplementary Data

# REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and
Shareholders Badger Paper Mills, Inc. and Subsidiary

We have audited the accompanying
consolidated balance sheets of Badger Paper Mills, Inc. and Subsidiary as of December 31,
2003 and 2002 and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. 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 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 Badger Paper Mills, Inc. and Subsidiary as of December 31, 2003 and
2002 and the consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

/s/  Grant Thornton LLP
Appleton, Wisconsin February 2, 2004 (except for Note F, as to which the date is March 1, 2004)

-16-

---

# Badger Paper Mills,
Inc. and Subsidiary

# CONSOLIDATED BALANCE
SHEETS December 31 (dollars in thousands)

|                                                        | 2003
|------------------------------------------------------- | ----
|ASSETS                                                  |     
|CURRENT ASSETS                                          |     
|Cash and cash equivalents                               |     
|Accounts receivable, net                                |     
|Inventories                                             |     
|Refundable income taxes                                 |     
|Deferred income taxes                                   |     
|Prepaid expenses and other                              |     
|                                                        |     
|Total current assets                                    |     
|PROPERTY, PLANT AND EQUIPMENT, NET                      |     
|OTHER ASSETS                                            |     
|                                                        |     
|Total assets                                            |     
|                                                        |     
|LIABILITIES                                             |     
|CURRENT LIABILITIES                                     |     
|Current portion of long-term debt                       |     
|Accounts payable                                        |     
|Accrued liabilities                                     |     
|                                                        |     
|Total current liabilities                               |     
|LONG-TERM DEBT                                          |     
|DEFERRED INCOME TAXES                                   |     
|OTHER LONG-TERM LIABILITIES                             |     
|COMMITMENTS AND CONTINGENCIES                           |     
|SHAREHOLDERS' EQUITY                                    |     
|Common stock, no par value; 4,000,000 shares authorized |     
|2,160,000 shares issued                                 |     
|Additional paid-in capital                              |     
|Retained earnings                                       |     
|Treasury stock, at cost, 120,845 and 129,815            |     
|shares in 2003 and 2002                                 |     
|                                                        |     
|Total shareholders' equity                              |     
|                                                        |     
|Total liabilities and shareholders' equity              |     
|                                                        |     

The accompanying notes
are an integral part of these statements.

-17-

---

# Badger Paper Mills,
Inc. and Subsidiary

# CONSOLIDATED
STATEMENTS OF OPERATIONS Years ended December 31, (dollars in thousands, except for per
share data)

|                                             | 2003
|-------------------------------------------- | ----
|Net sales                                    |     
|Cost of sales                                |     
|                                             |     
|Gross profit                                 |     
|Selling, general and administrative expenses |     
|                                             |     
|Operating income (loss)                      |     
|Other income (expense)                       |     
|Interest and dividend income                 |     
|Interest expense                             |     
|Gain on sale of non-core assets              |     
|Miscellaneous, net                           |     
|                                             |     
|                                             |     
|                                             |     
|Income (loss) before income taxes            |     
|Provision (benefit) for income taxes         |     
|                                             |     
|Net income (loss)                            |     
|                                             |     
|Net income (loss) per share - basic          |     
|                                             |     
|Net income (loss) per share - diluted        |     
|                                             |     

The accompanying notes
are an integral part of these statements.

-18-

---

# Badger Paper Mills,
Inc. and Subsidiary

# CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY Years ended December 31, (dollars in thousands)

|                                                       | 2003
|------------------------------------------------------ | ----
|Common Stock                                           |     
|Balance, December 31                                   |     
|                                                       |     
|Additional paid-in capital                             |     
|Balance, January 1                                     |     
|Treasury stock issued                                  |     
|                                                       |     
|Balance, December 31                                   |     
|                                                       |     
|Retained earnings                                      |     
|Balance, January 1                                     |     
|Net income (loss)                                      |     
|                                                       |     
|Balance, December 31                                   |     
|                                                       |     
|Treasury stock                                         |     
|Balance, January 1                                     |     
|Shares issued (8,970, 6,600 and 35,168 shares in 2003, |     
|2002 and 2001, respectively)                           |     
|                                                       |     
|Balance, December 31                                   |     
|                                                       |     
|Shareholders' equity                                   |     
|Balance, December 31                                   |     
|                                                       |     

The accompanying notes
are an integral part of these statements.

-19-

---

# Badger Paper Mills,
Inc. and Subsidiary

# CONSOLIDATED
STATEMENTS OF CASH FLOWS Years ended December 31, (dollars in thousands)

|                                                                     | 2003
|-------------------------------------------------------------------- | ----
|Cash flows from operating activities:                                |     
|Net income (loss)                                                    |     
|Adjustments to reconcile to net cash (used in) provided by operating |     
|activities                                                           |     
|Depreciation                                                         |     
|Directors' fees paid in shares                                       |     
|Deferred income taxes                                                |     
|Gain on sale of non-core assets                                      |     
|Other                                                                |     
|Changes in operating assets and liabilities:                         |     
|Accounts receivable, net                                             |     
|Inventories                                                          |     
|Accounts payable and accrued liabilities                             |     
|Income taxes refundable (payable)                                    |     
|Other                                                                |     
|                                                                     |     
|Net cash (used in) provided by operating activities                  |     
|Cash flows from investing activities:                                |     
|Additions to property, plant and equipment                           |     
|Proceeds from sale of non-core assets                                |     
|Net maturities (purchases) of certificates of deposit                |     
|                                                                     |     
|Net cash provided by (used in) investing activities                  |     
|Cash flows from financing activities:                                |     
|Increase (decrease) in revolving credit agreement                    |     
|Proceeds from long-term debt                                         |     
|Payments on long-term debt                                           |     
|                                                                     |     
|Net cash provided by (used in) financing activities                  |     
|                                                                     |     
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 |     
|Cash and cash equivalents:                                           |     
|Beginning of year                                                    |     
|                                                                     |     
|End of year                                                          |     
|                                                                     |     

The accompanying notes
are an integral part of these statements.

-20-

---

Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001

# NOTE A  SUMMARY OF
ACCOUNTING POLICIES

Badger
Paper Mills, Inc. (the Company) manufactures paper and paper products and
provides printing and converting services to customers throughout North America, with
concentrations in the Midwestern States of Wisconsin, Illinois, Michigan and Ohio. The
Companys wholly owned subsidiary, Peshtigo Power, LLC (Peshtigo)
produces steam for the Company.

A
summary of the significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows.

# 1. Consolidation
Principles

The consolidated financial statements
include the accounts of Badger Paper Mills, Inc. and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in consolidation.

# 2. Operating Segments

The Company previously operated in
the paper products segment and flexible packaging segment. During the third quarter of
2002, the Company reorganized its operations into a single business segment. Financial
statements have been revised for the change in reportable segments.

# 3. Concentrations

Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist principally of
cash and cash equivalents and trade accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions. The Company provides credit in
the normal course of business to its customers. These customers are located throughout
North America. No single customer accounted for more than 10% of sales in 2003, 2002 or
2001. The Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses and generally does not require collateral to
support the accounts receivable balances.

# 4. Financial Instruments

For cash and cash equivalents, the
carrying amount approximates fair value because of the short maturity of these
instruments. For long-term debt, the carrying amount approximates fair value based on
comparison with current rates offered to the Company for debt with similar remaining
maturities.

