<PAGE>

================================================================================

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

                           --------------------------

                                    FORM 10-Q

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

FOR THE QUARTER ENDED MARCH 31, 2004              COMMISSION FILE NUMBER 0-49741

                         PACKAGING DYNAMICS CORPORATION
             (Exact name of registrant as specified in its charter)

             DELAWARE                                     32-0009217
   (State or other jurisdiction                        (I.R.S. Employer
         of incorporation)                            Identification No.)

            3900 WEST 43RD STREET
              CHICAGO, ILLINOIS                              60632
   (Address of Principal Executive Office)                (Zip Code)

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (773) 843-8000

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.

                                 Yes [X] No [ ]

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

                                 Yes [ ] No [X]

      At May 5, 2004, there were 9,681,504 shares of common stock, par value
$0.01 per share, outstanding.

================================================================================

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         PACKAGING DYNAMICS CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                     March 31,   December 31,
                                                                                                       2004         2003
                                                                                                   -----------   ------------
<S>                                                                                                <C>           <C>
                                      ASSETS
Current Assets:
     Cash and cash equivalents................................................................     $        424  $        453
     Accounts receivable trade (net of allowance for doubtful accounts of $474 and
       $375, respectively)....................................................................           25,812        24,751
     Inventories..............................................................................           22,490        21,740
     Prepaid expenses and other...............................................................            2,425         2,567
                                                                                                   ------------  ------------
          Total current assets................................................................           51,151        49,511
                                                                                                   ------------  ------------
Property, Plant and Equipment:
     Property, plant and equipment............................................................           68,723        67,187
     Less - accumulated depreciation..........................................................          (24,982)      (23,582)
                                                                                                   ------------  ------------
          Total property, plant and equipment.................................................           43,741        43,605
                                                                                                   ------------  ------------
Other Assets:
     Goodwill, net of accumulated amortization................................................           43,423        43,724
     Miscellaneous............................................................................            1,655         1,819
                                                                                                   ------------  ------------
          Total other assets..................................................................           45,078        45,543
                                                                                                   ------------  ------------
Total Assets..................................................................................     $    139,970  $    138,659
                                                                                                   ============  ============
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Current maturities of long-term debt.....................................................     $      6,200  $      5,950
     Accounts payable.........................................................................           22,382        20,385
     Accrued salary and wages.................................................................            3,753         4,081
     Other accrued liabilities................................................................            6,537         6,276
                                                                                                   ------------  ------------
          Total current liabilities...........................................................           38,872        36,692
Long-Term Debt................................................................................           65,100        66,700
Other Liabilities.............................................................................            2,713         2,692
Deferred Income Taxes.........................................................................            1,071         1,185
                                                                                                   ------------  ------------
Total Liabilities.............................................................................          107,756       107,269
                                                                                                   ------------  ------------
Commitments and Contingencies (Note 9)........................................................               --            --
Stockholders' Equity:
     Common stock, $.01 par value -- 40,000,000 shares authorized; (9,681,504
       shares issued and outstanding at March 31, 2004 and December 31, 2003).................               97            97
     Preferred stock, $.01 par value -- 5,000,000 shares authorized; (no shares
       issued or outstanding).................................................................               --            --
    Paid in capital in excess of par value....................................................           46,003        46,003
    Accumulated other comprehensive income....................................................               16           190
    Accumulated Deficit.......................................................................          (13,902)      (14,900)
                                                                                                   ------------  ------------
          Total stockholders' equity..........................................................           32,214        31,390
                                                                                                   ------------  ------------
Total Liabilities and Stockholders' Equity....................................................     $    139,970  $    138,659
                                                                                                   ============  ============
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       2

<PAGE>

                         PACKAGING DYNAMICS CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                             For the Three Months Ended,
                                                             March 31,           March 31,
                                                               2004               2003
                                                            -----------        -----------
<S>                                                         <C>                <C>
Net sales............................................       $    68,534        $    59,477
Cost of goods sold...................................            59,474             51,549
                                                            -----------        -----------
Gross profit.........................................             9,060              7,928
                                                            -----------        -----------
Operating expenses:
      Selling, general and administrative............             4,552              3,990
      Depreciation and amortization..................               216                194
                                                            -----------        -----------
Total operating expenses.............................             4,768              4,184
                                                            -----------        -----------
Income from operations...............................             4,292              3,744
Interest expense (net)...............................             1,200              1,236
                                                            -----------        -----------
Income before income taxes...........................             3,092              2,508
Income tax provision.................................             1,221                985
                                                            -----------        -----------
Income from continuing operations....................             1,871              1,523
Loss from discontinued operations, net of tax benefit              (389)              (456)
                                                            -----------        -----------
Net income...........................................       $     1,482        $     1,067
                                                            ===========        ===========
Income (loss) per share:
       Basic:
         Continuing operations.......................       $      0.19        $      0.16
         Discontinued operations.....................             (0.04)             (0.05)
                                                            -----------        -----------
         Net income..................................       $      0.15        $      0.11
                                                            ===========        ===========
       Fully diluted:
         Continuing operations.......................       $      0.19        $      0.15
         Discontinued operations.....................             (0.04)             (0.04)
                                                            -----------        -----------
         Net income..................................       $      0.15        $      0.11
                                                            -----------        -----------
Weighted average shares outstanding:
         Basic.......................................         9,681,504          9,657,892
                                                            ===========        ===========
         Fully diluted...............................         9,970,277          9,836,694
                                                            ===========        ===========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       3

