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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
SEPTEMBER 26, 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 1-05492

Nashua Corporation

Registrant’s telephone number, including area code: (603) 880-2323

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, and (2) has been subject to such filing requirements for the past 90 days.

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

As of October 30, 2003, the Company had 5,910,984 shares of Common
Stock, par value $1.00 per share, outstanding.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

See accompanying notes.

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NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The accompanying financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.

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

Note 2: Acquisitions, Strategic Alliance and Business Changes

On February 7, 2003, we acquired the assets and assumed certain liabilities of The Label Company from Bunzl Distribution for approximately $5 million and signed a multi-year agreement to supply Bunzl with label products. The Label Company has been a supplier of supermarket, promotional and product identification labels primarily for Bunzl and for other customers. This acquisition adds flexibility to our label manufacturing operations, provides additional volume to our coating facility within our Specialty Paper Products segment and enhances our relationship with a valued and long-standing customer. The Label Company had 2002 sales of approximately $9.0 million. Operating activity relating to the assets of The Label Company is reported under our Label Products segment from the date of acquisition.

On February 25, 2003, we entered into a strategic development agreement with Parlex Corporation. The agreement creates an organization, Stratos Technology, LLC, of which we own 50 percent, that will draw on both parties’ relative expertise in ink and printed circuit technology, label converting and the design, application and production of flexible circuits. Under the agreement, Stratos Technology will work to develop innovative products for use in the automotive, cellular and radio identification (RFID) markets.

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Note 3: Acquired Intangible Assets

Details of acquired intangible assets are as follows:

Note 4: Indebtedness

On July 15, 2003, we entered into a first amendment to our Credit Agreement dated March 1, 2002 with LaSalle Bank, NA as Agent and Issuing Bank and Fleet National Bank (the “Lenders”) to increase the Term Loan under the Credit Agreement from $10 million to $15 million and to adjust the amount of the quarterly principal payments. The amended Credit Agreement consists of a term loan of $15 million and a revolving loan commitment of $30 million. Borrowings under this agreement are collateralized by a security interest in our accounts receivable, inventories, certain machinery and equipment and real estate located in Merrimack, NH. Interest on loans outstanding is, at our option, either at a rate per annum equal to the Base Rate (prime) or LIBOR, plus applicable margin. The initial applicable margin over the Base Rate was .75 percent per annum through June 30, 2002, after which it ranges from zero up to ..75 percent per annum based on our total debt to EBITDA ratio. The initial applicable margin over LIBOR was 2.75 percent per annum through June 30, 2002, after which it ranges from 1.75 percent per annum up to 2.75 percent per annum based on our total debt to EBITDA ratio. We are also subject to a non-use fee for any unutilized portion of our revolving loan that ranges from .25 percent to .50 percent based on our total debt to EBITDA ratio. The revolving loan commitment is subject to certain limitations, such that the maximum principal amount of the revolving credit agreement is the lesser of (a) $30 million, or (b) our borrowing base, which is defined as the sum of 80 percent of our eligible accounts receivable, plus the lesser of (i) 50 percent of our eligible inventory or (ii) $12 million. Our borrowing base was $30.0 million at September 26, 2003 and our availability under the revolving loan commitment was $14.7 million at September 26, 2003. The maturity date of the Credit Agreement is February 28, 2005. For the nine months ended September 26, 2003 the weighted average annual interest rate on our long-term debt was 3.4 percent.

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On July 24, 2003, we entered into a second amendment to the Credit Agreement with the Lenders, to waive our non-compliance with the funded debt to EBITDA Ratio and the minimum EBITDA financial covenants for the quarter ended June 27, 2003, and to adjust the financial covenants related to minimum EBITDA levels. On September 25, 2003, we entered into a third amendment to our Credit Agreement with the Lenders to amend the definition of EBITDA with respect to the minimum EBITDA covenant. Adjusted EBITDA is now defined as EBITDA for the period comprising the last four most recently completed fiscal quarters, plus the following items: (1) restructuring, non-recurring, one-time charges, (2) non-cash expenses, and (3) pro forma adjustments for acquisitions, each as mutually agreed upon by us and the Lenders. Our financial covenants under the amended Credit Agreement are as follows:

	•		Maintain a fixed charge coverage ratio of not less than 1.10 to 1.00.
	•		Maintain a funded debt to EBITDA ratio of less than 2.75 to 1.00.
	•		Maintain a minimum adjusted EBITDA level, as defined in the third amendment to our Credit Agreement which is noted above, of $11.6 million for our third quarter of 2003, $12.0 million for the quarter ending December 31, 2003, increasing in increments of $250,000 during each quarter of 2004 to $13.0 million for the quarter ending December 31, 2004 and each quarter thereafter.