# 5. Estimates

Preparation of the consolidated
financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.

-21-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

NOTE A  SUMMARY OF
ACCOUNTING POLICIES  Continued

# 6. Cash Equivalents

The Company considers all highly
liquid debt instruments purchased with an original maturity of three months or less to be
cash equivalents.

# 7. Receivables

Accounts receivable are stated net of
an allowance for sales returns, cash discounts and doubtful accounts. Credit is extended
based on prior experience with the customer and evaluation of the customers current
financial condition. Accounts receivable are generally due within 30 to 45 days. The
Company estimates an allowance based on actual payment history of each individual
customer, adverse situations that may affect the customers ability to pay and
prevailing economic conditions. Consequently, an adverse change in the financial condition
of a particular customer could affect the Companys estimate of its allowance.
Accounts past due more than 120 days are generally written off, with subsequent payments
on previously written off accounts credited to miscellaneous income.

# 8. Inventories

Substantially all inventories are
valued at the lower of cost or market with cost being determined on the last-in, first-out
(LIFO) basis.

# 9. Property Held for
Resale

Property held for resale at December
31, 2001 consisted of a sewage treatment plant. On January 2, 2002, the Company sold this
plant to the City of Peshtigo for cash proceeds of $1,125,000.

# 10. Property, Plant and
Equipment

Property, plant and equipment are
stated at cost. Spare parts are stated at cost, subject to net realizable value. If the
parts are utilized in a project that either extends the lives or increases the capacity of
the equipment, they are capitalized. If the parts are utilized in ordinary repairs or
maintenance, they are charged to operating expense. Depreciation of plant and equipment is
provided on the straight-line basis over the estimated useful lives of the assets. Land
improvements useful lives are 15 years. Buildings useful lives range from 30 to 33 years
and machinery and equipment from 3 to 17 years. Leased property under the capital lease is
amortized over the life of the respective asset. Accelerated depreciation is used for
income tax purposes.

The Company reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be impaired, the
impairment recognized is measured by the amount by which the carrying amounts of the
assets exceed their respective fair values. Assets held for sale are recorded at the lower
of their fair value less costs to sell or the carrying amount of the asset.

-22-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

NOTE A  SUMMARY OF
ACCOUNTING POLICIES  Continued

# 11. Environmental
Expenditures

Accruals for remediation costs are
recorded when it is probable that a liability has been incurred and the amount of the
costs can be reasonably estimated.

# 12. Income Taxes

Deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end based on enacted
tax laws and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets and liabilities to the amount expected to be realized.

# 13. Stock Options

The Company uses the intrinsic value
method to account for its stock options. Therefore, if the exercise price of the stock
options is equal to or exceeds the market price of the underlying stock on the date of
grant, no compensation expense is recorded. The Company discloses the impact if the shares
were accounted for under the fair value method (see Note K).

The
following table illustrates the effect on net income (loss) and income (loss) per share if
the Company had applied the fair value method to stock-based employee compensation:

|                                            | Year ended December 31,
|------------------------------------------- | -----------------------
|2002                                        | 2001                   
|Net income (loss) as reported               |                        
|Deduct: stock based compensation expense    |                        
|determined under the fair value method, net |                        
|of tax effects                              |                        
|Add:  forfeiture of prior year stock based  |                        
|compensation determined under the fair      |                        
|value method, net of tax effects            |                        
|                                            |                        
|Pro forma net income (loss)                 |                        
|                                            |                        
|Earnings per share:                         |                        
|Basic - as reported                         |                        
|Basic - pro forma                           |                        
|Diluted - as reported                       |                        
|Diluted - pro forma                         |                        

-23-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

NOTE A  SUMMARY OF
ACCOUNTING POLICIES  Continued

# 14. Revenue Recognition

Revenue is recognized when goods are
shipped. Estimated rates of return are fairly consistent and the Company has recorded a
reserve to account for such anticipated returns.

# 15. Shipping and
Handling Costs

The Company records shipping and
handling costs in cost of sales on the statement of operations. Shipping and handling
costs amounted to $4,751,000, $5,133,000 and $4,562,000 for the years ended December 31,
2003, 2002 and 2001.

# 16. Research and Product
Development Costs

Research and product development
costs related to potential new products and applications are expensed when incurred. These
costs, after consideration of customer reimbursements, amounted to $673,000, $769,000 and
$469,000 for 2003, 2002 and 2001. Customer reimbursements amounted to $944,000, $2,467,000
and $1,921,000 for 2003, 2002 and 2001.

# 17. Net Earnings (Loss)
Per Share

Net earnings (loss) per share are
computed based on the weighted average number of shares of common stock outstanding during
the year:

|        | 2003     
|------- | ---------
|Basic   | 2,033,391
|Diluted | 2,033,391

Stock options to purchase 66,000
common shares in 2003 and 7,000 common shares in 2002 and 25,000 common shares in 2001
were not dilutive and, therefore, have not been included in the computations of diluted
per common share amounts.

# 18. Prospective
Accounting Pronouncements

The Financial Accounting Standards
Board (FASB) issued Interpretation 46, Consolidation of Variable Interest Entities (FIN
46) in January 2003. In December 2003, the FASB revised the effective date for entities
other than special-purpose entities to financial statements for periods after March 15,
2004. The Company is studying the application of the new rules, and anticipates that this
new accounting pronouncement will not have a significant impact on its results of
operations or financial position.

-24-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE B  RECEIVABLE
ALLOWANCES

The receivable allowances at December
31, 2003 and 2002 are as follows (in thousands):

|                             | 2003
|---------------------------- | ----
|Sales returns and allowances |     
|Cash discounts               |     
|Doubtful accounts            |     
|                             |     
|                             |     
|                             |     

# NOTE C  INVENTORIES

The major classes of inventories,
valued on the LIFO cost method, at December 31, 2003 and 2002 are as follows (in
thousands):

|                                   | 2003
|---------------------------------- | ----
|Raw Materials                      |     
|Work-in-process and finished stock |     
|                                   |     
|                                   |     
|                                   |     

It is not practical to separate
finished stock and work-in-process inventories. The first-in, first-out (FIFO)
cost of raw materials, work-in-process and finished stock inventories approximated
$10,233,000 and $10,844,000 at December 31, 2003 and 2002.

# NOTE D  PROPERTY,
PLANT AND EQUIPMENT

The major classes of property, plant
and equipment at December 31, 2003 and 2002 are as follows (in thousands):

|                                     | 2003
|------------------------------------ | ----
|Machinery and equipment              |     
|Buildings                            |     
|Spare parts                          |     
|Land                                 |     
|Construction-in-progress - equipment |     
|                                     |     
|                                     |     
|Accumulated depreciation             |     
|                                     |     
|                                     |     
|                                     |     

At
December 31, 2003, $28,684,000 of fully depreciated assets were still in use.