<PAGE>

                         PACKAGING DYNAMICS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                    For the Three Months Ended,
                                                                                                 March 31, 2004      March 31, 2003
                                                                                                 --------------      ---------------
<S>                                                                                              <C>                 <C>
Cash flows from operating activities:
     Net income...........................................................................       $        1,482      $        1,067
       Adjustments to reconcile net income to net cash from operating activities:
          Depreciation and amortization...................................................                1,484               2,090
          Amortization of deferred financing costs........................................                   86                 185
          Provision for doubtful accounts and allowances..................................                   94                 (23)
          Deferred income taxes...........................................................                  114                  --
       Changes in assets and liabilities:
             Accounts receivable..........................................................               (1,445)               (774)
             Inventories..................................................................                 (663)             (1,861)
             Other assets.................................................................                 (648)               (553)
             Accounts payable and accrued liabilities.....................................                3,929               5,195
                                                                                                 --------------      --------------
                   Net cash from continuing operating  activities.........................                4,433               5,326
                   Net cash used by discontinued operating activities.....................               (1,232)             (1,118)
                                                                                                 --------------      --------------
                   Net cash from operating activities.....................................                3,201               4,208
                                                                                                 --------------      --------------
Cash flows used by investing activities:
         Additions to property, plant and equipment.......................................               (1,544)             (1,840)
         Acquisition, net of cash acquired................................................                   --                (198)
                                                                                                 --------------      --------------
                   Net cash used by continuing investing activities.......................               (1,544)             (2,038)
                   Net cash from (used by) discontinued investing activities..............                  152                (236)
                                                                                                 --------------      --------------
                   Net cash used by investing activities..................................               (1,392)             (2,274)
                                                                                                 --------------      --------------
Cash flows used by financing activities:
          Principal payments for loan obligations.........................................               (1,250)             (1,680)
          Proceeds under revolving line of credit.........................................               14,600              13,500
          Repayments under revolving line of credit.......................................              (14,700)            (13,500)
          Payment of dividends............................................................                 (484)                 --
          Other, net......................................................................                   (4)                186
                                                                                                 --------------      --------------
                   Net cash used by financing activities..................................               (1,838)             (1,494)
                                                                                                 --------------      --------------
Net increase (decrease) in cash and cash equivalents......................................                  (29)                440
Cash and cash equivalents at beginning of period..........................................                  453               1,864
                                                                                                 --------------      --------------
Cash and cash equivalents at end of period................................................       $          424      $        2,304
                                                                                                 ==============      ==============
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       4

<PAGE>

                         PACKAGING DYNAMICS CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                         AND COMPREHENSIVE INCOME (LOSS)
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         Retained      Accumulated
                                            Common Stock                 Earnings        Other
                                          -----------------   Paid In  (Accumulated   Comprehensive   Stockholders'   Comprehensive
                                            Shares   Amount   Capital   Deficit)       Income (Loss)     Equity       Income (Loss)
                                          ---------  ------  --------  ------------   -------------   -------------   -------------
<S>                                       <C>        <C>     <C>       <C>            <C>             <C>             <C>
Balance at December 31, 2002              9,618,767  $   96  $ 45,560  $        304   $        (253)  $      45,707
Net loss                                                                    (14,720)                        (14,720)        (14,720)
Exercise of common stock options             62,737       1       443                                           444
Other comprehensive income (loss):
  Net change in fair value of derivative
    instruments, net of income taxes                                                            443             443             443
                                                                                                                      -------------
      Other comprehensive income (loss)                                                                               $     (14,277)
                                                                                                                      =============
Cash dividend ($.05 per share)                                                 (484)                           (484)
                                          ---------  ------  --------  ------------   -------------   -------------
Balance at December 31, 2003              9,681,504  $   97  $ 46,003  $    (14,900)  $         190   $      31,390
Net income                                                                    1,482                           1,482           1,482
Other comprehensive income (loss):
  Net change in fair value of derivative
    instruments, net of income taxes                                                           (174)           (174)           (174)
                                                                                                                      -------------
      Other comprehensive income                                                                                      $       1,308
                                                                                                                      =============
Cash dividend ($.05 per share)                                                 (484)                           (484)
                                          ---------  ------  --------  ------------   -------------   -------------
Balance at March 31, 2004                 9,681,504  $   97  $ 46,003  $    (13,902)  $          16   $      32,214
                                          =========  ======  ========  ============   =============   =============
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       5

<PAGE>

                         PACKAGING DYNAMICS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

GENERAL

      In the opinion of management, the information in the accompanying
unaudited consolidated financial statements reflects all adjustments necessary
to present fairly the results of operations, cash flows and stockholders' equity
for the three months ended March 31, 2004 and March 31, 2003 and the condensed
financial position at March 31, 2004. The interim results are not necessarily
indicative of results for a full year and do not contain information included in
the Company's annual consolidated financial statements and notes for the year
ended December 31, 2003. The consolidated balance sheet as of December 31, 2003
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. These interim
financial statements should be read in conjunction with our audited annual
consolidated financial statements and notes thereto included with the Company's
filings with the Securities and Exchange Commission.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

EARNINGS PER SHARE

      Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during each
period. Diluted earnings per share reflects the potential dilution that could
occur if common stock options are exercised and is computed by dividing net
income by the weighted average number of common shares outstanding, including
common stock equivalent shares, issuable upon exercise of outstanding stock
options, to the extent that they would have a dilutive effect on the per share
amounts. Dilution of the Company's weighted average shares outstanding results
from common stock issuable upon exercise of outstanding stock options (288,773
and 178,802 for the three months ended March 31, 2004 and 2003, respectively).
The Company recorded a basic and diluted earnings per share from continuing
operations of $0.19 for the three months ending March 31, 2004. The Company
recorded a basic and diluted earnings per share from continuing operations of
$0.16 and $0.15 for the same period in 2003.

      In accordance with SFAS 128, "Earnings per Share," the denominator used in
the diluted earnings per share calculation is based on the control number
concept, which requires that the same number of potentially dilutive securities
applied in computing diluted earnings per share from continuing operations be
applied to all other categories of income or loss, regardless of their
anti-dilutive effect on such categories.

