<PAGE>
================================================================================

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

                                   ----------

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

                                       or

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

For the transition period from _____________________ to _____________________

                         COMMISSION FILE NUMBER: 0-49741

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

<TABLE>
<S>                                                          <C>
                DELAWARE                                          32-0009217
      (State or other jurisdiction                             (I.R.S. Employer
           of incorporation)                                 Identification No.)
</TABLE>

<TABLE>
<S>                                                               <C>
         3900 WEST 43RD STREET
           CHICAGO, ILLINOIS                                         60632
(Address of Principal Executive Office)                           (Zip Code)
</TABLE>

                                 (773) 843-8000
              (Registrant's Telephone Number, Including Area Code)

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

                                 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]

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).

                                 Yes [ ] No [X]

     At October 28, 2005, there were 10,578,064 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)

<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,   DECEMBER 31,
                                                                            2005           2004
                                                                       -------------   ------------
                                                                        (unaudited)
<S>                                                                    <C>             <C>
                               ASSETS
Current Assets:
   Cash and cash equivalents                                             $      7        $  1,175
   Accounts receivable trade (net of allowance for doubtful accounts
      of $672 and $825)                                                    31,320          31,174
   Inventories, net                                                        39,419          36,506
   Prepaid expenses and other assets                                        5,236           5,962
                                                                         --------        --------
      Total current assets                                                 75,982          74,817
                                                                         --------        --------
Property, Plant and Equipment
   Property, plant and equipment                                           84,777          80,978
   Less-Accumulated depreciation                                          (34,649)        (29,284)
                                                                         --------        --------
      Total property, plant and equipment                                  50,128          51,694
                                                                         --------        --------
Other Assets:
   Goodwill                                                                81,263          81,263
   Intangibles and other assets, net                                       19,946          20,893
                                                                         --------        --------
      Total other assets                                                  101,209         102,156
                                                                         --------        --------
Total Assets                                                             $227,319        $228,667
                                                                         ========        ========

                LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Current maturities of long-term debt                                  $ 13,843        $  6,093
   Accounts payable and other                                              25,255          27,132
   Accrued salary and wages                                                 2,655           3,420
   Other accrued liabilities                                                9,411           8,207
                                                                         --------        --------
      Total current liabilities                                            51,164          44,852

Long-term Debt                                                            100,054         110,386
Other Liabilities                                                           4,990           7,592
Deferred Income Taxes                                                      16,747          15,975
                                                                         --------        --------
Total Liabilities                                                         172,955         178,805
                                                                         --------        --------
Commitments and Contingencies
                                                                         --------        --------
Stockholders' Equity:
   Commonstock, $.01 par value - 40,000,000 shares authorized;
      10,567,664 and 10,514,837 shares issued and outstanding at
      September 30, 2005 and December 31, 2004, respectively                  106             105
   Preferred stock, $.01 par value - 5,000,000 shares authorized; no
      shares issued and outstanding                                            --              --
   Paid in capital in excess of par value                                  58,096          57,570
   Accumulated other comprehensive income                                     815             486
   Accumulated deficit                                                     (4,653)         (8,299)
                                                                         --------        --------
      Total stockholders' equity                                           54,364          49,862
                                                                         --------        --------
Total Liabilities and Stockholders' Equity                               $227,319        $228,667
                                                                         ========        ========
</TABLE>

         The accompanying notes are an integral part of this statement.


                                       2
<PAGE>
                         PACKAGING DYNAMICS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                  FOR THE THREE MONTHS ENDED      FOR THE NINE MONTHS ENDED
                                                -----------------------------   -----------------------------
                                                SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,
                                                     2005            2004            2005            2004
                                                -------------   -------------   -------------   -------------
<S>                                             <C>             <C>             <C>             <C>
Net sales                                        $    93,015     $    74,314     $   268,854     $   212,590
   Cost of goods sold                                 80,544          63,856         232,706         182,905
                                                 -----------     -----------     -----------     -----------
Gross profit                                          12,471          10,458          36,148          29,685
   Operating expenses                                  7,048           5,098          19,785          14,313
                                                 -----------     -----------     -----------     -----------
Operating income                                       5,423           5,360          16,363          15,372
   Interest expense                                    2,095           1,533           6,226           3,891
                                                 -----------     -----------     -----------     -----------
Income before income taxes                             3,328           3,827          10,137          11,481
   Income tax provision                                1,281           1,512           3,902           4,535
                                                 -----------     -----------     -----------     -----------
Income from continuing operations                      2,047           2,315           6,235           6,946
Loss from discontinued operations, net of tax           (137)           (122)           (534)           (821)
                                                 -----------     -----------     -----------     -----------
Net income                                       $     1,910     $     2,193     $     5,701     $     6,125
                                                 ===========     ===========     ===========     ===========
Income (loss) per share:
   Basic:
      Continuing operations                      $      0.19     $      0.24     $      0.59     $      0.71
      Discontinued operations                          (0.01)          (0.02)          (0.05)          (0.08)
                                                 -----------     -----------     -----------     -----------
         Net income                              $      0.18     $      0.22     $      0.54     $      0.63
                                                 ===========     ===========     ===========     ===========
   Diluted:
      Continuing operations                      $      0.19     $      0.23     $      0.57     $      0.69
      Discontinued operations                          (0.02)          (0.01)          (0.05)          (0.08)
                                                 -----------     -----------     -----------     -----------
         Net income                              $      0.17     $      0.22     $      0.52     $      0.61
                                                 ===========     ===========     ===========     ===========
Cash dividend declared per share:                $     0.065     $     0.050     $     0.195     $     0.150
                                                 ===========     ===========     ===========     ===========
Weighted average shares outstanding:
   Basic                                          10,553,995       9,826,431      10,542,052       9,730,166
                                                 ===========     ===========     ===========     ===========
   Diluted                                        10,937,699      10,187,034      10,932,470      10,060,247
                                                 ===========     ===========     ===========     ===========
</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 NINE MONTHS ENDED
                                                                                      -----------------------------
                                                                                      SEPTEMBER 30,   SEPTEMBER 30,
                                                                                           2005            2004
                                                                                      -------------   -------------
<S>                                                                                   <C>             <C>
Cash flows from operating activities:
   Net income                                                                           $  5,701        $  6,125
   Adjustments to reconcile net income to net cash from operating activities:
      Depreciation and amortization                                                        6,069           4,347
      Amortization and write-off of deferred finance costs                                   482             265
      (Gain)/Loss on disposal of assets                                                       --            (538)
      Provision for doubtful accounts                                                       (153)            200
      Deferred income taxes                                                                  949           3,802
      Changes in operating assets and liabilities:
      Accounts receivable                                                                      8          (2,395)
      Inventories                                                                         (2,913)         (1,448)
      Other assets                                                                           816            (185)
      Accounts payable and accrued liabilities                                            (4,729)          1,731
                                                                                        --------        --------
         Net cash from continuing operating activities                                     6,230          11,904
         Net cash used by discontinued operating activities                                 (208)         (1,668)
                                                                                        --------        --------
         Net cash from operating activities                                                6,022          10,236
                                                                                        --------        --------

Cash flows used by investing activities:
      Additions to property, plant and equipment                                          (3,797)         (4,675)
      Acquisitions, net of cash acquired                                                      --         (23,007)
      Restricted cash in connection with acquisitions of subsidiary                           --         (21,554)
                                                                                        --------        --------
         Net cash used by continuing investing activities                                 (3,797)        (49,236)
         Net cash from discontinued investing activities                                      --             537
                                                                                        --------        --------
         Net cash used by investing activities                                            (3,797)        (48,699)
                                                                                        --------        --------

Cash flows from (used by) financing activities:
      Principal payments for loan obligations                                             (4,382)         (4,411)
      Proceeds from loan obligations                                                          --          45,000
      Proceeds under revolving line of credit                                             60,000          69,500
      Repayments under revolving line of credit                                          (58,200)        (48,300)
      Payment of dividends to stockholders                                                (2,055)         (1,452)
      Payment of financing costs                                                            (157)           (662)
      Other, net                                                                           1,401              80
                                                                                        --------        --------
         Net cash from (used by) financing activities                                     (3,393)         59,755
                                                                                        --------        --------

Net increase (decrease) in cash and cash equivalents                                      (1,168)         21,292
Cash and cash equivalents at beginning of period                                           1,175             453
                                                                                        --------        --------
Cash and cash equivalents at end of period                                              $      7        $ 21,745
                                                                                        ========        ========
Non-cash investing and financing activities:
      Common stock issued in connection with the acquisition of subsidiary                              $ 11,575
      Debt issued in connection with the acquisition of subsidiary                                         7,000
      Non-compete agreement issued in connection with the acquisition of subsidiary                        3,698
</TABLE>

         The accompanying notes are an integral part of this statement.


