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, 2003

OR

[ ]                              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

                                             OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________       to __________

Commission file number 1-457

BULOVA CORPORATION

(Exact name of registrant as specified in its charter)

New York

11-1719409

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

One Bulova Avenue, Woodside, New York 11377-7874

(Address of principal executive offices) (Zip code)

(718) 204-3300

(Registrant's telephone number, including area code)

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

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

Common Stock, par value $5.00 per share

(Title of Class)

   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

      X

No

_________

_________

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

   Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2).

Yes

No

         X

_________

_________

   The aggregate market value of voting and non-voting common equity held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter was approximately $3,919,944.

BULOVA CORPORATION

INDEX TO ANNUAL REPORT ON

FORM 10-K FILED WITH THE

SECURITIES AND EXCHANGE COMMISSION

For the Year Ended December 31, 2003

Item

Page

No.   

PART I

 No. 

  1

Business

3     

  2

Properties

3     

  3

Legal Proceedings

4     

  4

Submission of Matters to a Vote of Security Holders

4     

PART II

  5

Market for the Registrant's Common Stock and Related

   Stockholder Matters

4       

  6

Selected Financial Data

4       

  7

Management's Discussion and Analysis of Financial

   Condition and Results of Operations

5       

  7A

Quantitative and Qualitative Disclosures about Market Risk

9       

  8

Financial Statements and Supplementary Data

10

  9

Changes in and Disagreements with Accountants on

   Accounting and Financial Disclosure

29

  9A

Controls and Procedures

29

PART III

10

Directors and Executive Officers of The Registrant

29

11

Executive Compensation

30

12

Security Ownership of Certain Beneficial Owners and

   Management and Related Stockholder Matters

31

13

Certain Relationships and Related Transactions

32

14

Principal Accountant Fees and Services

33

PART IV

15

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

34

   Bulova Corporation (together with its subsidiaries referred to herein as "Bulova" or the "Company," unless the context otherwise requires) is a New York corporation. Loews Corporation ("Loews") owns approximately 97% of the Company's outstanding Common Stock. See Item 12 of this Form 10-K below.

   The Company is engaged in the distribution and sale of watches, clocks and timepiece parts for consumer use. The principal watch brands are Bulova, Caravelle, Wittnauer and Accutron. In addition, the Company sells watches and clocks with brand names licensed from third parties. The principal licensed brand is Harley Davidson. Clocks are primarily sold under the Bulova brand name and the Company manufacturers and distributes high quality grandfather clocks under the Bulova brand name. The Company's product breakdown includes luxury watch lines represented by Wittnauer and Accutron, a mid-priced watch line represented by Bulova, and a lower-priced watch line represented by Caravelle.

   Bulova's principal markets are the United States, Canada, Mexico and Europe which accounted for 85%, 10% 3% and 2%, respectively, of sales in 2003. Prior to January 1, 2003, the Company's products were sold in Europe and Asia through license agreements with third parties under which the Company received royalty payments. The Company's principal European license agreement expired at the end of 2002. In anticipation of the expiration of the European license agreement, the Company established a Swiss subsidiary, Bulova Swiss SA, in September of 2002 to distribute product throughout Europe. The Company's principal Far East license agreement expired December 31, 2001. The Company has since entered into third party distribution agreements for Australia, New Zealand, Brazil, South and Central America and the Philippines and license agreements for Hong Kong, China, Taiwan and Macao. For additional information concerning the Company's sales in foreign markets, see Not e 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Form 10-K.

   The Company buys complete watches and clocks from foreign suppliers for substantially all of its products. Watch movements, cases and other components are also purchased from foreign suppliers. In the United States, most of the Company's consumer products are sold through major department stores, jewelry store chains, and premium outlets through the Company's commissioned sales force and independent sales representatives. In Canada and Mexico, the Company, through marketing subsidiaries, sells directly to retailers. In Italy, independent agents sell directly to retailers. In 2002 and 2001, one customer represented approximately 13% and 16%, respectively, of sales. In 2003, no customer represented more than 10% of the Company's sales.

   The watch and clock business is intensely competitive. The principal methods of competition are price, styling, product availability, after sales service, warranty and product performance. The Company believes that there are approximately ten major competitors with well established names and positions in the principal markets in which the Company competes and that certain of these have sales and assets substantially greater than the Company. In addition, there are an indeterminate number of smaller competitors.

   It is characteristic of the Company's business and of the watch industry generally that customer receivables from watch and clock sales are carried for relatively long periods. The Company grants its retailers seasonal credit terms, depending on the product and date of sale. In certain circumstances, the Company also extends credit to its retailers on an interest-bearing basis.

   Any backlog of orders is not believed to be significant. Historically sales are greatest in the fourth quarter in anticipation of the Christmas and holiday season sales activity. The second most important selling season is the spring, in anticipation of Mother's and Father's Day, as well as graduations. Sales generally are dependent upon the level of retail sales, economic conditions, customer's buying habits and other factors beyond the Company's control. The Company does not expect any significant change in the seasonality of its business in the foreseeable future.

   The Company currently employs approximately 560 persons, approximately 150 of whom are union members, and has experienced satisfactory labor relations.

Item 2. Properties.

   The Company owns an 80,000 square-foot facility in Woodside, New York which it uses for executive, administrative and sales offices, watch distribution, service and warehouse purposes and also owns a 91,000 square foot facility in Brooklyn, New York, which it uses for clock service and warehouse purposes. The Company also

3

owns 6,100 square feet of office space in Hong Kong which it uses for quality control, sourcing and warehousing purposes. The Company leases an approximate 31,000 square-foot facility in Toronto, Canada, which it uses for administrative and sales offices, watch and clock distribution, service and warehouse purposes; an approximate 27,000 square-foot office and manufacturing facility in Ontario, Canada which it uses for its grandfather clock operations; approximately 2,300 square feet of office and warehouse space in Mexico, Federal District, and approximately 6,000 square feet of office space in Fribourg, Switzerland.

   The Company entered into a contract on February 16, 2004 to sell its Brooklyn, New York clock warehouse. See Note 9 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

Item 3. Legal Proceedings.

  The Company and its subsidiaries are parties to litigation arising in the ordinary course of business. The outcome of this litigation will not, in the opinion of management, materially affect the Company's results of operations, equity or financial position.

