e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

or

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______

For the quarterly period ended September 30, 2005

Commission file number 1-3560

P. H. Glatfelter Company

(Exact name of registrant as specified in its charter)


Pennsylvania		23-0628360
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

96 South George Street, Suite 500
York, Pennsylvania 17401		(717) 225-4711
(Address of principal executive offices)		(Registrant’s telephone number, including area code)

N/A
(Former name or former address, if changed since last report)

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 at least the past 90 days. Yes ü No .

Indicate by check mark whether the filer is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes ü No .

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes No ü .

As of October 31, 2005, P. H. Glatfelter Company had 44,068,541 shares of common stock outstanding.

PART I

Item 1 — Financial Statements

P. H. GLATFELTER COMPANY and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)


	Three Months Ended						Nine Months Ended
	September 30						September 30
In thousands, except per share	2005			2004			2005			2004


Net sales	$	146,780		$	143,075		$	435,959		$	404,181
Energy sales — net		2,414			2,616			7,673			7,924

Total revenues		149,194			145,691			443,632			412,105
Costs of products sold		123,578			118,649			369,589			348,522

Gross profit		25,616			27,042			74,043			63,583

Selling, general and administrative expenses		18,061			14,663			52,425			45,176
Restructuring charges		—			16,508			—			17,375
Gains on dispositions of plant, equipment and timberlands, net		(1,327	)		(2,464	)		(1,408	)		(35,894	)
Gains from insurance recoveries		—			(7,285	)		(2,200	)		(32,785	)

Operating income		8,882			5,620			25,226			69,711
Non-operating income (expense)
Interest expense		(3,331	)		(3,294	)		(9,881	)		(9,989	)
Interest income		475			444			1,532			1,340
Other — net		293			(457	)		529			(515	)

Total other expense		(2,563	)		(3,307	)		(7,820	)		(9,164	)

Income before income taxes		6,319			2,313			17,406			60,547
Income tax provision		2,656			115			5,744			23,719

Net income	$	3,663		$	2,198		$	11,662		$	36,828


Earnings Per Share
Basic	$	0.08		$	0.05		$	0.27		$	0.84
Diluted		0.08			0.05			0.26			0.84

Cash dividends declared per common share	$	0.09		$	0.09		$	0.27		$	0.27

The accompanying notes are an integral part of these condensed consolidated financial statements.

GLATFELTER

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P. H. GLATFELTER COMPANY and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)


	September 30,			December 31
In thousands	2005			2004


Assets
Current assets
Cash and cash equivalents	$	15,383		$	39,951
Accounts receivable — net		66,108			60,900
Inventories		81,368			78,836
Prepaid expenses and other current assets		23,611			18,765

Total current assets		186,470			198,452

Plant, equipment and timberlands — net		486,130			520,412

Other assets		335,367			333,406

Total assets	$	1,007,967		$	1,052,270


Liabilities and Shareholders’ Equity
Current liabilities
Current portion of long-term debt	$	18,345		$	446
Short-term debt		3,274			3,503
Accounts payable		32,902			30,174
Dividends payable		3,966			3,955
Environmental liabilities		7,823			7,715
Other current liabilities		61,233			58,214

Total current liabilities		127,543			104,007

Long-term debt		184,000			207,277

Deferred income taxes		209,383			212,074

Other long-term liabilities		73,629			108,542

Total liabilities		594,555			631,900

Commitments and contingencies		—			—

Shareholders’ equity
Common stock		544			544
Capital in excess of par value		43,559			41,828
Retained earnings		524,835			525,056
Deferred compensation		(2,556	)		(1,275	)
Accumulated other comprehensive (loss) income		(90	)		8,768

		566,292			574,921
Less cost of common stock in treasury		(152,880	)		(154,551	)

Total shareholders’ equity		413,412			420,370

Total liabilities and shareholders’ equity	$	1,007,967		$	1,052,270

The accompanying notes are an integral part of these condensed consolidated financial statements.

GLATFELTER

-3-

P. H. GLATFELTER COMPANY and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


	Nine Months Ended
	September 30
In thousands	2005			2004

Operating activities
Net income	$	11,662		$	36,828
Adjustments to reconcile to net cash provided by operations:
Depreciation, depletion and amortization		38,186			39,569
Pension income		(12,398	)		(13,022	)
Restructuring charges		—			17,375
Deferred income tax provision		1,339			14,143
Gains on dispositions of plant, equipment and timberlands, net		(1,408	)		(35,894	)
Other		475			504
Change in operating assets and liabilities
Accounts receivable		(8,925	)		(11,679	)
Inventories		(6,280	)		(1,879	)
Other assets and prepaid expenses		1,619			(10,603	)
Accounts payable and other liabilities		(12,674	)		(9,612	)

Net cash provided by operating activities		11,596			25,730

Investing activities
Purchases of plant, equipment and timberlands		(22,033	)		(14,348	)
Proceeds from disposals of plant, equipment and timberlands		1,225			36,719
Proceeds from sale of subsidiary		—			525

Net cash (used) provided by investing activities		(20,808	)		22,896

Financing activities
Net repayments of revolving credit facility and short-term debt		(2,019	)		(41,355	)
Payment of dividends		(11,873	)		(11,832	)
Proceeds from stock options exercised		785			413

Net cash used by financing activities		(13,107	)		(52,774	)

Effect of exchange rate changes on cash		(2,249	)		(187	)

Net decrease in cash and cash equivalents		(24,568	)		(4,335	)
Cash and cash equivalents at the beginning of period		39,951			15,566

Cash and cash equivalents at the end of period	$	15,383		$	11,231


Supplemental cash flow information
Cash paid (received) for
Interest expense	$	12,090		$	12,552
Income taxes		15,000			(1,645	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

GLATFELTER

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P. H. GLATFELTER COMPANY and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


1.		ORGANIZATION

P. H. Glatfelter Company and subsidiaries (“Glatfelter”) is a manufacturer of specialty papers and engineered products. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Neenah, Wisconsin; Gernsbach, Germany; Scaër, France and the Philippines. Our products are marketed throughout the United States and in many foreign countries, either through wholesale paper merchants, brokers and agents or directly to customers.


2.		ACCOUNTING POLICIES

These unaudited condensed consolidated interim financial statements (“Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the Securities and Exchange Commission and include the accounts of Glatfelter and its wholly-owned subsidiaries. These Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Glatfelter’s 2004 Annual Report on Form 10-K/A Amendment No. 1 filed with the Securities and Exchange Commission.

These Financial Statements do not include all of the information and notes required for complete financial statements. In management’s opinion, these Financial Statements reflect all adjustments, which are of a normal, recurring nature, necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.

Stock-based Compensation We account for stock-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Compensation expense for performance-based restricted stock awards is recognized ratably over the performance period based on changes in quoted market prices of Glatfelter stock and the likelihood of achieving the performance goals. This variable plan accounting recognition is due to the uncertainty of achieving performance goals and estimating the number of shares ultimately to be issued. Compensation expense for awards of non-vested restricted stock units

(“RSUs”) is recognized over their graded vesting period based on the grant-date fair value. The grant-date fair value is determined based on the grant-date closing price of Glatfelter common stock. The exercise price of all employee or non-employee director stock options is at least equal to their grant-date fair value. Accordingly, no compensation expense is recorded for stock options granted to employees or non-employee directors.

Pro Forma Information No compensation expense has been recognized for the issuance of non-qualified stock options. The weighted-average grant-date fair value of options granted during the first nine months of 2004 was $3.32. No options were granted in 2005.

The following table sets forth pro forma information as if compensation expense for all stock-based compensation had been determined consistent with the fair value method of SFAS No. 123.


	Three Months Ended
	September 30
In thousands, except per share	2005			2004

Net income as reported	$	3,663		$	2,198
Add: stock-based compensation expense included in reported net income, net of tax		161			56
Less: stock-based compensation expense determined under fair value based method for awards, net of tax		(168	)		(499	)

Pro forma	$	3,656		$	1,755

Earnings per share
Reported — basic and diluted	$	0.08		$	0.05
Pro forma — basic and diluted		0.08			0.04


	Nine Months Ended
	September 30
In thousands, except per share	2005			2004

Net income as reported	$	11,662		$	36,828
Add: stock-based compensation expense included in reported net income, net of tax		414			464
Less: stock-based compensation expense determined under fair value based method for awards, net of tax		(435	)		(705	)

Pro forma	$	11,641		$	36,587

Earnings per share
Reported — basic and diluted	$	0.26		$	0.84
Pro forma — basic and diluted		0.26			0.84

GLATFELTER

-5-


3.		RECENT PRONOUNCEMENTS

In December 2004, SFAS No. 123(R), “Share-Based Payment” was issued. This standard requires employee stock options and other stock-based compensation awards to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. SFAS No. 123(R) will be effective for us beginning in the first quarter of 2006. We do not expect its impact to be material to our consolidated results of operations or consolidated financial position.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of SFAS Statement No. 143” (“FIN 47”). This Interpretation, which is effective for fiscal years ending after December 15, 2005, clarifies the term “conditional” as used in SFAS No. 143 and requires companies to record a liability for “conditional” asset retirement obligations if required legally and there exists sufficient information to make a reasonable estimate of the fair value of the liability. We are currently evaluating the impact, if any, that FIN 47 may have on our consolidated results of operations or consolidated financial position.


4.		GAIN ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS

During the first nine months of 2005, various miscellaneous assets were sold for a pre-tax gain of $1.4 million.

