UNITED STATES
                                                 SECURITIES AND EXCHANGE COMMISSION
                                                      Washington, 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, 2004
|--- | --------------------------------------------------------------------------------------------------------------------------------

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.
00-00795

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

|                                                                        |                                                  
|----------------------------------------------------------------------- | -------------------------------------------------
|Wisconsin(State or other jurisdiction of incorporation or organization) | 39-0143840(I.R.S. Employer Identification Number)

|200 West Front Street
P.O. Box 149Peshtigo, Wisconsin 54157-0149
(Address of principal executive office, including zip code) | 
|---------------------------------------------------------------------------------------------------------------------------- | 

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, 2004, 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
$9,246,470. 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 March 18, 2005, 2,053,361
shares of common stock were outstanding.

# DOCUMENTS INCORPORATED
BY REFERENCE

Portions of the Companys Proxy
Statement for its 2005 Annual Meeting of Shareholders to be filed with the Commission
under Regulation 14A are incorporated by reference into Part III of this Annual Report on
Form 10-K.

---

# Statement Regarding
Forward-Looking Information

This Annual Report on Form 10-K, each
of Badger Paper Mills, Inc.s (the Company) annual reports to
shareholders, current reports on Form 8-K and quarterly reports on Form 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 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:

| | Financial
covenant violations. As of December 31, 2004, the Company was in compliance with the
financial covenants of its revolving credit agreement; however, due to covenant
violations relating to the variable rate term loan agreement, the Company violated the
cross-default provision of its revolving credit agreement. In addition, as of December
31, 2004, the Company was in violation of the current ratio, minimum debt service
coverage ratio, maximum debt to tangible net worth ratio and net worth covenants in its
variable rate term loan agreement, and these violations are continuing. The Company has
had discussions with its existing lenders with respect to a waiver of these contractual
violations, and with respect to revised financial covenants that are consistent with the
Companys current operating plan. As of the filing of this Annual Report on Form
10-K, the Company had not received such waiver or revised financial covenants. While
Company management believes that it will be able to secure waivers of past contractual
violations and revised financial covenants with its lenders going forward, there can be
no assurance that the Company will be successful in accomplishing either or both of these
objectives. These past and continuing violations by the Company of its identified credit
agreements give the applicable lender various rights, including the right to declare
default and/or accelerate all amounts currently due under such credit agreement.
Moreover, the declaration of a default and/or the acceleration of the amounts due under
any individual credit agreement could trigger cross-defaults under other Company credit
agreements. The declaration of a default and/or the acceleration of the amount due under
such Company credit agreement would have a material adverse effect on the Company.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
Section 289.41 of the Wisconsin Statutes, the Company is required to annually demonstrate
financial responsibility for future closure related activities it must undertake under
the Wisconsin Solid Waste Facilities law. In demonstrating financial responsibility, the
Company previously relied on the Net Worth Method. As of December 31, 2004,
the Company did not satisfy four of the seven specified financial tests and
was not able to use the Net Worth Method. In such an event, the Company is required to
demonstrate financial responsibility using one of the following alternative methods a
bond, a deposit, an escrow account or an irrevocable letter of credit. The Company
contacted the Wisconsin Department of Natural Resources in March 2005 and is in the
process of arranging for an alternate method for demonstrating financial responsibility.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2

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| | Going
concern. Because of the Companys operating losses, the difficult competitive
environment facing the Company and the Companys covenant violations under its
various credit agreements, the Companys auditors issued a going concernto
the Companys 2004 audited consolidated financial statements. Reference is made to
the Report of Independent Registered Public Accounting Firm included in Item 8 in this
Annual Report on Form 10-K. Management has reacted and taken action to address this
situation. Among other things, the Company has hired an outside consulting firm to assist
the Company in developing a market strategy focused on exploiting its expertise in
specialty paper grades utilizing the Companys diverse manufacturing and converting
knowledge. In addition, the consultants are working with the Company to assess liquidity
and implement a plan to return the Company to profitability.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Liquidity
concerns. The Company has modeled its borrowing needs for 2005 and management believes,
based on such model, that the Companys available borrowings will be sufficient to
fund the Companys liquidity requirement for 2005. The model is based on certain
assumptions and projections regarding sales and expenses. Any unfavorable variances in
such assumptions or projections could have a material adverse effect on the Companys
liquidity.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impairment
of assets. During 2004, the Company determined that its Fourdrinier paper machine and
related group assets are impaired in the amount of approximately $4,556,000. In
determining this impairment charge, the Company relied on a discounted cash flow model
that incorporates estimates of future cash flows (cash inflows less associated cash
outflows) directly associated with, and that were expected to arise as a direct result
of, the use of the Fourdrinier and related group assets. The circumstances related to
this impairment charge were market related, namely the impact of increased expenses for
fiber, chemicals and energy, and the difficulty in recovering those costs through
increased product pricing. The noted impairment charge is reported on the Consolidated
Statements of Operations included in Item 8 of this Annual Report on Form 10-K under the
separate caption, Asset Impairment Charge.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Increased
competition from domestic and 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 each of its paper machines at a
relatively high percentage of available production capacity. (See the bullet point above
with respect to the Companys current and continuing problems with its Fourdrinier
paper machine.) Many of 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
attempting to maintain acceptable production efficiencies and costs.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the price of pulp which is 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 2004, the market price for pulp
increased. The Company anticipates that the market price for pulp will continue to
increase during the first half of 2005 and stabilize or decrease during the latter half
of the year.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 2004
and continuing into 2005, energy prices rose and have appeared to stabilize at relatively
high levels. During 2004, the Company also incurred additional energy-related costs
because freight haulers imposed fuel surcharges due to their higher fuel prices. 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.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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

| | The
Companys collective bargaining agreements with its covered employees expire on May
31, 2005. The Company intends to commence formal contract negotiations with its covered
employees during April 2005. There can be no assurance that the labor contract
negotiations will be successful.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4

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|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                              |                         | 
|Asset impairment charge                    |                         | 
|Operating income (loss)                    |                         | 
|Other income                               |                         | 
|Gain on sale of non-core assets            |                         | 
|Interest expense                           |                         | 
|Restructuring provision                    |                         | 
|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, as restated for 2003**     |                         | 
|Shareholders' equity                       |                         | 

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

|** | Includes
reclassification of $2,756,000 of long-term debt to short-term debt (2003) and current
year classification of $10,278,000 of former long-term debt to short-term debt (2004).
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5

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# 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
wholly owned subsidiary, Peshtigo Power, LLC, produces steam for the Companys
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
its 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, 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®, and Artopaque. 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 characteristics.
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, or 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, or MF. MF paper works well in a broad range of applications
including publishing, writing paper and certain printing applications.

6

---

Products
produced at Badgers 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 laminates
substrates to foil.

Badger
sells its products 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. Badgers competition for
all grades of paper that it manufactures includes International Paper Company,
Georgia-Pacific Corporation, Domtar, Inc., Wausau Paper 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
main 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 of its fiber requirements on the
open market. Other raw materials used in the manufacturing process include inks,
chemicals, and waxes. 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. Badger does not
anticipate shortages of raw materials, and believes that the market price for pulp will
increase during the first half of 2005 and stabilize or decrease during the latter half of
the year.

# Energy

Badger
is a large consumer of energy, including electricity and natural gas. In 2004, 10.7% of
Badgers cost of sales, excluding the asset impairment charge, represented energy
costs compared to 9.7% of Badgers cost of sales in 2003. 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 supply the Peshtigo Facilities heating and manufacturing requirements.
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 generally cause the Company to temporarily suspend the
manufacture of paper. There is no damage to equipment during these temporary power
interruptions. Badger could experience similar interruptions in the future. Badgers
agreements with its providers of electricity and natural gas allow for temporary
interruptions of supply or service during peak demand periods.

7

---

The
market price for natural gas reached historically high levels during the second half of
2004. 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
quarter of 2005 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 $732,000 in 2004, $673,000 in 2003 and
$769,000 in 2002 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, 2004, the value of the Companys order backlog was approximately
$1,700,000 as compared to $2,221,000 and $1,270,000 at December 31, 2003 and 2002,
respectively.

# Customers

In
2004, 2003 and 2002, no sales to any single customer represented 10% or more of
Badgers consolidated 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.

8

---

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 a
consultants report dated April 1999, the Company estimated that the potential future
cost of environmental remedial efforts (assuming that the WDNR determines that the closure
was ineffective) to be approximately $300,000. The Company has not subsequently updated
this consultants report.

Under
Section 289.41 of the Wisconsin Statutes, the Company is required to annually demonstrate
financial responsibility for future closure related activities it must undertake under the
Wisconsin Solid Waste Facilities law. In demonstrating financial responsibility, the
Company previously relied on the Net Worth Method. As of December 31, 2004,
the Company did not satisfy four of the seven specified financial tests and
was not able to use the Net Worth Method. In such an event, the Company is required to
demonstrate financial responsibility using one of the following alternative methods 
a bond, a deposit, an escrow account or an irrevocable letter of credit. The Company
contacted the WDNR in March 2005 and is in the process of arranging for an alternate
method for demonstrating financial responsibility.

Based
on a January 2005 report from the Companys environmental consultant, the
Companys future solid waste facility closure activities, which are subject to the
financial responsibility requirements, are recommended to consist of maintenance of the
current landfill cap and groundwater monitoring for the next five years. The annual cost
of the recommended work is less than $10,000 per year. The WDNR has not yet responded to
the January 2005 closure assessment report.

Soil
contamination was identified at the Companys Peshtigo Facilities (French Street)
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. On June 1, 2004, Commerce issued a final
closure letter regarding this matter.

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 issued 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.

The
Company began production on new foil laminating equipment in late 2003, which requires a
permit for additional volatile organic compounds emissions. On June 21, 2004, the WDNR
issued a letter authorizing the operation of the laminator, subject to the general
conditions set forth in the permit. The authorization expires January 29, 2006.

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.

9

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# Employees

As
of December 31, 2004, the Company had 246 employees, including 146 employees at its
Peshtigo Facilities covered by three-year collective bargaining agreements,which
expire in May 2005. The Company intends to commence formal contract negotiations with its
covered employees during April 2005. There can be no assurance that the labor contract
negotiations will be successful.