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

  None.

2003              

2002             

__________________________________________________

High

Low

High

Low

_____________________________________________________________________________________________

First Quarter

$25.00

$25.00

$24.10

$24.00

Second Quarter

26.00

24.25

25.00

24.10

Third Quarter

27.60

26.00

26.00

25.00

Fourth Quarter

28.00

28.00

25.50

25.00

Dividend Information

   The Company paid no dividends for the years ended December 31, 2003 and 2002.

Approximate Number of Equity Security Holders

Year Ended December 31

2003

2002

2001

2000

1999

_________________________________________________________________________________________

(In thousands, except per share data)

Results of Operations:

  Net sales

$164,358 

$164,538 

$143,813

$150,771

$134,937

  Net income

12,148 

12,268 

10,456

15,436

14,620

  Net income per share

2.64 

2.67 

2.27

3.36

3.18

Financial Position:

  Total assets

220,534 

215,895 

199,625

193,742

182,139

  Shareholders' equity

160,071 

143,428 

131,151

121,532

106,749

  Dividends per share

None 

None 

None

None

None

  Shares of common stock outstanding

4,599 

4,599 

4,599

4,599

4,599

CRITICAL ACCOUNTING ESTIMATES

   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and the related notes. Actual results could differ from those estimates.

  The consolidated financial statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. The Company continually evaluates the accounting policies and estimates used to prepare the consolidated financial statements. In general, management's estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.

   The accounting policies discussed below are considered by management to be critical to an understanding of the Company's financial statements as their application places the most significant demands on management's judgment. Due to the inherent uncertainties involved with this type of judgment, actual results could differ significantly from estimates and have a material adverse impact on the Company's results of operations or equity.

Allowance for Doubtful Accounts

   Sales are recognized upon shipment of products to customers since title passes upon shipment or in the case of consignment sales, upon notification from our customers that products have been sold. Allowances for estimated uncollectible accounts, discounts, returns and allowances are provided when sales are recorded and adjusted for market and consumer conditions as necessary based upon historical experience and current trends.

Inventory Reserve

   The Company has established a reserve against inventory in order to report it at the lower of cost or market value. The cost of inventory is determined on a first-in, first out basis. In determining the market value of inventory, management considers sales history of the individual product, current consumer purchasing trends, secondary distribution channels, as well as overall sales activity.

Warranty Reserve

   The Company maintains a reserve for costs that it estimates will be needed to cover future product warranty obligations for products sold during the year. This estimate is based upon the Company's historical experience as well as current production techniques.

Reserve for Environmental Matters

   The Company has established a reserve for the expected costs of remediation relating to environmental contaminates at various manufacturing facilities formerly owned by the Company. These estimates are periodically reviewed and adjusted to reflect the current remediation progress, estimates of required activity and other relevant factors including technological or regulatory changes.

Pension and Other Postretirement Benefits

   The Company's pension and other postretirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions provided by the Company to our actuaries, including the discount rate and expected long-term rate of return on plan assets. Management is required to consider current market conditions, including changes in interest rates, in making these assumptions. The expected long-term rate of return on pension plan assets is selected by taking into account historical trends, the expected duration of the projected benefit obligation for the plans, the asset mix of the plans, and known economic and market conditions at the time of valuation. Material changes in the Company's pension and postretirement benefit costs may occur in the future due to changes in these assumptions. See Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

RESULTS OF OPERATIONS

2003 Compared with 2002

   Net sales and income before taxes decreased $180,000 and $3,545,000, or 0.1% and 16.4%, respectively, as compared to 2002.

    The decrease in consolidated sales for the year ended December 31, 2003 was marginal as compared to 2002. Results for 2003 reflect lower watch and clock sales volume of 8.8% and 12.7%, partially offset with higher watch and clock unit selling prices of 9.6% and 7.8%, as compared to the corresponding period of the prior year. Domestic operating results declined in watch unit sales volume for Caravelle, Bulova and Wittnauer, partially offset by the improvement within the Accutron brand and the Harley Davidson product lines. Accutron's results improved as it positioned itself in the sports-oriented market with new product lines. Sales of the Harley Davidson product line were positively impacted by the commemoration in 2003 of Harley Davidson's 100^th year anniversary and related promotions. The increase in watch unit selling prices is attributable to higher unit prices in the Caravelle, Bulova and Wittnauer product lines. The decline in domestic opera tions has been partially offset by the results of the Company's international operations which include the addition of the Swiss operations in 2003 and a full year of grandfather clock operations as compared to six months in 2002. Additionally, results of the Company's Canadian and Mexican subsidiaries have performed strongly, reporting 5.3% and 13.5% increases in sales, respectively. The Company believes that the decline in the United States market is reflective of the economic weakness and consumer reluctance to make discretionary expenditures.

   Gross profit as a percentage of net sales for the year ended December 31, 2003, was 52.5% as compared to 52.7% for the prior year. Gross margins are primarily affected by three major factors: sales mix, product pricing strategy and efficient procurement practices. Gross margins for the year ended December 31, 2003 have been negatively impacted by an $800,000 charge to provide an allowance for the valuation of spare parts inventory. Additionally, an increase in costs associated with material sales and service departments of approximately $1,800,000, primarily due to higher costs associated with servicing high-end products as well as higher overhead expenses, have negatively impacted gross profits and income before taxes. The strength in unit selling prices for watches and clocks, partially offsets the decline in gross profits.

    Selling, general and administrative expenses, as a percentage of net sales for the year ended December 31, 2003, was 42.3%, as compared to 40.9% for the prior year. Management continues to invest in marketing and selling expenses it believes are necessary to support its current market position, as well as incurring additional operating expenses related to the commencement of the European operations and the addition of the grandfather clock operation. In December of 2003, an additional charge of $103,000 was recognized related to environmental remediations, as compared to $1,194,000 for the year ended December 31, 2002.

   Royalty income in 2003 decreased by $943,000, as compared to the prior year. Royalty income in 2002 represents final minimum royalty payments received under the Company's principal European license agreement. In anticipation of the expiration of the European license agreement on December 31, 2002, the Company established a Swiss subsidiary, Bulova Swiss SA, in the third quarter of 2002 to distribute products throughout Europe and in certain other countries. Bulova Swiss SA began selling Bulova products using third party independent agents and/or distributors in Italy, Greece, Poland and the Netherlands. The Company has also signed new distribution agreements for Brazil, Central America and the Philippines, and has entered into license agreements for the territories of Hong Kong, China, Taiwan and Macao. During 2003, these agreements did not represent a significant contribution.