During the first nine months of 2004 we completed sales of timberlands, the corporate aircraft and certain other assets. The following table summarizes these transactions.


Dollars in thousands	Acres		Proceeds		Gain

Nine Months Ended September 30, 2004
Timberlands		2,479	$	32,683	$	32,343
Corporate Aircraft		n/a		2,861		2,554
Other		n/a		1,175		997

Total			$	36,719	$	35,894


5.		RESTRUCTURING CHARGE

In 2004, we implemented the North American Restructuring Program, a comprehensive series of actions designed to improve operating results by enhancing product and service offerings in book publishing markets, growing revenue from uncoated specialty papers, reducing our workforce at our Spring Grove facility by approximately 20%, and implementing improved supply chain management processes. In conjunction with this initiative, we negotiated a new labor agreement that enabled us to achieve targeted workforce reduction levels at our Spring Grove, PA facility. As part of the new labor agreement, we offered a voluntary early retirement benefits package to eligible employees. These special termination benefits resulted in a charge of $16.5 million in the third quarter of 2004, substantially all of which was for enhanced pension benefits, post-retirement medical benefits and other related employee severance costs. In addition, during the second quarter of 2004, we recorded restructuring charges totaling $0.7 million, for severance and related pension and other post employment benefits (“OPEB”) associated with the elimination of certain non-represented positions.


6.		EARNINGS PER SHARE

The following table sets forth the details of basic and diluted earnings per share (“EPS”):


	Three Months Ended
	September 30
In thousands, except per share	2005		2004

Net income	$	3,663	$	2,198

Weighted average common shares outstanding used in basic EPS		44,012		43,871
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards		345		221

Weighted average common shares outstanding and common share equivalents used in diluted EPS		44,357		44,092

Basic and diluted EPS	$	0.08	$	0.05

GLATFELTER

-6-


	Nine Months Ended
	September 30
In thousands, except per share	2005		2004

Net income	$	11,662	$	36,828

Weighted average common shares outstanding used in basic EPS		43,986		43,837
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards		312		146

Weighted average common shares outstanding and common share equivalents used in diluted EPS		44,298		43,983

Basic EPS	$	0.27	$	0.84
Diluted EPS		0.26		0.84

The following table sets forth the potential common shares for options to purchase shares of common stock that were outstanding but were not included in the computation of diluted EPS for the period indicated because their effect would be anti-dilutive.

Three Months Ended

Nine Months Ended

September 30

In thousands

2005

2004

2005

2004

Potential common shares

972

2,064

964

2,064


7.		GAIN ON INSURANCE RECOVERIES

During the first nine months of 2005 and 2004, we reached successful resolution of certain claims under insurance policies related to the Fox River environmental matter. Insurance recoveries included in the results of operations for the first nine months of 2005 and 2004 totaled $2.2 million and $32.8 million, respectively, and were received in cash prior to the end of the respective period.


8.		STOCK-BASED COMPENSATION

During 2005 and 2004, 152,082 and 137,880, respectively, of non-vested “RSUs” were awarded net of forfeitures, under the 2005 and 1992 Key Employee Long-Term Incentive Plan, respectively, to executive officers, non-employee directors and other key employees. Under terms of the awards, the RSUs vest based solely on the passage of time on a graded scale over a three-year to five-year period. The grant date fair value, net of forfeitures, of RSUs granted in 2005 and 2004 totaled $2.1 million and $1.5 million, respectively. The RSUs were recorded as “Deferred compensation,” a contra-equity account in the accompanying Condensed Consolidated Balance Sheets.


9.		RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS

We have both funded and, with respect to our international operations, unfunded noncontributory defined benefit pension plans, covering substantially all of our employees. The benefits are based, in the case of certain plans, on average salary and years of service and, in the case of other plans, on a fixed amount for each year of service. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974. The Company uses a December 31 measurement date for all of its defined benefit plans.

We also provide certain healthcare benefits to eligible retired employees. These benefits include a comprehensive medical plan for retirees prior to age 65, and fixed supplemental premium payments to retirees over age 65 to help defray the costs of Medicare. The plan is not funded and claims are paid as reported.

The following tables set forth information with respect to our defined benefit plans.


	Three Months Ended
	September 30
In thousands	2005			2004

Pension Benefits
Service cost	$	931		$	969
Interest cost		4,132			4,080
Expected return on plan assets		(9,853	)		(9,819	)
Amortization of transition assets		—			(213	)
Amortization of prior service cost		517			533
Amortization of unrecognized loss		121			112

Net periodic benefit income		(4,152	)		(4,338	)
Special termination benefits		—			11,255

Total net periodic benefit income	$	(4,152	)	$	6,917


Other Benefits
Service cost	$	284		$	254
Interest cost		674			602
Amortization of prior service cost		(185	)		(185	)
Amortization of unrecognized loss		332			311

Net periodic benefit cost		1,105			982
Special termination benefits		—			5,228

Total net periodic benefit cost	$	1,105		$	6,210

GLATFELTER

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	Nine Months Ended
	September 30
In thousands	2005			2004

Pension Benefits
Service cost	$	2,795		$	2,899
Interest cost		12,441			12,154
Expected return on plan assets		(29,560	)		(29,454	)
Amortization of transition assets		—			(639	)
Amortization of prior service cost		1,552			1,596
Amortization of unrecognized loss		374			326

Net periodic benefit income		(12,398	)		(13,118	)
Special termination benefits		—			11,351

Total net periodic benefit income	$	(12,398	)	$	(1,767	)

Other Benefits
Service cost	$	852		$	762
Interest cost		2,021			1,806
Amortization of prior service cost		(554	)		(554	)
Amortization of unrecognized loss		996			933

Net periodic benefit cost		3,315			2,947
Special termination benefits		—			5,228

Total net periodic benefit cost	$	3,315		$	8,175


10.		COMPREHENSIVE INCOME

The following tables sets forth comprehensive income and its components:


	Three Months Ended
	September 30
In thousands	2005			2004

Net income	$	3,663		$	2,198
Foreign currency translation adjustment		(17	)		1,393

Comprehensive income	$	3,646		$	3,591


	Nine Months Ended
	September 30
In thousands	2005			2004

Net income	$	11,662		$	36,828
Foreign currency translation adjustment		(8,858	)		(1,605	)

Comprehensive income	$	2,804		$	35,223


11.		INVENTORIES

Inventories, net of reserves, were as follows:


	September 30,		December 31,
In thousands	2005		2004

Raw materials	$	16,478	$	14,974
In-process and finished		40,166		39,327
Supplies		24,724		24,535

Total	$	81,368	$	78,836


12.		LONG-TERM DEBT

Long-term debt is summarized as follows:


	September 30,			December 31,
In thousands	2005			2004

Revolving credit facility, due June 2006	$	18,345		$	23,277
6^7/8% Notes, due July 2007		150,000			150,000
Note payable — SunTrust, due March 2008		34,000			34,000
Other notes, various		—			446

Total long-term debt		202,345			207,723
Less current portion		(18,345	)		(446	)

Long-term debt, excluding current portion	$	184,000		$	207,277

On June 24, 2002, we entered into an unsecured $102.5 million multi-currency revolving credit facility due June 2006, (the “Facility”) with a syndicate of three major banks. An additional $22.5 million was added to the Facility on September 24, 2002 with a fourth major bank. The Facility enables Glatfelter or its subsidiaries to borrow up to the equivalent of $125.0 million in certain currencies. Borrowings can be made for any time period from one day to six months and incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin ranging from .525 to 1.05. The margin and a facility fee on the commitment balance are based on the higher of our debt ratings as published by Standard & Poor’s and Moody’s. The Facility requires us to meet certain leverage and interest coverage ratios, with both of which we are in compliance at September 30, 2005.

On July 22, 1997, we issued $150.0 million principal amount of 6^7/8%Notes due July 15, 2007. Interest on these notes is payable semiannually on January 15 and July 15. These notes are redeemable, in whole or in part, at our option at any time at a calculated redemption price plus accrued and unpaid interest to the date of redemption, and constitute unsecured and unsubordinated indebtedness.

On March 21, 2003, we sold approximately 25,500 acres of timberlands and received as consideration a $37.9 million 10-year interest bearing note receivable from the timberland buyer. We pledged this note as collateral under a $34.0 million promissory note payable to SunTrust Financial (the “Note Payable”). The Note Payable bears interest at a fixed rate of 3.82% for five years at which time we can elect to renew the obligation.

P. H. Glatfelter Company guarantees debt obligations of all its subsidiaries. All such obligations are recorded in these condensed consolidated financial statements.

GLATFELTER

-8-

At September 30, 2005, we had $4.5 million of letters of credit issued to us by a financial institution. The letters of credit are for the benefit of certain state workers’ compensation insurance agencies in conjunction with our self-insurance program. No amounts were outstanding under the letters of credit. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. The letters of credit do not reduce the amount available under our lines of credit.


13.		CROSS-CURRENCY SWAP

In conjunction with our 2002 refinancing, we entered into a cross-currency swap transaction effective June 24, 2002. Under this transaction, we swapped $70.0 million for approximately €73.0 million and will pay interest on the Euro portion of the swap at a floating Eurocurrency Rate, plus applicable margins and will receive interest on the dollar portion of the swap at a floating U.S. dollar LIBOR, plus applicable margins. The contract matures on June 24, 2006. The cross-currency swap is designed to provide protection from the impact that changes in currency rates have on certain U.S. dollar-denominated inter-company obligations recorded at our subsidiary in Gernsbach, Germany.

