UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended

[  ] 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

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

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.

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

As of July 30, 2004, the Company has 6,153,634 shares of Common
Stock, par value $1.00 per share, outstanding.

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NASHUA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes.

-2-

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

See accompanying notes.

-3-

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

See accompanying notes.

-4-

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, 2003.

Note 2: Acquired Intangible Assets

Details of acquired intangible assets are as follows:

-5-

Note 3: Postretirement Benefits

Net periodic pension and postretirement benefit (income) costs for the quarters and six months ended July 2, 2004 and June 27, 2003 from continuing operations for the plans, exclusive of gains and losses from freezing and curtailing pension and postretirement plans, includes the following components:

At December 31, 2003, we estimated a contribution of $.8 million to be paid into the plan in 2004. Legislative changes allowed companies to delay contributions, therefore, we were not required to fund the plan in the first or second quarters of 2004 and do not anticipate a payment for the remainder of 2004.

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 the Credit Agreement are collateralized by a security interest in our accounts receivable, inventories, certain machinery and equipment and real estate located in Merrimack, NH. At July 2, 2004, the approximate fair market value of these assets was $79.9 million. 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 July 2, 2004, and our availability under the revolving loan commitment was $5.2 million at July 2, 2004. For the six months ended July 2, 2004, the weighted average annual interest rate on our long-term debt was 3.3 percent.

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 the 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

-6-

expenses, and (3) pro forma adjustments for acquisitions, each as mutually agreed upon by us and the Lenders. On December 30, 2003, we entered into a consent and fourth amendment to the Credit Agreement adding the provision to the funded debt to EBITDA ratio to be computed as the funded debt to adjusted EBITDA ratio for the computation period ended December 31, 2003 only.

We entered into a fifth amendment to the Credit Agreement, effective March 31, 2004, that:

	•		extended the term of the credit facility to February 28, 2007;
	•		modified the definition of fixed charge coverage ratio to provide that (1) the ratio is based on our adjusted EBITDA and (2) payments of principal of funded debt, included in the calculation of the fixed charge coverage ratio, are limited to the last four principal payments;
	•		replaced the definition and covenant relating to the total debt to EBITDA ratio with a definition and covenant relating to the funded debt to adjusted EBITDA ratio;
	•		eliminated the covenant relating to adjusted EBITDA; and
	•		adjusted the interest rate on loans outstanding under the credit facility to provide that the interest rate is based on the funded debt to adjusted EBITDA ratio and that the interest rate is, at our option, either (1) a range from zero to .25 percent over the base rate (prime) or (2) a range from 1.5 percent to 2.0 percent over LIBOR.

We are also subject to a non-use fee for any unutilized portion of our revolving loan that ranges from .25 percent to .375 percent based on our funded debt to adjusted EBITDA ratio. 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 adjusted EBITDA ratio of less than 2.75 to 1.00.

Furthermore, without prior consent of our lenders, the amended 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 as of July 2, 2004.

The aggregate amounts of maturities on our long-term debt are as follows:

-7-

Note 5: Stock-Based Compensation

On May 4, 2004 our Board of Directors adopted the 2004 Value Creation Incentive Plan in which restricted stock awards have been granted to certain key executives and are earned only upon achievement of certain target average closing prices of our common stock over the 40-consecutive trading day period which ends on the third anniversary of the date of grant, such that 33 percent of such shares shall vest if the 40-day average closing price of at least $13.00 but less than $14.00 is achieved, 66 percent of such shares shall vest if the 40-day average closing price of at least $14.00 but less than $15.00 is achieved, and 100 percent of such shares shall vest if the 40-day average closing price of $15.00 or greater is achieved. The restricted shares vest upon a change of control if the share price at the date of the change in control exceeds $13.00. Shares of the restricted stock are forfeited if the specified closing prices of our common stock are not met.

In addition to our newly adopted Value Creation Incentive Plan, at July 2, 2004, 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, 2003. 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 July 2, 2004 and June 27, 2003, 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:

-8-

Note 6: Segment and Related Information

The following table presents information about our reportable segments.

For the Quarter:

For the Six Months:

Note 7: 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 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

-9-

the IRS and filed a formal protest of their proposed adjustments on April 6, 2000. We continue to work 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.