                                        4
<PAGE>
                         PACKAGING DYNAMICS CORPORATION
          CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
                           OTHER COMPREHENSIVE INCOME
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                       ACCUMULATED
                                            COMMON STOCK                                  OTHER
                                        -------------------   PAID IN   ACCUMULATED   COMPREHENSIVE   STOCKHOLDERS'   COMPREHENSIVE
                                          SHARES     AMOUNT   CAPITAL     DEFICIT         INCOME          EQUITY          INCOME
                                        ----------   ------   -------   -----------   -------------   -------------   -------------
<S>                                     <C>          <C>      <C>       <C>           <C>             <C>             <C>
Balance at December 31, 2003             9,681,504    $ 97    $46,003    $(14,900)         $190          $31,390
   Net income                                                               8,778                          8,778          $8,778
   Issuance of common stock                833,333       8     11,567                                     11,575
   Other comprehensive income:
      Net change in fair value of
         derivative instruments,
         net of income taxes of $193                                                        296              296             296
                                                                                                                          ------
            Comprehensive Income                                                                                          $9,074
                                                                                                                          ======
   Cash dividend ($.22 per share)                                          (2,177)                        (2,177)
                                        ----------    ----    -------    --------          ----          -------
Balance at December 31, 2004            10,514,837    $105    $57,570    $ (8,299)         $486          $49,862

      Net income                                                            5,701                          5,701          $5,701
   Issuance of common stock                 52,827       1        526                                        527
   Other comprehensive income:
      Net change in fair value of
         derivative instruments,
         net of  income taxes of $206                                                       329              329             329
                                                                                                                          ------
            Comprehensive Income                                                                                          $6,030
                                                                                                                          ======
   Cash dividend ($.195 per share)                                         (2,055)                        (2,055)
                                        ----------    ----    -------    --------          ----          -------
Balance at September 30, 2005           10,567,664    $106    $58,096    $ (4,653)         $815          $54,364
                                        ==========    ====    =======    ========          ====          =======
</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
condensed consolidated financial statements reflects a fair statement of the
results of operations, cash flows and stockholders' equity for the three and
nine months ended September 30, 2005 and 2004 and the financial position at
September 30, 2005. 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, 2004. The consolidated balance sheet as of December 31, 2004 was derived
from audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States of America.
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 (383,704
and 360,603 for the three months ended September 30, 2005 and 2004, respectively
and 390,418 and 330,081 for the nine months ended September 30, 2005 and 2004,
respectively).

     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   FOR THE NINE MONTHS ENDED
                                                    SEPTEMBER 30,               SEPTEMBER 30,
                                             --------------------------   -------------------------
                                                  2005          2004          2005          2004
                                              -----------   -----------   -----------   -----------
<S>                                          <C>            <C>           <C>           <C>
Income from continuing operations ........    $     2,047   $     2,315   $     6,235   $     6,946
                                              ===========   ===========   ===========   ===========
Weighted average shares used to determine
   basic earnings per share from
   continuing operations .................     10,553,995     9,826,431    10,542,052     9,730,166
Common stock equivalents .................        383,704       360,603       390,418       330,081
                                              -----------   -----------   -----------   -----------
Weighted average shares used to determine
   diluted earnings per share from
   continuing operations .................     10,937,699    10,187,034    10,932,470    10,060,247
                                              ===========   ===========   ===========   ===========
Basic earnings per share from continuing
   operations ............................    $      0.19   $      0.24   $      0.59   $      0.71
                                              ===========   ===========   ===========   ===========
Diluted earnings per share from continuing
   operations ............................    $      0.19   $      0.23   $      0.57   $      0.69
                                              ===========   ===========   ===========   ===========
</TABLE>


                                       6
<PAGE>
     Excluded from the computations of diluted earnings per share were options
to purchase 405 and 361 shares of common stock for the third quarter and nine
months ended September 30, 2005, respectively. These outstanding options were
excluded because the option exercise prices were greater than the average market
price of the common shares during these periods and therefore, their effect
would be anti-dilutive.

DERIVATIVES AND OTHER COMPREHENSIVE INCOME (LOSS)

     The Company maintains interest rate derivative instruments (typically
swaps, collars and caps) 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. 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 through accumulated other
comprehensive income. Such instruments are recorded at fair value, and at
September 30, 2005 and December 31, 2004, the fair value approximates an asset
of $922 and $471, respectively, which is included in other current assets within
the accompanying condensed consolidated balance sheet. Changes in fair value,
based upon the amount at which the instrument could be settled with a third
party, are recorded in other comprehensive income only to the extent of
effectiveness. Any ineffectiveness on the instrument would be recognized in the
consolidated statement of operations. The differentials to be received or paid
under the instrument are recognized in income over the life of the contract as
adjustments to interest expense.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In November 2004, the FASB released FASB Statement No. 151, "Inventory
Costs -- an amendment of ARB No. 43, Chapter 4" (which we refer to as "SFAS
151"). SFAS 151 is the result of the FASB's efforts to converge U.S. accounting
standards for inventories with International Accounting Standards. SFAS 151
requires abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) to be recognized as current-period charges. It also
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We are currently evaluating the effect that the adoption of
SFAS 151 will have on our consolidated results of operations and financial
condition but do not expect SFAS 151 to have a material impact.

     In December 2004, the FASB issued two FASB Staff Positions (FSP's) that
provide accounting guidance on how companies should account for the effects of
the American Jobs Creation Act of 2004 (the Act) that was signed into law on
October 22, 2004. The Act could affect how companies report their deferred
income tax balances. The first FSP is FSP FAS 109-1 (FAS 109-1); the second is
FSP FAS 109-2 (FAS 109-2). In FAS 109-1, the FASB concludes that the tax relief
(special tax deduction for domestic manufacturing) from the Act should be
accounted for as a "special deduction" instead of a tax rate reduction. FAS
109-2 gives a company additional time to evaluate the effects of the Act on any
plan for reinvestment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109, "Accounting for Income Taxes." The Company has
adopted the FSP 109-1 in the first quarter of 2005 which resulted in a decrease
in the effective tax rate of approximately one percentage point. FSP 109-2 has
no impact on the Company.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. In April 2005, the SEC issued a
ruling that FAS 123R will be effective for public companies beginning with the
first annual period after June 15, 2005, with early adoption encouraged. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Under SFAS 123R, we must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that beginning
with the first quarter of adoption of SFAS 123R compensation expense will be
recorded for stock options and restricted stock as such items vest, while the
retroactive methods would record compensation expense for all stock options and
restricted stock as they vest beginning with the first period restated. We have
not


                                        7
<PAGE>
yet determined the method of adoption or the effect of adopting SFAS 123R,
and have not determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.