The cross-currency swap is recorded in the Condensed Consolidated Balance Sheets at fair value of $(17.9) and $(29.6) million at September 30, 2005 and December 31, 2004, respectively, under the caption “Other current liabilities” and “Other long-term liabilities”, respectively. Changes in fair value are recognized in current earnings as “Other income (expenses)” in the Condensed Consolidated Statements of Income. The mark-to-market adjustment was offset by a gain on the related remeasurement of the U.S. dollar-denominated inter-company obligations.

The credit risks associated with our financial derivative are controlled through the evaluation and monitoring of creditworthiness of the counterparties. Although counterparties may expose us to losses in the event of nonperformance, we do not expect such losses, if any, to be significant.


14.		COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

Ecusta Division Matters At September 30, 2005, we had reserves for various matters associated with our former Ecusta Division. Activity in these reserves during the periods indicated is summarized below.

Three Months Ended September 30, 2005

Ecusta

Environmental

Workers’

In thousands

Matters

Comp

Other

Total

Beginning balance

5,800

2,130

3,300

11,230

Accruals

2,700

—

2,700

Payments

(165

)

—

(172

)

Ending balance

8,335

2,123

3,300

13,758

Nine Months Ended September 30, 2005

Ecusta

Environmental

Workers’

In thousands

Matters

Comp

Other

Total

Beginning balance

6,391

2,144

3,300

11,835

Accruals

2,700

—

2,700

Payments

(756

)

(21

)

—

(777

)

Ending balance

8,335

2,123

3,300

13,758

Activity during the respective periods of 2004 consisted only of payments made in connection with the Ecusta environmental matters. With respect to the reserves set forth above as of September 30, 2005 $1.6 million are recorded under the caption “Other current liabilities” and $12.2 million are recorded under the caption “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets.

The following discussion provides more details on each of these matters.

Background Information In August 2001, pursuant to an acquisition agreement (the “Acquisition Agreement”), we sold the assets of our Ecusta Division to four related entities, consisting of Purico (IOM) Limited, an Isle of Man limited liability company (“Purico”), and RF&Son Inc. (“RF”), RFS US Inc. (“RFS US”) and RFS Ecusta Inc. (“RFS Ecusta”), each of which is a Delaware corporation, (collectively, the “Buyers”).

In August 2002, the Buyers shut down the manufacturing operation of the pulp and paper mill in Pisgah Forest, North Carolina, which was the most significant operation of the Ecusta Division. On October 23, 2002, RFS Ecusta and RFS US filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. During the fourth quarter of 2002, in accordance with the provisions of the Acquisition Agreement, we notified the Buyers of third party claims (“Third Party Claims”) made against us for which we are seeking indemnification from the Buyers. The Third Party Claims primarily relate to certain post-retirement benefits, workers’ compensation claims and vendor payables.

GLATFELTER

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Effective August 8, 2003, the assets of RFS Ecusta and RFS US, which substantially consist of the pulp and paper mill and related real property, were sold to several third parties unrelated to the Buyers (the “New Buyers”). We understand the New Buyers’ business plan was to continue certain mill-related operations and to convert portions of the mill site into a business park.

Ecusta Environmental Matters Beginning in April 2003, government authorities, including the North Carolina Department of Environment and Natural Resources (“NCDENR”), initiated discussions with us and the New Buyers regarding, among other environmental issues, certain potential landfill closure liabilities associated with the Ecusta mill and its properties. The discussions focused on NCDENR’s desire to establish a plan and secure financial resources to close three landfills located at the Ecusta facility and to address other environmental matters at the facility. During the third quarter of 2003, the discussions ended with NCDENR’s conclusion to hold us responsible for the closure of three landfills. In March 2004 and September 2005, the NCDENR issued us separate orders requiring the closure of two of the three landfills at issue.

In September 2004, one of the New Buyers entered into a Brownfields Agreement with the NCDENR relating to the Ecusta mill, pursuant to which the New Buyer was to be held responsible for certain specified environmental concerns. In September 2005, NCDENR sought our participation in the evaluation and potential remediation of environmentally hazardous conditions at the former Ecusta mill site. We believe NCDENR is looking to us in this evaluation due, in part, to its concerns regarding the financial condition of one of the New Buyers. In addition to calling for the assessment, closure, and post-closure monitoring and maintenance of the third landfill for which we had previously been held responsible, NCDENR has asserted concerns regarding (i) mercury and certain other contamination on and around the site; (ii) potentially hazardous conditions existing in the sediment and water column of the site’s water treatment and aeration and sedimentation basin (the “ASB”); and (iii) contamination associated with two additional landfills on the site that were not used by us (collectively, the “NCDENR Matters”). With respect to the concerns discussed above, the New Buyers, in a May 2004 agreement, expressly agreed to indemnify and hold us harmless from any and all such liabilities. We continue to have discussions with NCDENR concerning our potential responsibilities and appropriate remedial actions, if any, which may be necessary.

In addition, we have recently learned that the New Buyers may not have sufficient cash flow to continue

meeting certain obligations to NCDENR and us. Specifically, the New Buyers are obligated (i) to treat leachate and stormwater runoff from the landfills which we are currently required to manage, and (ii) to remediate groundwater contamination in the vicinity of a former caustic building at site. If the New Buyers should default on these obligations, it is possible that NCDENR will require us to make appropriate arrangements for the treatment and disposal of the landfill waste streams and to be responsible for the remediation of certain contamination on and around the site (collectively, the “New Buyers Matters”).

As a result of NCDENR’s recent communication with us and our assessment of the range of likely outcomes of the NCDENR Matters and the New Buyers Matters, our results of operations for the third quarter of 2005 includes a $2.7 million charge to increase our reserve for estimated costs associated with the Ecusta environmental matters. The addition to the reserve includes estimated operating costs associated with continuing certain water treatment facilities at the site which are necessary to treat leachate discharges from certain of the landfills, the closure for which we had previously reserved, estimated costs to perform an assessment of certain risks posed by the presence of mercury, further characterization of sediment in the ASB and treatment of other contamination.

The extent of additional remediation activities, if any, is unknown, pending the completion of the risk assessments. Therefore, the third quarter 2005 charge does not include costs associated with further remediation activities that we may be required to perform. For example, if we agree to perform a mercury risk assessment and the results of which would warrant, NCDENR could require us to perform remediation activities on-site and/or in the adjacent river. In addition, NCDENR could seek to require remedial activities associated with the ASB to resolve potential environmental risks posed by the presence of dioxins and mercury contaminants in the ASB’s sediments. Whether we will be required to remediate, the extent of contamination, if any, and the ultimate costs to remedy, are not reasonably estimable based on information currently available to us. Accordingly, no amounts for such actions have been included in our reserve discussed above. If we are required to complete additional remedial actions, further charges would be required, and such amounts could be material. We are evaluating options for ensuring that the New Buyers fulfill their obligations with respect to the New Buyers Matters. Further, we are evaluating

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potential legal claims we may have in pursuing any other parties, including previous owners, of the site for their obligations and/or cost recoveries.

We are uncertain as to what additional Ecusta-related claims, including, among others, environmental matters, government oversight and/or government past costs, if any, may be asserted against us.

Workers’ Compensation In addition to reserves for environmental matters at the site, prior to 2003, we had recorded liabilities related to potential workers’ compensation claims totaling approximately $2.2 million.

We continue to believe the Buyers are responsible for the Environmental Matters and the Workers’ Compensation claims under provisions of the Acquisition Agreement, and believe we have a strong legal basis claim for indemnification. We are pursuing appropriate avenues to enforce the provisions of the Acquisition Agreement.

Other In October 2004, the bankruptcy trustee for the estates of RFS Ecusta and RFS US filed a complaint in the U.S. Bankruptcy Court for the Western District of North Carolina against certain of the Buyers and other related parties (“Defendant Buyers”) and us. The complaint alleges, among other things, that the Defendant Buyers engaged in fraud and fraudulent transfers and breached their fiduciary duties. With respect to Glatfelter, the complaint alleges that we aided and abetted the Defendant Buyers in their purported actions in the structuring of the acquisition of the Ecusta Division and asserts a claim against us under the Bankruptcy Code. The trustee seeks damages from us in an amount not less than $25.8 million, plus interest, and other relief. We believe these claims are largely without merit and we are vigorously defending ourselves in this action. Accordingly, no amounts have been recorded in the accompanying consolidated financial statements.

The bankruptcy trustee filed another complaint, also in the U.S. Bankruptcy Court for the Western District of North Carolina, against us, certain banks and other parties, seeking, among other things, damages totaling $6.5 million for alleged breaches of the Acquisition Agreement (the “Breach Claims”), release of certain amounts held in escrow totaling $3.5 million (the “Escrow Claims”) and recoveries of unspecified amounts allegedly payable under the Acquisition Agreement and a related agreement. We were first notified of the potential Breach Claims in July 2002, which are primarily related to the physical condition of the Ecusta mill at the time of sale. We believe these claims are without merit. With respect to the Escrow Claims, the trustee seeks the release of certain amounts held in escrow related to the

sale of the Ecusta Division, of which $2.0 million was escrowed at the time of closing in the event of claims arising such as those asserted in the Breach Claim. The Escrow Claims also include amounts alleged to total $1.5 million arising from sales by us of certain properties at or around the Ecusta mill. We have previously reserved such escrowed amounts and they are recorded in the accompanying Condensed Consolidated Balance Sheets as “Other long-term liabilities.” We are vigorously defending ourselves in this action.

