UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).       Yes [    ]      No [ X ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

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CPAC, INC. AND SUBSIDIARIES

INDEX

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Note: The balance sheet at March 31, 2003 has been taken from the audited financial statements as of that date
and restated for the change in accounting for the investment in affiliate (see Note 3).

The accompanying notes are an integral part of the financial statements.

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CPAC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE NINE MONTHS ENDED

DECEMBER 31, 2003 AND DECEMBER 31, 2002

UNAUDITED

The accompanying notes are an integral part of the financial statements.

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CPAC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED

DECEMBER 31, 2003 AND DECEMBER 31, 2002

UNAUDITED

The accompanying notes are an integral part of the financial statements.

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The accompanying notes are an integral part of the financial statements.

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The consolidated balance sheets, the consolidated statements of operations and comprehensive income (loss), and the consolidated statements of cash flows for the interim periods presented have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim periods presented (which include only normal recurring adjustments), have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's March 31, 2003 Annual Report to Shareholders. The results of operations for the interim periods presented are not necessarily indicative of the operating results for the full year.

Inventory net of reserves is summarized as follows:

As a result of the additional equity ownership, the Company has treated this transaction as a change in reporting entity and has restated the prior period's financial statements, as if the equity method had been utilized at inception. In addition, the purchase price to acquire the cumulative 40% ownership share exceeded the Company's proportionate share of TURA's net assets and such excess has been allocated as follows:

The difference between the purchase price for the Company's equity interests in TURA and the net investment balance shown above at December 31, 2003 and 2002 represents the Company's recognition of the proportionate share of TURA's net income (loss), amortization of the purchase price, and foreign currency translation adjustments.

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Summarized, financial information for TURA for the three and nine months ended December 31, 2003 and 2002 is shown below:

As required by APB No. 18, the change in accounting for the TURA investment requires restatement of prior period financial statements. Beginning in the Company's second quarter of fiscal 2004, the Company recognized 40% of the income or loss of TURA, as it records its equity in TURA earnings on a three-month lag, adjusted for the purchase price amortization of $41,250. The amounts included in previous quarters represented 19% of the affiliate's losses, adjusted for the purchase price amortization of $36,250 in each quarter presented. The following table presents the restated prior quarter earnings and earnings per share, as if the equity method of accounting had been applied for the three and nine months ended December 31, 2002:

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The following table shows the restatement impact on the March 31, 2003 balance sheet for the change in the accounting for the TURA investment:

The Company has warranty obligations in connection with sales of its Imaging equipment. The warranty period generally ranges from 6 to 12 months. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. The Company estimates its warranty cost at the time of sale for a given product based on historical failure rates and related costs to repair. The change in the Company's accrued warranty obligations from March 31, 2003 to December 31, 2003 was as follows (in thousands):

Related to this endeavor, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and has accounted for the employee termination costs and other costs associated with the move under its guidelines. Most employees were offered severance packages, which were payable upon rendering service, until termination dates. As of December 31, 2003, substantially all of the termination benefit costs have been accrued. The majority of the other associated costs of moving and integrating the two operations has also been incurred as of December 31, 2003, although some residual costs may occur in fiscal 2004's fourth quarter. The total expenses estimated to be incurred in this

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project were $1,375,000 of which approximately $534,000 were expensed during the third quarter and $1,131,000 for the nine months ended December 31, 2003, leaving $244,000 yet to be incurred.

The table below summarizes the total costs accrued and paid under the criteria described in SFAS No. 146 for the three and nine months ended December 31, 2003:

During the third quarter, the Company began actively marketing the St. Louis facility for sale. As such, the Company is accounting for the potential sale in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The result was a third quarter reclassification in the consolidated balance sheet of approximately $1,237,000 from "property, plant, and equipment, net" to "assets held for sale." No impairment charge was recorded at December 31, 2003, as the fair market value of the property, less costs to dispose, exceeded the recorded cost. The Company hopes to sell the property in the next three to six months. The Company continues to lease a 35,000 square foot warehouse space adjacent to the St. Louis manufacturing facility with approximately three years remaining (original lease was for ten years, with a five-year termination clause). The Company has not concluded at this time as to whether it will utilize t his space for distribution purposes or attempt to sublease it, and as such, has not accrued any lease impairment or termination costs at December 31, 2003.