     In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS
154). SFAS 154 changes the accounting for and reporting of a change in
accounting principle by requiring retrospective applications to prior periods'
financial statements of changes in accounting principle unless impracticable.
SFAS 154 is effective for accounting changes made in fiscal years beginning
after December 15, 2005. The Company does not expect the adoption of SFAS 154 to
have a material impact on its results of operations, financial position or cash
flows.

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 instruments were a net asset of $922 and $471 at September 30,
2005 and December 31, 2004, respectively. At September 30, 2005, the fair value
of the remaining amounts payable under a non-compete agreement (eight quarterly
payments totaling $2,667) was estimated to be $2,525. Also at September 30,
2005, the fair value of a $7,000 note payable on September 14, 2006 and bearing
a 5% annual interest rate payable quarterly approximates recorded value.

PAPERCON ACQUISITION

     On September 14, 2004, the Company completed the acquisition of 100% of the
issued and outstanding shares of capital stock of 3141276 Canada Inc. from the
sole shareholder (the "Seller") pursuant to an acquisition agreement dated
August 6, 2004. 3141276 Canada Inc. was a Canadian corporation and the ultimate
parent holding company of Papercon, Inc. (Papercon, Inc. and 3141276 Canada Inc.
are collectively referred to as "Papercon"), a Georgia corporation, which
conducts all of Papercon's business operations. During the third quarter of
2005, the Company resolved the net asset purchase price with the Seller and
finalized the purchase price allocation, resulting in no change to goodwill.

PRODUCT CLAIM COST

     During the second quarter of 2005, the Company recorded a charge of $1,100
related to a product quality claim by a large building products customer in the
Company's Specialty Laminations segment. The charge is comprised of products to
be returned by the customer, reimbursement for costs incurred by the customer in
processing certain products supplied by the Company and one third party repair
claim. The claim relates to de-lamination during the customer's manufacturing
process which involves the use of laminated facer material supplied by the
Company. The Company has worked closely with the customer to evaluate the issues
involved and make manufacturing process changes which are believed to have
remedied the situation. The Company is not aware of any additional related
customer or third party claims. The Company intends to analyze and evaluate the
returned goods to determine whether such products have alternative uses,
although there can be no assurances that there will be any alternative uses. The
charge was recorded as sales returns and allowances and is reflected in "Net
sales" for the Company's Specialty Laminations segment in the Company's
Condensed Consolidated Statement of Operations.

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.


                                        8
<PAGE>
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. The
Specialty Paper operation is classified as a discontinued operation.

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

<TABLE>
<CAPTION>
                              THREE MONTHS ENDED   NINE MONTHS ENDED
                                 SEPTEMBER 30,       SEPTEMBER 30,
                              ------------------   -----------------
                                 2005    2004        2005     2004
                                -----   -----       -----   -------
<S>                           <C>       <C>        <C>      <C>
Sales
   External ...............     $  --   $  --       $  --   $    --
   Intercompany ...........        --      --          --        --
   Discounts & Returns ....        --      --          --        --
                                -----   -----       -----   -------
   Net Sales ..............     $  --   $  --       $  --   $    --
                                =====   =====       =====   =======
Operating loss ............     $(223)  $(201)      $(868)  $(1,357)
Interest expense ..........        --      --          --        --
                                -----   -----       -----   -------
Loss before income taxes ..      (223)   (201)       (868)   (1,357)
Income tax benefit ........        86      79         334       536
                                -----   -----       -----   -------
Net loss ..................     $(137)  $(122)      $(534)  $  (821)
                                =====   =====       =====   =======
</TABLE>

     The net loss for the three and nine months ended September 30, 2005
represents approximately $223 and $868, respectively, of pretax administrative
costs associated with the ongoing program to maintain and dispose of the Detroit
property. The Company is working towards a resolution of the Detroit property.

     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>
                                                  SEPTEMBER 30,   DECEMBER 31,
                                                       2005           2004
                                                  -------------   ------------
<S>                                               <C>             <C>
Accounts receivable trade (net of allowance
   for doubtful accounts of $22 and $45,
   respectively) ..............................       $    5         $    4
Other current assets ..........................           75            138
                                                      ------         ------
Total assets of discontinued operations .......       $   80         $  142
                                                      ======         ======
Accounts payable ..............................       $   45         $  156
Accrued liabilities ...........................        1,229          1,388
                                                      ------         ------
Total liabilities of discontinued operations ..       $1,274         $1,544
                                                      ======         ======
</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
                                   AND BENEFIT    CHARGE    TOTAL
                                   -----------   -------   -------
<S>                                <C>           <C>       <C>
Balance at December 31, 2003 ...     $   951      $  816   $ 1,767
   Charges to expense ..........         228         398       626
   Cash payments ...............      (1,064)         --    (1,064)
                                     -------      ------   -------
Balance at December 31, 2004 ...     $   115      $1,214   $ 1,329
                                     -------      ------   -------
   Charges to expense ..........         221          --       221
   Cash payments ...............        (304)        (53)     (357)
                                     -------      ------   -------
Balance at September 30, 2005 ..     $    32      $1,161   $ 1,193
                                     =======      ======   =======
</TABLE>


                                        9
<PAGE>
NOTE 4--GOODWILL AND INTANGIBLE ASSETS

     Goodwill and intangible assets at September 30, 2005 consist of the
following:

<TABLE>
<CAPTION>
                                                  Weighted
                                                Average Life   Carrying   Accumulated
                                                   (Years)      Amount    Amortization     Net
                                                ------------   --------   ------------   -------
<S>                                             <C>            <C>        <C>            <C>
Intangible assets subject to amortization
   Customer contracts and relationships .....       19.4       $ 10,880      $  927      $ 9,953
   Covenants not to compete .................        9.6          4,014         633        3,381
                                                               --------      ------      -------
                                                               $ 14,894      $1,560      $13,334
Intangible assets not subject to amortization
   Trademarks and trade names ...............                  $  4,800      $   --      $ 4,800
   Goodwill .................................                    81,263          --       81,263
                                                               --------      ------      -------
                                                               $ 86,063      $   --      $86,063
                                                               --------      ------      -------
Total intangible assets and goodwill                           $100,957      $1,560      $99,397
                                                               ========      ======      =======
</TABLE>

     Amortization expense for intangible assets subject to amortization was $228
and $57 for the three months and $703 and $160 for the nine months ended
September 30, 2005 and 2004, respectively. Amortization expense for the
remainder of 2005 and years 2006, 2007, 2008, 2009 and 2010 is estimated to be
$226, $906, $906, $906, $904 and $904, respectively.

NOTE 5--STOCK BASED COMPENSATION

     At September 30, 2005, 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 and nine months ended September 30, 2005
and September 30, 2004, as all options granted under the plan had an exercise
price that was equal to the market price on the date of grant.

     The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 as amended by SFAS No. 148, to stock-based employee compensation.