Fox River — Neenah, Wisconsin We have previously reported with respect to potential environmental claims arising out of the presence of polychlorinated biphenyls (“PCBs”) in sediments in the lower Fox River and in the Bay of Green Bay, downstream of our Neenah, Wisconsin facility. We acquired the Neenah facility in 1979 as part of the acquisition of the Bergstrom Paper Company. In part, this facility used wastepaper as a source of fiber. At no time did the Neenah facility utilize PCBs in the pulp and paper making process, but discharges from the facility containing PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that the Neenah facility discharged into the Fox River resulted from the presence of NCR®-brand carbonless copy paper in the wastepaper that was received from others and recycled.

As described below, various state and federal governmental agencies have formally notified nine potentially responsible parties (“PRPs”), including us, that they are potentially responsible for response costs and “natural resource damages” (“NRDs”) arising from PCB contamination in the lower Fox River and in the Bay of Green Bay, under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and other statutes. The other identified PRPs are NCR Corporation, Appleton Papers Inc., Georgia Pacific Corp. (formerly Fort Howard Corp. and Fort James), WTM I Company (a subsidiary of Chesapeake Corp.), Riverside Paper Corporation, U.S. Paper Mills Corp. (a subsidiary of Sonoco Products Company), Sonoco Products Company, and Menasha Corporation.

CERCLA establishes a two-part liability structure that makes responsible parties liable for (1) “response costs” associated with the remediation of a release of hazardous substances and (2) NRDs related to that release. Courts have interpreted CERCLA to impose joint and several liabilities on responsible parties for response costs, subject to equitable allocation in certain instances. Prior to a final settlement by all responsible parties and the final cleanup of the contamination, uncertainty regarding the application of such liability will persist.

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The areas of the lower Fox River and in the Bay of Green Bay in which the contamination exists are commonly referred to as Operable Unit 1 (“OU1”), which consists of Little Lake Butte des Morts, the portion of the river that is closest to our Neenah facility, Operable Unit 2 (“OU2”), which is the portion of the river between dams at Appleton and Little Rapids, and Operable Units 3 through 5 (“OU3 – 5”), an area approximately 20 miles downstream of our Neenah facility.

The following summarizes the status of our potential exposure:

Response Actions
OU1 and OU2 On January 7, 2003, the Wisconsin Department of Natural Resources (the “Wisconsin DNR”) and the Environmental Protection Agency (“EPA”) issued a Record of Decision (“ROD”) for the cleanup of OU1 and OU2. Subject to extenuating circumstances and alternative solutions that may arise during the cleanup, the ROD requires the removal of approximately 784,000 cubic yards of sediment from OU1 and no active remediation of OU2. The ROD also requires the monitoring of the two operable units. Based on the remediation activities completed to date, contract proposals received for the remaining remediation work, and the potential availability of alternative remedies under the ROD, we believe the total remediation of OU1 will cost between $61 million and $137 million.

On July 1, 2003, WTM I Company entered into an Administrative Order on Consent (“AOC”) with EPA and the Wisconsin DNR regarding the implementation of the Remedial Design for OU1.

On October 1, 2003, the U.S. Department of Justice lodged a consent decree regarding OU1 (“the OU1 Consent Decree”) with the U.S. District Court for the Eastern District of Wisconsin. In the first quarter of 2004, the United States District Court for the Eastern District of Wisconsin entered the OU1 Consent Decree. Under terms of the OU1 Consent Decree, Glatfelter and WTM I Company each agreed to pay approximately $27 million, of which $25.0 million from each was placed in escrow to fund response work associated with remedial actions specified in the ROD. The remaining amount that the parties agreed to pay under the Consent Decree includes payments for NRD, and NRD assessment and other past costs incurred by the governments. In addition, EPA agreed to take steps to place $10 million from another source into escrow for the OU1 cleanup.

The terms of the OU1 Consent Decree and the underlying escrow agreement restrict the use of the funds to qualifying remediation activities or restoration activities at the lower Fox River site. The response work is being managed and/or performed by Glatfelter and WTM I, with governmental oversight, and funded by the amounts placed in escrow. In mid 2004, activities to remediate OU1 began including, among others, construction of de-watering and water-treatment facilities, and commencement of dredging of portions of OU1. In 2004, we completed dredging, dewatering and disposal activities covering of approximately 18,000 cubic yards of contaminated sediment from various locations in OU1. This work continued on a larger scale in 2005 and dredging activities are continuing.

The terms of the OU1 Consent Decree include provisions to be followed should the escrow account be depleted prior to completion of the response work. In this event, each company would be notified and be provided an opportunity to contribute additional funds to the escrow account and to extend the remediation effort. Should the OU1 Consent Decree be terminated due to insufficient funds, each company would lose the protections contained in the settlement and the governments may turn to one or both parties for the completion of OU1 clean up. In such a situation, the governments may also seek response work from a third party, or perform the work themselves and seek response costs from any or all PRPs for the site, including Glatfelter. Based on information currently available to us, and subject to government approval of the use of alternative remedies under the ROD, we believe the required remedial actions can be completed with the amount of monies committed under the Consent Decree. If the Consent Decree is terminated due to an insufficiency of escrow funds, Glatfelter and WTM I each remain potentially responsible for the costs necessary to complete the remedial action.

As of September 30, 2005, our portion of the escrow account totaled approximately $17.1 million, of which $7.5 million is recorded in the accompanying Condensed Consolidated Balance Sheet under the caption “Prepaid expenses and other current assets” and $9.6 million is included under the caption “Other assets.” As of September 30, 2005, our reserve for environmental liabilities, substantially all of which is for OU1 remediation activities, totaled $18.3 million.

OUs 3 – 5 On July 28, 2003, the EPA and the Wisconsin DNR issued a ROD (the “Second ROD”) for the cleanup of OU3 – 5. The Second ROD calls for the removal of 6.5 million cubic yards of sediment and certain monitoring at an estimated cost of $324.4 million but could, according to the Second ROD, cost within a range from approximately $227.0 million to

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$486.6 million. The most significant component of the estimated costs is attributable to large-scale sediment removal by dredging.

During the first quarter of 2004, NCR Corp. and Georgia Pacific Corp. entered into an AOC with the United States EPA under which they agreed to perform the Remedial Design for OUs 3 – 5, thereby accomplishing a first step towards remediation.

We do not believe that we have more than a de minimis share of any equitable distribution of responsibility for OU3 – 5 after taking into account the location of our Neenah facility relative to the site and considering other work or funds committed or expended by us. However, uncertainty regarding responsibilities for the cleanup of these sites continues due to disagreement over a fair allocation or apportionment of responsibility.

Natural Resource Damages The ROD and Second ROD do not place any value on claims for NRDs associated with this matter. As noted above, NRD claims are distinct from costs related to the primary remediation of a Superfund site. Calculating the value of NRD claims is difficult, especially in the absence of a completed remedy for the underlying contamination. The State of Wisconsin, the United States Fish and Wildlife Service (“FWS”), the National Oceanic and Atmospheric Administration (“NOAA”), four Indian tribes and the Michigan Attorney General have asserted that they possess NRD claims related to the lower Fox River and the Bay of Green Bay.

In June 1994, FWS notified the then identified PRPs that it considered them potentially responsible for NRDs. The federal, tribal and Michigan agencies claiming to be NRD trustees have proceeded with the preparation of an NRD assessment. While the final assessment has yet to be completed, the federal trustees released a plan on October 25, 2000 that values their NRDs for injured natural resources between $176 million and $333 million. We believe that the federal NRD assessment is technically and procedurally flawed. We also believe that the NRD claims alleged by the various alleged trustees are legally and factually without merit.

The OU1 Consent Decree required that Glatfelter and WTM I each pay the governments $1.5 million for NRDs for the Fox River site, and $150,000 for NRD assessment costs. Each of these payments was made in return for credit to be applied toward each settling company’s potential liability for NRDs associated with the Fox River site.

Other Information The Wisconsin DNR and FWS have each published studies, the latter in draft form, estimating the amount of PCBs discharged by each identified PRP to the lower Fox River and the Bay of Green Bay. These reports estimate our Neenah facility’s share of the volumetric discharge to be as high as 27%. We do not believe the volumetric estimates used in these studies are accurate because (a) the studies themselves disclose that they are not accurate and (b) the volumetric estimates contained in the studies are based on assumptions for which there exists no evidence. We believe that our volumetric contribution is significantly lower than the estimates set forth in these studies. Further, we do not believe that a volumetric allocation would constitute an equitable distribution of the potential liability for the contamination. Other factors, such as the location of contamination, the location of discharge and a party’s role in causing discharge must be considered in order for the allocation to be equitable.

We have entered into interim cost-sharing agreements with four of the other PRPs, pursuant to which such PRPs have agreed to share both defense costs and costs for scientific studies relating to PCBs discharged into the lower Fox River. These interim cost-sharing agreements have no bearing on the final allocation of costs related to this matter. Based upon our evaluation of the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination, we believe our share of any liability among the identified PRPs is much less than our per capita share of the cost sharing agreement.

We also believe that there exist additional potentially responsible parties other than the identified PRPs. For instance, certain of the identified PRPs discharged their wastewater through public wastewater treatment facilities, which we believe makes the owners of such facilities potentially responsible in this matter. We also believe that entities providing wastepaper-containing PCBs to each of the recycling mills are also potentially responsible for this matter.

While the OU1 Consent Decree clarifies exposure we may have with regard to the Fox River site, it does not completely resolve our potential liability related to this matter. We continue to believe that this matter may result in litigation, but cannot predict the timing, nature, extent or magnitude of such litigation. We currently are unable to predict our ultimate cost related to this matter.