The Company accounts for its stock option plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25. Accordingly, no expense is charged to net income as all options granted included an exercise price equal to the market value of the underlying common stock on the date of the grant. In accordance with SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," the following table illustrates the effect on net income and earnings per share, as if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based, employee compensation.

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The fair value of these options were estimated at grant date using the Black-Scholes option pricing model. There have been no charges to income in any of the periods above in connection with these options other than incidental expenses related to options.

Basic earnings per share are based upon the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average common shares outstanding during the period plus the dilutive effect of shares issuable through stock options and warrants. The shares used in calculating basic and diluted earnings per share are reconciled as follows:

Unexercised stock options to purchase 790,936 and 916,417 shares of the Company's common stock as of December 31, 2003 and 2002, respectively, were not included in the computations of diluted earnings per share because the exercise prices of these options were greater than the average market price of the Company's common stock during the respective periods. These options, issued at various dates from 1995 to 2003, are still outstanding at the end of the period.

Other comprehensive income (loss) includes foreign currency translation adjustments.

The Company operates in two industry segments: the Fuller Brands segment and the CPAC Imaging (Imaging) segment. Information concerning the Company's business segments' net sales and income before income taxes, minority interests, equity in income (loss) of affiliate, and cumulative effect of change in accounting principle for the quarters and nine months ended December 31, 2003 and 2002 are as follows:

Sales between segments are not material.

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Information concerning the identifiable assets of the Company's business segments at December 31, 2003 and March 31, 2003 are as follows:

At the time of the asset purchase, the acquisition accounting used in allocating the purchase price resulted in the establishment of approximately $11.9 million of goodwill. This purchase price reflected market prices for entities that owned well-established brands. In the subsequent four years that the Company owned this operation, prior to adoption of SFAS No. 142, traditional distribution markets began a slow trend towards consolidation; and the expected efficiencies from integrating manufacturing became more difficult than originally thought. Despite management changes in key sales and marketing positions, expected sales growth never materialized. In early fiscal 2003, it became apparent that post "9/11" impacts on the entity's distribution channels were not temporary and that the Company's biggest customer would be using the Company's products on a reduced basis, due to closing numerous locations during their bankruptcy proceedings. In connection with the Company's adopt ion of SFAS No. 142, the CTG business discounted cash flow analysis was used to determine the fair market value of CTG's net assets, incorporating projected earnings based on historical and budgeted 2003 estimates. The first step of the impairment test calculation using these amounts showed that the fair market value of the CTG business (as measured by future, discounted cash flows) was less than the recorded carrying value of the net assets of the entity, indicating potential impairment. Step two of the impairment calculation demonstrated that the entire amount of goodwill recorded on the balance sheet for CTG was impaired, thus, necessitating the SFAS No. 142 adoption adjustment. The effect was to reduce the carrying value of goodwill by approximately $6.3 million, net of income tax benefit of $4.2 million, or $1.23 per diluted share. The adjustment is shown as a cumulative effect of change in accounting principle in the consolidated statements of operations and comprehensive income for the nine months ended December 31, 2002. The income tax benefit realized, netted with the previously recognized deferred tax credit, resulted in the recording of a long-term deferred tax asset upon adoption. This asset has been grouped with other long-term deferred tax assets on the Company's consolidated balance sheet.

A summary of changes in the Company's goodwill during the nine months ended December 31, 2003 by segment is as follows (in thousands):

At December 31, 2003 and March 31, 2003, other intangible assets consisted primarily of a contractual license agreement allowing the Company to manufacture and distribute products through the use of the trademarks and formulas of Stanley Home Products. The license is being amortized over the contract period, which expires on March 31, 2010. The original cost pertaining to this intangible at December 31, 2003 and March 31, 2003 was $2,250,000, while accumulated amortization at December 31, 2003 and March 31, 2003 amounted to $1,312,500 and 1,200,000, respectively.