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED  NINE MONTHS ENDED
                                               SEPTEMBER 30,      SEPTEMBER 30,
                                            ------------------  -----------------
                                               2005     2004      2005     2004
                                              ------   ------    ------   ------
<S>                                         <C>        <C>      <C>       <C>
Net Income ..............................     $1,910   $2,193    $5,701   $6,125
Deduct: Stock-based employee compensation
   expense determined under fair value
   based method .........................        (90)    (210)     (255)    (653)
                                              ------   ------    ------   ------
Pro forma net income ....................     $1,820   $1,983    $5,446   $5,472
                                              ======   ======    ======   ======
Income per share:
   Basic - as reported ..................     $ 0.18   $ 0.22    $ 0.54   $ 0.63
                                              ======   ======    ======   ======
   Basic - proforma .....................     $ 0.17   $ 0.20    $ 0.52   $ 0.56
                                              ======   ======    ======   ======
   Diluted - as reported ................     $ 0.17   $ 0.22    $ 0.52   $ 0.61
                                              ======   ======    ======   ======
   Diluted - proforma ...................     $ 0.17   $ 0.19    $ 0.50   $ 0.54
                                              ======   ======    ======   ======
</TABLE>


                                       10
<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>
                               September 30,   September 30,
                                    2005            2004
                               -------------   -------------
<S>                            <C>             <C>
Expected option life (years)          5               5
Risk-free weighted average
interest rate                      3.95%           2.92%
Stock price volatility             27.5%           27.5%
Dividend yield                      1.9%            1.9%
</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 September 30, 2005 and December
31, 2004 consist of the following:

<TABLE>
<CAPTION>
                       September 30,   December 31,
                            2005           2004
                       -------------   ------------
<S>                    <C>             <C>
Raw materials             $19,791         $18,609
Work-in-process             3,623           3,580
Finished goods             16,306          14,608
                          -------         -------
                           39,720          36,797
Obsolescence reserve         (301)           (291)
                          -------         -------
Net                       $39,419         $36,506
                          =======         =======
</TABLE>

NOTE 7--LONG-TERM DEBT

     Long-term debt at September 30, 2005 and December 31, 2004 consists of the
following:

<TABLE>
<CAPTION>
                                       September 30,   December 31,
                                            2005           2004
                                       -------------   ------------
<S>                                    <C>             <C>
Senior Credit Facility:
   Term A Loan                           $ 21,000        $ 24,750
   Term B Loan                             83,197          83,829
   Revolving credit loan                    2,700             900
Seller note payable                         7,000           7,000
                                         --------        --------
   Subtotal                               113,897         116,479
Current maturities of long term debt      (13,843)         (6,093)
                                         --------        --------
Long-term debt                           $100,054        $110,386
                                         ========        ========
</TABLE>

SENIOR CREDIT FACILITY

     The Company maintains a credit facility with a group of banks (the "Senior
Credit Facility") that provides for Term A and Term B Loans totaling $115,000
and a $50,000 revolving credit facility, up to $8,000 of which could be in the
form of letters of credit. Borrowings are collateralized by substantially all of
the stock and assets of the Company's operating subsidiaries.

     As of September 30, 2005, the Term A Loan had a balance of $21,000 and will
mature in 2008. The required aggregate annual payments, payable in quarterly
installments, total $5,250, $6,250, $7,250 and $6,000 in years 2005 through
2008, respectively, of which $3,750 was paid during the nine months ended
September 30, 2005. As of September 30, 2005, the Term B Loan had a balance of
$83,197 and will mature in 2009. The aggregate annual payments, payable in equal
quarterly installments, total $843 in years 2005 through 2008 and $80,459 in
2009 of which $632 was paid during the nine months ended September 30, 2005. The
revolver had a balance of $2,700 as of


                                       11
<PAGE>
September 30, 2005. The revolving credit facility is due in 2008. 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.

     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 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.

     At September 30, 2005, the Term A Loan and revolving loans were bearing
interest at rates of up to 1.25% plus the base rate, in the case of Base Rate
Loans, and up to 2.25% plus LIBOR, in the case of Eurodollar Loans. The Term B
Loan was bearing interest at rates of 1.25% plus the base rate, in the case of
Base Rate Loans, and 2.25% plus LIBOR, in the case of Eurodollar Loans. At
September 30, 2005, the interest rates on borrowings under the Term A Loan and
the Term B Loan were 2.00% plus LIBOR (3.49%) and 2.25% plus LIBOR (3.49%),
respectively, compared with 3.0% plus LIBOR (1.59%) and 3.0% plus LIBOR (1.59%),
respectively, at September 30, 2004.

     As of September 30, 2005, we had interest rate instruments in effect with
banks having notional amounts totaling $75,000 and varying maturity dates
through December 31, 2007. We have an interest rate swap agreement with a
notional value of $25,000 which became effective on December 31, 2003 and
matures on December 29, 2006. This swap fixes our LIBOR rate for $25,000 of our
Senior Credit Facility indebtedness at a rate of 2.91%. We have an interest rate
collar agreement with a notional amount of $20,000 which became effective on
December 31, 2004 and matures on December 31, 2007. This collar results in our
paying market LIBOR rates for $20,000 of our Senior Credit Facility indebtedness
from a floor of 3.08% to a cap of 5.00%. In addition, we have two interest rate
caps of $15,000 each which became effective on December 31, 2004 and mature on
December 31, 2007. We purchased these caps for a cap premium of $376 of which
$83 was amortized during the nine months ended September 30, 2005. These caps
limit our LIBOR rate for $30,000 of our Senior Credit Facility indebtedness at a
maximum rate of 4.00%.

     Under the Senior Credit Facility, as amended, the Company is 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 from 4.5 to 1 at September 30,
          2005 to 4 to 1;

     -    under the senior secured leverage ratio covenant, as of the last day
          of each fiscal quarter, the ratio of total secured 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 from 3.75 to 1
          at September 30, 2005 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 (excluding the $7,000 seller note
          issued in connection with the Papercon acquisition) of the Company and
          its consolidated subsidiaries must be equal to or greater than certain
          specified levels, increasing from 1.1 to 1 at September 30, 2005 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, (2) 75% of the
          net cash proceeds from any equity issuance by Packaging Dynamics or
          any subsidiary of Packaging Dynamics, and (3) 75% of the amount added
          to the equity of Packaging Dynamics in accordance with GAAP in
          connection with the Papercon acquisition.


                                       12
<PAGE>
     For purposes of the Senior Credit Facility, as amended, 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 sale
and/or 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, non-cash expenses relating to the granting of
options, cash and non-cash charges and/or losses with respect to the sale and/or
closure of the Detroit paper mill, and charges related to the Papercon owner
bonus program prior to the date of acquisition by the Company, 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
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 September 30, 2005,
the latest measurement date. The occurrence of any default of these covenants
could result in acceleration of our obligations under the Senior Credit Facility
($106,897 as of September 30, 2005) and foreclosure on the collateral securing
those obligations.

     The Senior Credit Facility limits and restricts the payment of dividends
and distribution or transfer of assets by Packaging Dynamics and its
subsidiaries. Dividends to shareholders may not exceed $4 million in any twelve
month period. Additionally, any redemption or repurchase of capital stock of the
Company other than as defined in the Senior Credit Facility is not permitted. As
a result, substantially all of PDOC's net assets are restricted.

SELLER NOTE PAYABLE

     On September 14, 2004, the Company issued a $7,000 note to the former owner
of Papercon in connection with the acquisition of Papercon. The note matures on
September 14, 2006 and bears an annual interest rate of 5% payable quarterly.
This note is unsecured and subordinated to the Senior Credit Facility.

NOTE 8 - OPERATING SEGMENT INFORMATION

     Our continuing operations operate within, and sell to customers throughout,
the U.S., Canada and Europe in two operating segments - Food Packaging and
Specialty Laminations. The Food Packaging segment converts paper, film and foil
into a variety of specialty value-added food packaging products. The Specialty
Laminations segment produces multi-layer laminated structures from a variety of
substrates (foil, paper, paperboard and film), adhesives and coatings for use in
various food, consumer, medical and industrial packaging applications as well as
in the production of insulation and other products for the building materials
market. Corporate administrative expenses are allocated to the segments on a
direct basis where appropriate with the remainder being allocated based on
revenues.


