<PAGE>

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

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

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

                                    FORM 10-Q

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

 FOR THE QUARTER ENDED SEPTEMBER 30, 2003        COMMISSION FILE NUMBER 0-49741

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

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

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

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

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

                                            Yes [X] No [ ]

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

                                            Yes [X] No [ ]

         At October 31, 2003, there were 9,681,504 shares of common stock, par
value $0.01 per share, outstanding.

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

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                             September 30,   December 31,
                                                                                                 2003           2002
                                                                                             -------------   ------------
                                                                                              (Unaudited)
<S>                                                                                          <C>             <C>
                                      ASSETS
Current Assets:
     Cash and cash equivalents ...........................................................     $     805      $   1,864
     Accounts receivable trade (net of allowance for doubtful accounts of $399 and
        $609, respectively) ..............................................................        21,373         22,640
     Inventories .........................................................................        27,600         28,257
     Prepaid expenses and other ..........................................................         5,412          3,995
                                                                                               ---------      ---------
          Total current assets ...........................................................        55,190         56,756
                                                                                               ---------      ---------
Property, Plant and Equipment:
     Property, plant and equipment .......................................................        63,235         91,077
     Less - accumulated depreciation .....................................................       (22,578)       (26,476)
                                                                                                --------       --------
          Total property, plant and equipment ............................................        40,657         64,601
                                                                                               ---------      ---------

Other Assets:
     Goodwill, net of accumulated amortization ...........................................        42,969         42,771
     Miscellaneous .......................................................................         2,276          2,227
                                                                                               ---------      ---------
          Total other assets .............................................................        45,245         44,998
                                                                                               ---------      ---------

Total Assets .............................................................................     $ 141,092      $ 166,355
                                                                                               =========      =========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Current maturities of long-term debt ................................................     $   5,700      $   7,420
     Accounts payable ....................................................................        18,566         23,299
     Accrued salary and wages ............................................................         2,943          2,627
     Other accrued liabilities ...........................................................         8,287          6,433
                                                                                               ---------      ---------

          Total current liabilities ......................................................        35,496         39,779

Long-Term Debt ...........................................................................        68,000         67,710
Other Liabilities ........................................................................         2,345          2,736
Deferred Income Taxes ....................................................................         2,191         10,423
                                                                                               ---------      ---------
Total Liabilities ........................................................................       108,032        120,648
                                                                                               ---------      ---------

Commitments and Contingencies (Note 9)....................................................

Stockholders' Equity:
     Common stock, $.01 par value -- 40,000,000 shares authorized; (9,681,504
     and 9,618,767 shares issued and outstanding at September 30, 2003
     and December 31, 2002,  respectively) ...............................................            97             96
     Preferred stock, $.01 par value -- 5,000,000 shares authorized; (no shares
        issued or outstanding) ...........................................................            --             --
     Paid in capital in excess of par value ..............................................        46,069         45,560
     Accumulated other comprehensive loss ................................................           (70)          (253)
     Retained earnings (Accumulated Deficit) .............................................       (13,036)           304
                                                                                               ---------      ---------
          Total stockholders' equity .....................................................        33,060         45,707
                                                                                               ---------      ---------
Total Liabilities and Stockholders' Equity ...............................................     $ 141,092      $ 166,355
                                                                                               =========      =========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       2

<PAGE>

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

<TABLE>
<CAPTION>
                                                            For the Three Months Ended,       For the Nine Months Ended,
                                                           September 30,    September 28,   September 30,    September 28,
                                                               2003              2002            2003             2002
                                                           -------------    -------------   -------------    -------------
<S>                                                        <C>              <C>             <C>              <C>
Net sales .............................................     $    66,221      $    64,132     $   196,092      $   189,988
Cost of goods sold ....................................          59,814           55,870         173,381          166,897
                                                            -----------      -----------     -----------      -----------
Gross profit ..........................................           6,407            8,262          22,711           23,091
                                                            -----------      -----------     -----------      -----------
Operating expenses:
      Selling .........................................           1,746            1,794           5,377            5,486
      General and administrative ......................           3,080            3,287           8,364            8,527
      Other expenses:
          Restructuring and impairment charges ........          24,894               --          24,894               --
          Asset sales and disposals ...................             806              233             813              246
                                                            -----------      -----------     -----------      -----------
Total operating expenses ..............................          30,526            5,314          39,448           14,259
                                                            -----------      -----------     -----------      -----------
Income (loss) from operations .........................         (24,119)           2,948         (16,737)           8,832

Interest expense ......................................           2,189            1,501           5,312            6,077
                                                            -----------      -----------     -----------      -----------

Income (loss) before income taxes .....................         (26,308)           1,447         (22,049)           2,755

Income tax provision (benefit) ........................         (10,386)             572          (8,709)           1,253
                                                            -----------      -----------     -----------      -----------