The
workplace redesign process to improve manufacturing efficiency and quality, begun in 2003,
was completed during 2004, resulting in an approximate 20% permanent workforce reduction
at the Peshtigo Facilities. The financial effect of the workforce reduction is reported as
a restructuring provision for 2004.

# 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 Annual Report on Form 10-K.

# Item 2.   Properties*

|                 | Properties |       
|---------------- | ---------- | ------
|
|Peshtigo, WI     | Owned(1)   | 3,750 
|Peshtigo, WI     | Owned(1)   | 88,500
|Oconto Falls, WI | Owned      | 40,000
|Oconto Falls, WI | Leased(2)  | 20,300

|
|

|(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 original base rent was
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 equipment leases can be found in
Note G to the Companys 2004 audited consolidated financial statements.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Item 3.   Legal Proceedings

There
are no material legal proceedings pending to which the Company is a party or of which any
of the Companys property is the subject. The Company 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 during the fourth
quarter of 2004.

# Executive Officers of
the Registrant

The
following table sets forth certain information as of December 31, 2004 concerning the
Companys executive officers.

10

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|Name               | Age |  | Business Experience |  | Period Served |                                                
|------------------ | --- |  | ------------------- |  | ------------- | -----------------------------------------------
|Ronald E. Swanson  |     |  | 55                  |  |               | President and Chief Executive Officer, Director
|                   |     |  |                     |  |               | Badger Paper Mills, Inc.                       
|                   |     |  |                     |  |               | Senior Vice President - SENA Magazine Papers   
|                   |     |  |                     |  |               | Stora Enso North America                       
|                   |     |  |                     |  |               | Senior Vice President                          
|                   |     |  |                     |  |               | Consolidated Papers, Inc.                      
|Alan L. Rowland    |     |  | 55                  |  |               | Vice President Sales & Marketing               
|                   |     |  |                     |  |               | Badger Paper Mills, Inc.                       
|                   |     |  |                     |  |               | Vice President Sales & Marketing               
|                   |     |  |                     |  |               | Fox River Paper Company                        
|                   |     |  |                     |  |               | Vice President Sales & Marketing               
|                   |     |  |                     |  |               | Zanders USA Div., International Paper Company  
|Robert J. Spannuth |     |  | 57                  |  |               | Vice President, Operations                     
|                   |     |  |                     |  |               | Badger Paper Mills, Inc.                       
|                   |     |  |                     |  |               | Director - Source & Support                    
|                   |     |  |                     |  |               | Mead Westvaco                                  
|                   |     |  |                     |  |               | Vice President & Mill Manager                  
|                   |     |  |                     |  |               | Fraser Papers                                  
|                   |     |  |                     |  |               | Manager Paperboard                             
|                   |     |  |                     |  |               | Fraser Papers                                  
|Paul M. Bouthilet  |     |  | 58                  |  |               | Vice President and Chief Financial Officer     
|                   |     |  |                     |  |               | Badger Paper Mills, Inc.                       
|                   |     |  |                     |  |               | Chief Financial Officer and                    
|                   |     |  |                     |  |               | various executive positions                    
|                   |     |  |                     |  |               | Seagrave Fire Apparatus, LLC                   
|                   |     |  |                     |  |               | Chief Financial Officer and                    
|                   |     |  |                     |  |               | various executive positions                    
|                   |     |  |                     |  |               | Voith Fabrics, Inc.                            
|                   |     |  |                     |  |               | Chief Financial Officer and                    
|                   |     |  |                     |  |               | various executive positions                    
|                   |     |  |                     |  |               | Voith Paper, Inc.                              

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.

11

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# PART II

|Item 5. | Market
for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
|------- | ----------------------------------------------------------------------------------------------------------------

The
Companys Common Stock trades on the Nasdaq SmallCap Market under the symbol
BPMI. As of March 18, 2005, the Company had 282 shareholders of record.
Information about the Companys equity compensation plans is included in this Annual
Report on Form 10-K under Item 12 beginning on page 30.

# 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

|       | 2004 |  | 2003 |     
|------ | ---- |  | ---- | ----
|
|First  |      |  | $    | 6.50
|Second |      |  | $    | 5.47
|Third  |      |  | $    | 5.03
|Fourth |      |  | $    | 4.63

# Quarterly Dividends Per
Share

The Companys revolving credit
and variable rate term loan agreements include certain covenants, which limit the
Companys ability to pay dividends. See Managements Discussion and
Analysis  Liquidity and Capital Resources  Capital Resources and Loans,
beginning on page 17. The Company last paid a dividend in the first quarter of 1993 and
can give no assurance that it will make any future dividend payments.

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

Selected
Company financial data is included in this Annual Report on Form 10-K under the caption
Five-Year Comparison of Selected Financial Data on page 5 and is incorporated
herein by reference.

12

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

The
following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the Companys selected financial data
included on page 5, and the Companys financial statements and related notes included
in Item 8 in this Annual Report.

# Results of Operations

# Executive Overview

Due
to intense competition in the marketplace and increased manufacturing costs driven
partially by high energy, pulp and health/medical expenses, the Company incurred losses
for 2004. The Company sells its products to a market characterized by price
competitiveness and low, no or limited overall volume growth. During 2004, the Company
realized an increase in net sales despite lower shipment volumes. The net sales
improvement was attributable to a combination of factors, including a mid-year price
increase and a shift to selling more value-added products.

In
addition, 2004 saw a yearlong escalation in energy prices, one of the major components of
the Companys cost of sales. Notwithstanding the increase in energy prices, the
Company was successful in controlling other cost of sales elements resulting in a
favorable year-to-year development in gross profit. Selling, general and administrative
expenses were less than the previous year as the beneficial effects of implemented cost
containment programs were realized. Per capita health care costs increased dramatically
during 2004 and the Company is evaluating options to limit future upside cost exposures.
The workplace redesign process to improve manufacturing efficiency and quality, begun in
2003, was completed during 2004 resulting in a permanent 20% workforce reduction at the
Peshtigo Facilities. The financial effects of the workforce reduction are reported as a
restructuring provision for 2004.

As
of December 31, 2004, the Company was in compliance with the financial covenants of its
revolving credit agreement, however, due to covenant violations relating to the variable
rate term loan agreement, the Company violated the cross-default provision of its
revolving credit agreement. In addition, as of December 31, 2004, the Company was in
violation of the current ratio, minimum debt service coverage ratio, maximum debt to
tangible net worth ratio and net worth covenants in its variable rate term loan agreement,
and these violations are continuing. The Company has had discussions with its existing
lenders with respect to a waiver of these contractual violations, and with respect to
revised financial covenants that are consistent with the Companys current operating
plan. As of the filing of this Annual Report on Form 10-K, the Company had not received
such waiver or revised financial covenants. While Company management believes that it will
be able to secure waivers of past contractual violations and revised financial covenants
with its lenders going forward, there can be no assurance that the Company will be
successful in accomplishing either or both of these objectives. These past and continuing
violations by the Company of its identified credit agreements give the applicable lender
various rights, including the right to declare default and/or accelerate all amounts
currently due under such credit agreement. Moreover, the declaration of a default and/or
the acceleration of the amounts due under any individual credit agreement could trigger
cross-defaults under other Company credit agreements. The declaration of a default and/or
the acceleration of the amount due under such Company credit agreement would have a
material adverse effect on the Company.

13

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Under
Section 289.41 of the Wisconsin Statutes, the Company is required to annually demonstrate
financial responsibility for future closure related activities it must undertake under the
Wisconsin Solid Waste Facilities law. In demonstrating financial responsibility, the
Company previously relied on the Net Worth Method. As of December 31, 2004,
the Company did not satisfy four of the seven specified financial tests and
was not able to use the Net Worth Method. In such an event, the Company is required to
demonstrate financial responsibility using one of the following alternative methods 
a bond, a deposit, an escrow account or an irrevocable letter of credit. The Company
contacted the Wisconsin Department of Natural Resources in March 2005 and is in the
process of arranging for an alternate method for demonstrating financial responsibility.

As
of December 31, 2004, the Companys capital resources included $426,000 in cash and
the availability under the Companys $12,000,000 revolving credit agreement.
Borrowings under the Companys revolving credit agreement totaled $5,223,000 as of
December 31, 2004. Based on the balances in inventory and accounts receivable, the Company
had $3,395,000 of availability under the revolving credit agreement at December 31, 2004.
The Company has modeled its borrowing needs for 2005 and management believes, based on
such model, that the Companys available borrowings will be sufficient to fund the
Companys liquidity requirement for 2005. The model is based on certain assumptions
and projections regarding sales and expenses. Any unfavorable variances in such
assumptions or projections could have a material adverse effect on the Companys
liquidity.

During
2004, the Company determined that its Fourdrinier paper machine and related group assets
are impaired in the amount of approximately $4,556,000. In determining this impairment
charge, the Company relied on a discounted cash flow model that incorporates estimates of
future cash flows (cash inflows less associated cash outflows) directly associated with,
and that were expected to arise as a direct result of the use of, the Fourdrinier and
related group assets. The circumstances related to this impairment charge were market
related, namely the impact of increased expenses for fiber, chemicals and energy, and the
difficulty in recovering those costs through increased product pricing. The noted
impairment amount is reported on the Statement of Operations included in Item 8 of this
Annual Report on Form 10-K under the separate caption, Asset Impairment
Charge.

Because
of the Companys operating losses, the difficult competitive environment facing the
Company and the Companys covenant violations under its various credit agreements,
the Companys auditors issued a going concern to the Companys 2004
audited consolidated financial statements. Reference is made to the Report of Independent
Registered Public Accounting Firm included in Item 8 in this Annual Report on Form 10-K.
Management has reacted and taken action to address this situation. Among other things, the
Company has hired an outside consulting firm to assist the Company is developing a market
strategy focused on exploiting its expertise in specialty paper grades utilizing the
Companys diverse manufacturing and converting knowledge. In addition, the
consultants are working with the Company to assess liquidity and implement a plan to
return the Company to profitability.

# 2004 versus 2003

Net Sales

Net
sales in 2004 were $73,109,000 compared to $71,691,000 in 2003, an increase of $1,418,000,
or 2%. The improvement in net sales is attributable to revenue increases in both the paper
and printed product lines and new business development efforts. Year-to-year shipment
volume fell 5.2% for paper products, 5.9% for printed products, and 5.3% overall. Unit
sales prices for 2004 registered an average 7.7% increase over 2003, attributable
partially to a price increase implemented in July 2004 and to new products being sold.