   Net interest declined by $111,000 from $282,000 in 2002 to $171,000 in 2003 due primarily to a lower level of invested assets, as well as lower interest rates.

   Income before taxes decreased $3,545,000, or 16.4%, for the year ended December 31, 2003, as compared to 2002, due primarily to a decline in gross profit attributable to increased costs of $1,800,000 associated with the material sales and service departments and an additional charge of $800,000 for the valuation of spare parts inventory, as well as higher selling general and administrative costs and lower royalty income.

   Income taxes declined $3,425,000, or 36.7%, due to franchise and state tax settlements, lower taxes at the Company's Canadian watch company and lower pretax income.

2002 Compared with 2001

   Net sales and income before taxes increased $20,725,000 and $3,821,000, or 14.4% and 21.5%, respectively, as compared to 2001.
    

   The increase in net sales in 2002 is primarily attributable to a full year of Wittnauer watch brand sales, which was acquired during the third quarter of 2001. In addition, net sales were positively impacted by sales of the Harley Davidson licensed product associated with the license agreement signed in May 2001 and initial line distributions in 2002, and an increase in clock unit volume sales of 21.5%, as compared to the prior year. These increases were partially offset by an 11.1% unit volume decrease of the Company's Bulova brand for the year ended December 31, 2002, as compared to the prior year. The Company believes that the decline in the unit volume reflects the economic downturn and consumer reluctance to make discretionary expenditures.
    

   Gross profit as a percentage of net sales was 52.7% for the year ended December 31, 2002, as compared to 51.7% for the prior year. This increase is attributable to the addition of sales of higher margin products under the Wittnauer watch brand, which was acquired in September 2001.

   Selling, general and administrative expenses as a percentage of net sales for 2002 were 40.9%, as compared to 41.6% for the prior year. This decrease was due to the absence of system development costs and hardware related to the Company's re-platforming of its computer systems in 2001, partially offset by the Company recognizing a $1,194,000 charge relating to environmental remediation costs in 2002.

   Royalty income in 2002 decreased by $743,000, as compared to the prior year. Royalty income in 2002 represented final minimum royalty payments received under the Company's principal Europe and Far East licenses agreements, each of which has expired. The Company's principal Far East license agreement expired on December 31, 2001, and its principal European license agreement expired on December 31, 2002.

   Net interest declined by $708,000 from $990,000 in 2001 to $282,000 in 2002 due primarily to a lower level of invested assets, as well as lower interest rates.
    

Contingencies

   During the third quarter of 2002, the Company received notice of potential additional environmental contaminates at two facilities formerly owned by the Company, and settled a claim relating to contaminates at an offsite disposal location formerly used by the Company. The Company recorded charges of $103,000 and $1,194,000 related to the foregoing matters for the years ended December 31, 2003 and 2002, respectively. At December 31, 2003, the company's reserve for environmental liabilities was approximately $385,000, which represents the Company's estimate of its remaining costs for these properties. The Company does not expect to receive insurance proceeds related to environmental matters. The Company will fund these costs from its working capital.
    

Foreign Currency

   The Company imports most of its watch and clock products. In 2003, approximately 3% and 1% of the Company's purchases were denominated in Japanese yen and the Euro. The remaining purchases were primarily denominated in U.S. dollars for product acquired from vendors located in Asia, principally Hong Kong, as well as Europe. The Hong Kong dollar is pegged to the U.S. dollar and has not been subject to significant fluctuations. In the event that the peg between the two currencies is removed, currency fluctuations could have a material impact on the cost of those imported products which ultimately could have a negative impact on the Company's gross profit, operating income and cash flow. Foreign currency fluctuations have not had a material impact on the results of operations for the years ended December 31, 2003, 2002 and 2001.

LIQUIDITY AND CAPITAL RESOURCES

Payments Due by Period

________________________________________________________

Less than

More than

December 31, 2003

Total

1 Year

1-3 Years

4-5 Years

5 Years

________________________________________________________________________________________

(In thousands)

Operating leases

$    2, 902    

$     334     

$       995    

$      499     

$   1,074     

=======    

    ======

=======    

======     

======     

   The Company provided net cash from operations of $9,388,000 for the year ended December 31, 2003, as compared to a utilization of $7,583,000 for the same period in 2002. The increase of $16,971,000 in net cash flow is primarily the result of lower inventory purchases.

   The Company and Loews have a credit agreement (the "Credit Agreement") which provides for unsecured loans to be made by Loews from time to time, in principal amounts aggregating up to $50,000,000. In September of 2003, the Company borrowed $8,000,000, which was repaid in December of 2003. Prior to September, the Company had not utilized the Credit Agreement since 1995. The interest rate for amounts outstanding under the Credit Agreement is a fixed rate equal to the Six-Month London Interbank Offered Rate, in effect on the date the Company requests the loan, plus 250 basis points (2.5%). The Credit Agreement has been periodically extended and currently expires on December 31, 2005. Interest expense related to the Credit Agreement was $59,000 for the year ended December 31, 2003.

On February 16, 2004, the Company entered into a contract to sell its clock warehouse in Brooklyn, New York for $12,750,000. The closing of this sale is scheduled for September 2004, but is subject to the satisfaction of certain conditions, including among others, that the Company arrange with the New York City Industrial Development Agency ("IDA") for the termination of the IDA lease under which the Company purchased the property, and the successful completion of environmental testing of the property by the purchaser. The transaction also provides for the Company to lease the property back for a period of up to one year at a monthly rent of $50,000, with the Company having the right to terminate the lease on sixty days notice. Assuming closing of this transaction on its current terms, the Company expects to recognize a pretax gain on the sale of approximately of $8,000,000.

   Cash and cash equivalents, and short-term investments amounted to $18,201,000 at December 31, 2003, as compared to $10,159,000 at December 31, 2002.

   The Company has no material commitments for capital expenditures as of December 31, 2003.