-25-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE E  ACCRUED LIABILITIES

Accrued liabilities at December 31,
2003 and 2002 are as follows (in thousands):

|                                                           | 2003
|---------------------------------------------------------- | ----
|Compensation, including future absences, and related taxes |     
|Defined contribution plan                                  |     
|Incurred but not reported medical claims                   |     
|Other                                                      |     
|                                                           |     
|                                                           |     
|                                                           |     

# NOTE F  LONG-TERM
DEBT

Long-term debt at December 31, 2003
and 2002 consists of the following (in thousands):

|                                        | 2003
|--------------------------------------- | ----
|Revolving credit agreement              |     
|Term note                               |     
|Capital lease obligation                |     
|Variable rate loan                      |     
|Urban Development Action Grant ("UDAG") |     
|                                        |     
|                                        |     
|Less:  current maturities               |     
|                                        |     
|                                        |     
|                                        |     

In November 2001, the Company
obtained a revolving credit agreement, as most recently amended November 2003, with a
commercial bank expiring in November 2006. The revolving credit agreement provides for
maximum borrowings of $15,000,000, limited to certain percentages of receivables and
inventory, and reduced by outstanding letters of credit. The revolving credit agreement
bears interest at a variable rate based on alternative interest rate bases plus the
applicable margin, as defined in the agreement, at the Companys option (4.50% at
December 31, 2003). A facility fee of 0.25% is payable for unused amounts. At December 31,
2003, the revolving credit agreement required, among other items, the Company to maintain
a minimum tangible net worth, as outlined in the agreement, undrawn availability of not
less than $3,500,000 and a limitation on capital expenditures. The Company is in
compliance with these covenants at December 31, 2003.

The Company obtained a term note in
November 2001 with a commercial bank. The agreement provides for monthly payments of
principal and interest of $49,102, with interest at prime plus 0.25% (effectively 4.25% at
December 31, 2003). The final payment on this loan is due in November 2011. At December
31, 2003, the term note required, among other things, the Company to maintain a minimum
debt service ratio and restrict indebtedness of the Company. At December 31, 2003, the
Company was not in compliance with these covenants. A waiver of these violations was
obtained on March 1, 2004.

-26-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE F  LONG-TERM
DEBT  Continued

The Company obtained a variable rate
loan in September 2003 with a commercial bank. The agreement provides for monthly payments
of principal and interest of $17,336, with interest at prime plus 0.25% (effectively 4.25%
at December 31, 2003). The final payment on this loan is due in November 2015.

The UDAG debt, including additional
funding obtained in November 2001 and March 2002, is due in monthly installments of $2,972
and $17,931, including interest at 4.0% and 5.0%, through maturity in May 2006 and
November 2011.

In November 2003, the Company entered
into a capital lease agreement for equipment with a financing company. The agreement
provides for monthly payments of principal and interest of $14,913, including interest at
5.9%. The final payment is due in November 2010. Gross amount of the asset recorded is
$1,257,000 with a net book value of $1,220,000 at December 31, 2003.

Substantially all assets of the
Company serve as collateral for the above debt.

Maturities of long-term debt for the
years ending after December 31, 2003 are as follows:

|Year ending December 31, | Long-term debt
obligations
excluding
capital lease | Minimum
capital lease
payments | Amount
representing
interest | Net present
value of long-
term debt
|------------------------ | -------------------------------------------------- | ------------------------------ | ---------------------------- | ------------------------------------
|2004                     |                                                    |                                | $                            | 727                                 
|2005                     |                                                    |                                |                              | 759                                 
|2006                     |                                                    |                                |                              | 3,524                               
|2007                     |                                                    |                                |                              | 791                                 
|2008                     |                                                    |                                |                              | 827                                 
|Thereafter               |                                                    |                                |                              | 3,767                               
|                         |                                                    |                                |                              |                                     
|                         |                                                    |                                | $                            | 10,395                              
|                         |                                                    |                                |                              |                                     

-27-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE G  INCOME
TAXES

The provision (benefit) for income
taxes consists of the following (in thousands):

|                                | 2003
|------------------------------- | ----
|Currently payable (refundable): |     
|Federal                         |     
|State                           |     
|                                |     
|                                |     
|Deferred:                       |     
|Federal                         |     
|State                           |     
|                                |     
|                                |     
|                                |     
|                                |     
|                                |     

The significant differences between
the effective tax rate and the statutory federal tax rates are as follows:

|                                           | 2003
|------------------------------------------ | ----
|Statutory Federal tax rate                 |     
|Increase (decrease) in valuation allowance |     
|Other                                      |     
|                                           |     
|Effective tax rate                         |     
|                                           |     

The components of the deferred tax
assets and liabilities are as follows (in thousands):

|                                        | 2003
|--------------------------------------- | ----
|Deferred tax assets:                    |     
|Accounts receivable                     |     
|Inventories                             |     
|Accrued expenses                        |     
|Deferred compensation                   |     
|Postretirement benefits                 |     
|Federal net operating loss carryforward |     
|Alternative minimum tax carryforwards   |     
|Tax credit carryforwards                |     
|State net operating loss carryforwards  |     
|State credit carryforwards              |     
|                                        |     
|                                        |     

-28-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE G  INCOME
TAXES  Continued

|                          |  | 
|------------------------- |  | 
|                          |  | 
|Deferred tax liabilities: |  | 
|Fixed assets              |  | 
|                          |  | 
|Valuation allowance       |  | 
|                          |  | 
|Net liability             |  | 

The total deferred tax liabilities
(assets) as presented in the accompanying balance sheet are as follows (in thousands):

|                                       |  | 
|-------------------------------------- |  | 
|                                       |  | 
|                                       |  | 
|Net long-term deferred tax liabilities |  | 
|Gross current deferred tax assets      |  | 
|                                       |  | 
|                                       |  | 
|                                       |  | 

For Federal income tax purposes, the
Company has net operating loss carryforwards, research and development credit carryovers
and alternative minimum tax credit carryovers of $1,053,000, $1,099,000 and $1,902,000
respectively. For state income tax purposes, the Company has net operating loss and tax
credit carryovers of $9,943,000 and $2,736,000, respectively. Certain carryforwards expire
at various times over the next 20 years. For financial reporting purposes, a valuation
allowance has been established to the extent that state carryforwards, absent future
taxable income, will expire unused. The valuation allowance increased $526,000 in 2003.

# NOTE H  EMPLOYEE
BENEFITS

The Company has defined contribution
plans covering substantially all employees. Contribution expenses associated with these
plans were $550,000, $646,000 and $717,000 in 2003, 2002 and 2001.

The Company is self-funded for health
costs. The Company has stop-loss coverage for costs in excess of $100,000 per individual
per year.

# NOTE I 
SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid (refunded) for interest and
income taxes was as follows (in thousands):

|                                     |  |  |  
|------------------------------------ |  |  | -
|                                     |  |  |  
|                                     |  |  |  
|Interest                             |  |  | $
|Income taxes, net of refund received |  |  |  

In November 2003, the Company entered into
a capital lease arrangement with a financing company. Total amount financed was
$1,150,000.

-29-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE J  DIRECTOR
STOCK GRANT PLANS

In 2001, 1999 and 1997, in order to
attract and retain competent directors to serve as Directors of the Company, the Company
established Director Stock Grant Plans. An aggregate of 110,000 shares of Common Stock was
reserved for issuance. Each Director of the Company is to receive a grant of Common Stock,
at fair market value, in partial payment of his or her directors fee. During 2003,
2002 and 2001, 8,970, 6,600 and 35,168 shares, were issued from treasury stock, at a value
of $48,000, $48,000 and $117,000.