Net income (loss) .....................................     $   (15,922)     $       875     $   (13,340)     $     1,502
                                                            ===========      ===========     ===========      ===========
Net income (loss) per share:
         Basic ........................................     $     (1.64)     $      0.09     $     (1.38)
                                                            ===========      ===========     ===========
         Fully diluted ................................     $     (1.64)     $      0.09     $     (1.38)
                                                            ===========      ===========     ===========
Weighted average shares outstanding:
         Basic ........................................       9,681,504        9,446,391       9,662,514
                                                            ===========      ===========     ===========
         Fully diluted ................................       9,681,504        9,649,162       9,662,514
                                                            ===========      ===========     ===========
</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, 2003   September 28, 2002
                                                                                           ------------------   ------------------
<S>                                                                                        <C>                  <C>
Cash flows from operating activities:
     Net income (loss) .................................................................        $(13,340)            $  1,502
       Adjustments to reconcile net income to net cash from operating activities:
          Loss on asset impairment .....................................................          22,094                   --
          Depreciation and amortization ................................................           5,977                5,721
          Amortization of deferred finance costs .......................................           1,439                  555
          Loss on disposal of equipment ................................................             813                  246
          Provision for doubtful accounts and allowances ...............................            (210)                 (51)
          Non-cash charge for long-term incentive compensation .........................              --                2,545
          Non-cash interest to related party ...........................................              --                1,106
          Changes in assets and liabilities:
             Accounts receivable .......................................................           1,477               (5,597)
             Inventories ...............................................................             657                1,735
             Other assets ..............................................................          (1,415)              (1,321)
             Accounts payable and accrued liabilities ..................................          (3,208)              11,135
             Deferred taxes ............................................................          (8,232)                  --
                                                                                                --------             --------
                   Net cash from operating activities ..................................           6,052               17,576
                                                                                                --------             --------

Cash flows used by investing activities:
         Additions to property, plant and equipment ....................................          (4,675)              (3,551)
         Acquisition of Wolf Packaging Inc., net of cash acquired ......................            (198)                  --
         Proceeds from sale of assets ..................................................               4                  402
                                                                                                --------             --------
                   Net cash used by investing activities ...............................          (4,869)              (3,149)
                                                                                                --------             --------

Cash flows used by financing activities:
          Principal payments for loan obligations ......................................         (73,730)              (4,990)
          Proceeds from loan obligations ...............................................          70,000                   --
          Proceeds under revolving line of credit ......................................          38,400               21,900
          Repayments under revolving line of credit ....................................         (35,400)             (23,600)
          Payment of financing costs ...................................................          (1,757)                  --
          Issuance of common stock .....................................................             245                  113
                                                                                                --------             --------
                   Net cash used by financing activities ...............................          (2,242)              (6,577)
                                                                                                --------             --------
Net increase (decrease) in cash and cash equivalents ...................................          (1,059)               7,850
Cash and cash equivalents at beginning of period .......................................           1,864                1,041
                                                                                                --------             --------
Cash and cash equivalents at end of period .............................................        $    805             $  8,891
                                                                                                ========             ========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       4

<PAGE>

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

<TABLE>
<CAPTION>
                                        Common Stock              Contribution  Advances
                                     -----------------  Paid In       from         To
                                      Shares    Amount  Capital     Members     Members
                                     ---------  ------  --------  ------------  --------
<S>                                  <C>        <C>     <C>       <C>           <C>
Balance at December 31, 2001                                       $  34,579     $ (298)
Formation of Packaging Dynamics
    Corporation (Note 1)             9,437,750  $   94  $ 44,475     (34,579)       298
Net income
Exercise of common stock options        14,350               103
Issuance of common stock               166,667       2       982
Other comprehensive income (loss):
    Reclassification of derivative
       losses to earnings
    Change in fair value of
       derivative instruments, net
       of income taxes
                                     ---------  ------  --------   ---------     ------
           Comprehensive income

Balance at December 31, 2002         9,618,767  $   96  $ 45,560   $      --     $   --

Net loss
Exercise of common stock options        62,737       1       509
Other comprehensive income (loss):
    Reclassification of derivative
       losses to earnings
    Change in fair value of
       derivative instruments, net
       of income taxes
                                     ---------  ------  --------   ---------     ------
            Comprehensive income

Balance at September 30, 2003
   (unaudited)                       9,681,504  $   97  $ 46,069   $      --         --
                                     =========  ======  ========   =========     ======

<CAPTION>
                                      Retained       Accumulated
                                      Earnings          Other
                                     Accumulated    comprehensive  Stockholders  Comprehensive
                                      Deficit)      Income (Loss)     Equity      Income (Loss)
                                     -----------    -------------  -----------   --------------
<S>                                  <C>            <C>            <C>           <C>
Balance at December 31, 2001         $    270       $   (554)        $ 33,997
Formation of Packaging Dynamics
    Corporation (Note 1)                 (897)           704           10,095
Net income                                931                             931     $      931
Exercise of common stock options                                          103
Issuance of common stock                                                  984
Other comprehensive income (loss):
    Reclassification of derivative
       losses to earnings                                957              957            957
    Change in fair value of
       derivative instruments, net
       of income taxes                                (1,360)          (1,360)        (1,360)
                                     --------       --------         --------     ----------
           Comprehensive income                                                   $      528
                                                                                  ==========
Balance at December 31, 2002         $    304       $   (253)        $ 45,707

Net loss                              (13,340)                        (13,340)       (13,340)
Exercise of common stock options                                          510
Other comprehensive income (loss):
    Reclassification of derivative
       losses to earnings                                809              809            809
    Change in fair value of
       derivative instruments, net
       of income taxes                                  (626)            (626)         (626)
                                     --------       --------         --------     ----------
            Comprehensive income                                                  $  (13,157)
                                                                                  ==========
Balance at September 30, 2003
   (unaudited)                       $(13,036)      $    (70)        $ 33,060
                                     ========       ========         ========
</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 -- ORGANIZATION

         Packaging Dynamics Corporation ("the Company" or "Packaging Dynamics")
is a Delaware corporation established as a holding company to own all of the
interest in Packaging Dynamics Operating Company ("PDOC"). PDOC is a Delaware
corporation which is the parent company of all our current operating
subsidiaries.