Reserves for Fox River Environmental Liabilities We have reserves for environmental liabilities with contractual obligations and for those environmental matters for which it is probable that a

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claim will be made, that an obligation may exist, and for which the amount of the obligation is reasonably estimable. The following table summarizes information with respect to such reserves.


	September 30,		December 31,
In millions	2005		2004

Recorded as:
Environmental liabilities	$	7.8	$	7.7
Other long-term liabilities		10.5		13.9

Total	$	18.3	$	21.6

The classification of our environmental liabilities is based on the development of the underlying Fox River OU1 remediation plan and execution of the related escrow agreement for the funding thereof. The reserve balance declined as a result of payments associated with remediation activities under the OU1 Consent Decree and items related to the Fox River matter. We did not record charges associated with the Fox River matter to our results of operations during the first nine months of 2005 or 2004.

Other than with respect to the OU1 Consent Decree, the amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, NRDs and property damage liabilities cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contamination, the extent and timing of any technological advances for pollution abatement, the response actions that may be required, the availability of qualified remediation contractors, equipment, and landfill space, and the number and financial resources of any other PRPs.

Range of Reasonably Possible Outcomes Based on currently available information, including actual remediation costs incurred to date, we believe that the remediation of OU1 will be satisfactorily completed for the amounts provided under the OU1 Consent Decree. Our assessment is dependent, in part, on government approval of the use of alternative remedies in OU1, as set forth in the ROD, on the successful negotiation of acceptable contracts to complete remediation activities, and an effective implementation of the chosen technologies by the remediation contractor.

The OU1 Consent Decree does not address response costs necessary to remediate the remainder of the Fox River site and only addresses NRDs and claims for reimbursement of government expenses to a limited extent. Due to judicial interpretations that find CERCLA imposes joint and several liability, uncertainty persists regarding our exposure with respect to the remainder of the Fox River site.

Based on our analysis of currently available information and experience regarding the cleanup of hazardous substances, we believe that it is reasonably possible that our costs associated with the lower Fox River and the Bay of Green Bay may exceed our original reserves by amounts that may prove to be insignificant or that could range, in the aggregate, up to approximately $125 million, over a period that is undeterminable but could range beyond 20 years. We believe that the likelihood of an outcome in the upper end of the monetary range is significantly less than other possible outcomes within the range and that the possibility of an outcome in excess of the upper end of the monetary range is remote.

In our estimate of the upper end of the range, we have considered: (i) the remedial actions agreed to in the OU1 Consent Decree and our belief that the required work can be accomplished with the funds to be escrowed under the OU1 Consent Decree; and (ii) no active remediation of OU2. We have also assumed dredging for the remainder of the Fox River site as set forth in the Second ROD, although at a significantly higher cost than estimated in the Second ROD. We have also assumed our share of the ultimate liability to be 18%, which is significantly higher than we believe is appropriate or than we will incur, and a level of NRD claims and claims for reimbursement of expenses from other parties that, although reasonably possible, is unlikely.

In estimating both our current reserves for environmental remediation and other environmental liabilities and the possible range of additional costs, we have assumed that we will not bear the entire cost of remediation and damages to the exclusion of other known PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, generally based on their financial condition and probable contribution. Our evaluation of the other PRPs’ financial condition included the review of publicly available financial information. Furthermore, we believe certain of these PRPs have corporate or contractual relationships with additional entities that may shift to those entities some or all of the monetary obligations arising from the Fox River site. The relative probable contribution is based upon our knowledge that at least two PRPs manufactured the paper, and arranged for the disposal of the wastepaper, that included the PCBs and consequently, in our opinion, bear a higher level of responsibility.

In addition, our assessment is based upon the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We continue to evaluate our exposure and the level of our reserves, including, but not limited to, our potential

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share of the costs and NRDs, if any, associated with the Fox River site.

We believe that we are insured against certain losses related to the Fox River site, depending on the nature and amount of the losses. On July 30, 2003, we filed a Complaint in the Circuit Court for the County of Milwaukee, Wisconsin, against our insurers, seeking damages for breach of contract and declaratory relief related to such losses. The filing of our lawsuit followed the issuance of a Wisconsin Supreme Court opinion regarding environmental coverage issues that is favorable to policyholders. Since the filing of the complaint, we received a total of $35.0 million from the successful resolution of certain claims under insurance policies related to the Fox River environmental matter.

Summary Our current assessment is that we should be able to manage these environmental matters without a long-term, material adverse impact on the Company. These matters could, however, at any particular time or for any particular year or years, have a material adverse effect on our consolidated financial position, liquidity and/or results of operations or could result in a default under our loan covenants. Moreover, there can be no assurance that our reserves will be adequate to provide for future obligations related to these matters, that our share of costs and/or damages for these matters will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. With regard to the Fox River site, if we are not successful in managing the

implementation of the OU1 Consent Decree and/or if we are ordered to implement the remedy proposed in the Second ROD, such developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and may result in a default under our loan covenants.

Environmental Matters In addition to the specific matters discussed above, we are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governments with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate the adverse effects, if any, on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources.

We are also involved in other lawsuits that are ordinary and incidental to our business. The ultimate outcome of these lawsuits cannot be predicted with certainty; however, we do not expect that such lawsuits in the aggregate or individually will have a material adverse effect on our consolidated financial position, liquidity or results of operations.

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15. SEGMENT INFORMATION

In connection with the implementation of the North American Restructuring Program and other initiatives, during 2004, we changed the way we manage our business and transitioned from three distinct business units to two: the Europe-based Long Fiber & Overlay Papers business unit and the North America-based Specialty Papers business unit. While the Long Fiber & Overlay Papers business unit remains unchanged, the formation of the Specialty Papers business unit, which

consists of the former Engineered Products and the Printing & Converting Papers business units, allows us to more effectively manage the demand planning process, optimize product mix, minimize process variability and meet the demands of our customers. As a result of this transition, all prior period segment data presented herein has been restated to give effect to the further refinement of our organizational structure discussed above.

The following table sets forth financial and other information by business unit for the periods indicated:


Business Unit Performance	For the Three Months Ended September 30,
In thousands, except net tons sold	Specialty Papers				Long Fiber & Overlay				Other and Unallocated						Total

	2005		2004		2005		2004		2005			2004			2005			2004

Net sales	$	100,500	$	90,446	$	46,259	$	52,565	$	21		$	64		$	146,780		$	143,075
Energy sales, net		2,414		2,616		—		—		—			—			2,414			2,616

Total revenue		102,914		93,062		46,259		52,565		21			64			149,194			145,691
Cost of products sold		87,808		81,514		39,475		41,071		23			51			127,306			122,636

Gross profit (loss)		15,106		11,548		6,784		11,494		(2	)		13			21,888			23,055
SG&A		9,716		8,292		4,926		5,613		3,843			1,109			18,485			15,014
Pension income		—		—		—		—		(4,152	)		(4,338	)		(4,152	)		(4,338	)
Restructuring charges		—		—		—		—		—			16,508						16,508
Gains on dispositions of plant, equipment and timberlands		—		—		—		—		(1,327	)		(2,464	)		(1,327	)		(2,464	)
Gain on insurance recoveries		—		—		—		—		—			(7,285	)		—			(7,285	)

Total operating income (loss)		5,390		3,256		1,858		5,881		1,634			(3,517	)		8,882			5,620
Non-operating income (expense)		—		—		—		—		(2,563	)		(3,307	)		(2,563	)		(3,307	)

Income (loss) before income taxes	$	5,390	$	3,256	$	1,858	$	5,881	$	(929	)	$	(6,824	)	$	6,319		$	2,313


Supplementary Data
Net tons sold		119,257		109,889		11,454		12,718		9			23			130,720			122,630
Depreciation expense	$	8,963	$	9,546	$	3,567	$	3,643		—			—		$	12,530		$	13,189


	For The Nine Months Ended September 30,
In thousands, except net tons sold	Specialty Papers					Long Fiber & Overlay				Other and Unallocated						Total

	2005		2004			2005		2004		2005			2004			2005			2004

Net sales	$	287,727		253,484		$	148,183		149,887	$	49		$	810		$	435,959		$	404,181
Energy sales, net		7,673		7,924			—		—		—			—			7,673			7,924

Total revenue		295,400		261,408			148,183		149,887		49			810			443,632			412,105
Cost of products sold		257,161		239,022			123,516		120,469		54			995			380,731			360,486

Gross profit (loss)		38,239		22,386			24,667		29,418		(5	)		(185	)		62,901			51,619
SG&A		29,785		27,784			17,196		16,581		6,700			1,869			53,681			46,234
Pension income		—		—			—		—		(12,398	)		(13,022	)		(12,398	)		(13,022	)
Restructuring charges		—		—			—		—		—			17,375			—			17,375
Gains on dispositions of plant, equipment and timberlands		—		—			—		—		(1,408	)		(35,894	)		(1,408	)		(35,894	)
Gain on insurance recoveries		—		—			—		—		(2,200	)		(32,785	)		(2,200	)		(32,785	)

Total operating income (loss)		8,454		(5,398	)		7,471		12,837		9,301			62,272			25,226			69,711
Non-operating income (expense)		—		—			—		—		(7,820	)		(9,164	)		(7,820	)		(9,164	)

Income before income taxes	$	8,454		(5,398	)	$	7,471		12,837	$	1,481		$	53,108		$	17,406		$	60,547


Supplementary Data
Net tons sold		341,200		320,133			35,181		36,512		16			370			376,397			357,015
Depreciation expense	$	26,832	$	28,587		$	11,354	$	10,982		—			—		$	38,186		$	39,569

Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally

accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure

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performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or included in “Other and Unallocated” in the table above. Certain prior period information has been reclassified to conform to the current period presentation.