      The following table details the calculation of basic and diluted earnings
per share for continuing operations:

<TABLE>
<CAPTION>
                                                                        FOR THE THREE MONTHS ENDED
                                                                       ----------------------------
                                                                                MARCH 31,
                                                                       ----------------------------
                                                                           2004           2003
                                                                       -------------  -------------
<S>                                                                    <C>            <C>
Income from continuing operations.................................     $       1,871  $       1,523
                                                                       =============  =============
Weighted average shares used to determine basic earnings per
  share from continuing operations................................         9,681,504      9,657,892
Common stock equivalents..........................................           288,773        178,802
                                                                       -------------  -------------
Weighted average shares used to determine diluted earnings
  per share from continuing operations............................         9,970,277      9,836,694
                                                                       =============  =============
Basic earnings per share from continuing operations...............     $        0.19  $        0.16
                                                                       =============  =============
Diluted earnings per share from continuing operations.............     $        0.19  $        0.15
                                                                       =============  =============
</TABLE>

                                       6

<PAGE>

DERIVATIVES AND OTHER COMPREHENSIVE INCOME (LOSS)

      The Company recognizes all derivative instruments which are cash flow
hedges as assets or liabilities at fair value, with the related gain or loss
reflected within stockholders' equity/members' equity through accumulated other
comprehensive income (loss) or within operations depending upon the nature of
the derivative instrument. The Company maintains interest rate swap agreements
that are designated as cash flow hedges to manage the market risk from changes
in interest rates on a portion of its variable rate term loans. Such derivative
financial instruments are recorded at fair value, and at March 31, 2004 and
December 31, 2003, the fair value approximates a loss of $681 and $394,
respectively, which is included in accrued liabilities within the accompanying
consolidated balance sheet. Changes in fair value, based upon the amount at
which the swap could be settled with a third party, are recorded in other
comprehensive income (loss) only to the extent of effectiveness. Any
ineffectiveness on the swap would be recognized in the consolidated statement of
operations. The differentials to be received or paid under the interest rate
swap agreements are recognized in income over the life of the contract as
adjustments to interest expense.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities."
The objective of FIN 46R is to improve financial reporting by companies involved
with variable interest entities. Prior to FIN 46R, companies have generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interest. FIN 46R changes that by requiring
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk or loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. Consolidation by a primary beneficiary of the assets, liability and
results of activities of variable interest entities will provide more complete
information about the resources, obligations, risks and opportunities of the
consolidated company. The provisions of FIN 46R are effective immediately for
those variable interest entities created after January 31, 2003. In October
2003, the FASB delayed the implementation of FIN 46R until the first quarter
beginning after December 15, 2003 for all entities acquired before February 1,
2003. We do not have any investments in variable interest entities.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and variable rate debt
approximates their estimated fair value based either on the short-term maturity
of these instruments or on market prices for the same or similar type of
financial instruments. The fair market value and carrying value of the Company's
interest rate swaps were a loss of $681 and $394 at March 31, 2004 and December
31, 2003, respectively.

ESTIMATES

      The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

RECLASSIFICATION

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

NOTE 3 -- DISCONTINUED OPERATIONS

      During the fourth quarter of 2003, the Company shut down its paper mill,
located in Detroit, Michigan, and exited the Specialty Paper operation. In
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" which establishes accounting and reporting standards for the
impairment and disposal of long-lived assets and discontinued operations, the
Specialty Paper operation is classified as a discontinued operation. The
financial information presented for all prior periods has been reclassified to
reflect the Specialty Paper operation as a discontinued operation in the
Consolidated Statement of Operations.

                                       7

<PAGE>

      The following table details selected income statement information for the
Specialty Paper operation.

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED
                                      ------------------------
                                              MARCH 31,
                                      ------------------------
                                          2004          2003
                                      -----------   ----------
<S>                                   <C>           <C>
Sales
  External........................    $        --   $    5,088
  Intercompany....................             --        7,055
  Discounts & Returns.............             --         (111)
                                      -----------   ----------
  Net Sales.......................    $        --   $   12,032
(Loss) income from operations.....    $      (643)  $     (520)
Interest expense..................             --          233
                                      -----------   ----------
Loss before income taxes..........           (643)        (753)
Income tax benefit................            254          297
                                      -----------   ----------
Net loss..........................    $      (389)  $     (456)
                                      ===========   ==========
</TABLE>

      The net loss for the first quarter of 2004 represents approximately $795
of pretax administrative costs associated with the ongoing program to clear the
site, recover assets and dispose of the Detroit property offset by approximately
$152 of proceeds from the liquidation of equipment.

      The assets and liabilities associated with the Specialty Paper operation
are included in the Consolidated Balance Sheet. The following table details
selected balance sheet information for the Specialty Paper operation.

<TABLE>
<CAPTION>
                                                                  MARCH 31,        DECEMBER 31,
                                                                 ----------        ------------
                                                                    2004               2003
                                                                 ----------        ------------
<S>                                                              <C>               <C>
Accounts receivable trade (net of allowance for doubtful
  accounts of $38 and $33, respectively).....................    $       30        $        346
Other current assets.........................................           302               1,092
                                                                 ----------        ------------
Total assets of discontinued operations......................           332               1,438
                                                                 ----------        ------------
Accounts payable.............................................           456                 827
Accrued liabilities..........................................         1,548               3,363
                                                                 ----------        ------------
Total liabilities of discontinued operations.................         2,004               4,190
                                                                 ----------        ------------
Net liabilities of discontinued operations...................    $   (1,672)       $     (2,752)
                                                                 ==========        ============
</TABLE>

      A summary of the changes in the reserves related to the Company's exit
from the Specialty Paper operation is as follows:

<TABLE>
<CAPTION>
                                      SEVERANCE         PENSION
                                         PAY             CHARGE          TOTAL
                                     ----------        --------         ----------
<S>                                  <C>                <C>             <C>
Balance at December 31, 2002......   $       --         $    --         $       --
  Charges to expense..............        2,800             816              3,616
  Cash Payments...................       (1,849)             --             (1,849)
  Reversals.......................           --              --                 --
                                     ----------         -------         ----------
Balance at December 31, 2003......   $      951         $   816         $    1,767
                                     ----------        --------         ----------
  Charges to expense..............           --              --                 --
  Cash Payments...................         (449)             --               (449)
  Reversals.......................           --              --                 --
                                     ----------         -------         ----------
Balance at March 31, 2004.........   $      502         $   816         $    1,318
                                     ==========         =======         ==========
</TABLE>

NOTE 4 - ACQUISITIONS

      On December 4, 2003, the Company acquired the net assets of the Iuka
Lamination Division ("Iuka") of Ormet Corporation ("Ormet") for $5,000 in cash
and incurred $240 in other direct costs. The purchase price allocation reflected
in the consolidated balance sheet at December 31, 2003 was based upon
preliminary information. During

                                       8

<PAGE>

the first quarter of 2004, the purchase price allocation was revised and
goodwill was reduced based upon the receipt of additional information. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition as reflected at March 31, 2004.