Furthermore, without prior consent of our lenders, the Credit Agreement limits, among other things, the payment of dividends to $.6 million, capital expenditures to $8.0 million, the incurrence of additional debt and restricts the sale of certain assets and merger or acquisition activities. We were in compliance with the above financial covenants for the quarter ended September 26, 2003.

Note 5: Goodwill

The carrying amount of goodwill by segment and activity during the nine months ended September 26, 2003, is as follows:

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Note 6: Stock-Based Compensation

At September 26, 2003, we had three stock compensation plans, which are described more fully in Note 9 to the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2002. We account for those plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB No. 25, no stock-based employee compensation cost relating to stock option awards is reflected in our net income, as all options under our plans had an exercise price equal to the market value of our common stock on their date of grant. Stock-based compensation, representing grants to non-employee directors and vesting of performance-based restricted stock awards was $0 and $.1 million for the quarters ended September 26, 2003 and September 27, 2002, respectively. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-based Compensation — Transition and Disclosure,” to stock-based employee compensation:

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Note 7: Segment and Related Information

The table below presents information about reportable segments.

For the Quarter

For the Nine Months

Note 8: Contingencies

In December 1999, the IRS completed an examination of our corporate income tax returns for the years 1995 through 1997 and issued a Notice of Proposed Adjustment which assessed additional taxes of $5.2 million, excluding interest. This assessment represents a total of $14.0 million of adjustments to taxable

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income for the years under review. The proposed adjustments relate to the deductibility of restructuring and other reserves for continuing and discontinued operations and the utilization of foreign net operating losses associated with discontinued operations. We disagreed with the position taken by the IRS and filed a formal protest of their proposed adjustments on April 6, 2000. We are working through the IRS appeals process to resolve open issues.

We believe that we are adequately reserved for potential liabilities that could arise from the resolution of the IRS’ assessment for the years 1995 through 1997. While we believe that we have adequately provided for tax liabilities through September 26, 2003, we can provide no assurances that we will prevail in our defense against adjustments proposed in pending or future federal and state examinations. In addition, we can provide no assurances that the ultimate resolution of open tax matters will not be either in excess of or less than current reserves.

In August and September 1996, two individual plaintiffs filed lawsuits in the Circuit Court of Cook County, Illinois against Nashua Corporation, Cerion Technologies, Inc., certain directors and officers of Cerion, and our underwriter, on behalf of all persons who purchased the common stock of Cerion between May 24, 1996 and July 9, 1996. These two complaints were consolidated. In March 1997, the same individual plaintiffs joined by a third plaintiff filed a Consolidated Amended Class Action Complaint. The amended consolidated complaint alleged that, in connection with Cerion’s initial public offering, the defendants issued materially false and misleading statements and omitted the disclosure of material facts regarding, in particular, certain significant customer relationships. In October 1997, the Circuit Court on motion by the defendants, dismissed the consolidated complaint. The plaintiffs filed a Second Amended Consolidated Complaint alleging similar claims as the first consolidated complaint seeking damages and injunctive relief. On May 6, 1998, the Circuit Court, on motion by the defendants, dismissed with prejudice the second amended consolidated complaint. The plaintiffs filed with the Appellate Court an appeal of the Circuit Court’s ruling. On November 19, 1999, the Appellate Court reversed the Circuit Court’s ruling that dismissed the second amended consolidated complaint. The Appellate Court ruled that the second amended consolidated complaint represented a valid claim and sent the case back to the Circuit Court for further proceedings. On December 27, 1999, we filed a Petition with the Supreme Court of Illinois. In that Petition, we asked the Supreme Court of Illinois to determine whether the Circuit Court or the Appellate Court is correct. Our Petition was denied and the case was sent to the Circuit Court for trial. Discovery has been completed, but no date has been set for trial and pre-trial motions. Non-binding mediation discussions were held in November 2002 without resolving the dispute. A hearing was held in October 2003 to review outstanding motions to (1) dismiss the case on summary judgment and (2) certify the case for class action. The court has not yet ruled on the motions. We believe that the lawsuit is without merit and will continue to defend ourselves in this matter. We also believe that we will receive the value of our 37.1 percent ownership in the Cerion Liquidating Trust, which our ownership was valued at $.9 million on an after-tax basis at September 26, 2003. Our investment in Cerion is included under other assets in our Consolidated Balance Sheet.