                                       13
<PAGE>
     The reconciliation of Segment Operating Income to the Company's
consolidated financial statements is as follows:

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30,   NINE MONTHS ENDED SEPTEMBER 30,
                                          --------------------------------   -------------------------------
                                                   2005      2004                    2005       2004
                                                 -------   -------                 --------   --------
<S>                                       <C>              <C>               <C>              <C>
Net Sales:
   Food Packaging .....................          $71,597   $49,889                 $209,605   $140,396
   Specialty Laminations ..............           22,874    25,305                   62,969     74,492
   Elimination of Specialty Laminations
      intercompany sales ..............           (1,456)     (880)                  (3,720)    (2,298)
                                                 -------   -------                 --------   --------
      Total ...........................          $93,015   $74,314                 $268,854   $212,590
                                                 =======   =======                 ========   ========

Segment Operating Income:
   Food Packaging .....................          $ 4,437   $ 2,929                 $ 13,608   $  8,366
   Specialty Laminations ..............              986     2,430                    2,755      7,005
                                                 -------   -------                 --------   --------
      Total ...........................            5,423     5,359                   16,363     15,371
Gain on sale of assets ................               --         1                       --          1
                                                 -------   -------                 --------   --------
Operating income ......................            5,423     5,360                   16,363     15,372
Interest expense ......................           (2,095)   (1,533)                  (6,226)    (3,891)
                                                 -------   -------                 --------   --------
Income before income taxes ............          $ 3,328   $ 3,827                 $ 10,137   $ 11,481
                                                 =======   =======                 ========   ========

Depreciation and Amortization:
   Food Packaging .....................          $ 1,597   $ 1,111                 $  4,802   $  3,033
   Specialty Laminations ..............              440       417                    1,267      1,314
                                                 -------   -------                 --------   --------
      Total ...........................          $ 2,037   $ 1,528                 $  6,069   $  4,347
                                                 =======   =======                 ========   ========
</TABLE>

NOTE 9--COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED   NINE MONTHS ENDED
                                                        SEPTEMBER 30,       SEPTEMBER 30,
                                                     ------------------   -----------------
                                                        2005     2004       2005     2004
                                                       ------   ------     ------   ------
<S>                                                  <C>        <C>       <C>       <C>
Net income                                             $1,910   $2,193     $5,701   $6,125
Net change in fair value of derivative instruments        221      191        329      165
                                                       ------   ------     ------   ------
Comprehensive income                                   $2,131   $2,384     $6,030   $6,290
                                                       ======   ======     ======   ======
</TABLE>

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

NOTE 10--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.

LEASE COMMITMENTS

     The Company occupies certain facilities under lease arrangements and leases
certain machinery, automobiles,


                                       14
<PAGE>
and equipment. Future minimum rental commitments, including capital lease
obligations, with noncancelable terms in excess of one year are as follows:

<TABLE>
<CAPTION>
Year ended December 31:
-----------------------
<S>                         <C>
2005 (fourth quarter) ...       648
2006 ....................     2,377
2007 ....................     1,884
2008 ....................     1,542
2009 ....................     1,241
Thereafter ..............     3,820
                            -------
Total ...................   $11,512
                            =======
</TABLE>

     Accumulated amortization on capital leases as of September 30, 2005 is
$150.

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
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.

     We will continue to have additional costs related to our ongoing program to
maintain 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.

     Papercon has been identified as a potentially-responsible-party ("PRP")
under Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") with respect to the Constitution Road Drum Superfund Site located in
Atlanta, Georgia by virtue of having allegedly sent drums, totes, or other
containers to the site containing substances classified as hazardous under
CERCLA. During the third quarter of 2005, the Company and other PRPs formed the
Constitution Road PRP Group to develop a plan to resolve liabilities of the
members at the site. The plan may include activities such as negotiation with
United States Environmental Protection Agency ("EPA"), evaluation of cleanup
alternatives, as well as hiring contractors to do cleanup work at the site. The
Company has established a reserve of $300 related to its estimate of the
Company's obligations with respect to this site. However, there can be no
assurances that this reserve will be adequate. Factors which are likely to
impact the Company's potential liability include, but may not be limited to, the
amount and content of any hazardous substances that Papercon and other parties
may have sent to the site, the ultimate cost to remediate the site and the
contributions of other parties towards the cost of remediation. In addition, the
Company is evaluating its rights under indemnification provisions in agreements
executed in connection with the acquisition of Papercon.

NOTE 11 -- RELATED PARTY TRANSACTIONS

     Pursuant to an acquisition agreement (the "Acquisition Agreement") dated
August 6, 2004, Packaging Dynamics acquired 100% of the issued and outstanding
shares of capital stock of 3141276 Canada Inc., the parent holding company of
Papercon, from its sole shareholder (the "Seller"). The acquisition closed on
September 14, 2004. Prior


                                       15
<PAGE>
to the Papercon acquisition, the Seller was not affiliated with the Company.
Effective with the closing, the Seller became an officer of the Company. In
connection with the Papercon acquisition, the Company entered into the
Acquisition Agreement and several related agreements with the Seller. Certain of
these agreements obligate the Company to make payments to, or take other action
for the benefit, of the Seller as discussed below. Pursuant to the Acquisition
Agreement, Packaging Dynamics acquired Papercon for aggregate consideration of
approximately $66,421, net of $22,650 of cash acquired.

     The Company issued a $7,000 two year Seller Note to the Seller which is due
and payable on September 14, 2006. The principal amount payable under the Seller
Note will accrue interest at a rate of 5% per year, which will be due and
payable in cash on a quarterly basis. The Company has the right to set-off
against its payment obligations under the Seller Note for the full amount of any
indemnification obligations required to be paid by the Seller under the
Acquisition Agreement. Events of default under the Seller Note would include the
Company's failure to make any payment that is not subject to a claim for
set-off, a material breach of any of the Company's representations and
warranties under the Seller Note that are not cured within 30 days of notice of
such breach and the bankruptcy or general insolvency of the Company. In
addition, a default by the Company under the Non-Competition Agreement would
constitute a cross-default under the Seller Note. In the event of a default and
upon written notice of the Seller (except in the case of default due to the
bankruptcy or general insolvency of the Company, in which case written notice is
not required), the balance of consideration due under the Seller Note would
become immediately due and payable and would also accrue interest at a rate of
12% per year until such time as the event of default is cured by the Company (or
waived by the Seller) or all amounts due are paid in full.

     In connection with the Seller Note, the Seller entered into an
intercreditor agreement with Bank of America, the administrative agent for the
Company's credit facility, pursuant to which payments under the Seller Note are
subordinated to payments under the Company's senior credit facility, as amended.

     The Company entered into a Non-Competition Agreement with the Seller which
provides, among other things, that for a period of ten years following the
closing of the Acquisition, the Seller may not own, operate, manage, control,
engage in, invest in or participate in any manner in, act as a consultant or
advisor to, or render services for any other person or entity in any similar or
competitive business as Packaging Dynamics and its subsidiaries (including
Papercon) anywhere in the United States and Canada. Also, during this period,
the Seller may not without the prior written consent of the Company, solicit or
advise any customer or vendor of the Company to patronize a competitive business
or curtail or withdraw their business with the Company or solicit for employment
any person employed by the Company. The Company is required to make twelve (12)
equal quarterly payments of $333 to the Seller under the Non-Competition
Agreement commencing in December 2004. The Company has the right to set-off
against its payment obligations under the Non-Competition Agreement the full
amount of any indemnification obligations required to be paid by the Seller
under the Acquisition Agreement. A failure by the Company to make any payment
under the Non-Competition Agreement that is not subject to a claim for set-off,
so long as the Seller has not breached the Non-Competition Agreement, would
constitute an event of default. Additionally, the failure to pay any amount of
principal or interest due under the Seller Note would constitute a cross-default
under the Non-Competition Agreement. In the event of a default and upon written
notice of the Seller, the balance of consideration due under the Non-Competition
Agreement would become immediately due and payable and would also accrue
interest at a rate of 12% per year until such time as the event of default is
cured by the Company (or waived by the Seller) or all amounts due are paid in
full.