# NOTE K  STOCK
OPTION PLAN

In May 1998, the Company established an
incentive stock option plan (Plan) as a mechanism to attract and retain its
officers and key employees by providing additional performance incentives and the
opportunity to share ownership in the Company. The Plan allows the Company to grant
options for 130,000 common shares. Options awarded under the Plan vest over a three or
five year period and expire in five to nine years.

In May 2002, the Company established
an incentive stock option plan (2002 Plan) to encourage and provide for
acquisition of an equity interest in the Company by officers and key employees. The 2002
Plan allows the Company to grant options for 150,000 common shares. The terms of any
options granted under the 2002 Plan will be determined by the Compensation Committee of
the Company.

The following table summarizes the
transactions of the Companys stock option plan for the three-year period ended
December 31, 2003:

|                            | Number
of shares | Weighted
average
exercise price
|--------------------------- | ---------------- | -------------------------------
|Stock options outstanding - |                  |                                
|January 1, 2001             |                  |                                
|Options granted             |                  |                                
|Options forfeited           |                  |                                
|                            |                  |                                
|Stock options outstanding - |                  |                                
|December 31, 2001           |                  |                                
|Options forfeited           |                  |                                
|                            |                  |                                
|Stock options outstanding - |                  |                                
|December 31, 2002           |                  |                                
|Option granted              |                  |                                
|Option forfeited            |                  |                                
|                            |                  |                                
|Stock options outstanding - |                  |                                
|December 31, 2003           |                  |                                
|                            |                  |                                

-30-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

NOTE K - STOCK OPTION
PLAN- Continued

|                                         |  | 
|---------------------------------------- |  | 
|Price of $7.86 - $8.68 (weighted-        |  | 
|average contractual life of 1 - 5 years) |  | 
|Price of $5.50 - $5.55 (weighted-average |  | 
|contractual life of 5 years)             |  | 
|Price range $3.70 (weighted-             |  | 
|average contractual life of 2 years)     |  | 
|                                         |  | 
|                                         |  | 
|                                         |  | 
|Exercisable options -                    |  | 
|December 31, 2001                        |  | 
|December 31, 2002                        |  | 
|December 31, 2003                        |  | 

The Company has determined the
pro-forma effect as if the Company had accounted for stock options granted under the plan
under the fair value method. The Black-Scholes option-pricing model was used with the
following weighted-average assumptions for options issued:

|                               | 
|------------------------------ | 
|                               | 
|                               | 
|Risk-free interest rate        | 
|Dividend yield                 | 
|Volatility factor              | 
|Weighted-average expected life | 

The weighted-average fair value of
options granted in 2003 was $5.75 per share and $2.89 per share in 2001. No options were
granted in 2002.

# NOTE L 
COMMITMENTS AND CONTINGENCIES

Rental Agreements

The Company leases warehouse space
and certain equipment under various agreements, classified as operating leases, expiring
through April 2007. Total rent expense amounted to approximately $736,000, $726,000 and
$817,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

-31-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE L 
COMMITMENTS AND CONTINGENCIES  Continued

Future minimum rental payments are as
follows (in thousands):

|Year ended December 31,
|-----------------------
|
|2004                   
|2005                   
|2006                   
|2007                   
|                       
|                       

# Environmental Matters

In May 1999, the Company entered into an
agreement with the Wisconsin Department of Natural Resources (WDNR) related to the closure
of a solid waste landfill. If the WDNR subsequently determines that the closure was
ineffective, then the WDNR may require the Company to undertake further remedial actions.
In April 1999, a consultant was engaged by the Company to determine the costs associated
with potential future remediation actions. These potential future remediation actions were
estimated to approximate $300,000. The Company has not subsequently updated this
consultants report. Management believes any future remediation actions, if any, will
not have a material adverse impact on the financial statements.

# NOTE M 
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET FINANCING

The following table summarizes the
Companys significant contractual obligations at December 31, 2003:

|(in thousands)    | Total
Amounts | Less Than
1 Year | 1-3
Years | 4-5
Years | Over
5 Years
|----------------- | ------------- | ---------------- | --------- | --------- | ------------
|Long-term debt    |               |                  | $         | 8,755     |             
|Operating leases  |               |                 
|(non-cancellable) |               |                  |           | 1,221     |             
|Bank revolving    |               |                 
|line of credit    |               |                  |           | 2,756     |             
|Pulp contracts    |               |                  |           | 14,924    |             
|Energy contracts  |               |                  |           | 2,158     |             
|                  |               |                  |           |           |             
|Total contractual |               |                  | $         | 29,814    |             
|                  |               |                  |           |           |             

-32-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE M 
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET FINANCING  Continued

Management believes that the
combination of internally generated funds, available cash reserves, and the credit
facility are sufficient to fund the Companys operations over the next year.

The Company has no off balance sheet
financing arrangements with related or unrelated parties and no unconsolidated
subsidiaries.

# NOTE N  LIQUIDITY

At December 31, 2003 the Company had
cash resources of $656,000 and an unused credit availability of $4,555,000 under the
Companys revolving credit facility to fund on-going operations. The Companys
revolving credit facility contains certain covenants that require the Company to maintain
certain financial ratios. These covenants include, among other items, maintenance of
certain levels of tangible net worth, maintenance of fixed charge coverage ratios, and
maintenance of debt service coverage ratios. Failure to maintain these covenants will
result in a request for waiver or modification of these covenants. The Company has been
successful in obtaining waivers related to these covenant violations in the past, and
existing covenants effective at January 1, 2004 have been adjusted to levels wherein
Companys management believe that they can comply with the covenants. The Company is
attempting to reduce its costs and improve its gross profit in order to improve
profitability and insure compliance with these covenants. There can be no assurance that
the Company will be in compliance with the covenants contained in its revolving credit
facility in the future. If the Company fails to comply with any of such covenants and is
unable to obtain a waiver of such covenants in the future, there could be a material
adverse effect on the Companys liquidity.

# NOTE O  SUBSEQUENT
EVENT

In early 2004, the Company began
implementation of a program to reduce its cost structure and improve operating efficiency.
The program includes, among other items, a reduction in the employee workforce and changes
in the scheduling of manufacturing operations. The severance and benefit costs related to
the workforce reduction, the majority of whom are engaged in direct manufacturing
activities, is not determinable as of February 2, 2004.

-33-

---

# Badger Paper Mills,
Inc. and Subsidiary

# NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUED

December 31, 2003, 2002
and 2001

# NOTE P  SUMMARIZED
QUARTERLY DATA (UNAUDITED)

The following is a summary of the
quarterly results of operations for the years ended December 31 (in thousands):

|                                  | Fiscal Quarter | 
|--------------------------------- | -------------- | 
|
|2003                              |                | 
|                                  |                | 
|Net sales                         |                | 
|Gross profit (loss)               |                | 
|Net income (loss)                 |                | 
|Basic earnings (loss) per share   |                | 
|Diluted earnings (loss) per share |                | 
|                                  |                | 
|2002                              |                | 
|                                  |                | 
|Net sales                         |                | 
|Gross profit                      |                | 
|Net income (loss)                 |                | 
|Basic earnings (loss) per share   |                | 
|Diluted earnings (loss) per share |                | 

# Item 9.   Changes in and
Disagreements with Accountants and Financial Disclosure

| | None.
| | -----

# Item 9A.    Controls and
Procedures

# Evaluation of Disclosure
Controls and Procedures

In
accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
Exchange Act), as of the end of the period covered by this Annual Report on
Form 10-K, the Companys management carried out an evaluation, with the participation
of the Companys President and Chief Executive Officer along with its Vice President
and Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act). Based upon their evaluation of these disclosure controls and procedures,
the Companys President and Chief Executive Officer along with the Vice President and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures were effective as of the date of such evaluation in timely alerting them to
material information relating to the Company, including its consolidated subsidiary,
required to be included in the Companys periodic filings with the Securities and
Exchange Commission, particularly during the period in which this Annual Report on Form
10-K was being prepared.