14

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The
majority of the shipment volume decline was identified with the paper products business
within which two-thirds of the decrease was attributable to Fourdrinier machine paper
products output. During the fourth quarter of 2004, the Company suspended production on
the Fourdrinier machine to balance production output with market requirements. In
addition, the Company withdrew for pricing reasons from a market that generated
approximately 10% of the Fourdriniers 2004 volume.

Cost of Sales

Cost
of sales totaled $70,309,000 in 2004 compared to $70,472,000 in 2003, or 96.2% and 98.3%
of each years net sales, respectively. The minimal decrease of $163,000 was net of a
$699,000 year-to-year increase in the cost of electricity and natural gas. During 2004,
the cost for purchased pulp and chemicals per hundred weight of sales increased 5.5% over
2003. The combination of higher energy and material costs, and the inability to fully
recoup these additional costs through improved product pricing, negatively affected
earnings.

The
Company anticipates that market pulp prices will increase during the first half of 2005
and stabilize or decrease in the latter six months of the year. For 2005, the Company has
contracted with one supplier to purchase a immaterial portion of its pulp requirements at
a fixed price.

In
order to manage the risk associated with market price fluctuations, the Company has
entered into fixed price supply contracts for natural gas for the first quarter of 2005.
Furthermore, the Company is evaluating various price protection options relative to
projected natural gas requirements for the remainder of 2005.

Gross Profit

Gross
profit improved to $2,800,000 in 2004 from $1,219,000 in 2003. As a percentage of net
sales, the 2004 gross profit result equaled 3.8%, while 2003s total corresponded to
1.7%. The year-to-year gross profit recovery of $1,581,000 is mainly explained by
increased revenue resulting from improved pricing in the paper products specialty grades.
In addition, cost of sales were $163,000 less in 2004 compared to 2003.

Selling,General and
Administrative Expense

Selling,
general and administrative expenses for 2004 were $4,774,000, or 6.5% of net sales,
compared to $5,097,000 for 2003, or 7.1% of net sales. The $323,000 reduction in expenses
from 2003 to 2004 is traceable in part to fewer employees and less costs for salaries and
fringe benefits.

Asset Impairment Charge

During
2004, in response to the requirements of FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company determined that its Fourdrinier
paper machine and related group assets are impaired in the amount of approximately
$4,556,000. In determining this impairment charge, the Company relied on a discounted cash
flow model that incorporates estimates of future cash flows (cash inflows less associated
cash outflows) directly associated with, and that were expected to arise as a direct
result of, the use of the Fourdrinier and related group assets. The circumstances related
to this impairment charge were market related, namely the impact of increased expenses for
fiber, chemicals and energy, and the difficulty in recovering those costs through
increased product pricing. The noted impairment amount is reported on the Consolidated
Statements of Operations included in Item 8 of this Annual Report on Form 10-K under the
separate caption, Asset Impairment Charge.

Restructuring Provision

During
2004, the Company recognized a $1,303,000 restructuring provision charge relating to a
permanent 20% workforce reduction at its Peshtigo Facilities.

15

---

Income Tax

In
2004, the Company recorded an $836,000 income tax benefit at an effective tax rate of 9.9%
of the years loss compared to an income tax benefit of $1,203,000 at an effective
tax rate of 28% in 2003. The difference between the statutory tax rates and the
Companys effective tax rate for 2004 is attributable to increases in valuation
reserves.

Other Income and Expense

In
2004, other income and expense totaled $586,000 compared to $416,000 in 2003. The
year-to-year change is due to interest expense related and assignable to increased
long-term debt and the effects of rising interest rates.

# 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,
or 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, or 98.3% of net sales compared to $65,943,000, or 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, or 2.7% in 2003 as compared to
2002 on 6.7% lower production volume. The disproportionate increase in pulp costs resulted
from higher market prices for pulp.

In
2003, the Company entered into contracts with pulp suppliers to purchase a portion of its
2004 pulp requirements at a fixed price. Approximately half of the Companys pulp
requirements in 2004 were 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 or 57.3% from 2002. In order to reduce
the risk of fluctuating market prices for natural gas, the Company purchased a significant
portion of its natural gas requirements for the first half of 2004 at a fixed price.

16

---

Gross Profit

Gross
profit in 2003 was $1,219,000, or 1.7% of net sales compared to $7,829,000, or 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, General and
Administrative Expense

Selling,
general and administrative expenses in 2003 were $5,097,000 or 7.1% of net sales compared
to $5,779,000 or 7.8% in 2002. The reduction in selling, general 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, or 28% of the loss before
income taxes compared to income tax expense of $925,000, or 32.8% of income before taxes
in 2002. The differences between statutory rates and the Companys effective rate are
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.

# Liquidity and Capital
Resources

Capital Expenditures

Capital
expenditures in 2004 were $747,000 compared to $730,000 in 2003. There were no individual
capital expenditures in excess of $250,000 during 2004. The purchase of a flexible
packaging rewinder and the capitalization of a press roll replacement accounted for more
than 50% of 2004s capital additions. The Company anticipates that total capital
expenditures in 2005 will not exceed $2,000,000.

Capital Resources and
Loans

In
November 2001, the Company obtained a revolving credit agreement with a commercial bank
providing for asset-based financing that 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. As of December 31,
2004, the revolving credit agreement provided for maximum borrowings of $12,000,000,
limited to certain percentages of accounts receivable 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 at the Companys option (6.25% at
December 31, 2004). A facility fee of 0.25% is payable for unused amounts. Accounts
receivable and inventory collateralize the revolving credit agreement.

As
of December 31, 2004, the Companys capital resources included $426,000 in cash and
the Companys $12,000,000 revolving credit agreement. Borrowings under the
Companys revolving credit agreement totaled $5,223,000 as of December 31, 2004.
Based on the balances in inventory and accounts receivable, the Company had $3,395,000 of
availability under the revolving credit agreement at December 31, 2004.

17

---

At
December 31, 2004, the revolving credit agreement required, among other items, the Company
to maintain $2,000,000 in unused availability and satisfy EBITDA covenants. Capital
expenditures are limited to $3,000,000 in 2004 and each subsequent year while the
revolving credit agreement is in effect.

The
Company obtained a $5,000,000 variable rate term loan in November 2001 to provide
financing for the purchase of equipment and other capital expenses and for debt
refinancing. The variable rate term loan agreement has a maturity of November 2011 and
requires monthly principal payments plus interest at prime plus 0.25%. The variable rate
term loan is collateralized by certain property, plant and equipment. As of December 31,
2004, the principal balance due under the variable rate term loan was $3,777,000, and the
year-end interest rate was 5.5%.

The
Company obtained $1,800,000 of funding from the Urban Development Action Committee in the
form of an Urban Development Action Grant (UDAG). The UDAG loan, including additional
funding obtained in November 2001 and March 2002, is due in monthly installments of
$17,817, including interest at 5.0%, through maturity in November 2011. The UDAG loan is
collateralized by certain property. The principal amount owed on the UDAG loan as of
December 31, 2004 was $1,248,000.

The
Company obtained $160,000 of funding from the Marinette County Association of Community
Development (Urban Development Loan) on January 1, 2002 for the purpose of purchasing
waxing equipment. Monthly payment installments are $2,972, including interest at 4%. The
loan matures in May of 2006. As of December 31, 2004, the principal balance of the Urban
Development Loan was $45,000.

The
Company obtained a variable rate loan in September 2002 to finance capital expenditures.
The variable rate loan 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
variable rate term debt agreement matures in November 2015 and requires monthly principal
payments plus interest at prime plus 0.25%. The variable rate term loan is collateralized
by certain property, plant and equipment. As of December 31, 2004, the principal balance
due was $1,806,000, and the year-end interest rate was 5.5%.

As
of December 31, 2004, the Company was in compliance with the financial covenants of its
revolving credit agreement, however, due to covenant violations relating to the variable
rate term loan agreement, the Company violated the cross-default provision of its
revolving credit agreement. In addition, as of December 31, 2004, the Company was in
violation of the current ratio, minimum debt service coverage ratio, maximum debt to
tangible net worth ratio and net worth covenants in its variable rate term loan agreement,
and these violations are continuing. The Company has had discussions with its existing
lenders with respect to a waiver of these contractual violations, and with respect to
revised financial covenants that are consistent with the Companys current operating
plan. As of the filing of this Annual Report on Form 10-K, the Company had not received
such waiver or revised financial covenants. While Company management believes that it will
be able to secure waivers of past contractual violations and revised financial covenants
with its lenders going forward, there can be no assurance that the Company will be
successful in accomplishing either or both of these objectives. These past and continuing
violations by the Company of its identified credit agreements give the applicable lender
various rights, including the right to declare default and/or accelerate all amounts
currently due under such credit agreement. Moreover, the declaration of a default and/or
the acceleration of the amounts due under any individual credit agreement could trigger
cross-defaults under other Company credit agreements. The declaration of a default and/or
the acceleration of the amount due under such Company credit agreement would have a
material adverse effect on the Company.

Under
Section 289.41 of the Wisconsin Statutes, the Company is required to annually demonstrate
financial responsibility for future closure related activities it must undertake under the
Wisconsin Solid Waste Facilities law. In demonstrating financial responsibility, the
Company previously relied on the Net Worth ethod. As of December 31, 2004, the
Company did not satisfy four of the seven specified financial tests and was
not able to use the Net Worth Method. In such an event, the Company is required to
demonstrate financial responsibility using one of the following alternative methods 
a bond, a deposit, an escrow account or an irrevocable letter of credit. The Company
contacted the Wisconsin Department of Natural Resources in March 2005 and is in the
process of arranging for an alternate method for demonstrating financial responsibility.

18

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As
of December 31, 2004, the Companys capital resources included $426,000 in cash and
the availability under the Companys $12,000,000 revolving credit agreement.
Borrowings under the Companys revolving credit agreement totaled $5,223,000 as of
December 31, 2004. Based on the balances in inventory and accounts receivable, the Company
had $3,395,000 of availability under the revolving credit agreement at December 31, 2004.
The Company has modeled its borrowing needs for 2005 and management believes, based on
such model, that the Companys available borrowings will be sufficient to fund the
Companys liquidity requirement for 2005. The model is based on certain assumptions
and projections regarding sales and expenses. Any errors in such assumptions or
projections could have a material adverse effect on the Companys liquidity.