         On March 18, 2002, the board of directors of Ivex Packaging Corporation
("Ivex") approved a merger agreement providing for the merger with Ivex of a
wholly-owned subsidiary of Alcoa Inc. As a result of the merger, Ivex became a
wholly-owned subsidiary of Alcoa on July 1, 2002. The merger was conditioned
upon, among other things, the prior distribution to Ivex stockholders and option
holders of Ivex's 48.19% ownership interest in Packaging Holdings, L.L.C
("Packaging Holdings" or "PHLLC"). To facilitate the distribution, Ivex formed
Packaging Dynamics, a C-corporation for income tax purposes, to be the holding
company for all of the ownership interests in Packaging Holdings. In preparation
for the distribution, Ivex and the other members of Packaging Holdings exchanged
their ownership interests in Packaging Holdings for common stock of Packaging
Dynamics. On July 1, 2002, Ivex distributed its shares of Packaging Dynamics to
its stockholders and certain of its option holders immediately prior to the
merger. The consolidated financial statements of Packaging Dynamics presented
herein include the results of consolidated operations, financial position and
cash flows of Packaging Holdings.

         Also in connection with the merger and distribution, a new holding
company structure was created by contributing all of the limited liability
company interests of Packaging Holdings to Packaging Dynamics, a C-corporation
for income tax purposes, in exchange for the common stock; the $12,500 12%
subordinated note payable to Ivex, plus accreted interest, totaling
approximately $19,238 was canceled; and a consulting agreement with Ivex was
canceled. The impact of the distribution is reflected on the Consolidated
Statements of Stockholders' Equity and Other Comprehensive Income (Loss) as
Formation of Packaging Dynamics Corporation. The impact on Stockholders' Equity
of the distribution includes (i) an increase of $19,238 resulting from the
cancellation of the $12,500 12% subordinated note payable to Ivex; (ii) a
decrease of $9,200 resulting from additional deferred tax liabilities due to
Packaging Dynamics' C-corporation status; (iii) an increase of $423 resulting
from the repayment of certain advances and obligations of members of Packaging
Holdings; and (iv) a decrease of $366 resulting from expenses associated with
the transaction.

         On July 1, 2002, the Company issued 9,437,750 shares of common stock in
connection with the merger and distribution. Prior to July 1, 2002, the Company
ownership consisted of membership units. Accordingly, no earnings per share
information has been presented for any period prior to July 1, 2002.

         In September 2003, in conjunction with the refinancing of our Senior
Credit Facility, we merged Packaging Holdings with Packaging Dynamics, L.L.C., a
Delaware limited liability company which was the parent company of all our
operating subsidiaries and of which Packaging Holdings was a sole member, and
converted the surviving limited liability company into a Delaware corporation
which we named Packaging Dynamics Operating Company.

NOTE 2 -- BASIS OF PRESENTATION

GENERAL

         In the opinion of management, the information in the accompanying
unaudited financial statements reflects all adjustments (consisting solely of
normal recurring adjustments) necessary to present fairly the results of
operations, cash flows and comprehensive income (loss) for the nine months ended
September 30, 2003 and September 28, 2002 and the financial position at
September 30, 2003. 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, 2002. The consolidated balance sheet as of December 31, 2002 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. These interim financial statements
should be read in conjunction with our

                                       6
<PAGE>

audited consolidated financial statements and notes thereto included with the
Company's filings with the Securities and Exchange Commission.

RECENTLY ISSUED ACCOUNTING STANDARDS

         On July 30, 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than as of the
date of a commitment to an exit or disposal plan. Examples of costs covered by
SAFS 146 included lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing
or other exit or disposal activity. SFAS 146 also supercedes, in its entirety,
previous accounting guidance that was provided by Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Terminations
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company applied the provisions of
SFAS 146 prospectively to exit or disposal activities in 2003.

         In November of 2002, the FASB issued FASB Interpretation No. 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34."
FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies," relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees by requiring that the guarantor
recognize a liability for the fair value of the obligation it assumes under the
guarantee. The Company adopted the disclosure requirements of FIN 45 as of
December 31, 2002. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of the guarantor's year-end. FIN 45
requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
There was no material effect resulting from the adoption of the Statement.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure". This standard provides
alternative methods of transition to the fair value method of accounting for
stock-based employee compensation under SFAS No. 123, "Accounting for
Stock-Based Compensation," but does not require the Company to use the fair
value method. This standard also amends certain disclosure requirements related
to stock-based employee compensation. The Company adopted the disclosure portion
of this standard as of December 31, 2002.

         In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation of variable interest entities. FIN 46 requires certain variable
interest entities ("VIE's") to be consolidated by the primary beneficiary if the
entity does not effectively disperse risks among the parties involved. The
provisions of FIN 46 are effective immediately for those variable interest
entities created after January 31, 2003. In October 2003, the FASB delayed the
implementation of FIN 46 until after December 15, 2003 for all entities acquired
before February 1, 2003.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
150 establishes standards for issuers of financial instruments with
characteristics of both liabilities and equity related to the classification and
measurement of those instruments. It requires the issuer to classify a financial
instrument as a liability, or asset in some cases, that was previously
classified as equity. SFAS 150 applies to issuers' classification and
measurement of freestanding financial instruments, including those that comprise
more than one option or forward contract. It does not apply to features that are
embedded in a financial instrument that is not a derivative in its entirety. The
effective date of SFAS 150 is for financial instruments entered into or modified
after May 31, 2003. Otherwise, it is effective for public entities at the
beginning of the first interim period beginning after June 15, 2003. SFAS 150 is
to be implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created prior to the issuance date of the
standard and still in existence at the beginning of the interim period of
adoption. Restatement of prior years' financial statements is not permitted.
There was no material effect resulting from the adoption of the Statement.