ACCOUNTING STANDARDS

    In January of 2003, the FASB issued Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." This Interpretation clarifies the application of ARB No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest. Prior to the issuance of this Interpretation, ARB No. 51 defined a controlling financial interest as ownership of a majority voting interest. FIN 46 requires an entity to consolidate a variable interest entity even though the entity does not, either directly or indirectly, own more than 50% of the outstanding voting shares. FIN 46 defines a variable interest entity as having one or both of the following characteristics (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (2) the equity inv estors lack one or more of the following (a) the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights, (b) the obligation to absorb the expected losses of the entity, if they occur, which makes it possible for the entity to finance its activities and (c) the right to receive the expected residual returns of the entity, if they occur, which is the compensation for the risk of absorbing the expected losses. On December 24, 2003, the FASB issued a complete replacement of FIN 46 ("FIN 46R"), which clarified certain complexities of FIN 46. FIN 46R is applicable for financial statements issued for reporting periods that end after March 5, 2004. The Company is in the process of reviewing the recent revisions to FIN 46R. Any potential changes as a result of implementation of FIN 46R are not expected to have a significant impact on the results of operations or equity of the Company.

FORWARD-LOOKING STATEMENTS

   When included in this Report, the words "believes," "expects," "intends," "anticipates," "estimates" and analogous expressions are intended to identify forward-looking statements. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, changes in financial markets, significant changes in consumer spending patterns, competition in the Company's product areas, the closing of the sale of the Company's Brooklyn, New York warehouse, the extent of any future liabilities for environmental clean up cost, changes in foreign currency valuations in relation to the U.S. dollar, changes in foreign, political, social and economic conditions, the Company's ability to renew or find new licensees or distributors to replace those terminated in 2002, and various other matters, many of whic h are beyond the Company's control. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

   The Company has exposure to economic losses due to interest rate risk arising from changes in the level or volatility of interest rates. The Company mitigates its exposure to interest rate risk by maintaining investments with short-term maturities. As such, the Company does not believe these financial instruments present a significant exposure to market risk.

Bulova Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

_____________________________________________________________________________________________

_____________________________________________________________________________________________

Assets:

_________________________________________________________________________________

December 31

2003  

2002 

_____________________________________________________________________________________________

(Amounts in thousands, except share data)

Current assets:

  Cash and cash equivalents (Note 1)

$         18,201 

$        9,930 

  Short-term investments (Note 1)

229 

  Receivables, less allowance for doubtful accounts and cash discounts of

     $5,030 and $4,445 (Note 1)

94,732 

92,381 

  Inventories (Note 1)

64,491 

67,293 

  Prepaid expenses (Note 5)

1,019 

1,704 

  Deferred income taxes (Notes 1 and 4)

9,931 

11,209 

_____________________________________________________________________________________________

Total current assets

188,374 

182,746 

_____________________________________________________________________________________________

Property, plant and equipment, at cost (Note 1):

  Land, buildings and improvements

19,861 

19,814 

  Machinery and equipment

6,061 

4,760 

  Furniture, fixtures and leasehold improvements

5,069 

4,816 

_____________________________________________________________________________________________

30,991 

29,390 

  Less accumulated depreciation and amortization

14,606 

13,133 

_____________________________________________________________________________________________

Property, plant and equipment-net

16,385 

16,257 

_____________________________________________________________________________________________

Other assets:

  Deferred income taxes (Notes 1 and 4)

9,917 

11,448 

  Trademarks (Notes 1 and 3)

4,983 

4,983 

  Other assets

875 

461 

____________________________________________________________________________________________

Total other assets

15,775 

16,892 

____________________________________________________________________________________________

Total assets

$       220,534 

$      215,895 

=============================================================================================

Bulova Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

_____________________________________________________________________________________________

_____________________________________________________________________________________________

Liabilities and Shareholders' Equity:

_____________________________________________________________________________________________

December 31

2003 

2002 

_____________________________________________________________________________________________

(Amounts in thousands, except share data)

Current liabilities:

  Accounts payable

$         12,656 

$          14,751 

  Accrued expenses:

     Salaries, wages and commissions

1,456 

3,051 

     Postretirement benefits (Note 5)

1,792 

1,676 

     Advertising and promotions (Note 1)

10,117 

12,108 

     Accrued federal and foreign income taxes (Notes 1 and 4)

375 

787 

     Other

9,344 

10,305 

_____________________________________________________________________________________________

Total current liabilities

35,740 

42,678 

_____________________________________________________________________________________________

Other non-current liabilities:

  Postretirement benefits payable (Note 5)

24,723 

27,460 

  Pension benefits payable (Note 5)

2,329 

_____________________________________________________________________________________________

Total other liabilities and credits

24,723 

29,789 

_____________________________________________________________________________________________

Commitments and contingent liabilities (Notes 2, 4, 5 and 8)

Shareholders' equity (Note 1):

  Common stock, $5 par value:

     Authorized: 7,500,000 shares

     Issued: 4,600,000 shares

22,999 

22,999 

  Additional paid-in capital

23,197 

23,197 

  Retained earnings

113,642 

101,494 

  Accumulated other comprehensive income (loss), net

238 

(4,257)

_____________________________________________________________________________________________

160,076 

143,433 

  Less 1,000 shares of common stock held in treasury, at cost

5 

5 

_____________________________________________________________________________________________

Total shareholders' equity

160,071 

143,428 

_____________________________________________________________________________________________

Total liabilities and shareholders' equity

$        220,534 

$          215,895 

============================================================================================

Bulova Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

_________________________________________________________________________________

Year Ended December 31 

2003 

2002 

2001 

_____________________________________________________________________________________________

(Amounts in thousands, except per share data)

Net sales

$        164,358 

$         164,538 

$       143,813 

Cost of sales

78,040 

77,889 

69,449 

_____________________________________________________________________________________________

Gross profit

86,318 

86,649 

74,364 

Selling, general and administrative expenses

69,474 

67,270 

59,834 

_____________________________________________________________________________________________

Operating income

16,844 

19,379 

14,530 

Royalty income

734 

1,677 

2,420 

Interest -- net

171 

282 

990 

Other income (expense)

314 

270 

(153)

_____________________________________________________________________________________________

Income before income taxes

18,063 

21,608 

17,787 

Income taxes (Notes 1 and 4)

5,915 

9,340 

7,331 

_____________________________________________________________________________________________

Net income

$         12,148 

$           12,268 

$        10,456 

============================================================================================