We are involved in certain environmental matters and have been designated by the Environmental Protection Agency, referred to as the EPA, as a potentially responsible party for certain hazardous waste sites. In addition, we have been notified by certain state environmental agencies that some of our sites not addressed by the EPA require remedial action. These sites are in various stages of investigation and remediation. Due to the unique physical characteristics of each site, the technology employed, the extended timeframes of each remediation, the interpretation of applicable laws and regulations and the financial viability of other potential participants, our ultimate cost of remediation is difficult to estimate. Accordingly, estimates could either increase or decrease in the future due to changes in such factors. At September 26, 2003, based on the facts currently known and our prior experience with these matters, we have concluded that there is at least a reasonable possibility that site assessment, remediation and monitoring costs will be incurred. We have estimated a range for these costs of $.7 million to $1.4

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million. These estimates could increase if other potentially responsible parties or our insurance carriers are unable or unwilling to bear their allocated share and cannot be compelled to do so. At September 26, 2003, our accrual balances relating to environmental matters were $.8 million. Based on information currently available, we believe that it is probable that the major potentially responsible parties will fully pay the costs apportioned to them. We believe that our remediation expense is not likely to have a material adverse effect on our consolidated financial position or results of operations.

On May 30, 2003, Ricoh Company Ltd. filed a civil action in the U.S. District Court for the District of New Jersey, Case Number 03-CV-2612, against several defendants, including the largest customer of our Imaging Supplies segment and a Taiwanese company that provides essential product components. The complaint alleges multiple counts of patent infringement, trademark infringement, unfair competition and copyright infringement by the defendants. On October 17, 2003, we were added as a co-defendant in an amended complaint to the lawsuit. The allegations arise from the sale and distribution of Ricoh compatible toner products. We believe the claims against us are without merit and we intend to vigorously defend this matter.

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

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Our net sales increased 1.8 percent to $74.1 million in the third quarter of 2003 compared to the prior year quarter. Our gross margin percentage decreased during the third quarter of 2003 over the prior year quarter. Our selling and distribution expenses decreased, while our administrative expenses increased during the third quarter of 2003 over the prior year quarter. Our Label Products, Specialty Paper Products and Imaging Supplies segments all operated profitably during the third quarter of 2003.

Our net sales increased 2.6 percent to $213.7 million in the first nine months of 2003 compared to the prior year period. Our gross margin percentage decreased during the third quarter of 2003 over the prior year quarter. Our selling and distribution expenses decreased, while our administrative expenses increased during the first nine months of 2003 over the prior year period. Our Label Products, Specialty Paper Products, and Imaging Supplies segments all operated profitably for the first nine months of 2003. Our results for the first nine months of 2003 include contributions from our strategic acquisitions which consist of the assets of Computer Imaging Supplies, known as CIS, used in the fraud prevention business acquired in April of 2002, certain assets of Dietzgen LLC, used in the wide-format business acquired in June of 2002, and the acquisition of the assets of The Label Company, a supplier of supermarket, promotional and product identification labels acquired in February of 2003. These acquisitions expanded our product lines and helped us increase plant utilization.