                                       7
<PAGE>

NOTE 3--ASSET IMPAIRMENT AND RESTRUCTURING

         On September 4, 2003, the Company announced the exit of the specialty
paper operation. This was comprised of our paper mill which produced
approximately 55,000 tons of paper each year and employed approximately 148
people. The mill is a non-integrated facility including three paper machines
located in Detroit, Michigan. We determined that these mill assets were
impaired, although not yet permanently abandoned at September 30, 2003 as the
estimated future cash flows expected from the future use and disposal of the
assets was less than the carrying amount of the assets, and in the third quarter
of 2003 recorded a pre-tax charge to earnings of $22,094. Also in the third
quarter, we recorded a charge of $2,800 related to severance in accordance with
SFAS 112, "Employers Accounting for Postemployment Benefits," which will be paid
in future periods. Any further restructuring costs associated with the closure
of the operations will be charged to earnings when the related liability is
incurred. The mill was closed in October 2003. Beginning in the fourth quarter,
the results from the specialty paper operation will be reported as Discontinued
Operations.

NOTE 4--ASSET SALES AND DISPOSALS

         The Company continues its efforts to upgrade the capabilities of its
converting operations. During the three and nine months ended September 30,
2003, the Company permanently idled eight bag machines in our Baxter Springs,
Kansas manufacturing facility which are to be replaced with three new machines.
One of these machines was operational as of September 30, 2003. The loss on sale
or disposal of these assets was $806 and $813 for the three and nine months
ended September 30, 2003. This productivity improvement process was started in
the third quarter of 2002 when five bag machines were permanently idled. The
loss on sale or disposal of these assets was $233 and $246, respectively, for
the three and nine months ended September 28, 2002.

NOTE 5--STOCK BASED COMPENSATION

         At September 30, 2003, 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 (APBO) 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.

         On a pro forma basis, had compensation cost for the Company's stock
option plan been determined based on the fair value provisions of FAS 123
"Accounting for Stock-Based Compensation" as amended by FAS 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure," the Company's net income
and earnings per share for the three and nine months ended September 30, 2003
would have been as follows:

<TABLE>
<CAPTION>
                                                         Three Months Ended     Nine Months Ended        Three Months Ended
                                                         September 30, 2003     September 30, 2003       September 29, 2002
                                                         ------------------     ------------------       ------------------
<S>                                                      <C>                    <C>                      <C>
Net Loss                                                  $       (15,922)       $      (13,340)          $            875
                                                          ===============        ==============           ================
Add: Stock-based employee compensation
     expense previously recorded                                      --                    --                       1,614
                                                          ===============        ==============           ================
Deduct: Stock-based employee compensation
     expense determined under fair value
     based method                                                    (162)                 (450)                    (1,798)
                                                          ===============        ==============           ================
Pro forma net loss                                        $       (16,084)       $      (13,790)          $            691
                                                          ===============        ==============           ================
Pro forma basic loss per share                            $         (1.66)       $        (1.43)          $            .07
                                                          ===============        ==============           ================
Pro forma diluted loss per share                          $         (1.66)       $        (1.43)          $            .07
                                                          ===============        ==============           ================
</TABLE>

         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: dividend yield -- 0%; volatility -- 35%; and expected lives -- 5
years. The risk-free interest rate assumptions for the three and nine months
ended September 30, 2003 and the three months ended September 29, 2002 were
2.97%, 2.97% and 3.25%, respectively.

                                       8
<PAGE>

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, 2003 and December
31, 2002 consist of the following:

<TABLE>
<CAPTION>
                                      September 30,    December 31,
                                           2003           2002
                                      ------------    ------------
<S>                                   <C>             <C>
Raw materials                         $     10,994    $     13,025
Work-in-process                              1,420           1,089
Finished goods                              15,186          14,143
                                      ------------    ------------
                                      $     27,600    $     28,257
                                      ============    ============
</TABLE>

NOTE 7--LONG-TERM DEBT

         Long-term debt at September 30, 2003 and December 31, 2002 consists of
the following:

<TABLE>
<CAPTION>
                                                                      September 30,       December 31,
                                                                          2003               2002
                                                                      -------------      ------------
<S>                                                                   <C>                <C>
Senior Credit Facility:
    Tranche A Term Loan
                                                                      $      30,000      $     13,375
    Tranche B Term Loan                                                      40,000            57,355
    Revolving credit loan                                                     3,000                --
Seller note payable                                                              --             3,000
Baxter Springs facility HUD loan                                                700             1,400
                                                                      -------------      ------------
    Subtotal                                                                 73,700            75,130
Current maturities of long term debt                                         (5,700)           (7,420)
                                                                      -------------      ------------
Long-term debt                                                        $      68,000      $     67,710
                                                                      =============      ============
</TABLE>

SENIOR CREDIT FACILITY

         During the third quarter of 2003, the Company and its subsidiaries
entered into a credit agreement (the "Senior Credit Facility") with PDOC, as
borrower, and Bank of America, N.A., as agent, that provided two term loans and
a revolving credit loan totaling $110,000, including a $40,000 revolving credit
facility.

         The term loans require quarterly principal payments beginning December
31, 2003 and ending September 29, 2008 for Term Loan A and September 29, 2009
for Term Loan B and ranging from $250 to $2,000, with any outstanding principal
due at maturity. The revolving credit facility matures on September 29, 2008.

         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.