Net income per share (Note 1)

$             2.64 

$               2.67 

$            2.27 

============================================================================================

Bulova Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

_____________________________________________________________________________________________

Accumulated

Additional

Other

Comprehensive

Common

Paid-in

Retained

Comprehensive

Treasury

Income

Stock

Capital

Earnings

(Loss) Income

Stock

_____________________________________________________________________________________________

(Amounts in thousands)

Balance, January 1, 2001

$       22,999 

$       23,197 

$       78,770 

$             (3,429)

$                (5)

Comprehensive income:

    Net income

$           10,456 

10,456 

___________

    Other comprehensive

      loss, net of tax benefit:

       Exchange rate changes

          during the year (net of

          income tax benefit of $226)

(419)

(419)

       Pension liability adjustment           (net of income tax benefit of            $225) (Note 5)

(418)

(418)

___________

    Other comprehensive loss

(837)

___________

Comprehensive income

$             9,619 

==========

_____________________________________________________

Balance, December 31, 2001

22,999 

23,197 

89,226 

(4,266)

(5)

Comprehensive income:

    Net income

$           12,268 

12,268 

___________

    Other comprehensive

      income, net of taxes:

       Exchange rate changes

          during the year (net of

          income tax expense of $135)

251 

251 

       Pension liability adjustment           (net of income tax benefit of            $98) (Note 5)

(242)

(242)

___________

    Other comprehensive income

9 

___________

Comprehensive income

$            12,277 

==========

_____________________________________________________

Balance, December 31, 2002

      22,999 

      23,197 

       101,494 

             (4,257)

               (5)

Comprehensive income:

    Net income

$           12,148 

12,148 

___________

    Other comprehensive

      income, net of taxes:

       Exchange rate changes

         during the year (net of

         income tax expense of $1,660)

3,083 

3,083 

       Pension liability adjustment

          (net of income tax expense

          of $760) (Note 5)

1,412 

1,412 

___________

    Other comprehensive income

4,495 

___________

Comprehensive income

$           16,643 

==========

_____________________________________________________

Balance, December 31, 2003

$      22,999 

$      23,197 

$   113,642 

$                  238 

$               (5)

======================================================

Bulova Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

_____________________________________________________________________________________________

Year Ended December 31

2003 

2002 

2001 

_____________________________________________________________________________________________

(Amounts in thousands)

Operating Activities:

Net income

$            12,148 

$            12,268 

$            10,456 

Adjustments to reconcile net income to net cash

   provided by (used in) operating activities:

     Amortization of investments

(8)

(115)

     Depreciation and amortization

1,296 

1,345 

920 

     Gain on sale of investments

(70)

     Provision for losses and cash discounts on accounts

        receivable

2,754 

2,786 

1,095 

     Deferred income taxes

2,809 

2,056 

56 

Changes in operating assets and liabilities-net:

     Receivables

(5,105)

(12,417)

(3,645)

     Inventories

2,802 

(17,943)

10,383 

     Prepaid expenses

685 

903 

643 

     Other assets

(414)

(268)

(21)

     Accounts payable and accrued expenses

(6,526)

7,618 

(2,857)

     Accrued federal and foreign income taxes

(412)

(353)

1,770 

     Other-net

(641)

(3,393)

(2,856)

_____________________________________________________________________________________________

9,388 

(7,583)

15,944 

_____________________________________________________________________________________________

Investing Activities:

Acquisitions

(743)

(11,929)

Purchases of short-term investments

(4,703)

(20,445)

Proceeds from sales of short-term investments

4,045 

20,423 

Purchases of property, plant and equipment

(459)

(659)

(1,944)

Proceeds from disposal of property, plant and equipment

4 

_____________________________________________________________________________________________

(1,117)

(1,424)

(13,869)

_____________________________________________________________________________________________

Financing Activities:

Proceeds from debt to affiliate

8,000 

Repayment of debt to affiliate

(8,000)

_____________________________________________________________________________________________

_____________________________________________________________________________________________

Net change in cash and cash equivalents

8,271 

(9,007)

2,075 

Cash and cash equivalents, beginning of year

             9,930 

18,937 

16,862 

_____________________________________________________________________________________________

Cash and cash equivalents, end of year

$           18,201 

$              9,930 

$            18,937 

=============================================================================================

Bulova Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________________________________________________________________________________________

Note 1. Summary of Significant Accounting Policies -

   (a) Business -- Bulova Corporation and its subsidiaries (the "Company") are engaged in the distribution and sale of watches and clocks for consumer use. The principal watch brands are Bulova, Caravelle, Wittnauer and Accutron. Clocks are principally sold under the Bulova brand name. Bulova's principal markets are the United States, Canada, Mexico and Europe. Royalties represent minimum royalty payments received under the Company's principal Europe and Far East licenses. The Company's principal European license agreement expired on December 31, 2002. In anticipation of the expiration of the European license agreement, the Company established a Swiss subsidiary in the third quarter of 2002, Bulova Swiss SA, to handle sales and distribution throughout Europe. Loews Corporation ("Loews") owns approximately 97% of the Company's outstanding voting stock.

   (b) Principles of consolidation -- The consolidated financial statements include all subsidiaries, which are 100% owned, and all material intercompany accounts and transactions have been eliminated.

   (c) Accounting estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Actual results could differ from those estimates.

   (d) Cash and cash equivalents -- At December 31, 2003 and 2002, cash and cash equivalents were comprised of cash and investments in money-market accounts.

   (e) Short-term investments -- At December 31, 2002 the Company had investments in United States treasury bills.

   (f) Accounts receivable and concentration of credit risk -- Watches and clocks are sold to retail outlets throughout the United States, Canada, Mexico and Europe. The Company grants its retailers seasonal credit terms. For the years ended December 31, 2003 and 2002 accounts receivable were substantially comprised of balances due from retailers. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. One U.S. based customer accounted for approximately 13% and 16% of sales for the years ended December 31, 2002 and 2001, respectively. No customer represented more than 10% of the Company's sales in 2003. As is characteristic of the Company's business and of the watch industry generally, the Company extends this customer seasonal credit terms which results in the Company carrying this customer's receivables for relatively long periods, exposing the Company to credit risk asso ciated with non-payment by this customer. The carrying amount of receivables approximates fair value.