-34-

---

# Changes in Internal
Controls Over Financial Reporting

There
have been no significant changes in the Companys internal controls over financial
reporting or other factors that occurred during the quarter ended December 31, 2003 that
have materially affected or are reasonably likely to materially affect such internal
controls over financial reporting.

The
Company has adopted a Code of Ethics and Business Conduct that applies to all employees
and directors of the Company. The Company has posted a copy of the Code of Ethics and
Business Conduct on its website at www.badgerpaper.com. The Company intends to
satisfy the disclosure requirements under Item 10 of Form 8-K regarding amendments to or
waivers from the Code of Ethics and Business Conduct by posting such information on its
website referred to above.

# PART III

# Item 10.    Directors and
Executive Officers of the Registrant

The
information required by this Item with respect to directors and Section 16 compliance is
hereby incorporated by reference from the information included under the captions,
Election of Directors and Section 16(a) Beneficial Ownership Reporting
Compliance, respectively set forth in the Companys definitive Proxy Statement
for its 2004 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission.

Information
with respect to the executive officers of the Company appears in Part I of this Annual
Report on Form 10-K under the caption Executive Officers of the Registrant.

# Item 11.    Executive
Compensation

The
information required by this Item is hereby incorporated by reference from the information
included under the caption Executive Compensation set forth in the
Companys definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission.

# Item 12.    Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

# Equity Compensation Plan
Information

The
following table provides information about the Companys equity compensation plans as
of December 31, 2003:

-35-

---

|Plan category                    | Number of securities to
be issued upon
the exercise of
outstanding options,
warrants and rights(1) | Weighted-average
exercise price of
outstanding options,
warrants and rights | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in the first
column)(2)
|-------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans        |                                                                                                    |                                                                             |                                                                                                                                                     
|approved by security holders     |                                                                                                    |                                                                             |                                                                                                                                                     
|                                 |                                                                                                    |                                                                             |                                                                                                                                                     
|Equity compensation plans        |                                                                                                    |                                                                            
|not approved by security holders |                                                                                                    |                                                                             |                                                                                                                                                     
|                                 |                                                                                                    |                                                                             |                                                                                                                                                     
|Total                            |                                                                                                    |                                                                             |                                                                                                                                                     
|                                 |                                                                                                    |                                                                             |                                                                                                                                                     

---

|(1) | Represents
options to purchase the Companys Common Stock granted under the
                    1998 Stock Option Plan.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(2) | Includes
150,000 shares of the Companys Common Stock available for
                    issuance under the Companys 2002 Stock Option Plan, 64,000
shares of the                     Companys Common Stock available for issuance
under the Companys 1998                     Stock Option Plan and 15,355 shares of
the Companys Common Stock available                     for issuance under the
Companys 2001 Director Stock Grant Plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Security Ownership of
Certain Beneficial Owners

The
information required by this Item is hereby incorporated by reference from the information
included under the caption Stock Ownership of Certain Beneficial Owners and
Management, set forth in the Companys definitive Proxy Statement for its 2004
Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.

# Security Ownership of
Management

The
information required by this Item is hereby incorporated by reference from the information
included under the captions, Stock Ownership of Certain Beneficial Owners and
Management and Election of Directors, set forth in the Companys
definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission.

# Item 13.    Certain
Relationships and Related Transactions

The
information required by this Item is hereby incorporated by reference from the information
included under the caption, Certain Relationships and Transactions, set forth
in the Companys definitive Proxy Statement for its 2004 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission.

# Item 14.    Principal
Accountant Fees and Services

The
information required by this Item is hereby incorporated by reference from the information
included under the caption, Independent Auditor Fees, set forth in the
Companys definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission.

-36-

---

# PART IV

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

# (a) (1) List of
Financial Statements:

The
following is a list of the financial statements of Badger Paper Mills, Inc., together with
the report of independent accountants, included in this report:

|                                                                                                     | Pages
|---------------------------------------------------------------------------------------------------- | -----
|Report of Independent Certified Accountants                                                          | 16   
|Consolidated balance sheets, December 31, 2003 and 2002                                              | 17   
|Consolidated statements of operations for the years ended December 31, 2003, 2002 and 2001           | 18   
|Consolidated statements of shareholders' equity for the years ended December 31, 2003, 2002 and 2001 | 19   
|Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001           | 20   
|Notes to consolidated financial statements                                                           | 21   

# (a) (2) List of
Financial Schedules:

The
following is a listing of data submitted herewith:

|Report of independent certified accountants on financial statement schedule | 44
|--------------------------------------------------------------------------- | --
|Schedule  II  Valuation and qualifying accounts and reserves                | 45

Financial
statement schedules other than that listed above are omitted because they are either not
applicable, not required, or equivalent information has been included in the financial
statements, the notes thereto or elsewhere herein.

# (a) (3) Exhibits:

Number          Description

|(3.1) | Restated
 Articles of  Incorporation,  as amended  (Incorporated by reference to Exhibit 3(i) to
the Company's Annual                  Report on Form 10-K for the year ended December 31,
1996).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.2) | By-laws
as amended through August 12, 1999 (Incorporated by reference to Exhibit 3(ii) to the
Company's Annual                  Report on Form 10-K for the year ended December 31,
1999).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.1) | Revolving
 Credit and  Security  Agreement  dated  November 30, 2001,  by and among the Company,
 PNC Bank,  National                  Association,  individually and as agent, and other
lenders from time to time party thereto (Incorporated by reference                  to
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31,
2001).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.2) | Business
Loan Agreement dated November 30, 2001, by and between the Company and Wisconsin
 Community Bank,  Wisconsin                  Business Bank - Branch  (Incorporated by
reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the
                 year ended December 31, 2001).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-37-