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In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued. SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," and requires companies to recognize a liability for costs associated with an exit or disposal activity when the liability is incurred, as opposed to the date of an entity's commitment to an exit plan (as required under EITF No. 94-3). The pronouncement, effective for exit or disposal activities that are initiated after December 31, 2002 with earlier application allowed, did impact the Company's reported results of operations and financial position for the nine months ended December 31, 2003 (see Note 5).

In December 2002, SFAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure-an amendment of FASB No. 123," was issued. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends disclosure requirements of SFAS No. 123 requiring disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of this statement are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. At this time, the pronouncement is not expected to have any impa ct on the Company's reported results of operations and financial position as the Company continues to account for its stock compensation plans under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (see Note 6).

In November 2002, FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," was issued. The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that, at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for the Company's financial statements for the year ended March 31, 2003 (see Note 4).

In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF No. 00-21 also addresses how arrangement consideration should be measured and allocated to separate units of accounting in the arrangement. The Company is required to adopt EITF No. 00-21 for all revenue arrangements entered into beginning August 1, 2003. The pronouncement did not have a material impact on the Company's consolidated financial statements.

In January 2003, FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," was issued. The Interpretation provides guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first reporting period beginning after March 15, 2004 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. At this time, the Company does not believe the Interpretation will have an impact on the Company's future reported results of operations and financial position.

In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," was issued. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after September 30, 2003 and hedging relationships designated after September 30, 2003, except for those provisions of SFAS No. 149 which relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003. The Company does not expect adoption to have a material impact on the Company's consolidated financial statements.

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In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," was issued. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within the scope of SFAS No. 150 as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective for the Company beginning July 1, 2003. The pronouncement did not have a material impact on the Company's consolidated financial statements.

No material litigation is pending to which the Company and/or its subsidiaries are a party, or which property of the Company and/or its subsidiaries is the subject.

Certain March 31, 2003 financial statement and related footnote amounts have been reclassified to conform to the December 31, 2003 presentation.

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Item 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The Company operates in two industry segments. The Fuller Brands segment is involved in developing, manufacturing, distributing, and marketing branded industrial and consumer cleaning and personal care products in North America and internationally. The CPAC Imaging (Imaging) segment includes the Company's color photographic, health care, and graphic arts imaging operations in the United States, Belgium, Italy, South Africa, and Thailand. Sales between segments are not material.

The Company's financial results for the quarter and nine months ended December 31, 2003 include an after tax charge of $0.07 and $0.16 per diluted share for the Imaging Restructuring initiative, respectively, (see Note 5), as well as an after tax expense of $0.01 and $0.05 per diluted share, respectively, for its equity in losses from TURA, now required to be recognized due to the change in accounting, as a result of CPAC's increased ownership (see Note 3).

The Company's financial results for the nine months ended December 31, 2002 reflect the adoption of SFAS No. 142 during the Company's first quarter of fiscal 2003. Adoption included the recording of a one-time, non-cash expense of $6,281,251, net of a tax benefit of $4,188,000, or $1.23 per diluted share. The adjustment related to the Fuller Brands segment's Cleaning Technologies Group (CTG) investment in fiscal 1998, whose goodwill was determined to be impaired, based on calculating the present value of future, discounted cash flows. CTG had been impacted by several factors, including continued, reduced operating performance, since it was acquired (see Note 10).

The Company's net sales decreased 13.4% and 6.8% for the quarter and nine months ended December 31, 2003 respectively, as compared to the comparable periods last year (decreased 14.8% and 8.7%, respectively, excluding the impact of foreign currency exchange).