   (g) Inventories -- Substantially all inventory, consisting primarily of finished watches and clocks is valued at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company has established a reserve against inventory in order to report it at the lower of cost or market value. The cost of inventory is determined on a first-in, first out basis.

   (h) Property, plant and equipment -- Depreciation is calculated on the straight-line method over the estimated useful lives of the various classes of assets. Leasehold improvements are, if such period is shorter, amortized over the life of the lease. Asset lives range from 2 to 12 years for machinery, equipment, and furniture and fixtures and from 15 to 40 years for buildings and improvements.

   (i) Trademarks -- The Company purchased the Wittnauer trademark in September of 2001. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which was adopted at that time, no amortization was recorded, since the life of the trademarks is believed to be indefinite. See Note 3 for further discussion.

   (j) Revenue recognition -- Revenue is recognized upon shipment of products to customers since title passes upon shipment. Allowances for estimated uncollectible accounts, discounts, returns and allowances are provided when

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

______________________________________________________________________________ Note 1. Summary of Significant Accounting Policies -- Continued

sales are recorded and adjusted for market and consumer conditions as necessary based upon historical experience and current trends. The Company has entered into consignment sale agreements with certain existing customers and records such sales upon notification from our customers that products have been sold. The Company also enters into rebate-type arrangements with its customers. Such amounts are recorded as reductions of net sales. For the years ended December 31, 2003, 2002 and 2001, rebates which were recorded as reductions to net sales during such periods, amounted to $7,581,000, $6,221,000 and $5,075,000, respectively.

   (k) Cost of sales -- Cost of sales includes product cost, scrap and warranty expense and related overhead costs such as inbound freight costs, purchasing and receiving costs, duty, inspection costs, warehousing costs, internal transfer costs and other purchase related or internal product transfer costs.

   (l) Selling, general and administrative expenses -- These expenses include selling, advertising, personnel and related general and administrative expenses.

   (m) Advertising and promotional costs -- Advertising and promotional costs, which are expensed as incurred, totaled approximately $26,436,000, $27,014,000 and $23,288,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Advertising and promotional costs for point of sale and media advertising include promotions, co-op advertising and media placement.

   (n) Income taxes -- The Company is included in the consolidated federal tax return of Loews. Under the tax allocation agreement between the Company and Loews, the Company is required to provide a current tax provision calculated on a stand-alone basis. The Company provides for deferred income taxes under the liability method, whereby deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. No provision has been made for the expected U.S. federal income tax liabilities applicable to undistributed earnings of international subsidiaries as the Company intends to invest the undistributed earnings indefinitely.

   (o) Warranty costs -- The Company maintains a reserve for costs that it estimates will be needed to cover future product warranty obligations for products sold during the year. This estimate is based upon the Company's historical experience as well as current production techniques.

   (p) Reclassifications -- Certain amounts applicable to prior periods have been reclassified to conform to the 2003 presentation.

   (q) Earnings per share and Shareholders' equity -- Earnings per share has been computed on the basis of the weighted average number of shares outstanding during the periods (4,599,000 for each of the three years ended December 31, 2003). There are no potentially dilutive securities outstanding.

   In addition to its common stock, the Company has authorized 500,000 shares of preferred stock with no par value, none of which are outstanding.

   (r) Foreign currency adjustment -- The effect of changes in exchange rates in translating foreign currency financial statements is accumulated as a separate component of Other comprehensive income in the Statement of Shareholders' Equity.

   (s) Impairment of long-lived assets -- The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets and intangibles with finite lives, under certain circumstances, are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell.

   (t) In June of 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 applies

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________________________________________________________________________________________

Note 1. Summary of Significant Accounting Policies -- Continued

to the accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of long-lived assets, except for certain obligations of lessees. Adoption of this statement in January of 2003 has not had a material impact on the Company's results of operations or financial position.

   In January of 2003, the FASB issued Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." This Interpretation clarifies the application of ARB No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest. Prior to the issuance of this Interpretation, ARB No. 51 defined a controlling financial interest as ownership of a majority voting interest. FIN 46 requires an entity to consolidate a variable interest entity even though the entity does not, either directly or indirectly, own more than 50% of the outstanding voting shares. FIN 46 defines a variable interest entity as having one or both of the following characteristics (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (2) the equity inve stors lack one or more of the following (a) the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights, (b) the obligation to absorb the expected losses of the entity, if they occur, which makes it possible for the entity to finance its activities and (c) the right to receive the expected residual returns of the entity, if they occur, which is the compensation for the risk of absorbing the expected losses. On December 24, 2003, the FASB issued a complete replacement of FIN 46 ("FIN 46R"), which clarified certain complexities of FIN 46. FIN 46R is applicable for financial statements issued for reporting periods that end after March 5, 2004. The Company is in the process of reviewing the recent revisions to FIN 46R. Any potential changes as a result of implementation of FIN 46R are not expected to have a significant impact on the results of operations or equity of the Company.

   In April of 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement in 2003 did not have a material impact on the Company's results of operations or financial position.

   In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 modifies the accounting and financial statement disclosure of three types of financial instruments that, under previous guidance, issuers could account for as equity. The Company did not have any financial instruments outstanding to which the provisions of SFAS No. 150 apply, therefore the adoption of SFAS No. 150 in 2003 did not have a material impact on the Company's consolidated financial statements.

   In December of 2003, the FASB issued a revised version of SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." The revised version of SFAS No. 132 makes several significant changes to the required disclosure for pension and other postretirement benefit plan assets, obligations, and net cost in financial statements. SFAS No. 132 made no changes to the methodologies underlying the measurement of obligations or calculation of expense. In addition, SFAS No. 132 requires disclosure of certain plan information on a quarterly basis in interim financial statements. This annual report includes the revised disclosures and disclosure of plan information on interim financial statements will begin in the first quarter of 2004.