---

Number          Description

|(4.3) | City
of Peshtigo UDAG Revolving Loan Fund Loan Agreement dated  November 30 2001,  by and
between the Company and the                  City of Peshtigo,  Wisconsin  (Incorporated
 by reference to Exhibit 4.3 to the Company's  Annual Report on Form 10-K
                 for the year ended December 31, 2001).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.4) | First
Amendment to the Revolving Credit and Security Agreement dated November 30, 2001 by and
among the Company,  PNC                  Bank,  National  Association,  individually  and
as  agent,  and  other  lenders  from  time  to time  party  thereto
                 (Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.5) | First
 Amendment to the Business  Loan  Agreement  dated  November 30, 2001, by and between the
Company and Wisconsin                  Community Bank, Wisconsin Business  Bank-Branch
 (Incorporated by reference to the Company's Quarterly Report on Form
                 10-Q for the quarter ended March 31, 2002).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.6) | Second
 Amendment to Revolving  Credit and Security  Agreement,  dated September 19, 2002, by
and between the Company                  and PNC Bank, National Association
 (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
                 quarter ended September 30, 2002).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.7) | Promissory
 Note in favor of Wisconsin  Community  Bank,  Wisconsin  Business  Bank-Branch,  dated
September 19, 2002                  (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.8) | Second
 Amendment to Business Loan  Agreement  and Related  Documents,  dated  September 19,
2002, by and between the                  Company and Wisconsin  Community Bank,
 Wisconsin  Business  Bank-Branch  (Incorporated by reference to the Company's
                 Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.9) | Mortgage,
 dated September 19, 2002, made and executed  between the Company and Wisconsin
 Community Bank,  Wisconsin                  Business  Bank-Branch  (Incorporated  by
reference  to the  Company's  Quarterly  Report on Form 10-Q for the quarter
                 ended September 30, 2002).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.10) | Promissory
Note in favor of Wisconsin Community Bank, Wisconsin Business Bank-Branch dated May 15,
2003.
|------ | --------------------------------------------------------------------------------------------------------

|(4.11) | Third
 Amendment  to  Revolving  Credit  Facility and  Security  Agreement,  dated August 13,
2003,  by and among the                  Company,  PNC Bank,  National  Association,
 individually  and as agent,  and other  lenders  from time to time party
                 thereto  (Incorporated  by reference to the  Company's  Quarterly
 Report on Form 10-Q for the quarter ended June 30,                  2003).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.12) | Fourth
 Amendment to Revolving  Credit  Facility and Security  Agreement,  dated  November 14,
2003, by and among the                  Company,  PNC Bank,  National  Association,
 individually  and as agent,  and other  lenders  from time to time party
                 thereto  (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 30,                  2003).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.13) | Waiver
of Debt Service  Coverage  Covenant,  dated March 1, 2004,  provided by Wisconsin
 Community  Bank - Wisconsin                  Business Bank Branch.
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.14) | Fifth
Amendment to Revolving Credit Facility and Security Agreement,  dated March 23, 2004, by
and among the Company,                  PNC Bank, National Association, individually and
as agent, and other lenders from time to time party thereto.
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-38-

---

Number          Description

|(10) | Material
Contracts: **
|---- | ----------------------

|(10.1) | Supplemental
 Executive  Retirement Plan dated December 18, 1992 (Incorporated by reference to Exhibit
10 (ii) to the                  Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.2) | Health
 Insurance  Retirement  Benefit  Agreement  dated  January 1, 1996 between the Company
and Claude L. Van Hefty                  (Incorporated  by reference to Exhibit 10(v) to
the Company's  Annual Report on Form 10-K for the year ended December
                 31, 1996).
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.3) | Director
Stock Grant Plan dated July 23, 1997  (Incorporated  by reference to the Company's
 Quarterly Report on Form                  10-Q for the quarter ended September 30, 1997).
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.4) | Employee
 Resignation and Release Agreement dated as of March 12, 1998 between Badger Paper Mills,
Inc. and Claude L.                  Van Hefty  (Incorporated  by reference to the
Company's  Quarterly Report on Form 10-Q for the quarter ended June 30,
                 1998).
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.5) | Employee
 Resignation and Release  Agreement dated as of March 12, 1998 between Badger Paper
Mills, Inc. and Miles L.                  Kresl, Jr.  (Incorporated by reference to the
Company's  Quarterly Report on Form 10-Q for the quarter ended June 30,
                 1998).
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.6) | Badger
Paper Mills, Inc. 1998 Stock Option Plan (Incorporated by reference to the Company's
 Quarterly Report on Form                  10-Q for the quarter ended June 30, 1999).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.7) | Form
of Badger Paper Mills,  Inc. 1998 Stock Option Agreement  (Incorporated by reference to
the Company's  Quarterly                  Report on Form 10-Q for the quarter ended June
30, 1999).
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.8) | Badger
Paper Mills,  Inc. 1999  Directors  Stock Grant Plan  (Incorporated  by reference to the
 Company's  Quarterly                  Report on Form 10-Q for the quarter ended
September 30, 1999).
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.9) | Badger
Paper Mills,  Inc. 2001 Directors Stock Grant Plan  (Incorporated  by reference to
Appendix B to the Company's                  definitive Proxy Statement on Schedule 14A
filed on April 6, 2001).
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.10) | Executive
 Employment  Agreement  effective  July 9, 2001  between the Company  and Robert A. Olah
 (Incorporated  by                  reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001).
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.11) | Amendment
of 1998 Directors Stock Grant Plan  (Incorporated  by reference to the Company's
 Quarterly  Report on Form                  10-Q for the quarter ended June 30, 2002).
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.12) | 2002
Stock Option Plan  (Incorporated  by reference to the  Company's  Quarterly  Report on
Form 10-Q for the quarter                  ended June 30, 2002).
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.13) | Employment
 Agreement  effective April 1, 2002 between the Company and J. Glenn Davis.
 (Incorporated by reference to                  the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002).
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-39-

---

Number          Description

|(10.14) | Executive
 Employment  Agreement  effective May 1, 2003,  between the Company and Ronald E. Swanson
 (Incorporated by                  reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003).
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.15) | Employment
 Agreement  effective June 11, 2003 between the Company and Robert Spannuth
 (Incorporated by reference to                  the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.16) | Lease
Agreement, dated November 17, 2003, between General Electric Capital Corporation and the
Company.
|------- | -------------------------------------------------------------------------------------------------------

|(23) | Consent
of Independent Certified Public Accountants.
|---- | ----------------------------------------------------

|(31.1) | Certification
 of the  President  and Chief  Executive  Officer  pursuant to Rule  13a-14(a) or
 15d-14(a)  under the                  Securities Exchange Act of 1934.
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(31.2) | Certification
 of the Vice President and Chief  Financial  Officer  pursuant to Rule 13a-14(a) or
15d-14(a) under the                  Securities Exchange Act of 1934.
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(32.1) | Certification
of the President and Chief Executive Officer pursuant to 18 U. S. C.ss.1350.
|------ | ------------------------------------------------------------------------------------------

|(32.2) | Certification
of the Vice President and Chief Financial Officer pursuant to 18 U. S. C.ss.1350.
|------ | -----------------------------------------------------------------------------------------------

|(99.1) | Definitive
 Proxy  Statement for 2004 Annual  Meeting of  Shareholders  (to be filed with the
Securities and Exchange                  Commission under Regulation 14A and incorporated
by reference herein to the extent indicated in this Form 10-K).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

**Each of the material
contracts represents a management compensatory agreement or arrangement.

# (b) Reports on Form 8-K:

The
following reports on Form 8-K were filed during the quarter ended December 31, 2003:

|Date Filed       | Date of Report   | Item(s) Reported                    
|---------------- | ---------------- | ------------------------------------
|November 5, 2003 | October 22, 2003 | The Company filed a news release    
|                 |                  | under Items 7 and 12 of Form 8-K    
|                 |                  | reporting third quarter performance.