     The Company and the Seller entered into a registration rights agreement,
dated September 14, 2004 (the "Papercon Seller Registration Rights Agreement"),
between the Company, the Seller and Packaging Investors, L.P. ("Packaging
Investors"). The Company also amended its existing registration rights agreement
(the "Initial Registration Rights Agreement") with, among others, Packaging
Investors. Pursuant to the Papercon Seller Registration Rights Agreement, the
Seller has the right, under certain circumstances, to require the Company to
register his shares of Seller Common Stock for sale in the public markets. The
Seller also has piggyback registration rights to include his shares in any
registration statement which the Company files on its own behalf (other than for
employee benefit plans and business acquisitions or corporate restructurings) or
on behalf of other stockholders. The Company amended the Initial Registration
Rights Agreement to provide for the piggyback registration rights granted to the
Seller under the Papercon Seller Registration Rights Agreement. In addition,
under the Papercon Seller Registration Rights Agreement, until the date on which
the Seller ceases to own at least 5% of the outstanding shares of Seller Common
Stock, at each annual meeting of stockholders, the Company has agreed to
nominate or cause to be nominated the Seller for election to the board of
directors of the Company. The Seller and Packaging


                                       16
<PAGE>
Investors have agreed that until the date (a) on which Packaging Investors
ceases to own at least 20% of the outstanding shares of Seller Common Stock, the
Seller will vote any shares of Seller Common Stock then owned by him to nominate
and elect the individual designated by Packaging Investors for election to the
board of directors of the Company and (b) on which the Seller ceases to own at
least 5% of the outstanding shares of Seller Common Stock, Packaging Investors
will vote any shares of Seller Common Stock then owned by it to nominate and
elect the Seller for election to the board of directors of the Company.

     In connection with the Papercon acquisition, Papercon entered into a new
lease (the "Lease") with respect to its Atlanta headquarters and facilities,
effective as of September 14, 2004, with GHGA Properties, L.P. (the "Landlord"),
a limited partnership wholly-owned and controlled by the Seller. The initial
term of the Lease is five years and has options to renew for three additional
five-year terms. The monthly rent for the initial and first renewal terms has
been fixed at $49 and $52, respectively, with the subsequent renewal terms to be
set at the market rate as agreed upon by the parties. The payment and
performance of the obligations arising under the Lease are guaranteed pursuant
to a separate guaranty by the Company in favor of Landlord. This arrangement was
amended during the fourth quarter of 2004 and is reflected in the accompanying
financial statements as an operating lease.


                                       17
<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.

SUMMARY AND OUTLOOK

     During the balance of 2005, the Company will be focused on, among other
things, achieving price increases in response to rising raw material, energy and
transportation costs as well as addressing the ongoing sales weakness in the
Specialty Laminations segment. Other priorities in each of the Company's
operating segments include expanding sales of new and existing products,
improving manufacturing productivity and reducing manufacturing costs.

     The Company is evaluating a number of specific capital investment
opportunities to expand product capabilities and reduce production costs. The
combination of projects which have been approved and others under consideration
are expected to result in total capital expenditures of approximately $7,500 to
$8,500 in 2005 and $9,000 to $11,000 in 2006 compared to $6,081 in 2004 and an
estimated normalized range of $7,000 to $8,000. The Company is also continuing
its efforts to identify and pursue acquisition candidates which have the
potential to expand the Company's product capabilities, market participation and
geographical presence.

FINANCIAL PERFORMANCE

     Our continuing operations are comprised of two operating segments - Food
Packaging and Specialty Laminations. The Food Packaging segment converts paper,
film and foil into a variety of specialty value-added food packaging products.
The Specialty Laminations segment produces multi-layer laminated structures from
a variety of substrates (foil, paper, paperboard and film), adhesives and
coatings for use in various food, consumer, medical and industrial packaging
applications as well as in the production of insulation and other products for
the building materials market. Our discontinued operation is the Specialty Paper
segment which we exited during 2003 in connection with our decision to shut down
the Detroit Paper mill.

     The Company's management reporting system measures segment operating
performance based on Segment Operating Income. Certain items, such as asset
sales and disposals are excluded from Segment Operating Income. Corporate
administrative expenses are allocated to the segments on a direct basis where
appropriate with the remainder being allocated based on revenues.

Food Packaging

<TABLE>
<CAPTION>
                                   FOR THE THREE MONTHS ENDED      FOR THE NINE MONTHS ENDED
                                 -----------------------------   ----------------------------
                                 September 30,   September 30,   September 30,  September 30,
                                      2005           2004            2005            2004
                                 -------------   -------------   -------------  -------------
<S>                              <C>             <C>             <C>            <C>
Net Sales ....................      $71,597         $49,889         $209,605       $140,396
Segment Operating Income .....      $ 4,437         $ 2,929         $ 13,608       $  8,366
Segment Operating Income .....
   Margin ....................          6.2%            5.9%             6.5%           6.0%

Depreciation and
   Amortization ..............      $ 1,597         $ 1,111         $  4,802       $  3,033
</TABLE>


                                       18
<PAGE>
     Net sales increased $21,708, or 43.5%, during the third quarter of 2005
compared to the same period in 2004 primarily due to the September 14, 2004
acquisition of Papercon as well as increased sales in key market segments.

     Segment Operating Income increased $1,508, or 51.5%, during the third
quarter of 2005 compared to the same period in 2004 and Segment Operating Income
margin increased to 6.2% from 5.9% during the third quarter of 2005 compared to
the same period in 2004. The increase in Segment Operating Income was primarily
due to incremental earnings from Papercon and reduced incentive compensation
expense, partially offset by increased raw material costs. In addition, the
third quarter of 2005 was negatively impacted by $699 of management severance
and hiring costs. The third quarter of 2004 was negatively impacted by $234
related to fair value adjustments to inventory in connection with purchase
accounting for the Papercon acquisition.

     Net sales increased $69,209 or 49.3% during the nine months ended September
30, 2005 compared to the same period in 2004, primarily due to the Papercon
acquisition as well as increased sales in key market segments.

     Segment Operating Income for the nine months ended September 30, 2005
increased $5,242, or 62.7%, compared to the same period in 2004 and Segment
Operating Income margin increased to 6.5% from 6.0% during the nine months ended
September 30, 2005 compared to the same period in 2004. The increase in Segment
Operating Income was primarily due to incremental earnings from Papercon, cost
and productivity improvement initiatives and reduced incentive compensation
expense, partially offset by increased raw material costs. In addition, the 2005
result was negatively impacted by $1,019 of management severance and hiring
costs related to forming a single management team for the Food Packaging
segment. The 2004 result was negatively impacted by $234 related to fair value
adjustments to inventory in connection with purchase accounting for the Papercon
acquisition.

Specialty Laminations

<TABLE>
<CAPTION>
                                   FOR THE THREE MONTHS ENDED      FOR THE NINE MONTHS ENDED
                                 -----------------------------   -----------------------------
                                 September 30,   September 30,   September 30,   September 30,
                                      2005           2004            2005             2004
                                 -------------   -------------   -------------   -------------
<S>                              <C>             <C>            <C>              <C>
Net Sales ....................      $22,874         $25,305        $62,969          $74,492
Segment Operating Income .....      $   986         $ 2,430        $ 2,755          $ 7,005
Segment Operating Income
   Margin ....................          4.3%            9.6%           4.4%             9.4%

Depreciation and
   Amortization ..............      $   440         $   417        $ 1,267          $ 1,314
</TABLE>

     Net sales decreased $2,431, or 9.6%, during the third quarter of 2005
compared to the same period in 2004. The decrease was primarily due to continued
volume weakness for products sold into the building products market.

