exizldelfuego

I'm a big fan using the right tool for the job, and based on what they seem to want, (ie an exact replica of their printed edition that can be transmitted electronically), I really think that a compiled PDF is your best route. Sure, each individual page is high-res, but if you combined them into one PDF document and saved it as low-res, Acrobat can get the file size pretty small.
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Update: Just to follow up, because at the time I was in a rush, but the core of my reasoning is that a design needs to fit its medium. The design for this paper is no doubt apparent to the printed newspaper, where you're flipping from one printed page to the next, but this same design no longer holds any value on the internet where the concept of pagination holds no value -- articles are viewed on an article-by-article nature regardless of how many pages they may take up. This is why having a database for the content is valuable, because then the content can be flowed out into paper-based designs AND electronic designs, each with their own special styles inherent to the medium.

In your case, they want the PRINTED medium to be available online, and that -- in my mind -- brings up the king of printed medium: the PDF. I think you should work towards a future where the newspaper understands the separation of design and content, and allow the content to be displayed online through the natural online medium of (X)HTML. But until that day, so long as they want the printed version of their issues available online, low-res PDFs are the way to go.