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

                                       9
<PAGE>

                         PACKAGING DYNAMICS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

         At September 30, 2003, the interest rates on borrowings under the
Tranche A Term Loan and the Tranche B Term Loan were 3.0% plus LIBOR and 3.5%
plus LIBOR, respectively, compared with 2.75% plus LIBOR and 3.75% plus LIBOR,
respectively, at September 28, 2002. As of September 30, 2003, we had interest
rate swap agreements with a group of banks having notional amounts totaling
$55,000 and with various maturity dates through December 10, 2004. These
agreements effectively fix our LIBOR rate for $40,000 and $15,000 of our Senior
Credit Facility indebtedness at rates of 3.83% and 1.61%, respectively.
Borrowings are collateralized by substantially all of the stock and assets of
our operating subsidiaries. The revolving credit facility and Term A Loan will
terminate on September 29, 2008 and the Term B Loan will terminate on September
29, 2009.

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

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

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

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

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

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

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

                                       10
<PAGE>

NOTE 8--OPERATING SEGMENT INFORMATION

         The Company has two reportable business segments, Converting Operations
and Specialty Paper, with the former being the principal business segment. The
Converting Operations segment is an integrated converter of paper, film and foil
for use in a variety of food packaging and industrial applications. Top
customers include major quick- service restaurants, distributors, and industrial
businesses. Approximately 95% of our sales are to North American customers, with
the remaining 5% to European customers. The Specialty Paper segment manufactured
numerous grades of lightweight paper produced from either virgin or recycled
fiber. The Specialty Paper segment was closed in October 2003. The Company
applies one effective tax rate to its consolidated operations. As such, income
taxes are not reported or reviewed on a segment basis. In accordance with SFAS
131 "Disclosure about Segments of an Enterprise and Related Information," this
financial information by segment is as follows:

<TABLE>
<CAPTION>
                                                          For the Three Months Ended,              For the Nine Months Ended,
                                                        September 30,      September 28,       September 30,        September 28,
                                                            2003               2002                 2003                2002
                                                        -------------     --------------      ---------------      --------------
<S>                                                     <C>               <C>                 <C>                  <C>
Net External Sales:
      Converting Operations                             $      60,755     $       59,286      $       181,222      $      174,015
      Specialty Paper                                           5,466              4,846               14,870              15,973
                                                        -------------     --------------      ---------------      --------------
            Total External Sales                        $      66,221     $       64,132      $       196,092      $      189,988
                                                        =============     ==============      ===============      ==============

Intersegment Sales:
       Specialty Paper                                  $       7,503     $        8,309      $        21,487      $       25,622
                                                        =============     ==============      ===============      ==============

Income (Loss) from Operations:
            Converting Operations                       $       3,790     $        2,954      $        12,762      $        8,714
            Specialty Paper                                   (27,909)                (6)             (29,499)                118
                                                        -------------     --------------      ---------------      --------------
                  Total Income (Loss) from Operations   $     (24,119)    $        2,948      $       (16,737)     $        8,832
                                                        =============     ==============      ===============      ==============

Depreciation and Amortization:
            Converting Operations                       $       1,500     $        1,357      $         4,456      $        4,143
            Specialty Paper                                       380                424                1,521               1,578
                                                        -------------     --------------      ---------------      --------------
                  Total Depreciation and Amortization   $       1,880     $        1,781      $         5,977      $        5,721
                                                        =============     ==============      ===============      ==============

Interest Expense:
            Converting Operations                       $       1,729     $        1,186      $         4,356      $        4,776
            Specialty Paper                                       460                315                  956               1,301
                                                        -------------     --------------      ---------------      --------------
           Total Interest Expense                       $       2,189     $        1,501      $         5,312      $        6,077
                                                        =============     ==============      ===============      ==============

Capital Expenditures for Long-Lived Assets:
            Converting Operations                                                             $         3,820      $        1,747
            Specialty Paper                                                                               855               1,804
                                                                                              ---------------      --------------
           Total Depreciation and Amortization                                                $         4,675      $        3,551
                                                                                              ===============      ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                           September 30,         December 31,
                                                                               2003                 2002
                                                                          --------------        -------------
<S>                                                                       <C>                   <C>
Identifiable Assets:
      Converting Operations                                               $      130,549        $     135,801
      Specialty Paper                                                             10,543               30,554
                                                                          --------------        -------------

            Total Identifiable Assets                                     $      141,092        $     166,355
                                                                          ==============        =============
</TABLE>

                                       11
<PAGE>

NOTE 9--COMMITMENTS AND CONTINGENCIES

         The Company is currently a party to various legal proceedings in
various federal and state jurisdictions arising out of the operations of its
business. No amounts have been recorded in the financial statements related to
such proceedings as the amounts can not be estimated. The Company believes that
its 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, would not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.

         The Company's 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 the Company's properties or any
associated offsite disposal location, or if contamination from prior activities
is discovered at any of the Company's properties, the Company may be held
liable. From time to time, the Company is involved in regulatory proceedings and
inquiries relating to compliance with environmental laws, permits and other
environmental matters. The Company believes that it is in substantial compliance
with applicable environmental regulations and does not believe that costs of
compliance will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.

                                       12
<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.

RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND
SEPTEMBER 28, 2002

Net Sales

         Consolidated net sales increased by 3.3% during the third quarter of
2003 over our net sales during the corresponding period in 2002, primarily due
to an 11.2% increase in sale of specialty lamination products.

         Net sales in the converting operation segment increased 2.5% in the
third quarter of 2003 compared to the same period in 2002. This was primarily
due to an increase in sale of specialty lamination products.

         Net sales of our specialty paper segment decreased 1.4% in the third
quarter of 2003 compared to the same period in 2002. This was primarily due to a
9.7% decrease in intersegment sales.

Gross Profit

         Gross profit decreased 22.5% during the third quarter of 2003 compared
to the corresponding period in 2002 primarily due to an increase in raw material
costs in our specialty paper operation. The gross profit margin was 9.7% which
was 3.2% lower than the same period in 2002. The decrease in gross profit margin
was primarily due to a decrease in profitability on our specialty paper
operation. This was offset by the productivity improvements in our converting
operation.