     Segment Operating Income decreased $1,444, or 59.4%, during the third
quarter of 2005 compared to the same period in 2004 and Segment Operating Income
Margin decreased to 4.3% from 9.6% in the third quarter of 2005 compared to the
same period in 2004. The decrease in Segment Operating Income was primarily due
to continued volume weakness for products sold into the building products
market, increased raw material costs and $192 of management severance costs
during the third quarter of 2005.

     Net sales decreased $11,523 or 15.5%, during the nine months ended
September 30, 2005 compared to the same period in 2004. The decrease was
primarily due to continued volume weakness for products sold into the building
products market and the $1,100 charge for a product quality claim discussed
below.

     During the second quarter of 2005, the Company recorded a charge of $1,100
related to a product quality claim by a large building products customer in the
Company's Specialty Laminations segment. The charge is comprised of products to
be returned by the customer, reimbursement for costs incurred by the customer in
processing certain products supplied by the Company and one third party repair
claim. The claim relates to de-lamination during the customer's manufacturing
process which involves the use of laminated facer material supplied by the
Company. The Company has worked closely with the customer to evaluate the issues
involved and make manufacturing


                                       19
<PAGE>
process changes which are believed to have remedied the situation. The Company
is not aware of any additional related customer or third party claims. The
Company intends to analyze and evaluate the returned goods to determine whether
such products have alternative uses, although there can be no assurances that
there will be any alternative uses. The charge was recorded as sales returns and
allowances and is reflected in "Net sales" for the Company's Specialty
Laminations segment in the Company's Condensed Consolidated Statement of
Operations.

     Segment Operating Income for the nine months ended September 30, 2005
decreased $4,250 or 60.7% compared to the same period in 2004 and Segment
Operating Income margin decreased to 4.4% from 9.4% during the nine months ended
September 30, 2005 compared to the same period in 2004. The decline in Segment
Operating Income was primarily due to the impact of decreased sales volume and
the $1,100 customer product claim recorded in the second quarter of 2005 as well
as increased raw material costs and $192 of management severance costs during
the third quarter of 2005.

INTEREST EXPENSE

     Interest expense increased $562 and $2,335 during the quarter and nine
months ended September 30, 2005, respectively. The increase in interest expense
was primarily due to increased average outstanding indebtedness of approximately
$38,000 during the quarter ended September 30, 2005 and $45,000 during the nine
months ended September 30, 2005 compared to the same periods in 2004 and a
higher average borrowing rate. The average interest rate on borrowings in the
third quarter of 2005 was approximately 5.84% compared to 4.94% in the same
period in 2004. The average interest rate on borrowings during the nine months
ended September 30, 2005 was approximately 5.69% compared to 4.66% in the same
period in 2004.

INCOME TAXES

     The Company's effective tax rate on income from continuing operations was
38.5% and 39.5%, for the quarter and nine months ended September 30, 2005 and
2004, respectively. The decrease in the Company's effective tax rate during 2005
is due to the American Jobs Creation Act of 2004 (the "Act"). The Act provides a
deduction for income from qualified domestic production activities, which will
be phased in from 2005 through 2010.

INCOME FROM CONTINUING OPERATIONS

     Income from continuing operations was $2,047 and $2,315 for the quarters
ended September 30, 2005 and 2004, respectively. The decrease in income from
continuing operations of $268 or 11.6% during the quarter ended September 30,
2005 compared to 2004 was primarily due to the increased interest expense
associated with the Papercon acquisition and reduced Segment Operating Income
from Specialty Laminations, partially offset by increased Segment Operating
Income from Food Packaging which includes incremental earnings from the Papercon
acquisition.

     For the nine month periods ended September 30, 2005 and 2004, income from
continuing operations was $6,235 and $6,946, respectively. The decrease in
income from continuing operations of $711 or 10.2% during the nine months ended
September 30, 2005 was primarily due to increased interest expense associated
with the Papercon acquisition and decreased Segment Operating Income from
Specialty Laminations, partially offset by increased Segment Operating Income
from Food Packaging which includes incremental earnings from the Papercon
acquisition.

DISCONTINUED OPERATIONS

     Loss from discontinued operations during the third quarter of 2005 was $137
compared to a loss of $122 in the same period in 2004. For the nine months ended
September 30, 2005, loss from discontinued operations was $534 compared to a
loss of $821 in the same period in 2004. The net losses for 2005 represent the
administrative expenses associated with the ongoing program to maintain and
dispose of the Detroit property. We will continue to have additional costs
related to our ongoing program to maintain 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.


                                       20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 2005, we had cash and cash equivalents of $7, and $44,121
was available under the revolving portion of the Senior Credit Facility, after
taking into account $3,179 in letter of credits outstanding. Our working capital
at September 30, 2005 was $24,818 compared to $29,965 at December 31, 2004.

     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.

     The Company generated $6,022 of cash from operating activities in the nine
months ended September 30, 2005 compared to $10,236 for the same period in 2004.
The decrease in cash from operating activities is primarily due to a decrease in
non-cash tax expense and an increase in cash used for operating assets and
liabilities, partially offset by an increase in non-cash depreciation and
amortization expenses and a decrease in cash used by discontinued operations.
Cash used by discontinued operations decreased significantly during the nine
months ended September 30, 2005 compared to the same period in 2004 as a result
of a reduction in the costs to maintain and dispose of the Detroit property
during 2005.

     Cash used by investing activities was $3,797 for the nine months ended
September 30, 2005 compared to $48,699 for the same period in 2004. This change
was primarily due to $23,711 paid in connection with the Papercon acquisition
offset by the receipt of $704 related to Iuka purchase price adjustment in 2004,
and $21,554 transfer of cash to restricted cash in connection with the Papercon
acquisition in 2004, partially offset by decreased capital expenditures in 2005.
The Company is evaluating a number of specific capital investment opportunities
to expand product capabilities and reduce production costs. The combination of
projects which have been approved and others under consideration are expect to
result in total capital expenditures of approximately $7,500 to $8,500 in 2005
and $9,000 to $11,000 in 2006, compared to $6,081 in 2004 and an estimated
normalized range of $7,000 to $8,000.

     Cash used by financing activities was $3,393 for the nine months ended
September 30, 2005 compared to cash from financing activities of $59,755 for the
same period in 2004. The change was primarily due to borrowings in connection
with the acquisition of Papercon during 2004. In September 2005, the Company
announced a cash dividend of $0.065 per common share, $686 in the aggregate,
which was paid on October 3, 2005 to shareholders of record as of September 15,
2005.

     Disclosures about contractual obligations and commercial commitments are
included in various parts of this Report, including Note 7 - Long-Term Debt and
Note 10 - Commitments and Contingencies to the financial statements. A summary
of significant contractual obligations as of September 30, 2005 is included as
follows:

<TABLE>
<CAPTION>
                LONG-TERM
                  DEBT         LEASE      NON-COMPETE      OTHER
               MATURITIES   COMMITMENTS    AGREEMENT    COMMITMENTS     TOTAL
               ----------   -----------   -----------   -----------   --------
<S>            <C>          <C>           <C>           <C>           <C>
2005........    $  1,711      $   648        $  333        $   23     $  2,715
2006........      14,092        2,377         1,334            97       17,900
2007........       8,092        1,884         1,000           104       11,080
2008........       9,543        1,542            --           111       11,196
2009........      80,459        1,241            --           118       81,818
Thereafter..          --        3,820            --           708        4,528
                --------      -------        ------        ------     --------
Total.......    $113,897      $11,512        $2,667        $1,161     $129,237
                ========      =======        ======        ======     ========
</TABLE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In November 2004, the FASB released FASB Statement No. 151, "Inventory
Costs -- an amendment of ARB No. 43, Chapter 4" (which we refer to as "SFAS
151"). SFAS 151 is the result of the FASB's efforts to converge U.S. accounting
standards for inventories with International Accounting Standards. SFAS 151
requires abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) to be recognized as current-period charges. It also
requires that allocation of fixed production overheads to the costs of
conversion be based on


                                       21
<PAGE>
the normal capacity of the production facilities. SFAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. We
are currently evaluating the effect that the adoption of SFAS 151 will have on
our consolidated results of operations and financial condition but do not expect
SFAS 151 to have a material impact.