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. On October 8, 2003, the Circuit Court heard motions on a Summary Judgment motion and a class action certification motion. We are awaiting a decision by the Circuit Court which is expected to rule on these 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 July 2, 2004. Our investment in Cerion is included under other assets in our Consolidated Balance Sheet.

On May 30, 2003, Ricoh Company, Ltd. and affiliated companies filed a suit in the U.S. District Court for the District of New Jersey against several defendants, including the largest customer of our Imaging Supplies segment and another company who is a supplier to the Imaging Supplies segment. The Complaint alleged multiple counts of patent infringement, trademark infringement, trademark counterfeiting, false advertising, and unfair competition by the defendants. On October 17, 2003, Ricoh amended the Complaint and added us as an additional co-defendant in the suit. The allegations arose from the sale and distribution of Ricoh compatible toner products. We filed a legal answer to the Complaint in December 2003, and the parties are now engaged in discovery. Our attorneys have reviewed the background and history of the lawsuit and are continuing to develop our legal position and defense in this matter. We believe we have valid defenses and intend to fully defend our company in this matter. We are cooperating with the other defendants in the defense of this matter. We believe we may have potential recourse against certain co-defendants in this matter.

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 July 2, 2004, based on the facts currently known and our prior experience with these matters, we have concluded that it is probable that site assessment, remediation and monitoring costs will be incurred. We have estimated a range for these costs of $.4 million to $1.0 million for continuing operations. 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 July 2, 2004, our accrual balance relating to environmental matters was $.6 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.

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.

-10-

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

Overview

Our net sales increased slightly from $72.4 million to $72.6 million for the second quarter of 2004. Our gross margin percentage increased from 18.5 percent in the second quarter of 2003 to 18.7 percent in the second quarter of 2004. Our selling and distribution expenses and administrative expenses collectively decreased from $12.2 million in the second quarter of 2003 to $11.1 million in the second quarter of 2004. Our Label Products and Specialty Paper Products segments operated profitability during the second quarter, while our Imaging Supplies segment incurred a $.1 million loss.

Our net sales increased 3.0 percent or $4.3 million for the first six months of 2004 compared to the first six months of 2003. Our gross margin percentage increased from 18.6 percent to 19.2 percent for the first six months of 2004 compared to the first six months of 2003. Our selling and distribution expenses decreased, while our administrative expenses increased during the first six months of 2004 compared to the first six months of 2003. Our Label Products, Specialty Paper Products and Imaging Supplies segments all operated profitably during the first six months of 2004 and, each segment improved its profitability compared to the first six months of 2003.

Our results for the first six months of 2004 include contributions from our strategic acquisitions of the assets of The Label Company, primarily a supplier of supermarket labels acquired in February of 2003 and a small supermarket product line acquired in November of 2003. Operating activity relating to these acquisitions are reported under our Label Products segment from the date of acquisition.

During 2003 we took actions to reduce our cost structure. These cost reductions had a significant positive impact on our 2004 results.

There are preliminary signs of an improved business environment, however, we believe that overcapacity and intense competition continues to characterize the paper and label industry segments in which we are active. We continue the focus on initiatives which provide our customer base with higher value products and services. We will continue our focus on cost containment initiatives, investments that make our business more efficient and pursue technologies, such as radio frequency identification products or RFID, which are of growing importance to our customer base.

Consolidated Results of Operations

Our net sales increased $.2 million for the second quarter of 2004 and $4.3 million for the first six months of 2004 when compared to the prior year periods. Increases in our Label Products and Imaging Supplies segment were partially offset by decreases in our Specialty Paper Products segment during the second quarter of 2004. The increase for the first six months of 2004 was due to increased sales in all of our segments.

Our gross margin percentage increased to 18.7 percent for the second quarter of 2004 compared to 18.5 percent in the second quarter of 2003. The gross margin increase in our Label Products segment offset margin decreases in the Specialty Paper and Imaging Supplies segments during the second quarter. Our gross margin percentage increased to 19.2 percent for the first six

-11-

months of 2004 from 18.6 percent compared to the prior year period. Increases in the margin in our Label Products and Specialty Paper Products segments, offset the decreased margin in our Imaging Supplies segment during the first six months of 2004. Gross margin increased $.2 million for the second quarter of 2004 and $1.5 million for the first six months of 2004 when compared to the prior year periods.