Operating Expenses

         Selling and general and administrative expenses increased 6.0% during
the third quarter of 2003 compared to the corresponding period in 2002. The
increase due to the acquisition of Wolf Packaging Inc. ("Wolf") and loss on sale
of equipment of $806 was offset by the long-term incentive compensation expense
of $1,372 and loss on sale of equipment of $233 recorded in the third quarter of
2002.

         Other expense of $24,894 was recorded in the third quarter of 2003.
This is comprised of an asset impairment charge of $22,094 and restructuring
charge of $2,800 related to severance in connection with the announcement of the
closure of our single paper mill.

         On July 1, 2002, Packaging Dynamics granted to management, for
incentive purposes and in consideration of their waiver of cash payments under
the 2001 Long Term Incentive Plan ("LTIP"), stock options for the purchase of an
aggregate of 815,089 shares of its common stock under the 2002 LTIP.
Additionally, on July 1, 2002, Packaging Dynamics granted to certain former
employees stock options for the purchase of an aggregate of 29,047 shares of its
common stock under individual nonqualified stock option agreements in
consideration of their waiver of cash payments under the 2001 LTIP. The options
have an exercise price of $3.90 per share, which was below the fair market value
of Packaging Dynamics' common stock on the grant date and 730,924 options,
although fully vested, are not exercisable for three years after the grant date.
Consequently, for such options we have the right to repurchase an executive's
options if he terminates employment before the end of the three-year period. For
the three months ended September 28, 2002, the Company recorded a non-cash
compensation charge of $1,372. After December 31, 2002, no compensation expense
will be recorded for this plan.

Income (Loss) from Operations

        Loss from operations and operating margins were $24,119 and (36.4%),
respectively, during the third quarter of 2003 compared to income from
operations and operating margin of $2,948 and 4.6%, respectively, during the
third quarter of 2002. The decrease was primarily due to the $24,894 charge
related to the shut down of our paper

                                       13
<PAGE>

mill taken in the third quarter of 2003. In addition, our paper mill loss from
operations increased $3,010 in the third quarter of 2003 compared to the same
period in 2002. These decreases were offset by the $1,372 in compensation
expense recorded in the third quarter of 2002.

         The converting operation segment reported income from operations and
operating margin of $3,790 and 6.2%, respectively, during the three months ended
September 30, 2003 compared to income from operations and operating margin of
$2,954 and 5.0% during the corresponding period of 2002. This 28.3% increase in
income from operations is due to productivity improvements and the $1,372 in
compensation expense recorded in the third quarter of 2002.

         The specialty paper segment reported a loss from operations and
operating margin of $27,909 and (215.2%), respectively, during the three months
ended September 30, 2003 compared to a loss from operations of $6 during the
same period in 2002. This increase in loss was primarily due to the $24,894
charge related to the shutdown of the paper mill and higher raw material costs
in the third quarter of 2003.

Interest Expense

         Interest expense during the third quarter 2003 was $2,189 compared to
$1,501 during the same period in 2002. The increase in interest expense in 2003
compared to 2002 resulted primarily from the $739 write-off of unamortized bank
fees resulting from the Company's bank refinancing in the third quarter of 2003.
The average interest rate on borrowings on our senior credit facility was
approximately 7.66% which is .19% less than the same period in 2002.

Income Taxes

         The Company recorded an income tax benefit of $10,386 for the third
quarter of 2003 compared to an income tax provision of $572 for the same period
in 2002. The income tax benefit recorded in the third quarter of 2003 primarily
reflects the tax benefit associated with operating losses recognized in the
specialty paper operation. The Company has not provided a valuation allowance
for its deferred income tax assets as management believes it is more likely than
not that the Company's deferred income tax assets will be realized through
future taxable earnings. The Company's effective tax rate is 39.5% for the third
quarter of 2003 and 2002.

Net Income (Loss)

         Net loss for the third quarter of 2003 was $15,922 compared to net
income of $875 for the corresponding period of 2002. The decrease in earnings
primarily relates to the asset impairment and restructuring charge relating to
the announced shut down of our paper mill as well as the decrease in earnings in
the specialty paper operation in the third quarter of 2003 compared to the same
period in 2002.

Adjusted EBITDA

         In addition to financial results determined in accordance with
generally accepted accounting principles ("GAAP"), Packaging Dynamics utilizes
non-GAAP financial measures (within the meaning of Regulation G promulgated by
the Securities and Exchange Commission). For purposes of Regulation G, a
non-GAAP financial measure is a numerical measure of a registrant's historical
or future financial performance, financial position or cash flows that excludes
amounts, or is subject to adjustments that have the effect of excluding amounts,
that are included in the most directly comparable measure calculated and
presented in accordance with GAAP in the statement of income, balance sheet or
statement of cash flows (or equivalent statements) of the issuer; or includes
amounts, or is subject to adjustments that have the effect of including amounts,
that are excluded from the most directly comparable measure so calculated and
presented. These measures should be considered in addition to results prepared
in accordance with GAAP, but are not a substitute for or superior to GAAP
results. Non-GAAP financial measures are used because management believes this
information provides investors useful information in evaluating the results of
the continuing operations and believes that this information provides the users
of the financial statements a valuable insight into the operating results given
the restructuring of Packaging Dynamics and distribution by Ivex Packaging
Corporation of its ownership interest in Packaging Dynamics last year. The
non-GAAP measure of adjusted EBITDA is presented to supplement the consolidated
financial statements in accordance with GAAP. Specifically, management believes
that adjusted EBITDA is of interest to its investors and lenders in relation to
its debt covenants, as certain of its debt covenants include this adjusted
EBITDA as a performance measure. Refer to Liquidity and Capital Resources for
additional disclosure of these debt covenants.