     In December 2004, the FASB issued two FASB Staff Positions (FSP's) that
provide accounting guidance on how companies should account for the effects of
the American Jobs Creation Act of 2004 (the Act) that was signed into law on
October 22, 2004. The Act could affect how companies report their deferred
income tax balances. The first FSP is FSP FAS 109-1 (FAS 109-1); the second is
FSP FAS 109-2 (FAS 109-2). In FAS 109-1, the FASB concludes that the tax relief
(special tax deduction for domestic manufacturing) from the Act should be
accounted for as a "special deduction" instead of a tax rate reduction. FAS
109-2 gives a company additional time to evaluate the effects of the Act on any
plan for reinvestment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109, "Accounting for Income Taxes." The Company has
adopted the FSP 109-1 in the first quarter of 2005 which resulted in a decrease
in the effective tax rate of approximately one percentage point. FSP 109-2 has
no impact on the Company.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. In April 2005, the SEC issued a
ruling that FAS 123R will be effective for public companies beginning with the
first annual period after June 15, 2005, with early adoption encouraged. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Under SFAS 123R, we must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that beginning
with the first quarter of adoption of SFAS 123R compensation expense will be
recorded for stock options and restricted stock as such items vest, while the
retroactive methods would record compensation expense for all stock options and
restricted stock as they vest beginning with the first period restated. We have
not yet determined the method of adoption or the effect of adopting SFAS 123R,
and have not determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.

     In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS
154). SFAS 154 changes the accounting for and reporting of a change in
accounting principle by requiring retrospective applications to prior periods'
financial statements of changes in accounting principle unless impracticable.
SFAS 154 is effective for accounting changes made in fiscal years beginning
after December 15, 2005. The Company does not expect the adoption of SFAS 154 to
have a material impact on its results of operations, financial position or cash
flows.


                                       22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We use interest rate swaps, collars and caps 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 September 30, 2005, we had interest rate instruments in effect with
banks having notional amounts totaling $75,000 and varying maturity dates
through December 31, 2007. We have an interest rate swap agreement with a
notional value of $25,000 which became effective on December 31, 2003 and
matures on December 29, 2006. This swap fixes our LIBOR rate for $25,000 of our
Senior Credit Facility indebtedness at a rate of 2.91%. We have an interest rate
collar agreement with a notional amount of $20,000 which became effective on
December 31, 2004 and matures on December 31, 2007. This collar results in our
paying market LIBOR rates for $20,000 of our Senior Credit Facility indebtedness
from a floor of 3.08% to a cap of 5.00%. In addition, we have two interest rate
caps of $15,000 each which became effective on December 31, 2004 and mature on
December 31, 2007. We purchased these caps for a cap premium of $376 of which
$83 was amortized during the nine months ended September 30, 2005. These caps
limit our LIBOR rate for $30,000 of our Senior Credit Facility indebtedness at a
maximum rate of 4.00%. 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 $922 asset as
of September 30, 2005 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
change in 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

EVALUATION OF DISCLOSURE 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.

     In addition to our responsibilities with respect to an evaluation of our
disclosure controls and procedures, we, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, are in the process of performing the assessments required by
Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by
the SEC (collectively, the "Section 404 requirements"). We are not deemed to be
an Accelerated Filer for 2005 and thus the earliest we will be required to
include a report on management's assessment of the effectiveness of our internal
control over financial reporting in our Annual Report on Form 10-K will be the
year ending December 31, 2006. When applicable, our independent registered
public accounting firm will also be required to attest to and report on
management's assessment of the effectiveness of our internal control over
financial reporting. We have been and are continuing to devote significant
resources to prepare for the Section 404 requirements. There can be no
assurances that once completed, management's assessment and the independent
registered public accounting firm's attestation will not report any material
weaknesses in our internal control over financial reporting.

     In connection with our response to the rules pertaining to the evaluation
of our disclosure controls and procedures, as well as our response to the
Section 404 requirements pertaining to the assessment of our internal control
over financial reporting, we are reviewing, documenting and testing our
disclosure controls and procedures and our internal control over financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business. For
example, we are evaluating, documenting


                                       23
<PAGE>
and testing our key controls over financial reporting in preparation for
management's assessment under the Section 404 requirements. These efforts are
likely to lead to changes in our internal control over financial reporting,
including enhanced documentation of certain of these internal controls.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

     Except as further described in the following paragraphs, there have not
been any changes in the Company's internal control 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.

     On September 14, 2004, the Company acquired Papercon. The results of
Papercon's operations from the date of acquisition have been included in the
Company's 2004 financial results. Prior to its acquisition by the Company,
Papercon operated as an independent private company, was not subject to public
company reporting requirements and had a limited amount of resources available
for financial reporting and internal control matters. The Company is conducting
an ongoing review of Papercon's internal control over financial reporting and
intends to make changes, where necessary, to conform Papercon's controls and
procedures to the Company's controls and procedures and to ensure that such
controls and procedures are effective and integrated appropriately.

     In 2004, the Company implemented a new enterprise wide financial accounting
software system at each of its facilities except the Papercon facilities
acquired in September 2004. In the second quarter of 2005, the Company
implemented the financial and accounting software systems at Papercon.

SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS

     Certain statements included in this quarterly report, including without
limitation, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Summary and Outlook, --
Financial Performance, -- 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 its 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.


                                       24
<PAGE>
                           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.

     Papercon has been identified as a potentially-responsible-party ("PRP")
under Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") with respect to the Constitution Road Drum Superfund Site located in
Atlanta, Georgia by virtue of having allegedly sent drums, totes, or other
containers to the site containing substances classified as hazardous under
CERCLA. During the third quarter of 2005, the Company and other PRPs formed the
Constitution Road PRP Group to develop a plan to resolve liabilities of the
members at the site. The plan may include activities such as negotiation with
United States Environmental Protection Agency ("EPA"), evaluation of cleanup
alternatives, as well as hiring contractors to do cleanup work at the site. The
Company has established a reserve of $300 related to its estimate of the
Company's obligations with respect to this site. However, there can be no
assurances that this reserve will be adequate. Factors which are likely to
impact the Company's potential liability include, but may not be limited to, the
amount and content of any hazardous substances that Papercon and other parties
may have sent to the site, the ultimate cost to remediate the site and the
contributions of other parties towards the cost of remediation. In addition, the
Company is evaluating its rights under indemnification provisions in agreements
executed in connection with the acquisition of Papercon.

ITEM 6. EXHIBITS

     (a)  Exhibits

<TABLE>
<CAPTION>
Exhibit No.                             Description
-----------                             -----------
<S>           <C>
    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.
</TABLE>

                             SIGNATURE PAGE FOLLOWS


                                       25
<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/ PATRICK T. CHAMBLISS
                                            ------------------------------------
                                            PATRICK T. CHAMBLISS
                                            Vice President and
                                            Chief Financial Officer
                                            (Principal Financial Officer)

October 28, 2005


                                       26