Selling and distribution expenses decreased $.7 million during the second quarter of 2004 and $1.1 million for the first six months of 2004 when compared to the prior year periods. The decreases were primarily due to lower selling expenses, which were partially offset by higher freight and warehousing costs due to increased sales volume and an increase in freight rates. As a percent of sales, selling and distribution expenses decreased from 9.8 percent in the first six months of 2003 to 8.8 percent in the first six months of 2004.

General and administrative expenses decreased $.4 million for the second quarter of 2004 and increased $.2 million for the first six months of 2004 when compared to the prior year periods. The decrease in expenses for the second quarter of 2004 was due to a $.4 million decrease in corporate expenses and a $.2 million decrease in costs in our Specialty Paper Products segment, which were partially offset by a $.2 million increase in expenses in our Label Products and Imaging Supplies segments. The lower corporate expenses were mainly attributable to lower salary and fringe benefit expense due to headcount reductions and severance expense which were incurred in the second quarter of 2003. The increase for the first six months of 2004 was due to higher segment expenses, which were partially offset by lower corporate expenses. The decrease in corporate expenses in the first six months of 2004 was primarily due to lower salary and fringe benefit expenses due to headcount reductions that occurred in 2003 and lower expenses related to restricted stock options which vested in 2003, which were partially offset by increased employee incentive expenses and higher director fees. As a percent of net sales, general and administrative expenses decreased slightly from 7.0 percent for the first six months of 2003 to 6.9 percent for the first six months of 2004.

Research and development expenses decreased by $.1 million in the second quarter of 2004, and $.2 million for the first six months of 2004 when compared to the prior year periods primarily due to lower expenses in our Specialty Paper Products and Imaging Supplies segments.

Our pretax income was $1.5 million for the second quarter of 2004, compared to $.2 million for the prior year quarter. Our pretax income was $3.0 million for the first six months of 2004 compared to $.5 million for the prior year period. The $1.3 million increase in the second quarter of 2004 primarily was attributable to slightly higher sales volume, higher gross margins, lower selling and distribution expenses, lower general and administrative expenses, and lower research and development expenses, all as discussed above. The $2.5 million increase in the first six months of 2004 was due to higher sales volume, higher margins, lower selling and distribution expenses and lower research and development expenses partially offset by higher general and administrative expenses, all as discussed above.

The estimated annual effective income tax rate was approximately 39 percent for the second quarter of 2004 and 2003 and for the first six months of 2004 and 2003, respectively. The estimated rates were higher than the U.S. statutory rate principally due to the impact of state income taxes.

Net income for the second quarter of 2004 was $.9 million, or $.16 per share, compared to $.1 million, or $.02 per share compared to the second quarter of 2003. Net income for the first six months of 2004 was $1.9 million, or $.31 per share, compared to $.3 million, or $.05 per share in the prior year period.

-12-

Results of Operations by Reportable Segment

Label Products Segment

Net sales in our Label Products segment were $26.0 million for the second quarter of 2004 compared to $25.9 million for the second quarter of 2003. Net sales were $51.8 million for the first six months of 2004 compared to $49.1 million for the first six months of 2003.

	•		The $.1 million, or .5 percent increase in the second quarter of 2004 was driven mainly by $.3 million in supermarket scale product line sales, partially offset by $.2 million in lower inform product line sales.
	•		The $2.7 million, or 5.5 percent increase in the first six months of 2004 was driven by $1.3 million in supermarket scale product line sales, $1.0 million in sales in our automatic identification label product line, and $1.0 million in miscellaneous other product lines. The increases were partially offset by a $.4 million decline in our EDP label product line and a $.2 million decline in other miscellaneous product lines. The increased sales in our supermarket scale product line is primarily a result of $1.0 million of incremental sales from the acquisition of the assets of The Label Company on February 7, 2003. The increase in automatic identification label sales resulted primarily from business gained from a five-year contract with a major customer executed in the fourth quarter of 2002 and extended through 2009 as of the fourth quarter of 2003.

Gross margin for the Label Products segment increased $.9 million for the second quarter of 2004 and $1.3 million for the first six months of 2004. The gross margin percentage increased from 15.0 percent for the second quarter of 2003 to 18.4 percent for the second quarter of 2004. The gross margin increased from 16.3 percent for the first six months of 2003 to 18.1 percent for the first six months of 2004. The increase in the gross margin percentage was primarily related to favorable product and customer mix as well as reduced raw material costs and improved manufacturing performance partially through the successful implementation of new printing and finishing equipment.