Recent Developments

	•		On February 7, 2003, we acquired the assets and assumed certain liabilities of The Label Company from Bunzl Distribution and signed a multi-year agreement to supply Bunzl with label products. The Label Company has been a supplier of supermarket, promotional and product identification labels primarily for Bunzl and for other customers. We believe that this acquisition adds flexibility to our label manufacturing operations, provides additional volume to our coating facility within our Specialty Paper Products segment and enhances our relationship with a valued and long-standing customer. The Label Company had 2002 sales of approximately $9.0 million. Operating activity relating to the assets of The Label Company is reported under our Label Products segment from the date of acquisition.
	•		On February 25, 2003, we entered into a strategic agreement with Parlex Corporation to cooperate in the development of flexible circuit technology incorporating proprietary printing and plating technologies. The agreement creates an organization, Stratos Technology, LLC, of which we own 50 percent, that will draw on both parties’ relative expertise in ink and printed circuit technology, label converting and the design, application and production of flexible circuits. Under the agreement, Stratos Technology will work to develop innovative products for use in the automotive, cellular and radio identification (RFID) markets.

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Results of Operations For the Third Quarter of 2003 Compared to the Third Quarter of 2002

Our net sales increased $1.3 million, or 1.8 percent, to $74.1 million for the third quarter of 2003 compared to $72.8 million for the prior year quarter. The increase was due to increased sales of approximately $2.1 million in our Specialty Paper Products segment and $.3 million in our Label segment, partially offset by a decrease in sales in our Imaging Supplies segment of approximately $.5 million.

Our gross margin percentage decreased from 20.0 percent for the third quarter of 2002 to 18.9 percent for the third quarter of 2003 due to lower margin percentages in each of our segments. Gross margin decreased $.5 million to $14.1 million in the third quarter of 2003 compared to $14.6 million in the prior year quarter due primarily to pricing pressures in the Label Products and Specialty Paper Products segments and lower sales volume in the Imaging Supplies segment.

Selling and distribution expenses decreased $.7 million for the third quarter of 2003 compared to the prior year quarter primarily due to lower spending in each of our segments. As a percent of sales, selling and distribution expenses decreased from 9.9 percent in the third quarter of 2002 to 8.8 percent in the third quarter of 2003.

General and administrative expenses increased $.2 million to $5.3 million for the third quarter of 2003 as compared to the third quarter of 2002. Increases of $.5 million in our Specialty Paper Products segment, and a combined increase of $.2 million in our Imaging Supplies and Label Products segments, were partially offset by a reduction in our corporate expenses of $.5 million. The decrease in corporate expenses in the third quarter of 2003 was primarily due to a reduction in pension administration costs and a reduction in corporate staff that occurred in the second quarter of 2003. As a percentage of sales, general and administrative expenses increased from 6.9 percent for the third quarter of 2002 to 7.1 percent for the third quarter of 2003.

Research and development expenses decreased by $.2 million to $.6 million for the third quarter of 2003 compared to the same period last year primarily due to a shift in costs from research and development to manufacturing in our Specialty Paper Products segment.

Our pretax income was $1.2 million for the third quarter of 2003, compared to pretax income of $1.1 million for the third quarter of 2002. The $.1 million increase is primarily due to a decrease in selling and administration costs, partially offset by a decrease in gross margin, in each of our segments.

The estimated annual effective income tax rate was 40.2 percent for the third quarter of 2003 and 40.0 percent for the third quarter of 2002. The estimated rates were higher than the U.S. statutory rate principally due to the impact of state income taxes.

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Net income for the third quarter of 2003 was $.7 million, or $.12 per share, unchanged from the third quarter of 2002.

Results of Operations by Reportable Segment For the Third Quarter of 2003 Compared to the Third Quarter of 2002

Label Products Segment

Net sales in our Label Products segment increased $.3 million to $25.6 million in the third quarter of 2003 from $25.3 million in the third quarter of 2002. Sales generated from the acquisition of the assets of The Label Company were $2.3 million for the third quarter of 2003. These sales, along with a $.6 million increase in automatic identification label sales, more than offset decreases in sales of $2.0 million in the supermarket thermal product line, $.5 million in the ticket product line and $.1 million in other product lines. The increase in automatic identification label sales was the result of new business gained from a five-year contract executed in the fourth quarter of 2002. The decrease in the supermarket thermal product line sales was due to the loss of a major customer earlier in the year, as well as pricing pressures resulting from continued overcapacity in the label industry. The decrease in sales in the ticket product line is primarily due to the loss of a major cinema customer.