Because
of the Companys operating losses, the difficult competitive environment facing the
Company and the Companys covenant violations under its various credit agreements,
the Companys auditors issued a going concern to the Companys 2004
audited consolidated financial statements. Reference is made to the Report of Independent
Registered Public Accounting Firm included in Item 8 in the Annual Report on Form 10-K.
Management has reacted and taken action to address this situation. Among other things, the
Company has hired an outside consulting firm to assist the Company is developing a market
strategy focused on exploiting its expertise in specialty paper grades utilizing the
Companys diverse manufacturing and converting knowledge. In addition, the
consultants are working with the Company to assess liquidity and implement a plan to
return the Company to profitability.

Capital Lease Obligations

In
November 2003, the Company entered into a capital lease agreement with GE Capital in the
amount of $1,150,000 to fund the acquisition of foil laminator equipment at the Oconto
Falls Facilities. The lease provides for monthly payments of $14,913, including interest
at 5.9%. The final lease payment is due in November 2010, with an option to purchase the
equipment for a fixed price at that time. As of December 31, 2004, the balance due on the
lease totaled $1,025,000.

In
November 2004, the Company entered into a capital lease agreement with GE Capital in the
amount of $186,000 to fund the acquisition of winder equipment at the Oconto Falls
Facilities. Lease payments of $4,492 per month commenced January 2005 and continue for 47
months, after which the Company has the option to purchase the equipment at a fixed price.
The lease carries an interest rate of 6.7%. As of December 31, 2004, the balance due on
the lease was $186,000.

Cash Flows

Net
cash required to support operations in 2004 was $1,282,000 compared to cash required to
support operations of $2,110,000 in 2003. The improvement in negative operating cash flow
is attributable to a reduction in the year-to-year operating loss, net of 2004s
asset impairment charge and restructuring provision, offset in part by an increase in
accounts receivable.

Net
cash used in investing activities in 2004 was $747,000 compared to $730,000 in 2003.

19

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Cash
flow generated from financing activities in 2004 was $1,799,000 compared to $2,394,000 in
2003. The year-to-year improvement is attributable partially to the improved negative cash
flow development discussed above.

In
November of 2003, the Company entered into a capital lease arrangement with a financing
company. The total amount financed was $1,150,000. This capital lease is discussed in more
detail under the preceding Capital Lease Obligations caption.

In
November 2004, the Company entered into a capital lease arrangement with a financing
company. The total amount financed was $186,000. This capital lease is discussed in more
detail under the preceding Capital Lease Obligations caption.

The
Company believes that its cash flow from operations, together with available borrowing
capacity, will be adequate to allow the Company to operate and meet its obligations in
2005.The Company has modeled its borrowing needs for 2005 and management believes,
based on such model, that the Companys available borrowings will be sufficient to
fund the Companys liquidity requirement for 2005. The model is based on certain
assumptions and projections regarding sales and expenses. Any unfavorable variances in
such assumptions or projections could have a material adverse effect on the Companys
liquidity.

Contractual Obligations

The
following table of certain material contractual obligations at December 31, 2004
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                  |                        | 
|Capital Leases                  |                        | 
|Operating Leases                |                        | 
|Bank Revolving Credit Agreement |                        | 
|Pulp and Energy Contracts       |                        | 
|                                |                        | 
|Total                           |                        | 

# Application of Critical
Accounting Policies and Estimates

The
discussion and analysis of the Companys financial condition and results of
operations are based on the Companys 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 the Companys financial statements. Actual results may differ from these
estimates under different assumptions or conditions.

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 the Companys financial condition and results of operations. Management
believes the accounting policies described below meet these characteristics.

Revenue Recognition

Sales
revenue consists of direct sales to customers. Sales are recognized when products are
shipped to the customers, with provisions for discounts and rebates to customers and
returns and other adjustments provided for in the period the related sales are recorded.

20

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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

During
each accounting period, the Company determines an amount to be reserved to cover
potentially uncollectible accounts. The Companys methodology is based upon a
risk-based evaluation of accounts receivable associated with a customers ability to
make payments. These evaluations require considerable judgment in assessing the ultimate
potential for realization of these receivables, including reviewing the financial
condition of the customer and considering current market conditions. If the Companys
evaluation of a customers ability to pay is incorrect, future charges may be
incurred.

Benefit Accruals

During
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 estimates are based on an evaluation of past rates of claim payouts and
trends in the amount of payouts. This determination process 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 material adjustments to these medical cost
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. As of December 31,
2004, the Companys revolving credit agreement provides for borrowings up to
$12,000,000 (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, and bears interest at a variable rate based on alternative interest rate bases at
the Companys option. As of December 31, 2004, the Company was paying 6.25% annual
rate on amounts borrowed under the revolving credit agreement.

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 $133,000.

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

21

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# Item 8.   Financial
Statements and Supplementary Data

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and ShareholdersBadger Paper Mills, Inc. and
Subsidiary

We have audited the accompanying
consolidated balance sheets of Badger Paper Mills, Inc. and Subsidiary as of December 31,
2004 and 2003 and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period ended December 31, 2004.
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 the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinon. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial
statements referred to above, present fairly, in all material respects, the consolidated
financial position of Badger Paper Mills, Inc. and Subsidiary as of December 31, 2004 and
2003 and the consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.

As described in Note G, the
Companys consolidated balance sheet as of December 31, 2003 has been restated to
classify certain debt as current.

The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As
discussed in Note B to the financial statements, a significant portion of the
Companys revenues are in commodity grades of paper. The combination of intense
competition within the marketplace for this paper and rising manufacturing costs has
resulted in significant losses occurring at the Company for 2004 and 2003. This had an
adverse effect on various financial ratios, creating defaults under loan agreements. The
Company is negotiating with its lenders but has not received waivers from the lenders
relating to these defaults. These matters raise substantial doubt about the Companys
ability to continue as a going concern. Managements plan in regards to these matters
is described in Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Grant Thornton LLPAppleton, WisconsinFebruary 4, 2005

22

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# Badger Paper Mills,
Inc. and Subsidiary

# CONSOLIDATED BALANCE
SHEETSDecember 31(dollars in thousands)

|                                                             | 2004 |  | 2003 |       
|------------------------------------------------------------ | ---- |  | ---- | ------
|ASSETS                                                       |      |  |      |       
|CURRENT ASSETS                                               |      | 
|Cash and cash equivalents                                    |      |  | $    | 426   
|Accounts receivable, net                                     |      |  |      | 6,359 
|Inventories                                                  |      |  |      | 6,066 
|Refundable income taxes                                      |      |  |      | 168   
|Prepaid expenses and other                                   |      |  |      | 490   
|                                                             |      |  |      |       
|Total current assets                                         |      |  |      | 13,509
|PROPERTY, PLANT AND EQUIPMENT, NET                           |      |  |      | 19,220
|OTHER ASSETS                                                 |      |  |      | 543   
|                                                             |      |  |      |       
|Total assets                                                 |      |  | $    | 33,272
|                                                             |      |  |      |       
|LIABILITIES                                                  |      | 
|CURRENT LIABILITIES                                          |      | 
|Current portion of long-term debt, as restated for 2003      |      |  | $    | 11,159
|Accounts payable                                             |      |  |      | 3,061 
|Accrued liabilities                                          |      |  |      | 3,692 
|                                                             |      |  |      |       
|Total current liabilities                                    |      |  |      | 17,912
|LONG-TERM DEBT, as restated for 2003, net of current portion |      |  |      | 2,151 
|DEFERRED INCOME TAXES                                        |      |  |      | --    
|OTHER LONG-TERM LIABILITIES                                  |      |  |      | 1,395 
|COMMITMENTS AND CONTINGENCIES                                |      |  |      | --    
|SHAREHOLDERS' EQUITY                                         |      | 
|Common stock, no par value; 4,000,000 shares authorized      |      | 
|2,160,000 shares issued                                      |      |  |      | 2,700 
|Additional paid-in capital                                   |      |  |      | 24    
|Retained earnings                                            |      |  |      | 10,438
|Treasury stock, at cost, 109,775 and 120,845                 |      | 
|shares in 2004 and 2003, respectively                        |      |  |      | (1,348
|                                                             |      |  |      |       
|Total shareholders' equity                                   |      |  |      | 11,814
|                                                             |      |  |      |       
|Total liabilities and shareholders' equity                   |      |  | $    | 33,272
|                                                             |      |  |      |       

|The accompanying notes are an integral part of
these statements.
|----------------------------------------------------------------

23

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# Badger Paper Mills,
Inc. and Subsidiary

# CONSOLIDATED
STATEMENTS OF OPERATIONSYears
ended December 31,

# (dollars in thousands,
except for per share data)

|                                             | 2004 |  | 2003 |        | 2002 |  
|-------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|Net sales                                    |      |  | $    | 73,109 |      | $
|Expenses:                                    |      | 
|Cost of sales                                |      |  |      | 70,309 |      |  
|                                             |      |  |      |        |      |  
|Gross profit                                 |      |  |      | 2,800  |      |  
|Selling, general and administrative expenses |      |  |      | 4,774  |      |  
|Asset impairment charge                      |      |  |      | 4,556  |      |  
|Restructuring provision                      |      |  |      | 1,303  |      |  
|                                             |      |  |      |        |      |  
|Operating income (loss)                      |      |  |      | (7,833 | )    |  
|Other income (expense)                       |      | 
|Interest and dividend income                 |      |  |      | 6      |      |  
|Interest expense                             |      |  |      | (622   | )    |  
|Gain on sale of non-core assets              |      |  |      | --     |      |  
|Miscellaneous, net                           |      |  |      | 30     |      |  
|                                             |      |  |      |        |      |  
|                                             |      |  |      | (586   | )    |  
|                                             |      |  |      |        |      |  
|Income (loss) before income taxes            |      |  |      | (8,419 | )    |  
|Provision (benefit) for income taxes         |      |  |      | (836   | )    |  
|                                             |      |  |      |        |      |  
|Net income (loss)                            |      |  | $    | (7,583 | )    | $
|                                             |      |  |      |        |      |  
|Net income (loss) per share - basic          |      |  | $    | (3.71  | )    | $
|                                             |      |  |      |        |      |  
|Net income (loss) per share - diluted        |      |  | $    | (3.71  | )    | $
|                                             |      |  |      |        |      |  

|The accompanying notes are an integral part of
these statements.
|----------------------------------------------------------------