                                       14
<PAGE>

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

         Adjusted EBITDA for the three months ended September 30, 2003 and
September 28, 2002 is computed as follows:

<TABLE>
<CAPTION>
                                                                          For the Three Months Ended,
                                                                      September 30,        September 28,
                                                                           2003                 2002
                                                                      ------------         -----------
<S>                                                                   <C>                  <C>
Net income (loss)                                                     $    (15,922)        $       875
Income tax provision                                                       (10,386)                572
Interest expense                                                             2,189               1,501
Depreciation and amortization                                                1,880               1,781
                                                                      ------------         -----------
    EBITDA                                                                 (22,239)              4,729
Non-recurring and unusual items:
   Asset impairment and restructuring                                       24,894                  --
   Long-term incentive compensation expense                                     --               1,372
                                                                      ------------         -----------
Adjusted EBITDA                                                       $      2,655         $     6,101
                                                                      ============         ===========
</TABLE>

RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND
SEPTEMBER 28, 2002

Net Sales

         Consolidated net sales increased by 3.2% during the first nine months
of 2003 over our net sales during the corresponding period in 2002. This is
primarily due to a 16.6% increase in sales of specialty lamination products.
This was partially offset by a 6.9% decrease in volume in our specialty paper
operation.

         Net sales for the converting operation segment increased 4.1% during
the first nine months of 2003 compared to the corresponding period in 2002. This
was primarily due to an increase in sales of specialty lamination products.

         In the specialty paper segment, net sales decreased 12.6% during the
first nine months of 2003 compared to the corresponding period in 2002. This was
due to a decrease in volume of both internal and external sales.

Gross Profit

         Gross profit decreased 1.6% during the first nine months of 2003
compared to the corresponding period in 2002 primarily due to reduced
profitability in our specialty paper operation. This decrease was partially
offset by productivity improvements in our converting operation. The gross
profit margin was 11.6% which was 0.6% lower than the same period in 2002. This
was primarily due to reduced profitability in our specialty paper operation.

Operating Expenses

         Selling and general and administrative expenses remained relatively
unchanged during the first nine months of 2003 compared to the corresponding
period in 2002. An increase in 2003 due to the Wolf acquisition, the incremental
expense associated with operating as a public company and the loss on sale of
fixed assets of $813 were offset by the long-term incentive compensation expense
of $2,667 and the loss on sale of fixed assets of $246 recorded in the nine
months ended September 28, 2002.

         Other expense of $24,894 was recorded in the third quarter of 2003.
This is comprised an asset impairment charge of $22,094 and restructuring charge
of $2,800 related to severance in connection with the announcement of the
closure of our single paper mill.

                                       15
<PAGE>

         On July 1, 2002, Packaging Dynamics granted to management, for
incentive purposes and in consideration of their waiver of cash payments under
the 2001 Long Term Incentive Plan ("LTIP"), stock options for the purchase of an
aggregate of 815,089 shares of its common stock under the 2002 LTIP.
Additionally, on July 1, 2002, Packaging Dynamics granted to certain former
employees stock options for the purchase of an aggregate of 29,047 shares of its
common stock under individual nonqualified stock option agreements in
consideration of their waiver of cash payments under the 2001 LTIP. The options
have an exercise price of $3.90 per share, which was below the fair market value
of Packaging Dynamics' common stock on the grant date and 730,924 options,
although fully vested, are not exercisable for three years after the grant date.
Consequently, for such options we have the right to repurchase an executive's
options if he terminates employment before the end of the three-year period. For
the nine months ended September 28, 2002, the Company recorded a non-cash
compensation charge of $2,667. After December 31, 2002, no compensation expense
will be recorded for this plan.

Income (Loss) from Operations

         Loss from operations and operating margins were $16,737 and (8.5%),
respectively, during the first nine months of 2003 compared to income from
operations and operating margin of $8,832 and 4.6%, respectively, during the
first nine months of 2002. The decrease was primarily due to the $24,894 charge
related to the asset impairment in connection with the announcement of the shut
down of our paper mill taken in the third quarter of 2003. In addition, our
paper mill loss from operations increased $4,723 in the first nine months of
2003 compared to the same period in 2002. These decreases were offset by the
$2,667 in compensation expense recorded in the nine months ended September 29,
2002.

         The converting operation segment reported income from operations and
operating margin of $11,827 and 7.0%, respectively, during the nine months ended
September 30, 2003 compared to $8,714 and 5% during the same period in 2002.
This 46.5% increase in income from operations was primarily due to productivity
improvements in 2003 and the $2,667 in compensation expense recorded in the
first nine months of 2002.

         The specialty paper segment reported a loss from operations and
operating margin of $29,499 and (81.1%), respectively, during the first nine
months of 2003 compared to income from operations and operating margin of $118
and .3% during the same period in 2002. This decrease was due to the $24,894
charge related to the asset impairment in connection with the announcement of
the shut down of the paper mill and higher raw material costs in the first nine
months of 2003 compared to 2002.

Interest Expense

         Interest expense during the first nine months of 2003 was $5,312
compared to $6,077 during the same period in 2002. The decrease in interest
expense in 2003 compared to 2002 resulted primarily from decreased average
outstanding indebtedness, the forgiveness of the 12% Promissory Note payable to
Ivex and reduced interest rates. This decrease was offset by a $739 write-off of
unamortized bank fees resulting from the Company's bank refinancing in 2003. The
average interest rates on borrowings on our senior credit facility were
approximately .94% less during 2003 compared to 2002. The paid-in-kind interest
accruing on the 12% Promissory Note was zero and $1,106 during the first six
months of 2003 and 2002, respectively. The note was cancelled on July 1, 2002.