<TABLE>
<S>                                     <C>
Current assets...................       $   5,233
Property, plant and equipment....           1,490
Intangible assets................              --
Goodwill.........................             454
                                        ---------
  Total assets acquired..........           7,177
                                        ---------
Current liabilities..............          (1,937)
                                        ---------
  Total liabilities assumed......          (1,937)
                                        ---------
Net operating assets acquired....           5,240
  Debt assumed...................              --
                                        ---------
Net assets acquired..............       $   5,240
                                        =========
</TABLE>

      The purchase price allocation summarized above excludes the impact of an
approximately $704 adjustment (the "Adjustment") to the purchase price in favor
of the Company pursuant to the working capital purchase price adjustment
mechanism contained in the agreement of sale. Pursuant to an agreement (the
"Settlement Agreement") which sets forth the agreement of the parties with
respect to the Adjustment, Ormet has agreed to file a petition with the United
States Bankruptcy Court of the Southern District of Ohio, which is presiding
over Ormet's pending bankruptcy case, seeking approval of the Settlement
Agreement and payment of the Adjustment by way of offset against amounts owed to
Ormet by the Company.

NOTE 5 -- STOCK BASED COMPENSATION

      At March 31, 2004, the Company has a stock-based compensation plan. The
Company accounts for this plan under the recognition and measurement provisions
of Accounting Principles Board Opinion ("APB") No. 25 "Accounting for Stock
Issued to Employees," and related interpretations. Stock-based employee
compensation cost is reflected in earnings to the extent that option grants
under those plans had an exercise price below the market value of the underlying
common stock on the date of grant. SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") issued subsequent to APB No. 25 and amended by
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure," ("SFAS No. 148") defines a fair value based method of accounting
for employees stock options but allows companies to continue to measure
compensation cost for employee stock options using the intrinsic value based
method described in APB No. 25. The Company's stock-based compensation plans are
accounted for under the intrinsic value based method. No compensation expense is
reflected in net income in the three months ended March 31, 2004 and March 31,
2003, as all options granted under the plan had an exercise price that was equal
to the market price on the date of grant.

      The determination of compensation expense for the pro forma information
was based upon the estimated fair value of the options on the date of grant
using the Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                            Three Months Ended    Three Months Ended
                                                             March 31, 2004         March 31, 2003
                                                            ------------------    ------------------
<S>                                                         <C>                   <C>
Net Income..............................................    $            1,482    $           1,067
Deduct:  Stock-based employee compensation expense
   determined under fair value based method.............                  (222)                  --
                                                            ------------------    -----------------
Pro forma net income....................................    $            1,260    $           1,067
                                                            ==================    =================
Income per share:
   Basic - as reported..................................    $             0.15    $            0.11
                                                            ==================    =================
   Basic - pro forma....................................    $             0.13    $            0.11
                                                            ==================    =================
   Diluted - as reported................................    $             0.15    $            0.11
                                                            ==================    =================
   Diluted - pro forma..................................    $             0.13    $            0.11
                                                            ==================    =================
</TABLE>

                                       9

<PAGE>

      The fair value of the options granted was estimated on the date earned
using the Black-Scholes option-pricing model and utilized the following
assumptions:

<TABLE>
<CAPTION>
                                                         March 31,    March 31,
                                                           2004         2003
                                                         ---------    ---------
<S>                                                      <C>          <C>
Expected option life (years)                                  5            5
Work-Risk-free weighted average interest rate              2.92%        2.62%
Stock price volatility                                     27.5%          35%
Dividend yield                                              1.9%         0.0%
</TABLE>

NOTE 6 -- INVENTORIES

      Inventories are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method. Such cost includes raw materials, direct
labor and manufacturing overhead. Inventories at March 31, 2004 and December 31,
2003 consist of the following:

<TABLE>
<CAPTION>
                                              March       December 31,
                                            31, 2004         2003
                                         ------------   --------------
<S>                                      <C>            <C>
Raw materials                            $     10,918   $        9,892
Work-Work-in-process                            1,403            1,488
Finished goods                                 10,482           10,672
                                         ------------   --------------
                                               22,803           22,052
Obsolescence Reserve                             (313)            (312)
                                         ------------   --------------
Net                                      $     22,490   $       21,740
                                         ============   ==============
</TABLE>

NOTE 7 -- LONG-TERM DEBT

      Long-term debt at March 31, 2004 and December 31, 2003 consists of the
following:

<TABLE>
<CAPTION>
                                                   March 31,         December 31,
                                                      2004               2003
                                                 -------------      -------------
<S>                                              <C>                <C>
Senior Credit Facility:
    Tranche A Term Loan
                                                 $      28,000      $      29,000
    Tranche B Term Loan                                 39,500             39,750
    Revolving credit loan                                3,100              3,200
Baxter Springs facility HUD loan                           700                700
                                                 -------------      -------------
    Subtotal                                            71,300             72,650
Current maturities of long term debt                    (6,200)            (5,950)
                                                 -------------      -------------
Long-term debt                                   $      65,100      $      66,700
                                                 =============      =============
</TABLE>

      During the third quarter of 2003, the Company refinanced its existing
credit facility with a new credit facility (the "Senior Credit Facility"). The
Senior Credit Facility provides for a Term A Loan and Term B Loan totaling
$70,000 and a $40,000 revolving credit facility, up to $5,000 of which may be in
the form of letters of credit. As of March 31, 2004, the Term A Loan had a
balance of $28,000 and will mature in 2008. The required aggregate annual
payments, payable in equal quarterly installments, total $4,250, $5,250 $6,250,
$7,250 and $6,000 in years 2004 through 2008, respectively, of which $1,000 was
paid during the current quarter. As of March 31, 2004, the Term B Loan had a
balance of $39,500 and will mature in 2009. The aggregate annual payments,
payable in equal quarterly installments, total $1,000 in years 2004 through 2008
and $34,750 in 2009, of which $250 was paid during the current quarter. The
revolver had a balance of $3,100 as of March 31, 2004.