Selling and distribution expenses for our Label Products segment declined $.3 million in the second quarter of 2004 and $.5 million for the first six months of 2004 when compared to the prior year periods. As a percentage of sales, selling and distribution expenses declined to 6.0 percent for the first six months of 2004 compared to 7.3 percent for the first six months of 2003. The decrease in the second quarter expense was mainly due to headcount reductions which occurred in 2003. The decrease for the first six months of 2004 was primarily due to the headcount reductions as well as a bad debt recovery in the first quarter of 2004, which offset higher freight and commission expenses due to increased sales volume and an increase in freight rates.

General and administrative expenses for our Label Products segment increased $.1 million in the second quarter of 2004 and $.2 million for the first six months of 2004. As a percentage of sales, general and administrative expenses increased from 3.7 percent for the first six months of 2003 to 3.9 percent for the first six months of 2004. The increases in the second quarter and first six months of 2004 were both primarily due to increased pension expense related to defined benefit pension plans and employee incentive expenses.

The pretax income for our Label Product’s segment increased $.9 million to $2.0 million in the second quarter of 2004 compared to the second quarter of 2003. The pretax income increased $1.3 million to $3.9 million for the first six months of

-13-

2004 compared to $2.6 million for the first six months of 2003. The improvement in pretax for this segment was mainly attributable to increased sales, improved margins and the containment of selling expenses.

Specialty Paper Products Segment

Net Sales for our Specialty Paper Products segment were $42.1 million for the second quarter of 2004 compared to $42.8 million for the second quarter of 2003. Net sales were $82.4 million for the first six months of 2004 compared to $81.6 million for the first six months of 2003. During the third quarter of 2003, we exited the cut sheet paper and transparencies business.

	•		The $.7 million, or 1.6 percent decrease in sales in the second quarter was primarily related to decreases of $1.7 million in our thermal ticket and tag product line, $1.6 million in our retail product line, $1.0 million in our cut-sheet paper and transparencies product line and $1.5 million in other miscellaneous product lines. The sales decreases were partially offset by sales increases of $2.6 million of thermal products for point-of-sale applications and $2.5 million in our wide-format product line.
	•		The $.8 million, or 1.0 percent increase in sales in the first six months of 2004 was primarily due to sales increases of $4.6 million in our wide-format product line, $4.4 million in our thermal product line for both point-of-sale and label conversion applications and $0.8 in miscellaneous other product lines. These sales increases were partially offset by sales decreases of $2.2 million in our thermal ticket and tag product line, $2.0 million in our cut-sheet paper and transparencies product line, $1.3 million in our retail product line, $.8 million in our heat seal product line, $.7 million in our dry gum product line, $.5 million in our fraud prevention product line, $.5 million in our carbonless product line, and $1.0 million in miscellaneous other product lines.

As mentioned above, the decrease in our cut-sheet paper and transparencies product line sales was related to our decision to exit the low margin business in the third quarter of 2003. The continued shift in printing technologies in point-of-sale (POS) equipment from impact to thermal printers and price increases due to increased raw material cost resulted in the increased sales of our thermal POS products. The increase in our wide-format products resulted from new customer business. The decrease in retail sales was primarily due to the loss of a major customer which was partially offset by increased sales of our IBM branded product for point-of-sale applications. Heat seal, dry gum and carbonless are mature product lines which continue to decline due to technology changes. The decrease in the thermal ticket and tag products results from the loss of airline ticket business.

Gross margin for our Specialty Paper Products segment decreased $.5 million in the second quarter of 2004 and increased $.3 million for the first six months of 2004 when compared to the prior year periods. The gross margin percentage decreased from 19.9 percent in the second quarter of 2003 to 19.0 percent in the second quarter of 2004. The gross margin percentage increased to 19.5 percent for the first six months of 2004 compared to 19.3 percent for the first six months of 2003.

•

The decrease in the margin percentage in the second quarter of 2004 was attributable to unfavorable customer and product mix in the segment, lower absorption of production costs in our paper coating operations due to lower production volume and the delay in passing raw material price increases to our customers.