Gross margin for our Label Products segment decreased by $.4 million to $4.4 million in the third quarter of 2003 from $4.8 million in the third quarter of 2002. Gross margin percentage decreased from 19.1 percent in the third quarter of 2002 to 17.2 percent in the third quarter of 2003. The decrease in the margin percentage was due to unfavorable product mix as well as the impact of pricing pressures attributable to overcapacity in the paper and label industries.

Selling and distribution expenses for our Label Products segment declined $.4 million in the third quarter of 2003 compared to the third quarter of 2002 primarily due to a decrease in expenses related to sales distribution and lower direct selling expenses. Our distribution expense decreased following our decision to exit an outside warehouse and consolidate inventory for distribution within our own plant network. As a percentage of sales, selling and distribution expenses declined from 8.2 percent for the third quarter of 2002 to 6.7 percent for the third quarter of 2003.

General and administrative expenses for our Label Products segment increased $.1 million in the third quarter of 2003 compared to the third quarter of 2002. As a percentage of sales, general and administrative expenses increased from 4.0 percent for the third quarter of 2002 to 4.2 percent for the third quarter of 2003.

Our Label Products segment’s pretax income decreased $.2 million to $1.5 million in the third quarter of 2003 compared to the prior year period. The acquired Label Company business contributed positively to pretax income in the quarter.

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Specialty Paper Products Segment

Our Specialty Paper Products segment sales increased $2.1 million, or 5.1 percent, to $44.4 million for the third quarter of 2003 compared to the same period of 2002. The increase in sales over the prior year quarter was related to increases of $4.0 million of thermal products, $1.1 million of retail products, and $.4 million of wide format products, which were partially offset by sales decreases of $1.0 million for fraud prevention products, $.7 million for bond, carbonless and fax paper products, $.6 million for ticket and tag products, $.3 million for heat seal products, and a net decrease of $.8 million for other product lines. The increase in retail sales was primarily due to a major customer’s increased purchases of our IBM branded product. The continued shift in printing technologies from impact to thermal printers resulted in lower sales of bond and carbonless products and increased thermal product sales. The decrease in sales of our fraud prevention products was primarily due to lower sales to two of our major customers.

Gross margin for our Specialty Paper Products segment increased to $8.6 million for the third quarter of 2003 from $8.3 million for the same period of 2002. The gross margin percentage decreased from 19.7 percent for the third quarter of 2002 to 19.3 percent for the third quarter of 2003 due primarily to pricing pressures in thermal products and lower absorption of production costs due to the decrease in production volume in our paper coating business.

Selling and distribution expenses for our Specialty Paper Products segment decreased $.2 million to $4.4 million in the third quarter of 2003 compared to the same period in 2002. Selling and distribution expenses, as a percentage of sales decreased to 10.0 percent for the third quarter of 2003 from 10.9 percent for the same period in 2002.

General and administrative expenses for our Specialty Paper Products segment increased $.5 million to $2.3 million in the third quarter of 2003 compared to the same period last year. The increase was primarily due to severance costs of $.3 million related to management changes implemented during the third quarter of 2003. General and administrative expenses, as a percentage of sales, increased from 4.2 percent for the third quarter of 2002 to 5.2 percent for the same period in 2003.

Research and development expenses decreased by $.2 million to $.2 million in the third quarter of 2003 compared to the same period last year primarily due to a shift in cost from research and development to manufacturing.

The segment’s pretax income for the third quarter of 2003 remained unchanged, compared to the prior period, at $1.5 million.

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Imaging Supplies Segment

Our Imaging Supplies segment sales declined $.5 million from $5.9 million for the third quarter of 2002 to $5.4 million for the third quarter of 2003. The decline in sales was primarily due to lower sales of Ricoh and Xerox compatible toners.

The gross margin percentage for our Imaging Supplies segment decreased from 23.6 percent for the third quarter of 2002 to 19.4 percent for the third quarter of 2003. Gross margin for the third quarter of 2003 was $1.1 million, compared to $1.4 million for the third quarter of 2002. The $.3 million decline in gross margin was primarily attributable to the lower sales volume and lower absorption of production costs due to the decrease in production volume.