Management evaluates results of operations before non-cash pension income, restructuring related charges, unusual items, effects of asset dispositions and insurance

recoveries because it believes this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from core operations. This presentation is closely aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

P. H. Glatfelter Company:

We have reviewed the accompanying condensed consolidated balance sheet of P. H. Glatfelter Company and Subsidiaries as of September 30, 2005, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2005 and 2004, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of P. H. Glatfelter Company and Subsidiaries as of December 31, 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 15, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania
November 4, 2005

GLATFELTER

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

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its 2004 Annual Report on Form 10-K/A Amendment No. 1.

Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-Q are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements regarding expectations of, among others, net sales, costs of products sold, non-cash pension income, environmental costs, capital expenditures and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:

	i.		variations in demand for, or pricing of, our products;

	ii.		changes in the cost or availability of raw materials we use, in particular market pulp, pulp substitutes, and abaca fiber, and changes in energy-related costs;

	iii.		our ability to develop new, high value-added Specialty Papers and Long Fiber & Overlay Papers;

	iv.		the impact of competition, changes in industry paper production capacity, including the construction of new mills, the closing of mills and incremental changes due to capital expenditures or productivity increases;

	v.		cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damages related thereto, such as the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls (“PCBs”) in the lower Fox River on which our Neenah mill is located; and the costs of

environmental matters at our former Ecusta Division mill;

	vi.		the gain or loss of significant customers and/or on-going viability of such customers;

	vii.		risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;

	viii.		geopolitical events, including war and terrorism;

	ix.		enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;

	x.		adverse results in litigation;

	xi.		disruptions in production and/or increased costs due to labor disputes;

	xii.		our ability to realize the value of our timberlands;

	xiii.		the recovery of environmental-related losses under our insurance policies; and

	xiv.		our ability to identify, finance and consummate future alliances or acquisitions.

Introduction We manufacture, both domestically and internationally, a wide array of specialty papers and engineered products. Substantially all of our revenue is earned from the sale of our products to customers in numerous markets, including book publishing, food and beverage, decorative laminates for furniture and flooring, and other highly technical niche markets.

Overview The comparison of our financial results for the first nine months of 2005 versus the first nine months of 2004 reflects the following significant items:

1)		Demand for products in our North America-based Specialty Papers business unit improved and selling prices strengthened beginning in the second quarter of 2004 benefiting the period-to-period comparison;

2)		The results of our Long Fiber & Overlay Papers business unit, based in Europe, declined in the comparison primarily due to increased competition and softer demand in the composite laminates and food and beverage markets;

3)		Input costs, primarily fiber and energy related, increased in the comparison putting pressures on our margins;

4)		Selling, general & administrative expenses increased due to increased legal costs and a charge to increase our reserve for costs associated with environmental matters at the former Ecusta facility located in North Carolina; and

5)		The North America Restructuring Program, an initiative focused on improving profitability by enhancing our product mix, increasing workforce productivity, and reducing costs by enhancing supply chain management strategies, was implemented beginning in the second half of 2004.

GLATFELTER

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RESULTS OF OPERATIONS

Nine Months Ended September 30, 2005 versus the
Nine Months Ended September 30, 2004

The following table sets forth summarized results of operations:


	Nine Months Ended
	September 30
In thousands, except per share	2005		2004

Net sales	$	435,959	$	404,181
Gross profit		74,043		63,583
Operating income		25,226		69,711
Net income		11,662		36,828
Earnings per diluted share		0.26		0.84

The consolidated results of operations for the nine months includes the following significant items:


In thousands, except per share	After-tax			Diluted EPS

	Income
2005	(expense)
Gains on sale of timberlands, net of tax	$	(259	)	$	(0.01	)
Insurance recoveries		1,430			0.03
2004
Gains on sale of timberlands and corporate aircraft	$	20,593		$	0.47
Insurance recoveries		21,310			0.48
Restructuring charge		(10,773	)		(0.24	)

The above items increased earnings by $1.2 million, or $0.02 per diluted share and $31.1 million, or $0.71 per diluted share, in the first nine months of 2005 and 2004, respectively. The $(259) thousand shown above for the nine months ended September 30, 2005 represents a change to the estimated tax impact of previous timberland sales.

Business Units The following table sets forth profitability information by business unit and the composition of consolidated income before income taxes:


Business Unit Performance	For The Nine Months Ended September 30,
In thousands, except net tons sold	Specialty Papers					Long Fiber & Overlay				Other and Unallocated						Total

	2005		2004			2005		2004		2005			2004			2005			2004

Net sales	$	287,727		253,484		$	148,183		149,887	$	49		$	810		$	435,959		$	404,181
Energy sales, net		7,673		7,924			—		—		—			—			7,673			7,924

Total revenue		295,400		261,408			148,183		149,887		49			810			443,632			412,105
Cost of products sold		257,161		239,022			123,516		120,469		54			995			380,731			360,486

Gross profit (loss)		38,239		22,386			24,667		29,418		(5	)		(185	)		62,901			51,619
SG&A		29,785		27,784			17,196		16,581		6,700			1,869			53,681			46,234
Pension income		—		—			—		—		(12,398	)		(13,022	)		(12,398	)		(13,022	)
Restructuring charges		—		—			—		—		—			17,375			—			17,375
Gains on dispositions of plant, equipment and timberlands		—		—			—		—		(1,408	)		(35,894	)		(1,408	)		(35,894	)
Gain on insurance recoveries		—		—			—		—		(2,200	)		(32,785	)		(2,200	)		(32,785	)

Total operating income (loss)		8,454		(5,398	)		7,471		12,837		9,301			62,272			25,226			69,711
Non-operating income (expense)		—		—			—		—		(7,820	)		(9,164	)		(7,820	)		(9,164	)

Income before income taxes	$	8,454		(5,398	)	$	7,471		12,837	$	1,481		$	53,108		$	17,406		$	60,547


Supplementary Data
Net tons sold		341,200		320,133			35,181		36,512		16			370			376,397			357,015
Depreciation expense	$	26,832	$	28,587		$	11,354	$	10,982		—			—		$	38,186		$	39,569

In 2004 we changed the way we manage our business and transitioned from three distinct business units to two: the Europe-based Long Fiber & Overlay Papers business unit and the North America-based Specialty Papers business unit. While the Long Fiber & Overlay business unit remains unchanged, the combination of the former Engineered Products and the Printing & Converting Papers business units into Specialty Papers allows us to more effectively manage the demand planning process, optimize product mix, minimize process variability and meet the demands of our customers. As a result of this transition, all prior period segment data has been restated to give effect to the further refinement of our organizational structure discussed above.

Results of individual business units are presented based on our management accounting practices and

management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or included in “Other and Unallocated” in the table above. Certain prior period information has been reclassified to conform to the current period presentation.

GLATFELTER

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Management evaluates results of operations before non-cash pension income, and if applicable, restructuring related charges, unusual items, effects of asset dispositions and insurance recoveries because it believes this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from core operations. This presentation is closely aligned with the management and operating structure of our Company.

It is also on this basis that our performance is evaluated internally and by our Board of Directors.

Sales and Costs of Products Sold


	Nine Months Ended
	September 30
In thousands	2005			2004			Change

Net sales	$	435,959		$	404,181		$	31,778
Energy sales — net		7,673			7,924			(251	)

Total revenues		443,632			412,105			31,527
Costs of products sold		369,589			348,522			21,067

Gross profit	$	74,043		$	63,583		$	10,460

Gross profit as a percent of Net sales		17.0	%		15.7	%

The following table sets forth the contribution to consolidated net sales by each business unit:


	Nine Months Ended
	Percent of Total
	2005			2004

Business Unit
Specialty Papers		66.0	%		62.7	%
Long-Fiber & Overlay Papers		34.0			37.1
Tobacco Papers		—			0.2

Total		100.0	%		100.0	%

Net sales totaled $436.0 million for the first nine months of 2005, an increase of $31.8 million, or 7.9%, compared to the same period a year ago. This growth was primarily driven by strengthened product pricing and a 6.6% increase in volumes shipped in the Specialty Papers business unit compared with the same period of 2004. Higher pricing for Specialty Papers’ products increased revenue by $13.1 million compared to the same period a year ago. Long Fiber & Overlay Papers’ volumes shipped declined approximately 3% and lower selling prices, on a constant currency basis, decreased revenue by $4.6 million. The translation of foreign currencies favorably impacted net sales in the first nine months of 2005 by $3.7 million compared to the same period a year ago.

Costs of products sold increased $21.1 million in the comparison. In addition to the effect of increased shipping volumes, higher raw material and energy prices increased costs of products sold by approximately $8.2 million and the translation of foreign currencies increased costs by $3.3 million. In addition, we took market-related downtime during the first nine months of 2005 approximating 6% of the production capacity of the Long Fiber & Overlay business unit. These factors were partially offset by reduced labor costs attributable to the North American Restructuring Program and to improved operating performance at our Neenah, WI facility.