For the Fuller Brands segment, net sales for the quarter and nine months ended December 31, 2003 decreased 16.8% and 8.4%, as compared to the comparable quarter and nine months ended December 31, 2002. The Fuller Brush division (Fuller) experienced a 22.5% and 5.7% net sales decline for three and nine months ended December 31, 2003, as compared to similar periods last year. The third quarter decline was largely attributable to a decrease in the QVC home shopping network business, which due to timing and seasonality had less airings of "Fuller product shows" in fiscal 2004's third quarter, versus last year's third quarter. However, for the nine months ended December 31, 2003, sales to the QVC home shopping network increased 9% compared to the comparable period last year. Fuller was also impacted by a loss of a private label customer. Stanley Home Products (Stanley) net sales continued to decline, decreasing 9.7% and 13.6%, respectively, for the quarter and nine month s ended December 31, 2003 as compared to similar periods last year. With its hiring of a new president, Stanley has defined a new strategic direction which will emphasize new product development and work to improve recruitment of independent sales representatives and increase average order size. These improvements, initiated in the third quarter, have yet to stem year-over-year net sales declines, but the Company believes the rate of declines should begin to slow. Cleaning Technologies Group (CTG) net sales also continued to decline, with net sales for the quarter and nine months ended December 31, 2003 lower by 16.3% and 8.4%, as compared to comparable periods last year. CTG's business in fiscal 2004 has been impacted by lower distributor sales to school districts, due to budget constraints. This has caused the division to diversify its customer mix by attempting to increase sales to national accounts, retail chains, and GSA scheduled business for government procurement. The Company is hopeful thi s will mitigate and reverse the continued sales declines in future periods.

In the Imaging segment, net sales decreased 9.0% and 4.4% for the quarter and nine months ended December 31, 2003, as compared to comparable periods last year (decreased 12.3% and 9.3%, respectively, excluding the impact of foreign currency exchange). Most Imaging operations, domestically and internationally, with the exception of CPAC Asia and CPAC Africa, had lower net sales in the third quarter this year, as compared to last year, on a local currency basis. This reflects the worldwide slowdown in the traditional imaging marketplace, due partly to the advances of digital products, fierce competition from larger entities, and currency pressures overseas due to the stronger Euro and Japanese yen versus the U.S. dollar. Domestically, the Company's medical imaging and photo imaging had decreases for the quarter and nine months ended December 31, 2003, as compared to comparable periods last year ranging from 13.2 to 20.3%. The advances of digital technology are expected to conti nue to impact both of these operations in future quarters. Reduction in revenues were anticipated earlier this year, spurring the Imaging Restructuring plan, which will enable the Company to manufacture all domestic imaging products at one location. (See Foreign Operations discussion for international operation's quarter and nine months results.)

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Consolidated gross margins, exclusive of the Imaging restructuring charges, were 42.2% for this quarter versus 45.0% for the year ended March 31, 2003 and 45.2% for the same quarter last year.

Gross margins in the Fuller Brands segment were 48.7%, 50.3%, and 50.8% respectively, for the quarter ended December 31, 2003, the year ended March 31, 2003, and the quarter ended December 31, 2002. Declines in gross margins reflect the unfavorable impact of lower production volume through the Great Bend, Kansas, manufacturing facility, as a result of lower sales in each segment operation. Increasing production throughput is essential, if product margins are to improve in future periods.

Gross margins in the Imaging segment, exclusive of the restructuring charges, were 34.5%, 37.5%, and 37.7% for the quarter ended December 31, 2003, the year ended March 31, 2003, and the quarter ended December 31, 2002. With the completion of the domestic Imaging Restructuring initiative, it is expected that gross margins should improve by eliminating duplicate manufacturing costs and increased overhead efficiencies. However, with worldwide revenues continuing to decline, continued elimination of fixed costs wherever possible will be required in future periods.

Consolidated selling, administrative, and engineering costs this quarter, exclusive of the Imaging restructuring charges, were 42.2% of net sales, versus 40.5% for the year ended March 31, 2003 and 40.6% for the same quarter last year.

For the Fuller Brands segment, selling, administrative, and engineering expenses for the quarter were 50.4% of net sales, as compared to 44.4% and 47.0% for the year ended March 31, 2003 and the quarter ended December 31, 2002. The increase in the percentage this quarter versus previous periods reflects additional expense related to increased sales and marketing management, packaging revisions, and other initiatives related to Fuller's interest in selling its products through large retail store chains. The percentage increase also reflects the reduction in revenues in all divisions. In January 2004, the segment undertook a comprehensive review of its fixed costs, which resulted in small reductions in personnel and other discretionary spending, and will continue to search for future cost reduction opportunities.