-40-

---

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.

|Date:  March 26, 2004 | BADGER PAPER MILLS, INC.          
|--------------------- | ----------------------------------
|                      | By:  /s/ Ronald E. Swanson        
|                      | Ronald E. Swanson                 
|                      | President, Chief Executive Officer

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:

|/s/ Ronald E. Swanson                              | Date:  March 26, 2004
|-------------------------------------------------- | ---------------------
|Ronald E. Swanson, President,                     
|Chief Executive Officer                           
|(Principal Executive Officer)                     
|/s/ William H. Peters                              | Date:  March 26, 2004
|William H. Peters, Vice President and             
|Chief Financial Officer                           
|(Principal Financial Officer and                  
|Principal Accounting Officer)                     
|/s/ Harold J. Bergman                              | Date:  March 26, 2004
|Harold J. Bergman, Chairman of the Board, Director
|/s/ L. Harvey Buek                                 | Date:  March 26, 2004
|L. Harvey Buek, Director                          
|/s/ Mark D. Burish                                 | Date:  March 26, 2004
|Mark D. Burish, Director                          
|/s/ James L. Kemerling                             | Date:  March 26, 2004
|James L. Kemerling, Director                      
|/s/ John T. Paprocki                               | Date:  March 26, 2004
|John T. Paprocki, Director                        
|/s/ William A. Raaths                              | Date:  March 26, 2004
|William A. Raaths, Director                       

-41-

---

# REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT

To the Shareholders and
Board of DirectorsBadgerPaper Mills, Inc. and SubsidiaryPeshtigo, Wisconsin

Our
report on the 2003, 2002 and 2001 financial statements of Badger Paper Mills, Inc. and
Subsidiary is included on page 16 of this Form 10-K. In connection with our audit of such
financial statements, we have also audited the related financial statement schedule on
page 45 of this Form 10-K.

In
our opinion, the 2003, 2002 and 2001 financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be included
therein.

/s/ Grant Thornton LLP

Appleton, Wisconsin February 2, 2004 (except for Note F,
as to which the date is March 1, 2004)

-42-

---

# Schedule II 
Valuation and Qualifying Accounts and ReservesFor the Years Ended December 31, 2001,
2002 and 2003 (in thousands)

|Column A                                       | Column B | Column C | Column D | Column E
|---------------------------------------------- | -------- | -------- | -------- | --------
|
|Deducted in the balance sheet from the assets  |          |          |          |         
|to which they apply:                           |          |         
|Allowance for discounts, doubtful accounts and |          |         
|claims/allowances:                             |          |         
|Year ended December 31, 2003                   |          |         
|Doubtful accounts and claims/allowances        |          |          | $        | 748     
|Discounts                                      |          |          |          | 62      
|                                               |          |          |          |         
|                                               |          |          | $        | 810     
|                                               |          |          |          |         
|Year ended December 31, 2002                   |          |         
|Doubtful accounts and claims/allowances        |          |          | $        | 542     
|Discounts                                      |          |          |          | 59      
|                                               |          |          |          |         
|                                               |          |          | $        | 601     
|                                               |          |          |          |         
|Year ended December 31, 2001                   |          |         
|Doubtful accounts and claims/allowances        |          |          | $        | 117     
|Discounts                                      |          |          |          | 33      
|                                               |          |          |          |         
|                                               |          |          | $        | 150     
|                                               |          |          |          |         

(A)    
          Write-off of uncollectible accounts and claims for products

(B)    
          Discounts taken and allowed

-43-

---

# Shareholders
Information

|Market makers:                     | Stock transfer agent:          
|---------------------------------- | -------------------------------
|Knight Equity Markets L. P. (NITE) | Computershare Investor Services
|National Stock Exchange (CINN)     | 2 North LaSalle Street         
|Schwab Capital Markets (SCHB)      | Chicago, Illinois 60602        
|Goldman, Sachs & Co. (GSCO)       
|The Archipelago Exchange  (ARCX)  
|Alternate Display Facility (ADFN) 
|THE BRUT ECN, LLC (BRUT)          
|Archipelago, L.L.C. (ARCA)        
|Boston Stock Exchange (BOSX)      
|B-Trade Services LLC (BTRD)       

# Stock Price and Dividend
Information:

The
following table presents high and low sales prices of the Companys Common Stock in
the indicated calendar quarters, as reported by the Nasdaq SmallCap Market.

# Price Ranges of Stock:

|        | 2003
|------- | ----
|Quarter | High
|First   |     
|Second  |     
|Third   |     
|Fourth  |     

# Quarterly Dividends Per
Share:

The
Companys revolving credit and term debt maintain certain covenants which limit the
Companys ability to pay dividends. See Managements Discussion and
Analysis  Liquidity and Capital Resources  Capital Resources.

# Annual Meeting of
Shareholders:

The
Annual Meeting of Shareholders of Badger Paper Mills, Inc. will be held at the Best
Western Riverfront Inn, 1812 Riverside Avenue, Marinette, Wisconsin, on Tuesday, May 11,
2004, at 10:00 a.m.

-44-

---

# DIRECTORS AND OFFICERS

|Board of Directors:           | Corporate Officers:       
|----------------------------- | --------------------------
|Harold J. Bergman             | Ronald E. Swanson         
|Retired President and         | President and             
|Chief Executive Officer       | Chief Executive Officer   
|Riverside Paper Corporation  
|L. Harvey Buek                | William H. Peters         
|LHB - O & M Consulting        | Vice President and        
|                              | Chief Financial Officer   
|                              | Secretary and Treasurer   
|Mark D. Burish                | J. Glenn Davis            
|President                     | Vice President,           
|Hurley, Burish & Milliken, SC | Sales and Marketing       
|James L. Kemerling            | Robert J. Spannuth        
|Chairman and                  | Vice President, Operations
|Chief Executive Officer      
|Award Hardwood Floors LLC    
|President and                
|Chief Executive Officer      
|Riiser Oil Company, Inc.     
|Ronald E. Swanson            
|President and                
|Chief Executive Officer      
|Badger Paper Mills, Inc.     
|John T. Paprocki             
|Principal Consultant         
|Paprocki & Associates        
|William A. Raaths            
|Chief Executive Officer      
|Great Northern Corporation   