-14-

•

The increase in the margin percentage for the first six months of 2004 was due primarily to higher absorption of production costs due to the increase in production volume and a lower cost structure in our paper converting operations and improved margins on materials. These increases were partially offset by sales declines in the higher margin heat seal and dry gum product lines, the decrease in margins associated with competitive pricing related to thermal product for label applications and lower absorption of production costs in our paper coating operations due to lower production volumes.

Selling and distribution expenses for our Specialty Paper Products segment decreased $.2 million for the second quarter of 2004 and $.4 million for the first six months of 2004 when compared to the prior year periods. As a percentage of sales, selling and distribution expenses decreased to 10.7 percent for the first six months of 2004 compared to 11.3 percent for the first six months of 2003. The decrease for both the second quarter and first six months of 2004 was driven primarily by headcount reductions offset by higher distribution expenses due to higher freight cost and the increase in our wide-format product line sales which carry a higher freight and warehousing cost structure.

General and administrative expenses for our Specialty Paper Products segment decreased $.2 million in the second quarter of 2004 and $.1 million in the first six months of 2004 compared to the prior year periods. General and administrative expenses, as a percentage of sales, decreased slightly from 4.5 percent for the first six months of 2003 compared to 4.4 percent for the first six months of 2004. The decrease for both the second quarter and first six months of 2004 is driven mainly by headcount reductions, which occurred in 2003.

Research and development expenses remained unchanged in the second quarter of 2004 and decreased $.1 million for the first six months of 2004 compared to the prior year periods. The decrease is primarily attributable to headcount reductions.

The pretax income of $1.7 million for the second quarter of 2004 remained unchanged from the second quarter of 2003. Pretax income for the first six months of 2004 increased $1.1 million from the first six months of 2003 to $3.4 million. The improved performance is due mainly to increased sales and headcount reductions.

Imaging Supplies Segment

Sales for our Imaging Supplies segment were $5.7 million for the second quarter of 2004 compared to $5.6 million in the second quarter of 2003. Sales were $12.2 million for the first six months of 2004 compared to $11.7 million for the first six months of 2003.

	•		The $.1 million, or 1.8 percent increase in sales in the second quarter of 2004 was driven by the increased sales of Ricoh and IBM compatible toners, partially offset by lower sales of Xerox compatible toners and resins. The higher Ricoh compatible toner sales in the second quarter resulted primarily from new product sales.
	•		The $.5 million, or 4.3 percent increase in sales in the first six months of 2004 resulted from increased sales of Ricoh and IBM compatible toners, which were partially offset by lower sales of Xerox compatible toners.

The gross margin percentage for our Imaging Supplies segment decreased from 17.8 percent in the second quarter of 2003 to 14.9 percent in the second quarter of 2004. The gross margin decreased from 19.0 percent for the first six months of 2003 to

-15-

17.7 percent for the first six months of 2004. The decrease in the gross margin percentages for both the second quarter and first six months of 2004 was partially impacted by customer mix and the mix of products sold. Margins were also impacted by repair costs and the increased cost of oil based raw materials.

Selling and distribution expenses for our Imaging Supplies segment decreased $.2 million to $.3 million for the second quarter of 2004 compared to $.5 million for the second quarter of 2003. Selling and distribution expenses decreased $.2 million to $.7 million in the first six months of 2004 compared to $.9 million for the first six months of 2003. Selling and distribution expenses, as a percentage of sales, decreased from 7.7 percent for the first six months of 2003 to 5.7 percent for the first six months of 2004. The decrease for both the second quarter and first six months of 2004 resulted from lower headcount as well as lower distribution costs due to the lower sales of products to customers for whom we pay the freight.

General and administrative expenses for our Imaging Supplies segment increased $.1 million in the second quarter of 2004 and $.2 million for the first six months of 2004 when compared to the prior year periods. General and administrative expenses, as a percentage of sales, increased from 4.3 percent for the first six months of 2003 to 5.7 percent for the first six months of 2004. The increase in general and administrative expenses was due to legal expenses related to the Ricoh litigation discussed in Note 7 to the condensed consolidated financial statements of this report.

Research and development expenses decreased $.1 million in the second quarter of 2004 and $.1 million for the first six months of 2004 when compared to the prior year periods.

The pretax loss was $129,000 for the second quarter of 2004 compared to a pretax loss of $76,000 for the second quarter of 2003. The pretax income was $17,000 for the first six months of 2004 compared to a pretax loss of $18,000 for the first six months of 2003. The operating results were impacted by lower margins and increased legal cost.