In the Imaging segment, selling, administrative, and engineering costs for the quarter ended December 31, 2003, exclusive of the Imaging restructuring charges, were 35.5% of net sales, as compared to 34.2% and 31.8% for the year ended March 31, 2003 and the quarter ended December 31, 2002, respectively. While the Imaging Restructuring plan is expected to eliminate duplicate costs in the domestic Imaging operations, the segment continues to reduce fixed costs in light of falling revenues and has reduced headcount and other discretionary spending in January 2004. The Company will also be reviewing fixed cost levels in its foreign operations, which, depending on sales trends in Europe, Asia, and other international arenas in which they conduct business, may require expense reductions also.

Research and development expenses, as a percentage of sales were 0.9%, 0.7%, and 0.6% for the quarter ended December 31, 2003 versus the year ended March 31, 2003 and the quarter ended December 31, 2002. The slight increase in the current year's quarter, as a percentage of sales, reflects the Company's continuing emphasis of focusing on improving existing products or developing complimentary products, based on customer needs.

Net interest expense (interest expense less interest income) for the quarter and nine months ended December 31, 2003 decreased slightly, as compared to the third quarter and nine months ended December 31, 2002. The decrease was caused by a lower interest expense as a result of reduced foreign borrowings.

The consolidated provision (benefit) for income taxes, as a percentage of income (loss) before minority interests, equity in loss of affiliate, and cumulative effect of change in accounting principle was (31.1%) and (50.9%) for the three and nine months ended December 31, 2003, as compared to 30.8% for the year ended March 31, 2003, and 32.7% and 35.6% for the three and nine months ended December 31, 2002. The consolidated benefit recorded for the three and nine months ended December 31, 2003 is partly attributable to the expenses related to the Imaging Restructuring plan, which contributed to the losses before minority interests and equity in loss of affiliate in both periods, mitigated by foreign tax provisions from the Company's Belgian, Italian, and South African operations. The Company's consolidated benefit for the nine months ended December 31, 2003, as compared to previous periods, was also impacted by its majority-owned Asian subsidiary, CPAC A sia Imaging Products Limited, whose earnings increase of approximately $375,000, as compared to last year, was not subject to tax (CPAC Asia operates under a seven-year tax holiday).

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At December 31, 2003, the Company has recorded gross deferred tax assets of approximately $4,642,000 with no valuation reserve. These deferred tax assets consist primarily of domestic (U.S. Federal and State) tax benefits for items which have been recognized for financial reporting purposes, but which will be reported on tax returns to be filed in the future and approximately $428,000 of foreign net operating loss carryforwards. Realization of the domestic portion of the net deferred tax asset is dependent upon profitable operations in the United States during future years. Despite domestic pretax losses for the quarter and nine months ended December 31, 2003, the Company believes they are primarily attributable to the Imaging Restructuring plan and that the Company will return to profitability in fiscal 2005. Likewise, realization of the deferred tax asset related to the foreign net operating loss carryforward is also dependent on future, foreign income. Although realization for both is not assured, the Company believes, in following the criteria specified in SFAS No. 109, "Accounting for Income Taxes", that it is more likely than not that such assets will be realized. Should the Company experience a significant, future, unanticipated impairment or restructuring charge, it is possible that it could be required to record a valuation allowance on a portion or all of the deferred tax assets.

The net loss for the quarter ended December 31, 2003, as compared to net income for the corresponding quarter ended December 31, 2002, was partially a result of the $801,000 after-tax expense of the Imaging Restructuring initiative, the increased percentage of TURA's losses recognized, as well shortfalls in sales and resulting profits from both segments. The decrease in income before cumulative effect of change in accounting principle for the nine months ended December 31, 2003 versus the corresponding period last year, was due also to the $354,000 after-tax expense of the Imaging Restructuring initiative, increased amount of TURA losses recognized, and general decline in both segment's sales and resulting profits.

The results of operations for the Company's foreign subsidiaries, including the impacts of currency exchange, are reported on a three-month lag.