      Loans under the Senior Credit Facility are designated from time to time,
at our election, either (1) as Eurodollar Rate Loans, which bear interest at a
rate based on the London Interbank Offered Rate, or LIBOR, adjusted for
regulatory reserve requirements, or (2) as Base Rate Loans, which bear interest
at a rate based on the Federal Funds rate or the prime rate. The interest rate
on Eurodollar Rate Loans is equal to LIBOR plus an applicable percentage that
varies with the leverage ratio of the Company and its consolidated subsidiaries.
The interest rate on Base Rate

                                       10

<PAGE>

Loans is equal to a base rate equal to the greater of (1) the Federal Funds rate
plus 1/2 of 1% or (2) the prime rate, plus an applicable percentage that varies
with the leverage ratio of the Company and its consolidated subsidiaries.

      Accordingly, Tranche A Term Loans and revolving loans bear interest at
rates of up to 2.25% plus the base rate, in the case of Base Rate Loans, and up
to 3.25% plus LIBOR, in the case of Eurodollar Loans. Tranche B Term Loans bear
interest at rates of 2.5% plus the base rate, in the case of Base Rate Loans,
and 3.5% plus LIBOR, in the case of Eurodollar Loans.

      At March 31, 2004, the interest rates on borrowings under the Tranche A
Term Loan and the Tranche B Term Loan were 3.0% plus LIBOR (1.11%) and 3.5% plus
LIBOR (1.11%), respectively, compared with 3.0% plus LIBOR (1.17%) and 4.0% plus
LIBOR (1.17%), respectively, at March 31, 2003. As of March 31, 2004, we had
interest rate swap agreements with a group of banks having notional amounts
totaling $50,000 and with various maturity dates. These agreements effectively
fix our LIBOR rate for $25,000 and $25,000 of our Senior Credit Facility
indebtedness at rates of 2.34% and 2.91%, respectively.

      Borrowings are collateralized by substantially all of the stock and assets
of our operating subsidiaries. The revolving credit facility and Term A Loan
will terminate on September 29, 2008 and the Term B Loan will terminate on
September 29, 2009.

    Under the Senior Credit Facility, we are required to comply on a quarterly
basis with the following four financial covenants:

      -     under the leverage ratio covenant, as of the last day of each fiscal
            quarter, the ratio of total funded debt of the Company and its
            consolidated subsidiaries to consolidated EBITDA of the Company and
            its consolidated subsidiaries for the 12-month period then ended
            must not exceed specified levels, decreasing various levels from 4.5
            to 1 at March 31, 2004 to 4 to 1;

      -     under the senior leverage ratio covenant, as of the last day of each
            fiscal quarter, the ratio of total funded debt (other than
            subordinated debt) of the Company and its consolidated subsidiaries
            to consolidated EBITDA of the Company and its consolidated
            subsidiaries for the 12-month period then ended must not exceed
            specified levels, decreasing various levels from 3.5 to 1 at March
            31, 2004 to 3 to 1;

      -     under the fixed charge coverage ratio covenant, as of the last day
            of each fiscal quarter, for the 12-month period then ended, the
            ratio of consolidated EBITDA less capital expenditures and cash tax
            payments of the Company and its consolidated subsidiaries to cash
            interest expense and scheduled funded debt payments of the Company
            and its consolidated subsidiaries must be equal to or greater than
            certain levels increasing from 1.1 to 1 at March 31, 2004 to 1.2 to
            1; and

      -     under the net worth covenant, Packaging Dynamics' consolidated net
            worth as of the last day of each fiscal quarter must be equal to or
            greater than 80% of the net worth as of September 30, 2003 increased
            on a cumulative basis by (1) as of the last day of each fiscal
            quarter, 50% of the consolidated net income of Packaging Dynamics
            (to the extent positive) for the fiscal quarter then ended,
            commencing with the fiscal quarter ended March 31, 2004 and (2) 75%
            of the net cash proceeds from any equity issuance by Packaging
            Dynamics or any subsidiary of Packaging Dynamics.

      For purposes of the Senior Credit Facility, consolidated EBITDA,
calculated on a consolidated basis for Packaging Dynamics and its subsidiaries,
consists of (1) net income from continuing operations, excluding the effect of
any extraordinary or other non-recurring gains or losses or non-cash gains or
losses (in each case, other than in connection with the closure of the Detroit
paper mill), plus (2) an amount which, in the determination of net income, has
been deducted for interest expense, taxes, depreciation and amortization, and
cash and non-cash charges and/or losses with respect to the closure of the
Detroit paper mill, minus (3) cash expenditures related to non-cash charges
previously added back to net income in determining EBITDA (other than in
connection with the closure of the Detroit paper mill), plus (4) the write-off
of capitalized financing costs existing as of the closing of the Senior Credit
Facility.

      The Senior Credit Facility also contains various negative covenants that,
among other things, require Packaging Dynamics and its subsidiaries to limit
future borrowings and payments to related parties and restricts Packaging

                                       11

<PAGE>

Dynamics' ability and the ability of its subsidiaries to merge or consolidate.
In addition, the Senior Credit Facility prohibits changes in the nature of
business conducted by the Company and its subsidiaries. The failure to comply
with the covenants would result in a default under the Senior Credit Facility
and permit the lenders under the Senior Credit Facility to accelerate the
maturity of the indebtedness governed by the Senior Credit Facility.