24

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# Badger Paper Mills,
Inc. and Subsidiary

# CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITYYears ended December 31,(dollars in thousands)

|                                                       | 2004 |  | 2003 |        | 2002 |  
|------------------------------------------------------ | ---- |  | ---- | ------ | ---- | -
|Common Stock                                           |      |  |      |        |      |  
|Balance, December 31                                   |      |  | $    | 2,700  |      | $
|                                                       |      |  |      |        |      |  
|Additional paid-in capital                             |      | 
|Balance, January 1                                     |      |  |      | 49     |      |  
|Treasury stock issued                                  |      |  |      | (25    | )    |  
|                                                       |      |  |      |        |      |  
|Balance, December 31                                   |      |  |      | 24     |      |  
|                                                       |      |  |      |        |      |  
|Retained earnings                                      |      | 
|Balance, January 1                                     |      |  |      | 18,021 |      |  
|Net income (loss)                                      |      |  |      | (7,583 | )    |  
|                                                       |      |  |      |        |      |  
|Balance, December 31                                   |      |  |      | 10,438 |      |  
|                                                       |      |  |      |        |      |  
|Treasury stock                                         |      | 
|Balance, January 1                                     |      |  |      | (1,421 | )    |  
|Shares issued (11,070, 8,970 and 6,600 shares in 2004, |      | 
|2003 and 2002, respectively)                           |      |  |      | 73     |      |  
|                                                       |      |  |      |        |      |  
|Balance, December 31                                   |      |  |      | (1,348 | )    |  
|                                                       |      |  |      |        |      |  
|Shareholders' equity                                   |      | 
|Balance, December 31                                   |      |  | $    | 11,814 |      | $
|                                                       |      |  |      |        |      |  

|The accompanying notes are an integral part of
these statements.
|----------------------------------------------------------------

25

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# Badger Paper Mills,
Inc. and Subsidiary

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

|                                                                 | 2004 |  | 2003 |        | 2002 |  
|---------------------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|Cash flows from operating activities:                            |      |  |      |        |      |  
|Net income (loss)                                                |      |  | $    | (7,583 | )    | $
|Adjustments to reconcile to net cash (used in) provided by       |      | 
|operating activities                                             |      | 
|Depreciation, including asset impairment charge of $4,556 (2004) |      |  |      | 7,037  |      |  
|Directors' fees paid in shares                                   |      |  |      | 48     |      |  
|Deferred income taxes                                            |      |  |      | (340   | )    |  
|Gain on sale of non-core assets                                  |      |  |      | --     |      |  
|Changes in operating assets and liabilities:                     |      | 
|Accounts receivable, net                                         |      |  |      | (1,368 | )    |  
|Inventories                                                      |      |  |      | (170   | )    |  
|Accounts payable and accrued liabilities                         |      |  |      | 263    |      |  
|Income taxes refundable (payable)                                |      |  |      | 246    |      |  
|Other                                                            |      |  |      | 585    |      |  
|                                                                 |      |  |      |        |      |  
|Net cash (used in) provided by operating activities              |      |  |      | (1,282 | )    |  
|Cash flows from investing activities:                            |      | 
|Additions to property, plant and equipment                       |      |  |      | (747   | )    |  
|Proceeds from sale of non-core assets                            |      |  |      | --     |      |  
|Net maturities (purchases) of certificates of deposit            |      |  |      | --     |      |  
|                                                                 |      |  |      |        |      |  
|Net cash used in investing activities                            |      |  |      | (747   | )    |  
|Cash flows from financing activities:                            |      | 
|Increase (decrease) in revolving credit agreement, net           |      |  |      | 2,466  |      |  
|Proceeds from long-term debt                                     |      |  |      | --     |      |  
|Payments on long-term debt                                       |      |  |      | (667   | )    |  
|                                                                 |      |  |      |        |      |  
|Net cash provided by (used in) financing activities              |      |  |      | 1,799  |      |  
|                                                                 |      |  |      |        |      |  
|NET INCREASE (DECREASE) IN CASH AND  CASH EQUIVALENTS            |      |  |      | (230   | )    |  
|Cash and cash equivalents:                                       |      | 
|Beginning of year                                                |      |  |      | 656    |      |  
|                                                                 |      |  |      |        |      |  
|End of year                                                      |      |  | $    | 426    |      | $
|                                                                 |      |  |      |        |      |  

|The accompanying notes are an integral part of
these statements.
|----------------------------------------------------------------

26

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# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003
and 2002

# 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, 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 the Companys
consolidated net sales in 2004, 2003 or 2002. 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.

27

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# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# 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. Past
due receivables are written off against the receivables allowance when it is determined
the outstanding balance is uncollectible; subsequent recoveries of previously written off
balances are credited to the receivables allowance.

# 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, Plant and
Equipment

Property, plant and equipment are
stated at cost. Replacement parts are stated at cost, subject to net realizable value. If
the replacement parts are utilized in a project that either extends the life or increases
the capacity of the equipment, then the cost of the replacement parts is capitalized. If
the replacement parts are utilized in ordinary repairs or maintenance, then their costs
are charged to operating expense. Depreciation of plant and equipment is determined using
the straight-line method over the estimated useful lives of the assets. The useful life of
land improvements is 15 years. The useful lives of buildings range from 30 to 33 years and
of machinery and equipment from 3 to 17 years. Leased property under a capital lease
structure is amortized over the life of the lease. 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.

28

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE A  SUMMARY OF
ACCOUNTING POLICIES  Continued

# 10.   Environmental
Expenditures

Accruals for remediation costs are
recorded when it is probable that a liability exists and the amount of the costs
associated with the liability can be reasonably estimated. Such accruals are adjusted as
further information develops or circumstances change. Costs of future expenditures for
environmental remediation are discounted to their present value when the amount and timing
of expected cash payments are readily determinable.

# 11.   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.

# 12.   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 as if the
shares were accounted for under the fair value method.

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

29

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE A  SUMMARY OF
ACCOUNTING POLICIES  Continued

# 13.   Revenue Recognition

Sales revenue consists of direct
sales to customers. Sales are recognized when products are shipped to the customer, with
provisions for discounts and rebates to customers and returns and other adjustments
provided for in the period the related sales are recorded.

# 14.   Shipping and
Handling Costs

The Company records shipping and
handling costs in cost of sales on the Consolidated Statements of Operations. Shipping and
handling costs amounted to $4,915,000, $4,751,000 and $5,133,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.

# 15.   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 $732,000, $673,000, and
$769,000 for 2004, 2003 and 2002, respectively. Customer reimbursements amounted to
$519,000, $944,000 and $2,467,000 for 2004, 2003 and 2002, respectively.

# 16.   Net Income (Loss)
Per Share

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

|        | 2004 |  | 2003 |           | 2002 | 
|------- | ---- |  | ---- | --------- | ---- | 
|Basic   |      |  |      | 2,043,561 |      | 
|Diluted |      |  |      | 2,043,561 |      | 

Stock options to purchase 57,000
common shares in 2004, 66,000 common shares in 2003 and 7,000 common shares in 2002 were
not dilutive and, therefore, have not been included in the computations of diluted per
common share amounts.

# 17.   Prospective
Accounting Pronouncements

The Financial Accounting Standards
Board issued Statement on Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment, which will require compensation costs related to
share-based payment to be recognized in the financial statements. The amount of the
compensation cost will be measured based on the grant date fair value of the equity
instruments issued. This Statement will be effective for the Company in the first quarter
of 2006. The Financial Accounting Standards Board issued SFAS 151, Inventory Costs,
an amendment of ARB No. 43, Chapter 4, which requires abnormal amounts of idle
facility expense to be recognized as current period charges. The Company believes that the
adoption of these new accounting pronouncements will not have a material impact on its
results of operations or financial position. This Statement will be effective for the
Company January 1, 2006.

30

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE B  OPERATIONS

Due to intense competition in the
marketplace and increased manufacturing costs driven partially by high energy, pulp and
health/medical expenses, the Company has incurred losses in 2004 and 2003. Certain of
these losses are directly identified with the output related to the Fourdrinier paper
machine, whose product mix is heavily weighted to business and office paper that is used
for reprographic and office correspondence end use, and commodity offset for general
printing use. As a result of the losses related to Fourdrinier and changes in the paper
market, in the fourth quarter of 2004, management performed an asset impairment analysis
related to the cash flows generated by the Fourdrinier group of assets. Based on this
analysis, an impairment charge of $4,556,000 was charged to operations.

As of December 31, 2004, the Company
was in compliance with the financial covenants of its revolving credit agreement, however,
due to covenant violations relating to the variable rate term loan agreement, the Company
violated the cross-default provision of its revolving credit agreement. In addition, as of
December 31, 2004, the Company was in violation of the current ratio, minimum debt service
coverage ratio, maximum debt to tangible net worth ratio and net worth covenants in its
variable rate loan agreement and these violations are continuing. As a result of these
defaults, the lenders have various rights, including the right to declare default and/or
accelerate all amounts currently due under such credit agreement.

At December 31, 2004, the
Companys capital resources included $426,000 in cash and the availability under the
Companys $12,000,000 revolving credit agreement. Borrowings under the Companys
revolving credit agreement totaled $5,223,000 as of December 31, 2004. Based on the
balances in inventory and accounts receivable, the Company had $3,395,000 of availability
under the revolving credit agreement at December 31, 2004. The Company has modeled its
borrowing needs for 2005 and management believes, based on such model, that the
Companys available borrowings will be sufficient to fund the Companys
liquidity requirements for 2005. The model is based on certain assumptions and projections
regarding sales and expenses. Any unfavorable variances from such assumptions or
projections could have a material adverse effect on the Companys liquidity.

The above matters raise substantial
doubt about the Companys ability to continue as a going concern. The recoverability
of a major portion of the Companys assets is dependent upon the continued operations
of the Company, which in turn is dependent upon the Companys ability to maintain its
present financing and succeed in its future operations.