Combined net sales for the Company's operations in Thailand, Africa, Belgium, and Italy for the third quarter, as compared to last year, increased approximately $176,000 or 4.9% (or decreased approximately $162,000 or 4.5%, excluding the impact of currency exchange). For the third quarter CPAC Europe and Italia net sales combined increased 4.5% (decreased 8.8%, after removing currency impact). CPAC Asia's sales were flat in the third quarter, as their net sales increased approximately $1,000 or less than 1% (currency impact was negligible). CPAC Africa continued to demonstrate growth as net sales increased approximately $68,000 or 43% ($44,000 or 28%, after removing currency impact).

Total combined net sales for the Company's foreign operations for the first nine months of fiscal 2004, as compared to the similar nine-month period in fiscal 2003, increased approximately $1,254,000 or 13.3% (or decreased approximately $169,000 or 1.8%, after removing impact of currency exchange). Combined CPAC Europe and Italia net sales for this period increased approximately $671,000 or 11.1% (after removing currency impact, decreased $488,000 or 8.1%), which was offset by $356,000 and $227,000 increases from CPAC Asia and Africa, respectively ($285,000 and $34,000, after removing currency impacts).

Combined pretax profits for the third quarter, prior to minority interests and equity in losses of TURA, decreased approximately $14,000 (approximately $51,000, excluding impact of currency exchange), as compared to the third quarter of fiscal 2003. CPAC Europe and Italia's pretax profits combined decreased approximately 6.8% (approximately 18.7%, excluding impact of currency exchange). CPAC Asia's profits were up approximately $26,000 (approximately $23,000, after removing currency impact) over the comparable quarter last year, while CPAC Africa's third quarter pretax income declined approximately $21,000 (approximately $24,000, after removing currency impact).

Total combined pretax profits, prior to minority interests and equity in losses of TURA, for the first nine months of fiscal 2004, as compared to the similar nine month period in fiscal 2003, increased approximately $328,000 (approximately $221,000, excluding impact of currency exchange). Europe, Italia, and Africa pretax earnings declined approximately $46,000 (approximately $142,000, after removing currency impacts), while CPAC Asia's pretax profits increased almost $375,000 ($364,000, after currency impacts were removed). Over $250,000 of this increase was due to the fiscal 2003 CPAC Asia bad debt provision increase, due to a troubled distributor account.

As disclosed in Note 3, the Company increased the investment in TURA AG to 40% requiring the change in accounting for this investment to the equity method. Commencing in the second quarter of fiscal 2004, the Company recorded its 40% share of TURA's net loss, plus the amortization of the purchase price (in fiscal 2003 and the first quarter of fiscal 2004, the Company recorded its 19% of TURA's net loss, plus the amortization of the purchase price). TURA's results reflect the worldwide economic pressures on the traditional film, paper, and photofinishing markets, as well as currency difficulties due to the stronger Euro against the dollar. Despite steps taken by TURA AG to expand sourcing of materials to offset unfavorable pricing situations, these measures may not be enough to dramatically improve operating results during the fourth

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quarter. The Company expects TURA to report a net loss for the fourth quarter and calendar year ending December 31, 2003. Operating results for the first quarter of calendar 2004 will be analyzed to determine if the downturn in TURA's operations is other than temporary.

As previously disclosed, the Company announced on May 28, 2003 that it was consolidating its domestic manufacturing of imaging chemicals into its Norcross, Georgia, facility and that it would be curtailing manufacturing at its St. Louis, Missouri, facility during the fiscal year ending March 31, 2004. The decision to restructure was a result of improvements in manufacturing efficiencies and shifts to production of highly concentrated chemical formulations leaving excess capacity and the need to eliminate duplicate overhead functions. The Company expects to reduce domestic Imaging expenses by $1.0 to $1.2 million upon the completion of the restructuring plan (expected to begin during the fourth quarter of fiscal 2004).

During the first quarter of fiscal 2004, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," in conjunction with this Plan. The costs associated with the restructuring included severance benefits and other associated costs related to the physical move of the manufacturing. Upon completion of the Plan, severance costs should total approximately $570,000 with other associated costs related to the manufacturing move estimated at $805,000. For the three and nine months ended December 31, 2003 approximately $534,000 and $1,131,000 of total costs have been expensed, respectively.