      The Senior Credit Facility includes terms that limit changes in our
ownership structure. Modifications to the ownership structure outside the limits
prescribed by such agreements could place us in default under these debt
instruments. The Senior Credit Facility requires Packaging Dynamics Operating
Company ("PDOC") to maintain specified financial ratios and levels of tangible
net worth. PDOC was in compliance with those covenants as of March 31, 2004, the
latest measurement date. The occurrence of any default of these covenants could
result in acceleration of our obligations under the Senior Credit Facility
($70,600 as of March 31, 2004) and foreclosure on the collateral securing those
obligations.

      We have outstanding obligations under debt agreements with the U.S.
Department of Housing and Urban Development, or HUD, in the form of promissory
notes payable to the City of Baxter Springs. This loan was refinanced in the
third quarter of 2003. The remaining unpaid principal of these notes as of March
31, 2004 was $700 and bear interest at 1.21%, as determined by HUD, and interest
is payable on a semi-annual basis. These notes are payable in annual
installments of $700 through August 2004. Borrowings are collateralized by a
first lien on the land and building at our Baxter Springs, Kansas production
facility and by a second lien on specified machinery and equipment. Under
specified circumstances, repayment of the borrowings is subordinated to the
repayment of obligations under the Senior Credit Facility.

NOTE 8 -- COMPREHENSIVE INCOME

The components of comprehensive income, net of tax, were as follows:

<TABLE>
<CAPTION>
                                                                         Three Months Ended         Three Months Ended
                                                                           March 31, 2004             March 31, 2003
                                                                         ------------------         ------------------
<S>                                                                      <C>                        <C>
Net Income...................................................            $            1,482         $            1,067
Net change in fair value of derivative instruments...........                          (174)                        65
                                                                         ------------------         ------------------
Comprehensive income.........................................            $            1,308         $            1,132
                                                                         ==================         ==================
</TABLE>

Accumulated other comprehensive income presented on the accompanying condensed
consolidated balance sheet consists entirely of unrecognized gains and losses on
derivatives.

NOTE 9 -- COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

We are currently a party to various legal proceedings in various federal and
state jurisdictions arising out of the operations of our business. The amount of
alleged liability, if any, from these proceedings cannot be determined with
certainty; however, we believe that our ultimate liability, if any, arising from
the pending legal proceedings, as well as from asserted legal claims and known
potential legal claims which are probable of assertion, taking into account
established accruals for estimated liabilities, should not be material to our
financial condition or results of operations.

ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION

      Since many of our packaging products are used in the food industry, we are
subject to the manufacturing standards of the U.S. Food and Drug Administration.
Historically, compliance with the standards of the food industry has not had a
material effect on our earnings, capital expenditures or competitive position.
There can be no assurance, however, that compliance with those standards will
not have a material adverse effect on our future operating results or financial
condition.

      Our manufacturing operations are subject to federal, state and local
regulations governing the environment and the discharge of materials into air,
land and water, as well as the handling and disposal of solid and hazardous

                                       12

<PAGE>

wastes. As is the case with manufacturers in general, if a release of hazardous
substances occurs on or from our properties or any associated offsite disposal
location, or if contamination from prior activities is discovered at any of our
properties, we may be held liable. From time to time, we are involved in
regulatory proceedings and inquiries relating to compliance with environmental
laws, permits and other environmental matters. We believe that we are in
material compliance with applicable environmental regulations and do not believe
that costs of compliance, if any, will have a material adverse effect on our
financial condition, results of operation, or liquidity. In 2004, we will have
additional costs related to our ongoing program to clear the site, recover
assets and dispose of the Detroit property, although the total amount of such
costs are not currently estimable. There can be no assurance, however, that
items will not require additional expenditures beyond those that are anticipated
and that additional expenditures, if any, would not have a material adverse
effect on our operating results or financial condition.

                                       13

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITIONS AND
        RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)

      The following discussion addresses the consolidated financial statements
of Packaging Dynamics Corporation (the "Company," "Packaging Dynamics", "we" or
"our") which is a Delaware corporation established as a holding company to own
all interests in Packaging Dynamics Operating Company ("PDOC"), a Delaware
corporation which is the parent company of all our current operating companies.

      The following discussion should be read in conjunction with our interim
financial statements and accompanying notes thereto, and the other financial
information included elsewhere in this report. This discussion contains
forward-looking statements. Please see "Special Note Regarding Forward-Looking
Statements" for a discussion of the uncertainties, risks and assumptions
associated with these statements. In the discussion that follows, dollar amounts
other than per share data are stated in thousands.

      In 2003, the Company began reporting its financial results in two
segments. The Converting Operations segment included all the converting
operations of the Company. The Specialty Paper segment included the Detroit
Paper mill operation. With the shutdown of the Detroit paper mill, the Specialty
Paper segment is now reported as a discontinued operation and the Converting
Operations segment now represents the Company's continuing operations.

SUMMARY AND OUTLOOK

      The business experienced strong demand across nearly all end markets. In
the first full quarter since its acquisition, the Iuka plant produced sales
which exceeded expectations with potential for margin improvements as
integration is completed. Despite continued raw material price pressures,
operating margin improvements are expected during the balance of 2004 through
ongoing productivity and cost reduction programs as well as announced price
increases.

RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED MARCH 31, 2004

NET SALES

      Net sales increased $9,057, or 15.2 %, to $68,534 from $59,477 for the
comparable quarter in the prior year. Excluding $5,859 of net sales during the
first quarter of 2004 from the Iuka plant which was acquired in December, 2003,
net sales increased $3,198, or 5.4%, over the corresponding 2003 period. This
increase in net sales, excluding net sales from the Iuka plant, is attributable
to a 2.8% increase in the sales of specialty lamination products reflecting
volume growth and pricing increases and a 6.3% increase in sales of food
packaging products reflecting primarily volume growth.