Liquidity, Capital Resources and Financial Condition

Cash and cash equivalents increased $.5 million during the first six months of 2004 to $1.7 million at July 2, 2004. Cash used for continuing operations of $.8 million and $1.8 million invested in plant and equipment were partially offset by cash provided by financing activity of $3.1 million.

Cash flow used by operations in the first six months of 2004 included a $7.5 million increase in net working capital, which resulted from a $2.9 million decrease in accounts payable, a $1.9 million increase in inventory, a $1.6 million decrease in accrued expenses and a $1.7 million increase in accounts receivable partially offset by a $.6 million decrease in other current assets.

We are party to a Credit Agreement, dated March 1, 2002, with LaSalle Bank, NA as Agent and Issuing Bank and Fleet National Bank that, as amended, consists of a term loan of $15 million and a revolving loan commitment of $30 million and that requires us to maintain certain financial covenants such as total funded debt to adjusted earnings before interest, income taxes, depreciation and amortization, also known as adjusted EBITDA, and a fixed charge coverage ratio. Borrowings under the Credit Agreement are collateralized by a security interest in our accounts receivable, inventories, certain machinery and equipment and real estate located in Merrimack, New Hampshire. We had $5.2 million of additional borrowing capacity at July 2, 2004 under our revolving loan commitment. We had $2.8 million of obligations under standby letters of credit with the banks which are included in our bank debt when calculating our borrowing capacity. We entered into a first amendment to the Credit Agreement, effective July 15, 2003, to increase the term loan under the Credit Agreement from $10 million to $15 million and to adjust the terms of the quarterly interest payments. We entered into a second amendment to the Credit Agreement, effective July 24, 2003, 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. We entered into a third amendment to the Credit Agreement, effective September 25, 2003, to replace the minimum EBITDA covenant with a minimum adjusted EBITDA covenant, and we entered into a consent and fourth amendment to the Credit Agreement, effective December 30, 2003, adding the provision to the funded debt to EBITDA ratio, for the computation period ended December 31, 2003 only, to be computed as the funded debt to adjusted EBITDA ratio.

We entered into a fifth amendment to the Credit Agreement, effective March 31, 2004, that:

•

extended the term of the credit facility to February 28, 2007;

-16-

	•		modified the definition of fixed charge coverage ratio to provide that (1) the ratio is based on our adjusted EBITDA and (2) payments of principal of funded debt, included in the calculation of the fixed charge coverage ratio, are limited to the last four principal payments;
	•		replaced the definition and covenant relating to the total debt to EBITDA ratio with a definition and covenant relating to the funded debt to adjusted EBITDA ratio;
	•		eliminated the covenant relating to minimum adjusted EBITDA; and
	•		adjusted the interest rate on loans outstanding under the credit facility to provide that the interest rate is based on the funded debt to adjusted EBITDA ratio and that the interest rate is, at our option, either (1) a range from zero to .25 percent over the base rate (prime) or (2) a range from 1.5 percent to 2.0 percent over LIBOR.

Under the amended Credit Agreement, we are also subject to a non-use fee for any unutilized portion of our revolving loan that ranges from .25 percent to ..375 percent based on our funded debt to adjusted EBITDA ratio.

We were in compliance with the financial covenants required under the amended Credit Agreement and our compliance for the quarter ended July 2, 2004, is as follows:

     Pursuant to our amended credit agreement, our minimum payment obligations relating to long-term debt are as follows:

Our liquidity is affected by many factors, some based on the normal operations of our business and others related to the uncertainties of the industry and global economies. Although our cash requirements will fluctuate based on the timing of these factors, we believe that current cash and cash equivalents, cash flows from operations and amounts available under our credit agreement are sufficient to fund our planned capital expenditures, working capital needs and other operating cash requirements.

Critical Accounting Policies

Our critical accounting policies have not changed materially from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

Our company’s management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of July 2, 2004. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of July 2, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to our company, including our consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under

-17-

the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 2, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In August and September 1996, two individual plaintiffs filed lawsuits in the Circuit Court of Cook County, Illinois against us, 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. On October 8, 2003, the Circuit Court heard motions on a Summary Judgment motion and a class action certification motion. We are awaiting a decision by the Circuit Court which is expected to rule on these motions at any time. 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 July 2, 2004. Our investment in Cerion is included under other assets in our Consolidated Balance Sheet.