Selling and distribution expenses for our Imaging Supplies segment declined $.2 million in the third quarter of 2003. The decrease was primarily attributable to lower distribution expense related to the lower sales volume as well as lower headcount. As a percent of sales, selling and distribution expenses decreased from 9.3 percent for the third quarter of 2002 to 6.4 percent for the third quarter of 2003.

General and administrative expenses for our Imaging Supplies segment increased $.1 million in the third quarter of 2003 compared to the same period in 2002. General and administrative expenses, as a percentage of sales, increased from 3.0 percent for the third quarter of 2002 to 4.7 percent for the third quarter of 2003.

Research and development expenses remained unchanged, compared to the prior period, at $.4 million.

The segment’s pretax income was $.1 million for the third quarter of 2003, down from pretax income of $.3 million for the third quarter of 2002.

Results of Operations For Nine Months Year-to-Date 2003 Compared to 2002

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Our net sales increased $5.5 million, or 2.6 percent, to $213.7 million for the first nine months of 2003 compared to $208.2 million for the same period in the prior year, primarily due to increased sales in our Specialty Paper Products and Label Products segment partially offset by a decrease in sales in our Imaging Supplies segment.

Our gross margin percentage decreased from 20.1 percent for the first nine months of 2002 to 18.7 percent for the first nine months of 2003 due to lower margins in all of our segments. Gross margin decreased $1.9 million to $40.0 million in the first nine months of 2003 compared to $41.9 million in the first nine months of 2002 due primarily to an unfavorable product mix, pricing pressures, and volume declines within some of our product lines.

Selling and distribution expenses decreased $.4 million to $20.2 million for the first nine months of 2003 as compared to the same period last year. Increases of $.8 million in expenses in the Specialty Paper Products segment were more than offset by reductions of $.4 million in the Imaging Supplies segment and $.8 million in the Label Products segment. As a percent of sales, selling and distribution expenses decreased to 9.5 percent for the first nine months of 2003 from 9.9 percent for the same period last year.

General and administrative expenses increased $.5 million to $15.1 million for the first nine months of 2003. Increases of $1.1 million in expenses in our Specialty Paper Products segment were offset by reductions of $.1 million in expenses in our Imaging Supplies and Label Products segments and $.5 million in our corporate expenses. The increase in our Specialty Paper Products segment was due to incremental expenses associated with the Dietzgen product line acquired in June 2002 and severance cost related to reductions in workforce which were implemented during the second and third quarters of 2003. The decrease in corporate expenses for the first nine months of 2003 was related to lower legal fees, training costs, staffing and pension administration costs as compared to the same period of 2002, offset by increased expenses relating to severance costs associated with the reduction of corporate staff. As a percent of sales, general and administrative expenses were 7.1 percent for the first nine months of 2003 compared to 7.0 percent for the same period in 2002.

Research and development expenses decreased by $.5 million to $1.9 million in the first nine months of 2003 compared to the same period in the prior year primarily due to a shift in costs from research and development to manufacturing in our Specialty Paper Products segment.

Our pretax income was $1.7 million for the first nine months of 2003, compared to pretax income of $3.2 million for the first nine months of 2002. The decrease in our pretax income was due to lower profitability in all of our segments, partially offset by lower corporate expenses.

The estimated annual effective income tax rate was 40.0 percent for the first nine months of 2003 and 2002. The estimated rates were higher than the U.S. statutory rate principally due to the impact of state income taxes.

Net income was $1.0 million for the first nine months of 2003, or $.17 per share, compared to $1.9 million, or $.33 per share, in the first nine months of 2002.