Management has taken certain action
related to the Companys situation. The Company has hired an outside consulting firm
to assist the Company in developing a market strategy focused on exploiting its expertise
in specialty paper grades utilizing the Companys diverse manufacturing and
converting knowledge. In addition, the consultants are working with the Company to assess
liquidity and implement a plan to return the Company to profitability. The Company also
has had discussions with its existing lenders with respect to a waiver of the
Companys contractual violations and with respect to revised financial covenants that
are consistent with the Companys current operating plan. Management believes that it
will be able to secure waivers of past contractual violations and revised financial
covenants with it lenders going forward, but there can be no assurance that the Company
will be successful in accomplishing either or both of these objectives. The audited
consolidated financial statements included in this Annual Report do not include any
adjustments relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the Company be
unable to continue operating as a going concern.

31

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE C  RECEIVABLE
ALLOWANCES

The receivable allowances at December
31, 2004 and 2003 are as follows (in thousands):

|                             | 2004 |  | 2003 |    
|---------------------------- | ---- |  | ---- | ---
|Sales returns and allowances |      |  | $    | 372
|Cash discounts               |      |  |      | 120
|Doubtful accounts            |      |  |      | 400
|                             |      |  |      |    
|                             |      |  | $    | 892
|                             |      |  |      |    

# NOTE D  INVENTORIES

The major classes of inventories,
valued on the LIFO cost method, at December 31, 2004 and 2003 are as follows (in
thousands):

|                                   | 2004 |  | 2003 |      
|---------------------------------- | ---- |  | ---- | -----
|Raw Materials                      |      |  | $    | 2,130
|Work-in-process and finished stock |      |  |      | 3,936
|                                   |      |  |      |      
|                                   |      |  | $    | 6,066
|                                   |      |  |      |      

It is not practical to separate
finished stock and work-in-process inventories. The first-in, first-out cost of raw
materials, work-in-process and finished stock inventories approximated $10,741,000 and
$10,233,000 at December 31, 2004 and 2003, respectively.

# NOTE E  PROPERTY,
PLANT AND EQUIPMENT

The major classes of property, plant
and equipment at December 31, 2004 and 2003 are as follows (in thousands):

|                         | 2004 |  | 2003 |       
|------------------------ | ---- |  | ---- | ------
|Machinery and equipment  |      |  | $    | 63,443
|Buildings                |      |  |      | 9,183 
|Replacement parts        |      |  |      | 1,271 
|Land                     |      |  |      | 66    
|                         |      |  |      |       
|                         |      |  |      | 73,963
|Accumulated depreciation |      |  |      | 54,743
|                         |      |  |      |       
|                         |      |  | $    | 19,220
|                         |      |  |      |       

32

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE E  PROPERTY,
PLANT AND EQUIPMENT  Continued

In accordance with its policy on
impairment of long-lived assets, the Company identified impairment losses related to its
Fourdrinier paper machine and related group assets used in operations during 2004. These
losses are reported as asset impairment charges in the Consolidated Statements of
Operations and amounted to $4,556,000. High raw material and energy costs and competition
in certain grades of paper caused the Company to perform an impairment analysis in the
fourth quarter of 2004. Projections were prepared related to certain grades of paper to
determine whether the group of assets producing this paper was impaired. Then, discounted
cash flows were used to estimate the fair value of the assets for purposes of measuring
the impairment charge.

# NOTE F  ACCRUED
LIABILITIES

Accrued liabilities at December 31,
2004 and 2003 are as follows (in thousands):

|                                                           | 2004 |  | 2003 |      
|---------------------------------------------------------- | ---- |  | ---- | -----
|Compensation, including future absences, and related taxes |      |  | $    | 1,779
|Defined contribution plan                                  |      |  |      | 491  
|Incurred but not reported medical claims                   |      |  |      | 652  
|Other                                                      |      |  |      | 770  
|                                                           |      |  |      |      
|                                                           |      |  | $    | 3,692
|                                                           |      |  |      |      

# NOTE G  DEBT

Long-term debt at December 31, 2004 and
2003 consists of the following (in thousands):

|                                        | 2004 |  | 2003 |       
|--------------------------------------- | ---- |  | ---- | ------
|Revolving credit agreement              |      |  | $    | 5,223 
|Term loan                               |      |  |      | 3,777 
|Capital lease obligation                |      |  |      | 1,211 
|Variable rate loan                      |      |  |      | 1,806 
|Urban Development Action Grant ("UDAG") |      |  |      | 1,293 
|                                        |      |  |      |       
|                                        |      |  |      | 13,310
|Less:  current maturities               |      |  |      | 11,159
|                                        |      |  |      |       
|                                        |      |  | $    | 2,151 
|                                        |      |  |      |       

33

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

NOTE G  DEBT 
Continued

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 revolving credit
agreement is now scheduled to expire in November 2006. As of December 31, 2004, the
revolving credit agreement provides for maximum borrowings of $12,000,000, 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,
currently 6.25% at December 31, 2004. A facility fee of 0.25% is payable for unused
amounts. At December 31, 2004, the revolving credit agreement required, among other items,
the Company to maintain $2,000,000 in undrawn availability and satisfy EBITDA covenants.
In addition, capital expenditures are limited to $3,000,000 in 2004 and each subsequent
year the revolving credit agreement is in effect. As of December 31, 2004, the Company was
in compliance with the financial covenants of the revolving credit agreement, however, due
to covenant violations relating to the variable rate term loan agreement, the Company
violated the cross-default provision of the revolving credit agreement. Since the Company
is not in compliance with the cross-default provision and the outcome of the waiver
negotiations are unknown at this time, the Company has classified this debt as short-term.
As more fully discussed in Note B, the Company is currently in the process of negotiating
with its lender to obtain a waiver of these covenant violations.

The Company obtained a $5,000,000
variable rate term loan in November 2001 to provide financing for the purchase of
equipment and other capital expenses and for debt refinancing. The variable rate term loan
has a maturity of November 2011 and requires monthly principal payments plus interest at
prime plus 0.25% (effective 5.5% as of December 31, 2004). At December 31, 2003, the
variable rate term loan required, among other items, the Company to maintain a minimum
debt service ratio and restrict indebtedness of the Company. At December 31, 2004, the
Company did not meet these covenants and has classified this debt as short-term as a
result of the covenant violations. As more fully discussed in Note B, the Company is
currently in the process of negotiating with its lender to obtain a waiver of these
covenant violations.

The Company obtained a variable rate
loan in September 2002 to finance capital expenditures. The 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 loan agreement has a maturity of November 2015
and requires monthly principal payments plus interest at prime plus 0.25% (effective 5.5%
as of December 31, 2004). At December 31, 2004, the Company did not meet these covenants
and has classified this debt as short-term as a result of the covenant violations. As more
fully discussed in Note B, the Company is currently in the process of negotiating with its
lender to obtain a waiver of these covenant violations.

34

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

NOTE G  DEBT
Continued

The Company obtained $1,800,000 of
funding from the Urban Development Action Committee in the form of an Urban Development
Action Grant (UDAG). The UDAG debt, including additional funding obtained in November 2001
and March 2002, is due in monthly installments of $17,817, including interest at 5.0%,
through maturity in November 2011.

The Company obtained $160,000 of
funding from the Marinette County Association of Community Development (Urban Development
Loan) on January 1, 2002, for the purpose of purchasing waxing equipment. Monthly payment
installations are $2,972, including interest at 4.0%, through maturity in May 2006.

In November 2003, the Company entered
into a capital lease agreement with GE Capital in the amount of $1,150,000 to fund the
acquisition of foil laminator equipment at the Oconto Falls Facilities. The lease provides
for monthly payments of $14,913, including interest at 5.9%. The final lease payment is
due in November 2010, with an option to purchase the equipment for a fixed price at that
time. As of December 31, 2004, the balance due on the lease totaled $1,025,000.

In November 2004, the Company entered
into a capital lease agreement with GE Capital in the amount of $186,000 to fund the
acquisition of winder equipment at the Oconto Falls Facilities. Lease payments of $4,492
per month commenced January 2005 and continue for 47 months, after which the Company has
the option to purchase the equipment at a fixed price. The lease carries an interest rate
of 6.7%. As of December 31, 2004, the balance due on the lease was $186,000.

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

Maturities of long-term debt for the
years ending after December 31, 2004 are as follows:

|Year ending December 31, | Notes payable
and revolving
line of credit | Minimum
capital lease
payments | Amount
representing
interest | Net present
value of long-
term debt
|------------------------ | ------------------------------------------ | ------------------------------ | ---------------------------- | ------------------------------------
|2005                     |                                            |                                | $                            | 10,994                              
|2006                     |                                            |                                |                              | 173                                 
|2007                     |                                            |                                |                              | 170                                 
|2008                     |                                            |                                |                              | 179                                 
|2009                     |                                            |                                |                              | 188                                 
|Thereafter               |                                            |                                |                              | 395                                 
|                         |                                            |                                |                              |                                     
|                         |                                            |                                | $                            | 12,099                              
|                         |                                            |                                |                              |                                     

35

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

NOTE G  DEBT
Continued

The Company has re-examined the
provisions of its revolving credit agreement, and, based on Emerging Issues Task Force
(EITF) Issue No. 95-22, Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration
Clause and a Lock-Box Arrangement (EITF 95-22), and certain provisions
of the credit agreement, the Company has reclassified balances outstanding as of December
31, 2003 under the revolving credit agreement from long-term to short-term debt, though
the existing revolving credit agreement does not mature until November, 2006. As a result,
the Company has reclassified $2,756,000 as of December 31, 2003 from long-term debt to
short-term debt.