-45-

---

# EXHIBIT INDEX

# BADGER PAPER MILLS,
INC.ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

Number          Description

|(3.1) | Restated
 Articles of  Incorporation,  as amended  (Incorporated  by reference  to Exhibit 3(i) to
the  Company's                  Annual Report on Form 10-K for the year ended December
31, 1996).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.2) | By-laws
as amended through August 12, 1999 (Incorporated by reference to Exhibit 3(ii) to the
Company's Annual                  Report on Form 10-K for the year ended December 31,
1999).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.1) | Revolving
 Credit and Security  Agreement dated November 30, 2001, by and among the Company,  PNC
Bank,  National                  Association,  individually  and as agent,  and other
 lenders from time to time party  thereto  (Incorporated  by                  reference
to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December
31, 2001).
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.2) | Business
 Loan  Agreement  dated  November 30, 2001,  by and between the Company and  Wisconsin
 Community  Bank,                  Wisconsin  Business Bank - Branch  (Incorporated  by
reference to Exhibit 4.2 to the  Company's  Annual Report on                  Form 10-K
for the year ended December 31, 2001).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.3) | City
of Peshtigo UDAG Revolving Loan Fund Loan Agreement dated  November 30 2001,  by and
between the Company and                  the City of Peshtigo,  Wisconsin (Incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on Form                  10-K
for the year ended December 31, 2001).
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.4) | First
Amendment to the Revolving Credit and Security  Agreement dated November 30, 2001 by and
among the Company,                  PNC Bank,  National  Association,  individually  and
as agent,  and other lenders from time to time party thereto
                 (Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.5) | First
 Amendment to the Business Loan Agreement dated November 30, 2001, by and between the
Company and Wisconsin                  Community Bank,  Wisconsin Business  Bank-Branch
 (Incorporated by reference to the Company's Quarterly Report on                  Form
10-Q for the quarter ended March 31, 2002).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.6) | Second
 Amendment to Revolving  Credit and  Security  Agreement,  dated  September  19, 2002,
 by and between the                  Company and PNC Bank, National  Association
 (Incorporated by reference to the Company's Quarterly Report on Form
                 10-Q for the quarter ended September 30, 2002).
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.7) | Promissory
Note in favor of Wisconsin Community Bank,  Wisconsin Business  Bank-Branch,  dated
September 19, 2002                  (Incorporated  by reference to the Company's
 Quarterly  Report on Form 10-Q for the quarter ended  September 30,
                 2002).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.8) | Second
Amendment to Business Loan Agreement and Related  Documents,  dated September 19, 2002,
by and between the                  Company  and  Wisconsin  Community  Bank,  Wisconsin
 Business  Bank-Branch  (Incorporated  by  reference  to the                  Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-46-

---

Number          Description

|(4.9) | Mortgage,
 dated  September  19,  2002,  made and  executed  between the Company and  Wisconsin
 Community  Bank,                  Wisconsin  Business  Bank-Branch  (Incorporated  by
reference to the Company's  Quarterly Report on Form 10-Q for                  the
quarter ended September 30, 2002).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.10) | Promissory
Note in favor of Wisconsin Community Bank, Wisconsin Business Bank-Branch dated May 15,
2003.
|------ | --------------------------------------------------------------------------------------------------------

|(4.11) | Third
 Amendment to Revolving  Credit  Facility and Security  Agreement,  dated August 13,
2003, by and among the                  Company,  PNC Bank,  National  Association,
 individually and as agent, and other lenders from time to time party
                 thereto  (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30,                  2003).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.12) | Fourth
Amendment to Revolving Credit Facility and Security  Agreement,  dated November 14, 2003,
by and among the                  Company,  PNC Bank,  National  Association,
 individually and as agent, and other lenders from time to time party
                 thereto  (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended November                  30, 2003).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.13) | Waiver
of Debt Service Coverage Covenant,  dated March 1, 2004,  provided by Wisconsin Community
Bank - Wisconsin                  Business Bank Branch.
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.14) | Fifth
 Amendment to Revolving  Credit  Facility and Security  Agreement,  dated March 23, 2004,
 by and among the                  Company,  PNC Bank,  National  Association,
 individually and as agent, and other lenders from time to time party
                 thereto,
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Material
Contracts: **
|---- | ----------------------

|(10.1) | Supplemental
 Executive  Retirement Plan dated December 18, 1992 (Incorporated by reference to Exhibit
10 (ii) to                  the Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.2) | Health
Insurance  Retirement  Benefit Agreement dated January 1, 1996 between the Company and
Claude L. Van Hefty                  (Incorporated  by  reference  to Exhibit  10(v) to
the  Company's  Annual  Report on Form 10-K for the year ended                  December
31, 1996).
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.3) | Director
Stock Grant Plan dated July 23, 1997  (Incorporated  by reference to the Company's
 Quarterly  Report on                  Form 10-Q for the quarter ended September 30,
1997).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.4) | Employee
 Resignation  and Release  Agreement  dated as of March 12, 1998 between  Badger  Paper
Mills,  Inc. and                  Claude L. Van Hefty  (Incorporated  by reference to the
Company's  Quarterly  Report on Form 10-Q for the quarter                  ended June 30,
1998).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.5) | Employee
 Resignation and Release Agreement dated as of March 12, 1998 between Badger Paper Mills,
Inc. and Miles                  L. Kresl,  Jr.  (Incorporated  by reference to the
Company's  Quarterly Report on Form 10-Q for the quarter ended                  June 30,
1998).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-47-

---

Number          Description

|(10.6) | Badger
Paper Mills, Inc. 1998 Stock Option Plan  (Incorporated by reference to the Company's
 Quarterly Report on                  Form 10-Q for the quarter ended June 30, 1999).
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.7) | Form
of Badger Paper  Mills,  Inc.  1998 Stock  Option  Agreement  (Incorporated  by
 reference to the  Company's                  Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.8) | Badger
Paper Mills,  Inc. 1999 Directors Stock Grant Plan  (Incorporated by reference to the
Company's  Quarterly                  Report on Form 10-Q for the quarter ended September
30, 1999).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.9) | Badger
 Paper  Mills,  Inc.  2001  Directors  Stock Grant Plan  (Incorporated  by  reference to
Appendix B to the                  Company's definitive Proxy Statement on Schedule 14A
filed on April 6, 2001).
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.10) | Executive
 Employment  Agreement  effective July 9, 2001 between the Company and Robert A. Olah
 (Incorporated by                  reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001).
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.11) | Amendment
of 1998 Directors  Stock Grant Plan  (Incorporated  by reference to the Company's
 Quarterly  Report on                  Form 10-Q for the quarter ended June 30, 2002).
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.12) | 2002
Stock  Option  Plan  (Incorporated  by  reference  to the  Company's  Quarterly  Report
on Form 10-Q for the                  quarter ended June 30, 2002).
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.13) | Employment
 Agreement effective April 1, 2002 between the Company and J. Glenn Davis.  (Incorporated
by reference                  to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.14) | Executive
Employment Agreement effective May 1, 2003, between the Company and Ronald E. Swanson
 (Incorporated by                  reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003).
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.15) | Employment
 Agreement effective June 11, 2003 between the Company and Robert Spannuth  (Incorporated
by reference                  to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.16) | Lease
Agreement, dated November 17, 2003, between General Electric Capital Corporation and the
Company.
|------- | -------------------------------------------------------------------------------------------------------

|(23) | Consent
of Independent Certified Public Accountants.
|---- | ----------------------------------------------------

|(31.1) | Certification
 of the President and Chief  Executive  Officer  pursuant to Rule 13a-14(a) or 15d-14(a)
 under the                  Securities Exchange Act of 1934.
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(31.2) | Certification
 of the Vice President and Chief  Financial  Officer  pursuant to Rule 13a-14(a) or
15d-14(a) under                  the Securities Exchange Act of 1934.
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(32.1) | Certification
of the President and Chief Executive Officer pursuant to 18 U. S. C.ss.1350.
|------ | ------------------------------------------------------------------------------------------

|(32.2) | Certification
of the Vice President and Chief Financial Officer pursuant to 18 U. S. C.ss.1350.
|------ | -----------------------------------------------------------------------------------------------

-48-

---

Number          Description

|(99.1) | Definitive
 Proxy Statement for 2004 Annual Meeting of Shareholders (to be filed with the Securities
and Exchange                  Commission under Regulation 14A and incorporated by
reference herein to the extent indicated in this Form 10-K).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

**Each
of the material contracts represents a management compensatory agreement or
arrangement.

-49-