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Results of Operations by Reportable Segment For Nine Months Year-to-Date 2003 Compared to 2002

Label Products Segment

Net sales in our Label Products segment increased $.5 million to $74.7 million in the first nine months of 2003 as compared to the same period last year. Sales generated from the acquired Label Company business were $5.8 million for the first nine months of 2003. These sales, along with $2.2 million of increased automatic identification label sales, more than offset a decrease in sales of $5.0 million in the supermarket thermal product line, $.7 million in the retail shelf product line, $.6 million in the EDP product line, $.6 million in the ticket product line, $.3 million in the inform product line and $.3 million in other product lines. The increase in automatic identification label sales was the result of new business resulting from a five-year contract executed in the fourth quarter of 2002. The lower supermarket sales were due to the loss of a major customer, as well as continued pricing pressures due to overcapacity in the label industry. The decrease in retail shelf sales was due to an inventory reduction by a major customer in the first quarter of 2003. The decrease in the ticket product line sales is primarily due to the loss of a major cinema customer. Our sales in the EDP product line were impacted by a sluggish economy, changing technology and lower sales to charitable organizations.

Gross margin for the Label Products segment decreased by $1.1 million to $12.4 million in the first nine months of 2003, from $13.5 million for the first nine months of 2002. Gross margin percentage decreased from 18.2 percent in the first nine months of 2002 to 16.6 percent in the first nine months of 2003. The decrease in the margin percentage was primarily due to unfavorable product mix and pricing pressures due to the overcapacity in the label industry, partially offset by improved manufacturing efficiencies and material cost reductions.

Selling and distribution expenses for our Label Products segment declined $.8 million compared to the first nine months of 2002. As a percentage of sales, selling and distribution expenses declined from 8.3 percent for the first nine months of 2002 to 7.2 percent for the same period of 2003. The reduction resulted primarily from lower direct selling expenses and lower freight costs.

General and administrative expenses for our Label Products segment remained unchanged at $2.9 million for the first nine months of 2003 and 2002. As a percent of sales, general and administrative expenses declined to 3.8 percent for the first nine months of 2003 from 3.9 percent for the same period in 2002.

Our Label Products segment’s pretax income decreased $.2 million to $4.1 million in the first nine months of 2003, from $4.3 million in the prior year period.

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Specialty Paper Products Segment

Our Specialty Paper Products segment reported an $8.8 million, or 7.5 percent, increase in sales for the first nine months of 2003 compared to the same period in 2002 to $126.1 million. Increased sales of $5.1 million of wide format products, $7.5 million of thermal products, $1.3 million of our fraud prevention products, $.3 million of ticket and tag products were partially offset by a $2.5 million decrease in sales of bond, carbonless and fax paper products, $1.0 million decrease in sales volume of cut-sheet paper products, $.6 million decrease in sales of heat seal products, and a net decrease in sales of $1.3 million of other product lines. The increase in sales of our wide format products resulted from the Dietzgen product line acquired in June 2002. The increase in the fraud prevention product sales is related to the Computer Imaging Supplies acquisition in April 2002. The continued shift in printing technologies from impact to thermal printers resulted in lower sales of bond and carbonless products and increased thermal product sales.

Gross margin for our Specialty Paper Products segment increased $.5 million to $24.4 million for the first nine months of 2003 from the same period last year. The gross margin percentage decreased from 20.4 percent for the first nine months of 2002 to 19.3 percent for the first nine months of 2003. The lower gross margin percentage was due primarily to pricing pressures in the thermal product line and an unfavorable mix of products sold.

Selling and distribution expenses for our Specialty Paper Products segment increased $.9 million in the first nine months of 2003 compared to the same period in the prior year primarily due to higher freight expenses. As a percentage of sales, selling and distribution expenses decreased from 10.9 percent to 10.8 percent for the first nine months of 2003.

General and administrative expenses for our Specialty Paper Products segment increased $1.1 million to $6.0 million in the first nine months of 2003 compared to the same period in the prior year primarily due to severance costs of $.4 million and increased expenses associated with the two acquired product lines. As a percent of sales, general and administrative expenses increased from 4.2 percent for the first nine months of 2002 to 4.8 percent for the first nine months of 2003.

Research and development expenses decreased by $.6 million to $.7 million in the first nine months of 2003 compared to the same period in the prior year due primarily to a shift in cost from research and development to manufacturing.

The segment’s pretax income for the first nine months of 2003 decreased $1.1 million to $3.8 million, compared to $4.9 million in the first nine months of 2002.

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Imaging Supplies Segment