A summary of the effects of the
restatement on the Companys consolidated balance sheet as of December 31, 2003 is as
follows:

|                                               | December 31, 2003 | 
|---------------------------------------------- | ----------------- | 
|
|Term and variable rate loans                   |                   | 
|Urban Development Action Grant                 |                   | 
|and Urban Development Loan                     |                   | 
|Revolving credit agreement                     |                   | 
|Capital lease obligations                      |                   | 
|                                               |                   | 
|Long-term debt                                 |                   | 
|                                               |                   | 
|Term and variable rate loans - current portion |                   | 
|Urban Development Action Grant                 |                   | 
|and Urban Development Loan - current portion   |                   | 
|Revolving credit agreement                     |                   | 
|Capital lease obligations - current portion    |                   | 
|                                               |                   | 
|Short-term debt                                |                   | 
|                                               |                   | 
|Total current liabilities                      |                   | 

36

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE H  INCOME
TAXES

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

|                                | 2004 |  | 2003 |      | 2002 |  
|------------------------------- | ---- |  | ---- | ---- | ---- | -
|Currently payable (refundable): |      |  |      |      |      |  
|Federal                         |      |  | $    | (516 | )    | $
|State                           |      |  |      | 20   |      |  
|                                |      |  |      |      |      |  
|                                |      |  |      | (496 | )    |  
|Deferred:                       |      | 
|Federal                         |      |  |      | (340 | )    |  
|State                           |      |  |      | --   |      |  
|                                |      |  |      |      |      |  
|                                |      |  |      | (340 | )    |  
|                                |      |  |      |      |      |  
|                                |      |  | $    | (836 | )    | $
|                                |      |  |      |      |      |  

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

|                                         | 2004 |  | 2003 |       | 2002 | 
|---------------------------------------- | ---- |  | ---- | ----- | ---- | 
|Statutory Federal tax rate               |      |  |      | (34.0 | )%   | 
|Increase (decrease) in valuation reserve |      |  |      | 30.6  |      | 
|Other                                    |      |  |      | (6.5  | )    | 
|                                         |      |  |      |       |      | 
|Effective tax rate                       |      |  |      | (9.9  | )%   | 
|                                         |      |  |      |       |      | 

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

|                                        | 2004 |  | 2003 |       
|--------------------------------------- | ---- |  | ---- | ------
|Deferred tax assets:                    |      |  |      |       
|Accounts receivable                     |      |  | $    | 357   
|Inventories                             |      |  |      | 105   
|Accrued expenses                        |      |  |      | 1,282 
|Postretirement benefits                 |      |  |      | 300   
|Federal net operating loss carryforward |      |  |      | 250   
|Alternative minimum tax carryforwards   |      |  |      | 2,044 
|Tax credit carryforwards                |      |  |      | 1,560 
|State net operating loss carryforwards  |      |  |      | 635   
|State credit carryforwards              |      |  |      | 2,852 
|                                        |      |  |      |       
|                                        |      |  |      | 9,385 
|Deferred tax liabilities:               |      | 
|Fixed assets                            |      |  | $    | (3,757
|Valuation allowance                     |      |  |      | (5,628
|                                        |      |  |      |       
|Net liability                           |      |  | $    | 0     
|                                        |      |  |      |       

37

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE H  INCOME
TAXES  Continued

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

|                                       | 2004 |  | 2003 |  
|-------------------------------------- | ---- |  | ---- | -
|Net long-term deferred tax liabilities |      |  | $    | 0
|Gross current deferred tax assets      |      |  |      | 0
|                                       |      |  |      |  
|                                       |      |  | $    | 0
|                                       |      |  |      |  

For Federal income tax purposes, the
Company has net operating loss carryforwards, research and development credit carryovers,
alternative minimum net operating loss carryforwards, and alternative minimum tax credit
carryovers of $735,000, $1,560,000, $2,519,000 and $2,044,000, respectively. For state
income tax purposes, the Company has net operating loss and tax credit carryovers of
$12,182,000 and $2,852,000, 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 $3,314,000 in 2004 and $526,000 in 2003.

# NOTE I  EMPLOYEE
BENEFITS

The Company has defined contribution
plans covering substantially all of its employees. Contribution expenses associated with
these plans were $491,000, $550,000 and $646,000 in 2004, 2003 and 2002, respectively.

The Company is self-funded for health
costs. The Company has stop-loss coverage for costs in excess of $120,000 per individual
per year.

# NOTE J 
SUPPLEMENTAL CASH FLOW INFORMATION

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

|                                     | 2004 |  | 2003 |      | 2002 |  
|------------------------------------ | ---- |  | ---- | ---- | ---- | -
|Interest                             |      |  | $    | 631  |      | $
|Income taxes, net of refund received |      |  |      | (744 | )    |  

38

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE K  DIRECTOR
STOCK GRANT PLANS

In 2001, 1999 and 1997, in order to
attract and retain competent individuals to serve as directors of the Company, the Company
established Director Stock Grant Plans. An aggregate of 110,000 common shares was reserved
for issuance. Each director of the Company is to receive a grant of common shares, at fair
market value, in partial payment of his or her directors fee. During 2004, 2003 and
2002, 11,070, 8,970, and 6,600 shares, respectively were issued from treasury stock, at a
value of $48,000, $48,000 and $48,000, respectively.

Subject to approval by the
shareholders of the Company at the Companys May 15, 2005 annual meeting of
shareholders, the 2001 Director Stock Grant Plan will be amended to, among other things,
reserve for issuance on and after December 31, 2004 an additional 100,000 common shares.

39

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE L  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 related to the Companys 1998 and 2002 incentive stock option plans for
the three-year period ended December 31, 2004:

|                                         | Numberof shares |  | Weighted
average
exercise price
|---------------------------------------- | --------------- |  | -------------------------------
|Stock options outstanding -              |                 |  |                                
|January 1, 2002                          |                 |  |                                
|Options forfeited                        |                 |  |                                
|                                         |                 |  |                                
|Stock options outstanding -              |                 | 
|December 31, 2002                        |                 |  |                                
|Options granted                          |                 |  |                                
|Options forfeited                        |                 |  |                                
|                                         |                 |  |                                
|Stock options outstanding -              |                 | 
|December 31, 2003                        |                 |  |                                
|Options forfeited                        |                 |  |                                
|                                         |                 |  |                                
|Stock options outstanding -              |                 | 
|December 31, 2004                        |                 |  |                                
|                                         |                 |  |                                
|Price of $8.09 (weighted-                |                 | 
|average contractual life of 1 - 5 years) |                 |  |                                
|Price of $5.50 - $5.55 (weighted-average |                 | 
|contractual life of 5 years)             |                 |  |                                
|                                         |                 |  |                                
|                                         |                 |  |                                
|                                         |                 |  |                                
|Exercisable options -                    |                 | 
|December 31, 2002                        |                 |  |                                
|December 31, 2003                        |                 |  |                                
|December 31, 2004                        |                 |  |                                

40

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE L  STOCK
OPTION PLAN  Continued

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:

|                               | 2003      
|------------------------------ | ----------
|Risk-free interest rate        | 4.50%     
|Dividend yield                 | --        
|Volatility factor              | 126%      
|Weighted average expected life | 7.75 years

The weighted average fair value of
options granted in 2003 was $5.75 per share. No options were granted in 2004 and 2002.

# NOTE M 
COMMITMENTS AND CONTINGENCIES

Rental Agreements

The Company leases warehouse space
and certain equipment under various agreements, which are classified as operating leases
and expire through April 2007. Total rent expense amounted to approximately $615,000,
$736,000 and $726,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

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

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

41

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# NOTE M 
COMMITMENTS AND CONTINGENCIES  Continued

# 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. Under Section 289.41 of the Wisconsin Statutes, the Company is
required to annually demonstrate financial responsibility for future closure related
activities it must undertake under the Wisconsin Solid Waste Facilities law. In
demonstrating financial responsibility, the Company previously relied on the Net
Worth Method. As of December 31, 2004, the Company did not satisfy four of the seven
specified financial tests and was not able to use the Net Worth Method. In
such an event, the Company is required to demonstrate financial responsibility using one
of the following alternative methods  a bond, a deposit, an escrow account or an
irrevocable letter of credit. The Company contacted the Wisconsin Department of Natural
Resources in March 2005 and is in the process of arranging for an alternate method for
demonstrating financial responsibility.

Based
on a January 2005 report from the Companys environmental consultant, the
Companys future solid waste facility closure activities, which are subject to the
financial responsibility requirements, are recommended to consist of maintenance of the
current landfill cap and groundwater monitoring for the next five years. The annual cost
of the recommended work is less than $10,000 per year. The WDNR has not yet responded to
the January 2005 closure assessment report.

# NOTE N 
RESTRUCTURING PROVISION

In
the first quarter of 2004, the Company incurred a $1,303,000 non-cash restructuring charge
associated with a voluntary early retirement benefit offered to union employees and
certain costs associated with work force redesign. At December 31, 2004, $398,000 of plan
related cash payments had been made, with the remaining accrual, consisting exclusively of
retirement benefits, of $905,000 at December 31, 2004.

# NOTE O 
CONCENTRATION IN WORKFORCE

At
December 31, 2004, essentially all of the Companys 146 production employees were
covered by collective bargaining agreements that expire in May 2005. The Company intends
to commence formal contract negotiations with its covered employees during April 2005.
There can be no assurance that the labor contract negotiations will be successful.

42

---

# Badger Paper Mills,
Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  CONTINUEDDecember 31, 2004, 2003
and 2002

# 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 | 
|--------------------------------- | -------------- | 
|
|Net sales                         |                | 
|Gross profit (loss)               |                | 
|Net income (loss)                 |                | 
|Basic earnings (loss) per share   |                | 
|Diluted earnings (loss) per share |                | 

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

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

None.

43

---

|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 and 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 and its Vice President and Chief
Financial Officer concluded that the Companys disclosure controls and procedures
were effective as of the date of such evaluation to ensure that (a) information required
to be disclosed in the reports that the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and (b) material information relating to the Company, including
its consolidated subsidiary was made known to them by others within those entities

# Changes in Internal
Control Over Financial Reporting

There
was no significant change in the Companys internal control over financial reporting
that occurred during the quarter ended December 31, 2004 that has materially affected, or
is reasonably likely to materially affect, such internal control over financial reporting.

|Item 9B. | Other Information
|-------- | -----------------

None.

# 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 herein by
reference to the information included under the captions, Election of
Directors, Board of Directors and Section 16(a) Beneficial
Ownership Reporting Compliance, set forth in the Companys definitive Proxy
Statement for its 2005 Annual Meeting of Shareholders (Proxy Statement) 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.