Non-Cash Pension Income Non-cash pension income results from the considerably over-funded status of our pension plans. The amount of pension income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. The following summarizes non-cash pension income for each period:


	Nine Months Ended
	September 30
In thousands	2005		2004		Change

Recorded as:
Costs of products sold	$	11,142	$	11,964	$	(822	)
SG&A expense		1,256		1,058		198

Total	$	12,398	$	13,022	$	(624	)

The following summarizes SG&A expenses, restructuring charges, gains from asset dispositions and other nonrecurring items:


	Nine Months Ended
	September 30
In thousands	2005			2004			Change

SG&A expenses	$	52,425		$	45,176		$	7,249
Restructuring charges		—			17,375			(17,375	)
Gains on dispositions of plant, equipment and timberlands		(1,408	)		(35,894	)		34,486
Gains from insurance recoveries		(2,200	)		(32,785	)		30,585

Selling, General and Administrative (“SG&A”) expenses increased $7.2 million in the comparison to the year-earlier period primarily due to $3.7 million of higher litigation related costs and a $2.7 million charge to increase our reserve for costs associated with environmental matters at the former Ecusta facility located in North Carolina. See Item 1 — Financial Statements, Note 14 for additional discussion of this matter.

GLATFELTER

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Gain on Sales of Plant, Equipment and Timberlands During the first nine months of 2005, various miscellaneous assets were sold for a pre-tax gain of $1.4 million.

During the first nine months of 2004 we completed the sales of certain assets as summarized below.


Dollars in thousands	Acres		Proceeds		Pre-tax Gain

Nine Months Ended September 30, 2004
Timberlands		2,479	$	32,683	$	32,343
Corporate Aircraft		n/a		2,861		2,554
Other		n/a		1,175		997

Total			$	36,719	$	35,894

All property sales set forth in the table above were sold for cash.

Insurance Recoveries During the first nine months of 2005 and 2004, we reached successful resolution of certain claims under insurance policies related to the Fox River environmental matter. Insurance recoveries included in the results of operations totaled $2.2 million in the first nine months of 2005 and $32.8 million in the first nine months of 2004. All recoveries were received in cash prior the end of the applicable period.

We continue to pursue legal actions against certain other insurers that we believe are liable under similar policies related to the Fox River environmental matter.

Income Taxes Net income for the first nine months of 2005 reflects an effective tax rate of 33.0% compared to 39.2% in the same period a year ago. The lower effective tax rate in 2005 was primarily due to shifts in the jurisdictions in which taxable income was earned, lower amounts of timberland sales in the comparison, and the effect of tax credits relative to the level of pre-tax income.

Foreign Currency We own and operate paper and pulp mills in Germany, France and the Philippines. The local currency in Germany and France is the Euro, while in the Philippines the currency is the Peso. During the first nine months of 2005, these operations generated approximately 29% of our sales and 30% of operating expenses. The translation of the results from these international operations into U.S. dollars is subject to changes in foreign currency exchange rates.

The table below summarizes the effect from foreign currency translation on 2005 reported results compared to 2004:


	Nine Months Ended
In thousands	September 30

	Favorable
	(unfavorable)
Net sales	$	3,652
Costs of products sold		(3,283	)
SG&A expenses		(442	)
Income taxes and other		12

Net income	$	(61	)

The above table only presents the financial reporting impact of foreign currency translations. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets. The strengthening of the Euro relative to certain other currencies in the comparison of the first nine months of 2005 to the same period of 2004, adversely affected the price competitiveness of our Germany-based Long Fiber & Overlay Papers business unit relative to certain competitors.

Three Months Ended September 30, 2005 versus the
Three Months Ended September 30, 2004

The following table sets forth summarized results of operations:


	Three Months Ended
	September 30
In thousands, except per share	2005		2004

Net sales	$	146,780	$	143,075
Gross profit		25,616		27,042
Operating income		8,882		5,620
Net income (loss)		3,663		2,198
Earnings per diluted share		0.08		0.05

The consolidated results of operations for the three months ended September 30, 2005 and 2004 includes the following significant items:


In thousands, except per share	After-tax			Diluted EPS

	Income
2005	(expense)
Gains on sale of timberlands, net of taxes	$	(259	)	$	(0.01	)
2004
Gains on sale of timberlands	$	947		$	0.02
Insurance recoveries		5,908			0.13
Restructuring charges		(10,249	)		(0.23	)

The above items decreased earnings from continuing operations by $0.3 million, or $0.01 per diluted share, in the third quarter of 2005 and $3.4 million, or $0.08 per diluted share, in the third quarter of 2004. The amount shown above for the three months ended September 30, 2005 represents a change to the estimated tax impact of previous timberland sales.

GLATFELTER

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Business Units The following table sets forth profitability information by business unit and the composition of consolidated income before income taxes:


Business Unit Performance	For the Three Months Ended September 30,
In thousands, except net tons sold	Specialty Papers				Long Fiber & Overlay				Other and Unallocated						Total

	2005		2004		2005		2004		2005			2004			2005			2004

Net sales	$	100,500	$	90,446	$	46,259	$	52,565	$	21		$	64		$	146,780		$	143,075
Energy sales, net		2,414		2,616		—		—		—			—			2,414			2,616

Total revenue		102,914		93,062		46,259		52,565		21			64			149,194			145,691
Cost of products sold		87,808		81,514		39,475		41,071		23			51			127,306			122,636

Gross profit (loss)		15,106		11,548		6,784		11,494		(2	)		13			21,888			23,055
SG&A		9,716		8,292		4,926		5,613		3,843			1,109			18,485			15,014
Pension income		—		—		—		—		(4,152	)		(4,338	)		(4,152	)		(4,338	)
Restructuring charges		—		—		—		—		—			16,508						16,508
Gains on dispositions of plant, equipment and timberlands		—		—		—		—		(1,327	)		(2,464	)		(1,327	)		(2,464	)
Gain on insurance recoveries		—		—		—		—		—			(7,285	)		—			(7,285	)

Total operating income (loss)		5,390		3,256		1,858		5,881		1,634			(3,517	)		8,882			5,620
Non-operating expense		—		—		—		—		(2,563	)		(3,307	)		(2,563	)		(3,307	)

Income (loss) before income taxes	$	5,390	$	3,256	$	1,858	$	5,881	$	(929	)	$	(6,824	)	$	6,319		$	2,313


Supplementary Data
Net tons sold		119,257		109,889		11,454		12,718		9			23			130,720			122,630
Depreciation expense	$	8,963	$	9,546	$	3,567	$	3,643		—			—		$	12,530		$	13,189

The following table summarizes sales and costs of products sold for the three months ended September 30, 2005 and 2004.

Sales and Costs of Products Sold


	Three Months Ended
	September 30
In thousands	2005			2004			Change

Net sales	$	146,780		$	143,075		$	3,705
Energy sales — net		2,414			2,616			(202	)

Total revenues		149,194			145,691			3,503
Costs of products sold		123,578			118,649			4,929

Gross profit	$	25,616		$	27,042		$	(1,426	)

Gross profit as a percent of Net sales		17.5	%		18.9	%

The following table sets forth the contribution to consolidated net sales by each business unit:


	Percent of Total
	2005			2004

Business Unit
Specialty Papers		68.5	%		63.2	%
Long-Fiber & Overlay Papers		31.5			36.7
Tobacco Papers		—			0.1

Total		100.0	%		100.0	%

Net sales totaled $146.8 million for the third quarter of 2005, an increase of 2.5% compared to the same quarter a year ago. In our Specialty Papers business unit, net sales increased $10.1 million, or 11.1%, consisting of an 8.5% increase in volume and $2.2 million attributable to higher product pricing. Net tons shipped in the quarter-to-quarter comparison were particularly strong in this unit’s book publishing and engineered products markets, each of which generated volume growth of approximately 13% and 9%, respectively. Long Fiber &

Overlay Papers’ shipments declined 10% and selling prices declined $1.7 million on a constant currency basis in the quarter-to-quarter comparison. The decline in this unit’s performance, continuing trends experienced throughout much of 2005, reflects the adverse effects of a weaker economy in Western Europe and increased competition primarily in the composite laminate and food and beverage product lines.

Costs of products sold totaled $123.6 million for the third quarter of 2005, an increase of $4.9 million compared with the same quarter a year ago. In addition to the effect of an increase in net tons shipped, the increase was primarily due to higher fiber, other raw materials, and energy prices aggregating approximately $1.7 million. In addition, we took market-related downtime during the third quarter of 2005 approximating 12% of the production capacity of the Long Fiber & Overlay business unit.


	Three Months Ended
	September 30
In thousands	2005		2004		Change

Recorded as:
Costs of products sold	$	3,728	$	3,987	$	(259	)
SG&A expense		424		352		72

Total	$	4,152	$	4,339	$	(187	)

GLATFELTER

- 23 -

The following summarizes SG&A expenses, restructuring charges, gains from asset dispositions and other nonrecurring items:


	Three Months Ended
	September 30
In thousands	2005			2004			Change

SG&A expenses	$	18,061		$	14,663		$	3,398
Restructuring charges		—			16,508			(16,508	)
Gains on dispositions of plant, equipment and timberlands		(1,327	)		(2,464	)		1,137
Gains from insurance recoveries		—			(7,285	)		7,285

Selling, General and Administrative (“SG&A increased primarily due to additional charges totaling $2.7 million associated with environmental matters at our former Ecusta facility located in North Carolina. See Item 1 — Financial Statements, Note 14 for additional discussion of this matter.

Income Taxes Net income for the three months ended September 30, 2005 reflects an effective tax rate of 42.0% compared to 5.0% in the same period a year ago. The lower effective rate in 2004 was due to changes in the tax treatment of timberland sales and insurance recoveries completed earlier in 2004.