GROSS PROFIT

      Gross profit for the quarter ended March 31, 2004 increased $1,132, or
14.3%, to $9,060 from $7,928 for the comparable quarter in the prior year mainly
due to increased volume from the Company's base business and the recently
acquired Iuka plant and positive results from the Company's ongoing cost and
productivity initiatives. Gross profit margin was 13.2% during the current
quarter of 2004 compared to 13.3% for the comparable quarter in the prior year.
The gross profit margin for the current quarter of 2004 was negatively impacted
by increased raw materials costs, relatively lower margins in the acquired Iuka
plant, operating inefficiencies during the startup of the new equipment and
product mix. These were partially offset by increased selling prices and
positive results in ongoing costs and productivity initiatives.

OPERATING EXPENSES

      Operating expenses increased by $584, or 14%, to $4,768 for the quarter
ended March 31, 2004 compared with $4,184 for the comparable quarter in the
prior year, and both periods were at 7% of net sales. The dollar increase is
mainly due to increased employee benefit related costs and increased travel
expenses related to the acquisition of Iuka.

                                       14

<PAGE>

INCOME FROM OPERATIONS

      Income from operations for the quarter ended March 31, 2004 increased
$548, or 14.6%, to $4,292 from $3,744 for the comparable quarter in the prior
year mainly due to gross profit partially offset by increased selling, general
and administrative expenses as discussed above.

INTEREST EXPENSE

      Interest expense was $1,200 during the first quarter 2004. In the
comparable quarter of 2003, the total interest expense was $1,469, of which
$1,236 was allocated to continuing operations and $233 was allocated to
discontinued operations. The decrease in total interest expense resulted
primarily from decreased average outstanding indebtedness and lower interest
rates. The average interest rates on borrowings were approximately 4.53% during
the first quarter of 2004 compared to 5.18% during the corresponding 2003
period.

INCOME TAXES

      The Company recorded an income tax provision of $1,221 for the first
quarter of 2004 compared to a provision of $985 during the corresponding 2003
period. The Company's effective tax rate is approximately 39.5% for the first
quarter of 2004 and 2003.

INCOME FROM CONTINUING OPERATIONS

      Income from continuing operations for the first quarter of 2004 was
$1,871, or $0.19 per diluted share, a 22.8% increase over income from continuing
operations of $1,523, or $0.15 per diluted share, for the corresponding 2003
period. The increase resulted primarily from increased sales as well as the
various items impacting gross profit and operating expenses discussed above.

DISCONTINUED OPERATIONS

      Loss from discontinued operations for the first quarter of 2004 was $389,
or $0.04 per diluted share, compared to a loss of $456, or $0.04 per diluted
share, in the corresponding 2003 period. The net loss for the first quarter of
2004 represents approximately $795 of pretax administrative costs associated
with the ongoing program to clear the site, recover assets and dispose of the
Detroit property offset by approximately $152 of proceeds from the liquidation
of equipment. The Company is evaluating various alternatives related to the site
clearance of the Detroit property as well as possible disposition methods.

EBITDA AND ADJUSTED EBITDA

      In addition to financial results determined in accordance with generally
accepted accounting principles ("GAAP"), Packaging Dynamics utilizes non-GAAP
financial measures (within the meaning of Regulation G promulgated by the
Securities and Exchange Commission). These measures should be considered in
addition to results prepared in accordance with GAAP, but are not a substitute
for or superior to GAAP results. Non-GAAP financial measures are used because
management believes this information provides investors useful information in
evaluating the results of the continuing operations. The non-GAAP measure of
adjusted EBITDA is presented to supplement the consolidated financial statements
in accordance with GAAP. The Company defines EBITDA as income from operations
plus depreciation and amortization. Specifically, management believes that
adjusted EBITDA is of interest to its investors and lenders in relation to its
debt covenants, as certain of its debt covenants include adjusted EBITDA as a
performance measure. Refer to Note 7 of the financial statements for additional
disclosure of these debt covenants.

      Adjusted EBITDA is summarized in the table below. Adjusted EBITDA should
not be construed as an alternative to earnings from operations as determined in
accordance with generally accepted accounting principles, as an indicator of our
operating performance, as a measure of liquidity or as an alternative to cash
flow from operating activities as determined in accordance with generally
accepted accounting principles. We have significant uses of cash flow, including
capital expenditures and debt principal repayments that are not reflected in
adjusted EBITDA.

                                       15

<PAGE>

      Adjusted EBITDA for the three months ended March 31, 2004 and 2003 is
computed as follows:

<TABLE>
<CAPTION>
                                                    For the Three Months Ended,
                                                    March 31,          March 31,
                                                      2004               2003
                                                  ------------     -------------
<S>                                               <C>              <C>
Income from continuing operations                 $      1,871     $       1,523
Income tax provision                                     1,221               985
Interest expense                                         1,200             1,236
Depreciation and amortization                            1,484             1,519
                                                  ------------     -------------
    EBITDA                                               5,776             5,263
Non-recurring and unusual items:                            --                --
                                                  ------------     -------------
Adjusted EBITDA                                   $      5,776     $       5,263
                                                  ============     =============
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

      At March 31, 2004, we had cash and cash equivalents of $424, and $35,161
was available under the revolving portion of the Senior Credit Facility, after
taking into account $1,739 in letter of credits outstanding. Our working capital
at March 31, 2004 was $12,279 compared to $12,819 for the comparable period at
March 31, 2003.

      Our primary short-term and long-term operating cash requirements are for
debt service, working capital and capital expenditures. We expect to rely on
cash generated from operations supplemented by revolving borrowings under the
Senior Credit Facility to fund short-term and long-term cash requirements.

      We generated $3,201 of cash from operating activities in the three months
ended March 31, 2004 compared to $4,208 for the same period in 2003. This
decrease was primarily related to the change in certain components of net
working capital during the three months ended March 31, 2004 compared to the
same period in 2003.