The
Company has adopted a Code of Ethics and Business Conduct that applies to all employees
and directors of the Company, including the Companys President and Chief Executive
Officer, Chief Financial Officer and other persons performing similar functions. 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 5.05 of Form 8-K regarding amendments to, or waivers from, the Code of Ethics
and Business Conduct by posting such information on its website.

|Item 11. | Executive
Compensation
|-------- | ----------------------

The
information required by this Item is hereby incorporated herein by reference to the
information included under the caption Board of Directors-Director
Compensation, Executive Compensation, Compensation Committee
Report on Executive Compensation and Performance Information set forth
in the Companys Proxy Statement to be filed with the Securities and Exchange
Commission.

44

---

|Item 12. | Security
Ownership of Certain Beneficial Owners and Management
|-------- | --------------------------------------------------------------

# Equity Compensation Plan
Information

The
following table provides information about the Companys equity compensation plans as
of December 31, 2004:

|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, 73,000
shares of the                     Companys common stock available for issuance
under the Companys 1998                     Stock Option Plan and 4,285 shares of
the Companys common stock available                     for issuance under the
Companys 2001 Director Stock Grant Plan. Subject to                     approval by
the shareholders of the Company at the Companys May 15, 2005
                    annual meeting of shareholders, the 2001 Director Stock Grant Plan
will be                     amended to, among other things, reserve for issuance on and
after December 31,                     2004 an additional 100,000 common shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Security Ownership of
Certain Beneficial Owners

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

# Security Ownership of
Management

The
information required by this Item is hereby incorporated herein by reference to the
information included under the captions, Stock Ownership of Certain Beneficial
Owners and Management, set forth in the Companys Proxy 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 herein by reference to the
information included under the caption, Executive Compensation  Certain
Relationships and Transactions, set forth in the Companys Proxy Statement to
be filed with the Securities and Exchange Commission.

45

---

|Item 14. | Principal
Accounting Fees and ServicesThe
information required by this Item is hereby incorporated herein by reference to the
information included under the caption, Miscellaneous Independent Auditors
Fees, set forth in the Companys Proxy Statement to be filed with the
Securities and Exchange Commission.
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART IV

|Item 15. | Exhibits,
Financial Statement Schedules
|-------- | ---------------------------------------

|(a) | (1) | Financial
Statements:The
following financial statements and report of independent accountants are included in Item
8:
|--- | --- | ---------------------------------------------------------------------------------------------------------------------

| |    |                                                           | Pages
| | -- | --------------------------------------------------------- | -----
| | a. | Report of Independent Registered Public Accounting Firm   | 22   
| | b. | Consolidated Balance Sheets, December 31, 2004 and 2003   | 23   
| | c. | Consolidated Statements of Operations for the years ended
| |    | December 31, 2004, 2003 and 2002                          | 24   
| | d. | Consolidated Statements of Shareholders' Equity for the  
| |    | years ended December 31, 2004, 2003 and 2002              | 25   
| | e. | Consolidated Statements of Cash Flows for the years ended
| |    | December 31, 2004, 2003 and 2002                          | 26   
| | f. | Notes to Consolidated Financial Statements                | 27   

| | (2) | Financial
Statement Schedules:The
following financial statement schedule and related accountants report are filed as
part of this Annual Report on Form 10-K:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                                                            | Pages
| | -- | ---------------------------------------------------------- | -----
| | a. | Schedule II Valuation and Qualifying Accounts and Reserves | 49   
| | b. | Report of Independent Registered Public Accounting Firm on
| |    | financial statement schedule                               | 48   

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

| | (3) | Exhibits:The
exhibits listed in the accompanying exhibit index are filed (except where otherwise
indicated) as part of this Annual Report on Form 10-K.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Exhibits:The
exhibits listed in the accompanying exhibit index are filed (except where otherwise
indicated) as part of this report.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(c) | Financial Statement
Schedules:Not applicable.
|--- | ---------------------------------------------

46

---

# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                      | BADGER PAPER MILLS, INC.
|--------------------- | ------------------------
|Date:  March 31, 2005 | By:                     
|                      |                         

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 31, 2005
|Ronald E. Swanson, President,                   
|Chief Executive Officer and Director            
|(Principal Executive Officer)                   
|/s/  Paul M. Bouthilet                           | Date: March 31, 2005
|Paul M. Bouthilet, Vice President,              
|Chief Financial Officer, Secretary and Treasurer
|(Principal Financial Officer and                
|Principal Accounting Officer)                   
|/s/  Harold J. Bergman                           | Date: March 31, 2005
|Harold J. Bergman, Director                     
|/s/  L. Harvey Buek                              | Date: March 31, 2005
|L. Harvey Buek, Director                        
|/s/  Mark D. Burish                              | Date: March 31, 2005
|Mark D. Burish, Director                        
|/s/  James L. Kemerling                          | Date: March 31, 2005
|James L. Kemerling,                             
|Chairman of the Board                           
|/s/  Daniel D. King                              | Date: March 31, 2005
|Daniel D. King, Director                        
|                                                 | Date: March __, 2005
|John T. Paprocki, Director                      
|/s/  William A. Raaths                           | Date: March 31, 2005
|William A. Raaths, Director                     

47

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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

Our
report on the 2004, 2003 and 2002 financial statements of Badger Paper Mills, Inc. and
Subsidiary is included on page 22 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement schedule on
page 49 of this Form 10-K.

In
our opinion, the 2004, 2003 and 2002 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 LLPAppleton,
Wisconsin February 4, 2005

48

---

# Schedule II Valuation
and Qualifying Accounts and ReservesFor the Years Ended
December 31, 2004, 2003 and 2002 (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, 2004                  |          |         
|Doubtful accounts and claims/allowances       |          |          | $        | 904     
|Discounts                                     |          |          |          | 11      
|                                              |          |          |          |         
|                                              |          |          |          | 915     
|                                              |          |          |          |         
|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     
|                                              |          |          |          |         

|
|

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

|(B) | Discounts
taken and allowed
|--- | ---------------------------

49

---

# Shareholders
Information

|                                     |                                
|------------------------------------ | -------------------------------
|Market makers:                       | Stock transfer agent:          
|Knight Equity Markets L. P. (NITE)   | Computershare Investor Services
|UBS Capital Markets (SCHB)           | 2 North LaSalle Street         
|National Stock Exchange (CINN)       | Chicago, Illinois 60602        
|Archipelago, L.L.C. (ARCX)          
|UBS Securities, LLC (UBSW)          
|NASDAQ/Brut Market Center (BRUT)    
|Lime Brokerage LLC (LIMB)           
|Evolution Financial Tech (EVOF)     
|Boston Stock Exchange (BOSX)        
|B-Trade Services LLC (BTRD)         
|Lehman Brothers Inc. (LEHM)         
|Merrill Lynch, Pierce, Fenner (MLCO)

# 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 10,
2005, at 10:00 a.m.

50

---

# DIRECTORS AND OFFICERS

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

51

---

# EXHIBIT INDEX

# BADGER PAPER MILLS,
INC.ANNUAL REPORT ON FORM
10-KFOR THE FISCAL YEAR
ENDED DECEMBER 31, 2004

|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 Exhibit 4.4 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 Exhibit 4.5 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 Exhibit 4.1 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 Exhibit 4.2                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 Exhibit
4.3 to the                Companys Quarterly Report on Form 10-Q for the quarter
ended September 30,                2002).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

---

|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 Exhibit 4.4 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 (Incorporated by reference to Exhibit 4.10 to the
               Companys Annual Report on Form 10-K for the year ended December 31,
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 Exhibit 4 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 Exhibit 4 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
(Incorporated by                reference to Exhibit 4.13 to the Companys Annual
Report on Form 10-K for                the year ended December 31, 2003).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 (Incorporated by                reference to Exhibit 4.14 to the Companys
Annual Report on Form 10-K for                the year ended December 31, 2003).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.15) | Sixth
Amendment to Revolving Credit Facility and Security Agreement dated April
               30, 2004 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
Quarterly Report on Form 10-Q for                the quarter ended March 31, 2004).
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.16) | Seventh
Amendment to Revolving Credit Facility and Security Agreement dated May
               14, 2004 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 4.2 to the Companys
Quarterly Report on Form 10-Q for                the quarter ended March 31, 2004).
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.17) | Eighth
Amendment to Revolving Credit Facility and Security Agreement dated                August
12, 2004 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
Quarterly Report                on Form 10-Q for the quarter ended June 30, 2004).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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).*
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

53

---

|Number | Description
|------ | -----------

|(10.3) | Director
Stock Grant Plan dated July 23, 1997 (Incorporated by reference to                Exhibit
10 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                Exhibit 10.1 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                Exhibit 10.2 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
               Exhibit 10.1 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 Exhibit 10.2 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 Exhibit 10.2 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 Exhibit 10.1 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                Exhibit
10.1 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 Exhibit 10.2 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 Exhibit 10.13 to the Companys Annual
               Report, as amended, on Form 10-K/A for the year ended December 31, 2002).*
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.14) | Executive
Employment Agreement effective May 1, 2003, between the Company and                Ronald
E. Swanson (Incorporated by reference to Exhibit 10 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 Exhibit 10 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 (Incorporated by reference to Exhibit 10.16 to
the                Companys Annual Report on Form 10-K for the year ended December
31, 2003).
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

---

|Number | Description
|------ | -----------

|(23) | Consent
of Independent Registered Public Accounting Firm.
|---- | ---------------------------------------------------------

|(31.1) | Certification
of the President and Chief Executive Officer.
|------ | -----------------------------------------------------------

|(31.2) | Certification
of the Vice President, Chief Financial Officer, Secretary and                Treasurer.
|------ | -----------------------------------------------------------------------------------------------------

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

|(32.2) | Written
Statement of the Vice President, Chief Financial Officer, Secretary and
               Treasurer pursuant to 18 U. S. C. §1350.
|------ | ---------------------------------------------------------------------------------------------------------------------------------------

|(99.1) | Definitive
Proxy Statement for 2005 Annual Meeting of Shareholders to be filed                with
the Securities and Exchange Commission under Regulation 14A within 120 days
               after December 31, 2004; except to the extent specifically incorporated by
               reference, the definitive Proxy Statement for the 2005 Annual Meeting of
               Shareholders shall not be deemed to be filed with the Securities and
Exchange                Commission as part of this annual Report on Form 10-K.
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Represents
a management contract or compensatory plan or arrangement.
|- | ---------------------------------------------------------------------

55