Foreign Currency We own and operate paper and pulp mills in Germany, France and the Philippines. The local currency in Germany and France is the Euro, while in the Philippines the currency is the Peso. During the third quarter of 2005, these operations generated approximately 27% of our sales and 28% of operating expenses. The translation of the results from these international operations into U.S. dollars is subject to changes in foreign currency exchange rates.

The table below summarizes the effect from foreign currency translation on reported results for the third quarter of 2005 compared to the same quarter of 2004:


	Three Months Ended
In thousands	September 30, 2005

	Favorable
	(unfavorable)
Net sales	$	(73	)
Costs of products sold		30
SG&A expenses		(4	)
Income taxes and other		(3	)

Net income	$	(50	)

LIQUIDITY AND CAPITAL RESOURCES

Our business is capital intensive and requires expenditures for new or enhanced equipment, for environmental compliance matters and to support our business strategy and research and development efforts. The following table summarizes cash flow information for each of the periods presented.


	Nine Months Ended
	September 30
In thousands	2005			2004

Cash and cash equivalents at beginning of period	$	39,951		$	15,566
Cash provided by (used for)
Operating activities		11,596			25,730
Investing activities		(20,808	)		22,896
Financing activities		(13,107	)		(52,774	)
Effect of exchange rate changes on cash		(2,249	)		(187	)

Net cash provided (used)		(24,568	)		(4,335	)

Cash and cash equivalents at end of period	$	15,383		$	11,231

The change in cash generated from operations in the comparison was primarily due to a $16.6 million increase in income taxes paid in the period-to-period comparison, a decline in insurance recoveries, net of amounts escrowed to fund environmental remediation activities, totaling $5.0 million. These factors were partially offset by a $10.5 million increase in gross profit.

The changes in investing cash flows reflect cash proceeds in the first nine months of 2004 from dispositions of property, equipment and timberlands totaling $36.7 million. Further, capital expenditures totaled $22.0 million and $14.3 million in the period-to-period comparison. We currently expect capital expenditures in the full year 2005 to approximate $30 million to $35 million compared to $19 million in 2004.

The following table sets forth our outstanding long-term indebtedness:


	September 30,			December 31,
In thousands	2005			2004

Revolving credit facility, due June 2006	$	18,345		$	23,277
6^7/8% Notes, due July 2007		150,000			150,000
Note payable — SunTrust, due March 2008		34,000			34,000
Other notes, various		—			446

Total long-term debt		202,345			207,723
Less current portion		(18,345	)		(446	)

Long-term debt, excluding current portion	$	184,000		$	207,277

The significant terms of the debt obligations are set forth in Item 1 — Financial Statements, Note 12.

GLATFELTER

- 24 -

During the first nine months of 2005 and 2004, cash dividends paid on common stock totaled $11.9 million $11.8 million, respectively. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments.

We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of mills we operate, or have operated. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. Because environmental regulations are not consistent worldwide, our ability to compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance.

We expect to meet all of our near- and longer-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility or other bank lines of credit and other long-term debt. However, as discussed in Item 1 — Financial Statements — Note 14, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.

Off-Balance-Sheet Arrangements As of September 30, 2005 and December 31, 2004, we had not entered into any off-balance-sheet arrangements. A financial derivative instrument to which we are a party and guarantees of indebtedness, which solely consists of obligations of subsidiaries and a partnership, are

reflected in the consolidated balance sheets included herein in Item 1 — Financial Statements.

OUTLOOK We expect market conditions in our Specialty Papers business unit to remain relatively stable in the near term with traditional seasonal slowing. In addition, we expect continued volume growth in engineered products.

Our Long Fiber & Overlay Papers business unit continues to be challenged from increased competition and overcapacity and weak economic conditions in certain markets in Western Europe. Demand for this unit’s products is expected to remain soft for the balance of the year, particularly when compared with a very strong fourth quarter in 2004. We are approaching the completion of a detailed and comprehensive program designed to improve the performance of our Long Fiber & Overlay business unit. Similar to our successful 2004 North America Restructuring Program, the objectives of this program will include:

	•		Improving productivity of European facilities through workforce redesign;

	•		Reducing our costs to produce by implementing improved and expanded supply-chain management strategies and redesigning end-to-end planning and scheduling processes at our European operations; and

	•		Enhancing new product development activities to aggressively pursue new market opportunities.

Energy costs have risen substantially over the last two years with an acceleration of this increase over the last several months. Our operations are impacted by higher energy costs through direct purchase of energy for our facilities, in-bound and outbound freight and the purchase of raw materials that have a high energy related cost component. If the current energy cost levels persist and the market price of our products does not increase, our financial results will be adversely impacted.

GLATFELTER

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*ITEM 3.*		*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS*


	Year Ended December 31														At September 30, 2005

															Carrying
Dollars in thousands	2005			2006			2007			2008			2009		Value			Fair Value

Long-term debt
Average principal outstanding
At fixed interest rates	$	184,000		$	184,000		$	115,250		$	8,500			—	$	184,000		$	188,278
At variable interest rates		18,345			10,701			—			—			—		18,345			18,345
Weighted-average interest rate
On fixed interest rate debt		6.31	%		6.31	%		5.97	%		3.82	%		—
On variable interest rate debt		3.54			3.83			—			—			—

Cross-currency swap
Pay variable — EURIBOR	€	72,985		€	34,993			—			—			—	$	(17,940	)	$	(17,940	)
Variable rate payable		2.89	%		2.89	%		—			—			—
Receive variable — US$ LIBOR	$	70,000		$	33,562			—			—			—
Variable rate receivable		4.61	%		4.61	%		—			—			—

The table above presents average principal outstanding and related interest rates for the next five years and the amounts of cross-currency swap agreements. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.

Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At September 30, 2005, we had long-term debt outstanding of $202.3 million, of which $18.3 million, or 9.0%, was at variable interest rates.

Variable-rate debt outstanding represents borrowings under our revolving credit facility that incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin. At September 30, 2005, the interest rate paid was 3.54%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.2 million.

At September 30, 2005, we had a cross-currency swap agreement outstanding with a termination date of June 24, 2006. Under this transaction, we swapped $70.0 million for approximately €73 million, pay interest on the Euro portion of the swap at a floating Eurocurrency Rate (EURIBOR), plus applicable margins and receive interest on the dollar portion of the swap at a floating U.S. dollar LIBOR rate, plus applicable margins. The cross-currency swap is designed to provide protection from the impact that changes in currency rates have on certain U.S. dollar-denominated inter-company obligations recorded at our subsidiary in Gernsbach, Germany, S&H. The cross-currency swaps are recorded at fair value on the Condensed Consolidated Balance Sheet under the

caption “Other current liabilities” at September 30, 2005 and “Other long-term liabilities” at December 31, 2004. Changes in fair value are recognized in earnings as “Other income (expense)” in the Condensed Consolidated Statements of Income. Changes in fair value of the cross-currency swap transaction are substantially offset by changes in the value of U.S. dollar-denominated inter-company obligations when they are re-measured in Euros, the functional currency of S&H.

We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. Dollar. During the nine months ended September 30, 2005, approximately 71% of our net sales were shipped from the United States, 24% from Germany, and 5% from other international locations.


*ITEM 4.*		*CONTROLS AND PROCEDURES*

Evaluation of Disclosure Controls and Procedures Our chief executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2005, have concluded that, as of the evaluation date, our disclosure controls and procedures were effective.

Changes in Internal Controls There was no change in our internal control over financial reporting during the three months ended September 30, 2005 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

GLATFELTER

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ITEM 6. EXHIBITS

(a) Exhibits

The following exhibits are filed herewith.


			15			Letter in lieu of consent regarding review report of unaudited interim financial information.

			31.1			Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

			31.2			Certification of John C. van Roden, Jr., Executive Vice President and Chief Financial Officer of Glatfelter, pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

			32.1			Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

			32.2			Certification of John C. van Roden, Jr., Executive Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.


	P. H. GLATFELTER COMPANY
	(Registrant)
November 4, 2005
	By	/s/ John P. Jacunski
		John P. Jacunski
		Vice President and Corporate Controller
		(as chief accounting officer)

GLATFELTER

-27-


		Page

PART I — FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2005 and 2004 (unaudited)		2

	Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 (unaudited)		3

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited)		4

	Notes to Condensed Consolidated Financial Statements (unaudited)		5

	Report of Independent Registered Public Accounting Firm		18

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3	Quantitative and Qualitative Disclosures About Market Risks		26

Item 4	Controls and Procedures		26

PART II — OTHER INFORMATION

Item 6	Exhibits		27

SIGNATURES			27

EXHIBIT INDEX			28
LETTER IN LIEU OF CONSENT REGARDING REVIEW REPORT OF UNAUDITED INTERIM FINANCIAL INFORMATION
CERTIFICATION OF CEO PURSUANT TO SECTION 302
CERTIFICATION OF CFO PURSUANT TO SECTION 302
CERTIFICATION OF CEO PURSUANT TO SECTION 906
CERTIFICATION OF CFO PURSUANT TO SECTION 906


Exhibit
Number		Description

15		Letter in lieu of consent regarding review report of unaudited interim financial information, filed herewith.
31.1		Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2		Certification of John C. van Roden, Jr., Executive Vice President and Chief Financial Officer of Glatfelter, pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1		Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of, filed herewith.
32.2		Certification of John C. van Roden, Jr., Executive Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

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