   Stock options -- Loews has a stock option plan, in which some of the Company's employees participate. Loews does not record compensation expense for stock option awards given to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and accordingly no allocation of such cost is made to the Company. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to disclose pro forma information regarding option grants made to its employees. SFAS No. 123

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________________________________________________________________________________________

Note 1. Summary of Significant Accounting Policies -- Continued

specifies certain valuation techniques that produce estimated compensation charges for purposes of valuing stock option grants. These amounts have not been included in the Company's Consolidated Statements of Income, in accordance with APB No. 25. The Company's pro forma net income and income per share would have been as follows:

Year Ended December 31

2003 

2002 

2001 

__________________________________________________________________________________________

(In thousands, except per share data)

Net income:

   Net income as reported

$            12,148 

$       12,268 

$        10,456 

   Deduct: Total stock-based

      employee compensation expense

      determined under the fair value

      based method, net

(107)

(72)

(44)

_________________________________________________________________________________________

Pro forma net income

$            12,041 

$       12,196 

$       10,412 

==========================================================================================

Net income per share:

    As reported

$               2.64 

$           2.67 

$           2.27 

    Pro forma

$               2.62 

$           2.65 

$           2.26 

_________________________________________________________________________________________

   The fair value of granted options were estimated at the grant date using the Black-Scholes option pricing model with the following assumptions and results:

Year Ended December 31

2003 

2002 

2001 

_________________________________________________________________________________________

Expected dividend yield

1.3%

1.0%

1.1%

Expected volatility

35.3%

29.2%

35.2%

Weighted average risk-free interest rate

4.5%

5.4%

5.3%

Expected holding period (in years)

5.0  

5.0  

5.0   

Weighted average fair value of options

$15.92  

$18.68  

$16.90   

Note 2. Related Parties -

   The Company and Loews have entered into a services agreement pursuant to which Loews provides to the Company various administrative services, including among other things, data processing, purchasing, accounts payable, printing, tax return preparation, insurance and cash management services. In addition, the Company provides Loews with warehousing services. Pursuant to this agreement, each party reimburses the other in an amount not to exceed the allocated costs of the services provided. The Company paid Loews $3,000,000 for each of the years ended December 31, 2003, 2002 and 2001. In addition, the Company has reimbursed to Loews approximately $872,000, $534,000 and $538,000 in salaries and related employee benefits for the years ended December 31, 2003, 2002, and 2001, respectively, for employees of Loews on loan to the Company.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_______________________________________________________________________________________

Note 2. Related Parties -- Continued

   The Company participates in blanket insurance policies, primarily relating to property and casualty and general liability insurance, which cover properties and facilities of Loews and certain of its subsidiaries, including the Company. The Company reimbursed to Loews approximately $668,000, $405,000 and $254,000 for premiums paid during the years ended December 31, 2003, 2002 and 2001, respectively.

   The Company and Loews have a credit agreement (the "Credit Agreement") which provides for unsecured loans to be made by Loews from time to time, in principal amounts aggregating up to $50,000,000. In September of 2003, the Company borrowed $8,000,000, which was repaid in December of 2003. Prior to September, the Company had not utilized the Credit Agreement since 1995. The interest rate for amounts outstanding under the Credit Agreement is a fixed rate equal to the Six-Month London Interbank Offered Rate, in effect on the date the Company requests the loan, plus 250 basis points (2.5%). The Credit Agreement has been periodically extended and currently expires on December 31, 2005. Interest expense related to the Credit Agreement was $59,000 for the year ended December 31, 2003.

   Certain of the Company's employee health and life insurance benefits are provided by an insurance subsidiary of CNA Financial Corporation, a 90% owned subsidiary of Loews. Premiums and fees for such insurance amounted to approximately $127,000, $181,000 and $165,000 during the years ended December 31, 2003, 2002 and 2001, respectively.

   See Note 4 for information regarding a tax allocation agreement between the Company and Loews.

Note 3. Acquisitions -

   On July 2, 2002, the Company acquired the inventory and receivables of a grandfather clock manufacturer for a purchase price, including related payments, aggregating approximately $743,000. Net sales in 2002 of the grandfather clocks were not material in relation to the consolidated sales of the Company. Pro forma data, had the acquisition occurred on January 1, 2001 was not available. The purchase price was funded from the Company's existing working capital balances. The following table summarizes the estimated fair value of the assets, in thousands of dollars, acquired at the date of the acquisition.

Current assets:

  Accounts receivable

$                117   

  Inventories

436   

__________________________________________________________________________________________

     Total current assets

553   

Machinery and equipment

190   

_________________________________________________________________________________________

     Total assets acquired

$                 743   

=========================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

____________________________________________________________________________________________

Note 3. Acquisitions - Continued

   On September 5, 2001, the Company acquired the Wittnauer trademarks, related inventory and receivables, including the Wittnauer trademark for timepieces, for a purchase price, including related payments, aggregating approximately $11,929,000. Net sales in 2001 of the Wittnauer brand were not material in relation to the consolidated sales of the Company. Pro forma data had the acquisition occurred on January 1, 2001 was not available. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," no amortization has been recorded, since the life of the trademarks is believed to be indefinite. For tax purposes, the trademarks will be amortized over 15 years. The purchase price was funded from the Company's existing working capital balances. The following table summarizes the estimated fair values of the assets, in thousands of dollars, acquired at the date of acquisition.

Current assets:

  Accounts receivable

$               3,440  

  Inventories

3,225  

  Prepaid expenses

281  

__________________________________________________________________________________________

     Total current assets

6,946  

Trademarks

4,983  

__________________________________________________________________________________________

     Total assets acquired

$            11,929  

==========================================================================================

Note 4. Income Taxes -

   As previously noted, the Company and Loews have a tax allocation agreement with respect to the filing by Loews of consolidated federal income tax returns, which include the Company and its subsidiaries. Under the agreement, the Company will (i) be paid by Loews the amount, if any, by which Loews's consolidated federal income tax is reduced by virtue of the inclusion of the Company and its subsidiaries in the Loews's consolidated federal income tax return, or (ii) pay to Loews an amount, if any, equal to federal income tax which would have been payable by the Company if the Company and its subsidiaries had filed a separate consolidated return. Under this agreement, the Company was required to pay Loews approximately $4,207,000, $3,469,000 and $3,453,000 for the years ended December 31, 2003, 2002 and 2001, respectively. This agreement may be cancelled by the Company or Loews upon thirty days written notice. No valuation allowance is deemed necessary as in the opinion of management, it is more likely than not that such deferred tax assets will be realized.