      Cash used by discontinued operating activities in the three months ended
March 31, 2004 was $1,232 compared to $1,118 for the comparable period ended
March 31, 2003. Refer to the Discontinued Operations section of Management's
Discussion and Analysis for additional details regarding the first quarter of
2004.

      Cash used by investing activities was $1,392 for the three months ended
March 31, 2004 compared to $2,274 for the same period in 2003. This change was
primarily due to decreased capital expenditures for continuing operations in the
three months ended March 31, 2004 compared to the same period in 2003. In
addition, in 2003, there was an acquisition expenditure of $198 related to the
acquisition of Wolf Packaging Inc. and $236 of capital spending related to
discontinued operations. In the first three months of 2004, there were sales of
assets related to discontinued operations generating cash proceeds of $152.
Capital expenditures in continuing operations were $1,544 and $1,840 during the
three months ended March 31, 2004 and 2003, respectively. The decrease in
capital expenditures during 2004 compared to 2003 resulted primarily from
expenditures made for two new bag machines in the first quarter of 2003. At
March 31, 2004, we have capital projects ongoing at all converting locations. In
2004, capital expenditures are expected to be approximately $6,000.

      Cash used by financing activities was $1,838 for the three months ended
March 31, 2004 compared to $1,494 for the same period in 2003. The change was
primarily due to a quarterly cash dividend paid in the first quarter of 2004.

      In October 2003, the Company announced a cash dividend of $0.05 per common
share, $484 in the aggregate, which was paid on January 6, 2004 to shareholders
of record as of December 15, 2003. In March 2004, the Company announced a cash
dividend of $0.05 per common share, $484 in the aggregate, which was paid on
April 5, 2004 to shareholders of record on March 17, 2004.

                                       16

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We use interest rate swaps and collars to modify our exposure to interest
rate movements and to reduce borrowing costs. We have designated these
instruments as cash flow hedges and consider these instruments effective at
offsetting our risk to variable interest rates on debt. Our exposure to interest
rate risk consists of floating rate debt instruments that are benchmarked to
LIBOR. As of March 31, 2004, we had interest rate swap agreements with a group
of banks having notional amounts totaling $50,000 with various maturity dates
through December 10, 2006. Beginning on December 10, 2003, we have a no cost
collar agreement with a notional amount of $25,000 maturing on December 10,
2004. This collar agreement effectively fixes the LIBOR base rate for $25,000 of
our Senior Credit Facility indebtedness at a maximum of 3.97% and allow for us
to pay the market LIBOR from a floor of 2.34% to the maximum rate. Effective
December 31, 2003, the Company has an interest rate swap agreement effectively
fixing our LIBOR rate for $25,000 of our Senior Credit Facility indebtedness at
a rate of 2.91%. If LIBOR falls below 2.34%, we are required to pay the floor
rate of 2.91%. A 10% unfavorable movement in LIBOR would not expose us to
material losses of earnings or cash flows.

      Income or expense related to settlements under these agreements is
recorded as adjustments to interest expense in our financial statements. The
fair market value of our derivative instruments outlined above approximates a
loss of $681 as of March 31, 2004 and is based upon the amount at which it could
be settled with a third party, although we have no current intention to trade
any of these instruments and plan to hold them as hedges for the Senior Credit
Facility. The fair market value of our derivative instruments, net of income
tax, was recorded in other comprehensive income (loss).

Substantially all of our sales, including export sales, are denominated in
United States Dollars in order to reduce our exposure to changes in foreign
currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

      The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.

      There have not been any changes in the Company's internal controls over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.

                                       17

<PAGE>

SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS

      Certain statements included in this annual report, including without
limitation, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations - For the Three Months Ended March
31, 2004 and March 31, 2003 - Liquidity and Capital Resources, -- Recently
Issued Accounting Pronouncements, and - Quantitative and Qualitative Disclosure
About Market Risk" constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Among the
factors that could cause results to differ materially from current expectations
are: (i) changes in consumer demand and prices resulting in a negative impact on
revenues and margins; (ii) raw material substitutions and increases in the costs
of raw materials, utilities, labor and other supplies; (iii) increased
competition in the Company's product lines; (iv) changes in capital availability
or costs; (v) workforce factors such as strikes or labor interruptions; (vi) the
ability of the Company and it subsidiaries to develop new products, identify and
execute capital programs and efficiently integrate acquired businesses; (vii)
the cost of compliance with applicable governmental regulations and changes in
such regulations, including environmental regulations; (viii) the general
political, economic and competitive conditions in markets and countries where
the Company and its subsidiaries operate, including currency fluctuations and
other risks associated with operating in foreign countries; and (ix) the timing
and occurrence (or non-occurrence) of transactions and events which may be
subject to circumstances beyond the control of Packaging Dynamics and its
subsidiaries.

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      From time to time Packaging Dynamics and its subsidiaries are involved in
various litigation matters arising in the ordinary course of business. Packaging
Dynamics believes that none of the matters which arose during the quarter,
either individually or in the aggregate is material to Packaging Dynamics.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

            Exhibit No.                       Description
              31.1          Certification of Chief Executive Officer pursuant
                            to Section 302 of the Sarbanes-Oxley Act of 2002.

              31.2          Certification of Chief Financial Officer pursuant
                            to Section 302 of the Sarbanes-Oxley Act of 2002.

               32           Certification of CEO and CFO pursuant to 18 U.S.C.,
                            Section 1350, as adopted pursuant to Section 906
                            of the Sarbanes-Oxley Act of 2002.

      (b) Reports on Form 8-K

            Current Report on Form 8-K regarding Packaging Dynamics
            Corporation's first quarter 2004 earnings release and conference
            call, filed on February 5, 2004.

                             SIGNATURE PAGE FOLLOWS

                                       18

<PAGE>

                                    SIGNATURE

      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.

                                      PACKAGING DYNAMICS CORPORATION

                                      By: /s/ HENRY C. NEWELL
                                      ------------------------------------------
                                      HENRY C. NEWELL
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)

May 13, 2004

                                       19