The Company has begun actively marketing the former St. Louis manufacturing facility for sale and believes the property, having a net book value of approximately $1,237,000, will be sold in the next three to six months. The Company continues to lease a 35,000 square foot warehouse adjacent to the St. Louis manufacturing facility. The lease expires in approximately three years under a five-year termination clause (original lease was for ten years). At this time, the Company has not concluded if it will attempt to sublease the leased warehouse, or use as a distribution facility, and as such, has not accrued any lease impairment or termination costs at December 31, 2003.

The table below summarizes the total costs accrued and paid under the criteria described in SFAS No. 146, as of and for the three and nine months ended December 31, 2003:

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Consolidated net cash provided by operating activities increased for the nine months ended December 31, 2003, versus the comparable period last year, due primarily to a reduction in accounts receivable and inventory levels, as a result of reduced revenues.

Consolidated net cash used in investing activities increased for the nine months ended December 31, 2003, versus the comparable period last year, due to the Company's additional $1,300,000 equity investment in TURA, as well as capital expenditures related to the expansion of the Norcross, Georgia, manufacturing facility to incorporate the manufacture of color chemistry being transferred from the former St. Louis facility.

Consolidated cash used in financing activities decreased for the nine months ended December 31, 2003 versus the nine months ended December 31, 2002, due to the absence of any stock repurchases for the nine months ended December 31, 2003, partially offset by increased debt repayments from the Company's foreign subsidiaries.

The following table presents working capital information at December 31, 2003, March 31, 2003, and December 31, 2002:

The Company has a line of credit agreement with Bank of America, which provides for a $20,000,000 maximum borrowing capacity, interest at LIBOR plus 1.25% to 2.00% based on a ratio of funded debt to EBITDA (earnings before interest, taxes, depreciation, and amortization expense) parameters, and various financial covenants to be met. The Agreement matures on October 31, 2004. The Company was in compliance with the covenants as of December 31, 2003 or applicable waivers were obtained. At December 31, 2003, March 31, 2003, and December 31, 2002, the Company had not borrowed on the line of credit. The Agreement also contains a $6.2 million letter of credit facility, which the Company uses to collateralize the Fuller Brands' Industrial Revenue Bonds.

The Company's majority owned subsidiary, CPAC Asia Imaging Products Limited, has a line of credit with an international bank of 20 million baht (approximately $475,000 based on the third-quarter conversion rate in Thailand). Interest is payable at prime (prime rate in Thailand was 8.75% at the end of the third quarter). At December 31, 2003, CPAC Asia Imaging Products Limited had not borrowed on the line of credit.

Management believes that its existing available lines of credit and cash flows from operations will be adequate to meet normal working capital needs, based on operations as of December 31, 2003.

The accompanying unaudited interim financial statements and footnotes presented have been prepared by the Company and contain information that is pertinent to management's discussion and analysis of financial condition and results of operations. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results may differ from these estimates and assumptions.

The Company continues to follow the critical accounting policies and estimates as disclosed in the Company's March 31, 2003 Annual Report to Shareholders in preparing the interim financial statements for the three months ended December 31, 2003. Management's assumptions and judgements have not changed significantly from that previously disclosed.

This Form 10-Q contains forward-looking statements that are based on current expectations, estimates, and projections about the industries in which the Company operates, as well as management's beliefs and assumptions. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions ("Future Factors") that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The

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Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

The Future Factors that may affect the operations, performance, and results of the Company's business include the following:

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements. The Company does not intend to update forward-looking statements.

There has been no material change in the Company's assessment of its sensitivity to interest rate or foreign currency risks since its disclosure in Item 7(a) of the Company's Form 10-K for the year ended March 31, 2003.

Management, with the participation of the Company's chief executive officer and chief financial officer, has concluded that, based upon its evaluation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report (Form 10-Q), such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it submits under the Securities Exchange Act of 1934 is accumulated and communicated to management (including the chief executive officer and chief financial officer) as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of the Company's chief executive and chief financial officers, has concluded that there were no changes in the Company's internal control over financial reporting that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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