   Income before income taxes consisted of the following:
      

Year Ended December 31

2003 

2002 

2001 

_________________________________________________________________________________________

(In thousands)

Income before income taxes:

  Domestic

$          15,655 

$          19,611 

$         14,525 

  Foreign

2,408 

1,997 

3,262 

________________________________________________________________________________________

Total

$          18,063 

$          21,608 

$         17,787 

========================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

____________________________________________________________________________________________

Note 4. Income Taxes -- Continued

Year Ended December 31

2003 

2002 

2001 

_____________________________________________________________________________________________

(In thousands)

Income tax expense (benefit):

  Federal:

    Current

$                736 

$            4,413 

$           4,318 

    Deferred

2,629 

1,644 

277 

  State and local:

    Current

889 

1,456 

1,545 

    Deferred

801 

598 

61 

  Foreign:

    Current

1,481 

1,258 

1,073 

    Deferred

(621)

(29)

57 

_____________________________________________________________________________________________

Income tax expense

$             5,915 

$             9,340 

$           7,331 

============================================================================================

   Deferred tax assets (liabilities) are as follows:

December 31

2003 

2002 

_____________________________________________________________________________________________

(In thousands)

Employee benefits

$          12,223 

$         14,118 

Inventory

7,942 

8,931 

Accrued expenses

(1,908)

(2,260)

Accounts receivable

1,591 

1,868 

_____________________________________________________________________________________________

Deferred tax assets -- net

$         19,848 

$         22,657 

===========================================================================================

   Income taxes differ from that computed at the U.S. statutory rate for the following reasons:

Year ended December 31

2003 

2002 

2001 

_____________________________________________________________________________________________

Income taxes computed at statutory rate

35.0

%

35.0

%

35.0

%

Increase (decrease) in taxes resulting from:

  State and local taxes

6.5

6.2

5.5

  Foreign taxes

(0.6

)

2.3

1.0

  Tax settlements

(6.6

)

  Other

(1.6

)

(0.3

)

(0.3

)

_____________________________________________________________________________________________

Effective income tax rate

32.7

%

43.2

%

41.2

%

==========================================================================================

   Federal, foreign, state and local income tax payments amounted to approximately $4,142,000, $5,069,000 and $4,337,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

   Federal income tax returns of Loews have been examined and settled through 1997. The years 1998 through 2001 are currently under examination. The Company's Canadian tax returns have been examined and settled through 2001. While tax liabilities for subsequent years are subject to audit and final determination, in the opinion of management the amount accrued in the Consolidated Balance Sheets are believed to be adequate to cover any additional assessments which may be made by federal, foreign, state and local tax authorities and should not have a material effect on the financial condition or results of operations of the Company.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________________________________________________________________________________________

Note 4. Income Taxes -- Continued

   The Company does not provide for federal income taxes or recognize tax benefits associated with the undistributed earnings or losses of its international subsidiaries because such earnings are indefinitely reinvested in the international subsidiaries and, in the opinion of management, will continue to be reinvested indefinitely. If these earnings were ever distributed to the Company if the form of dividends, the Company may be liable for both U.S. income taxes and withholding taxes in the source country of the distribution.

Note 5. Benefit Plans -

   Pension Plans -- The Company maintains non-contributory pension plans for all of its employees in the United States. Separate retirement plans are maintained by the Company's Canadian subsidiary, which are not material. The Company's funding policy is to make contributions in accordance with applicable governmental requirements. The assets of the plans are invested primarily in interest-bearing obligations. Benefits are determined based on compensation during each year of credited service.

   At December 31, 2003, the Company's fair value of plan assets exceeded the Accumulated Benefit Obligation, therefore, the minimum pension liability of $1,412,000, net of transition obligation of $2,329,000, tax benefits of $727,000 and intangible assets of $190,000 were removed from the Company's books. At December 31, 2002 and 2001, the Company's minimum pension liability exceeded its unrecognized prior service cost and net transition obligation by $2,329,000 and $2,020,000, respectively. This excess was recorded as a reduction to Shareholders' equity of $1,412,000 and $1,170,000 net of tax benefits of $727,000 and $630,000 and intangible assets of $190,000 and $220,000 for the years ended December 31, 2002 and 2001, respectively.

   Other Postretirement Benefit Plans -- The Company maintains postretirement health care plans covering eligible employees and retirees. Union participants generally become eligible upon retirement at age 55 and 10 years of service or upon completion of 20 years of service. Another plan covers salaried employees who are eligible upon retirement at age 55 and 20 years of service or upon retirement at age 60 and 10 years of service. The benefits provided by the Company include health, and for certain retirees, life insurance type benefits.

Pension Benefits

Other Postretirement Benefits

_____________________________

_____________________________

Year Ended December 31

2003   

2002   

2001  

2003

2002    

2001   

____________________________________________________________________________________________

Discount rate

6.25%

6.75%

7.25%

6.25%

6.75%

7.25%

Rate of compensation increase

5.25%

5.25%

5.25%

Weighted-average assumption used to determine net periodic benefits cost:

Pension Benefits

Other Postretirement Benefits

_____________________________

_____________________________

Year Ended December 31

2003   

2002   

2001  

2003

2002    

2001   

____________________________________________________________________________________________

Discount rate

6.25%

6.75%

7.25%

6.25%

6.75%

7.25%

Expected long-term return on plan

  assets

7.50%

7.50%

7.50%

Rate of compensation increase

5.25%

5.25%

5.25%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

____________________________________________________________________________________________

Note 5. Benefit Plans -- Continued

  The long-term rate of return for plan assets is determined based on widely-accepted capital market principles, long-term return analysis for global fixed income and equity markets as well as the active total return oriented portfolio management style. Long-term trends are evaluated relative to market factors such as inflation, interest rates and fiscal and monetary policies, in order to assess the capital market assumptions as applied to the plan. Consideration of diversification needs and rebalancing is maintained.

Year Ended December 31

2003    

2002    

2001   

____________________________________________________________________________________________

Health care cost trend rate assumed for next year

10% to 12%

   9% to 11%

   9% to 11%

Rate to which the cost trend rate is assumed to decline (the   ultimate trend rate)

               5%

               5%

               5%

Year that the rate reaches the ultimate trend rate

2004-2018

         2014

          2013

  Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

One Percentage Point

______________________

Increase

Decrease

____________________________________________________________________________________________

(In thousands)

Effect on total of service and interest cost

$        1,885 

$      (1,591) 

Effect on postretirement benefit obligation

145 

(127) 

Pension Benefits