On May 30, 2003, Ricoh Company, Ltd. and affiliated companies filed a suit in the U.S. District Court for the District of New Jersey against several defendants, including the largest customer of our Imaging Supplies segment and another company who is a supplier to the Imaging Supplies segment. The Complaint alleged multiple counts of patent infringement, trademark infringement, trademark counterfeiting, false advertising, and unfair competition by the defendants. On October 17, 2003, Ricoh amended the Complaint and added us as an additional co-defendant in the suit. The allegations arose from the sale and distribution of Ricoh compatible toner products. We filed a legal answer to the Complaint in December 2003, and the parties are now engaged in discovery. Our attorneys have reviewed the background and history of the lawsuit and are continuing to develop our legal position and defense in this matter. We believe we have valid defenses and intend to fully defend our company in this matter. We are cooperating with the other defendants in the defense of this matter. We believe we may have potential recourse against certain co-defendants in 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 us.

ITEM 4. SUBMISSION OF OTHER MATTERS TO A VOTE OF SECURITY HOLDERS

(a)		Our 2004 Annual Meeting of Stockholders was held on May 4, 2004.
(b)		At our 2004 Annual Meeting, our stockholders elected Andrew B. Albert, L. Scott Barnard, Avrum Gray, George R. Mrkonic, Jr., James F. Orr III and Mark E. Schwarz to serve as our directors until our next annual meeting of stockholders and until their successors are elected and qualified.
(c)		The matters acted upon at our 2004 Annual Meeting, and the voting tabulation for each matter, is as follows:

-18-

Proposal 1: To elect six directors for a term of one year.

Each of the above named individuals was elected as a director of our Company.

Proposal 2: To approve the 2004 Value Creation Incentive Plan

The proposal was approved.

-19-

ITEM 5. OTHER INFORMATION

Stockholder Proposals

Any stockholder proposal which is to be included in the proxy materials for the 2005 annual meeting must be received by us on or before November 26, 2004. Such proposals should be directed to Nashua Corporation, 11 Trafalgar Square, 2nd Floor, Nashua, New Hampshire 03063, Attention: Clerk/Secretary.

In addition, our by-laws require that we be given advance notice of stockholder nominations for election to the Board of Directors and of other matters which stockholders wish to present for action at an annual meeting of stockholders, other than matters included in our proxy statement in accordance with SEC Rule 14a-8. The required notice must be in writing and received by our corporate clerk/secretary at our principal executive offices not less than 60 days nor more than 90 days prior to the annual meeting of stockholders. However, in the event that less than 70 days’ prior disclosure of the date of the meeting is first given or made (whether by public disclosure or written notice to stockholders), notice by the stockholder to be timely must be received by our corporate clerk/secretary at our principal executive offices no later than the close of business on the 10th day following the day on which such disclosure of the date of the meeting was made. The date of our 2005 annual meeting of stockholders has not yet been established, but assuming it is held on May 4, 2005, in order to comply with the time periods set forth in our by-laws, appropriate notice for the 2005 annual meeting would need to be provided to our corporate clerk/secretary no earlier than February 3, 2005 and no later than March 5, 2005.

Matters Affecting Future Results

Information we provide in this Form 10-Q may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports we file with the Securities and Exchange Commission, in materials we deliver to stockholders and in our press releases. In addition, our representatives may, from time to time, make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that is not directly related to historical or current fact. Words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects,” “can,” “may” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, but are not limited to, our future capital needs, stock market conditions, the price of our stock, fluctuations in customer demand, intensity of competition from other vendors, timing and acceptance of our new product introductions, general economic and industry conditions, delays or difficulties in programs designed to increase sales and improve profitability, the settlement of tax issues, the possibility of a final award of material damages in our pending litigation, and other risks detailed in this Form 10-Q in our filings with the Securities Exchange Commission. The information set forth in this Form 10-Q should be read in light of such risks. We assume no obligation to update the information contained in this Form 10-Q or to revise our forward-looking statements.

-20-

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K

On April 28, 2004, we filed a Current Report on Form 8-K, dated April 27, 2004, furnishing, under Item 12, a press release reporting preliminary financial results for the first quarter ended April 2, 2004.

-21-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

-22-