Income Taxes

         The income tax benefit recorded in the third quarter of 2003 primarily
reflects the tax benefit associated with operating losses recognized in the
specialty paper operation. The Company has not provided a valuation allowance
for its deferred income tax assets as management believes it is more likely than
not that the Company's deferred income tax assets will be recognized through
future taxable earnings.

         To facilitate the distribution on July 1, 2002, a new holding company
structure was created by contributing all of the limited liability company
interests of Packaging Holdings to Packaging Dynamics, a C-corporation for
income tax purposes, in exchange for the common stock. Prior to the
distribution, the members reported federal and state taxable income on their
income tax returns. International Converter, Inc. ("ICI"), a wholly owned
subsidiary, had remained a taxable C-corporation from the time we acquired it in
July 1999 through the date of the distribution. The income tax benefit for the
first nine months of 2003 was $8,709 as compared to a provision of $1,253 in the
first nine months of 2002. The decrease in income tax expense was associated
with a decrease in pre-tax income.

                                       16
7
<PAGE>

Net Income (Loss)

         Net loss for the first nine months of 2003 was $13,340 compared to net
income of $1,502 for the corresponding period of 2002. The decrease in earnings
primarily relates to the asset impairment and restructuring charge relating to
the shut down of our paper mill as well as the decrease in earnings in the paper
operation in the third quarter of 2003 compared to the same period in 2002.

Adjusted EBITDA

         In addition to financial results determined in accordance with
generally accepted accounting principles ("GAAP"), Packaging Dynamics utilizes
non-GAAP financial measures (within the meaning of Regulation G promulgated by
the Securities and Exchange Commission). For purposes of Regulation G, a
non-GAAP financial measure is a numerical measure of a registrant's historical
or future financial performance, financial position or cash flows that excludes
amounts, or is subject to adjustments that have the effect of excluding amounts,
that are included in the most directly comparable measure calculated and
presented in accordance with GAAP in the statement of income, balance sheet or
statement of cash flows (or equivalent statements) of the issuer; or includes
amounts, or is subject to adjustments that have the effect of including amounts,
that are excluded from the most directly comparable measure so calculated and
presented. These measures should be considered in addition to results prepared
in accordance with GAAP, but are not a substitute for or superior to GAAP
results. Non-GAAP financial measures are used because management believes this
information provides investors useful information in evaluating the results of
the continuing operations and believes that this information provides the users
of the financial statements a valuable insight into the operating results given
the restructuring of Packaging Dynamics and distribution by Ivex Packaging
Corporation of its ownership interest in Packaging Dynamics last year. The
non-GAAP measure of adjusted EBITDA is presented to supplement the consolidated
financial statements in accordance with GAAP. Specifically, management believes
that adjusted EBITDA is of interest to its investors and lenders in relation to
its debt covenants, as certain of its debt covenants include this adjusted
EBITDA as a performance measure. Refer to Liquidity and Capital Resources for
additional disclosure of these debt covenants.

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

         Adjusted EBITDA for the nine months ended September 30, 2003 and
September 28, 2002 is computed as follows:

<TABLE>
<CAPTION>
                                                                             For the Nine Months Ended,
                                                                        September 30,        September 28,
                                                                            2003                  2002
                                                                        -------------        -------------
<S>                                                                     <C>                  <C>
Net income (loss)                                                       $   (13,340)         $      1,502
Income tax provision                                                         (8,709)                1,253
Interest expense                                                              5,312                 6,077
Depreciation and amortization                                                 5,977                 5,721
                                                                        -----------          ------------
    EBITDA                                                                  (10,760)               14,553
Non-recurring and unusual items:
   Asset impairment and restructuring                                        24,894                    --
   Long-term incentive compensation expense                                      --                 2,667
                                                                        -----------          ------------
Adjusted EBITDA                                                         $    14,134          $     17,220
                                                                        ===========          ============
</TABLE>

                                       17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 2003, we had cash and cash equivalents of $805, and
$23,900 was available under the revolving portion of the Senior Credit Facility.
Our working capital at September 30, 2003 was $19,694.

         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 principal short-term and long-term cash
requirements.

         During the third quarter of 2003, the Company refinanced its Senior
Credit Facility. The new credit facility provides for a Term A Loan and Term B
Loan totaling $70,000 and a $40,000 revolving credit facility, up to $5,000 of
which may be in the form of letters of credit. As of September 30, 2003, the
Term A Loan had a balance of $30,000 and will mature in five years. The required
quarterly payments total $4,000, $5,000 $6,000, $7,000 and $8,000 in years one
through five, respectively. As of September 30, 2003 the Term B Loan had a
balance of $40,000 and will mature in six years. The required quarterly payments
total $1,000 in years one through five and $35,000 in the sixth year. The
revolver had a balance of $3,000 as of September 30, 2003.

         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.

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

         At September 30, 2003, the interest rates on borrowings under the
Tranche A Term Loan and the Tranche B Term Loan were 3.0% plus LIBOR and 3.5%
plus LIBOR, respectively, compared with 2.75% plus LIBOR and 3.75% plus LIBOR,
respectively, at September 28, 2002. As of September 30, 2003, we had interest
rate swap agreements with a group of banks having notional amounts totaling
$55,000 and with various maturity dates through December 10, 2004. These
agreements effectively fix our LIBOR rate for $40,000 and $15,000 of our Senior
Credit Facility indebtedness at rates of 3.83% and 1.61%, respectively.
Borrowings are collateralized by substantially all of the stock and assets of
our operating subsidiaries. The revolving credit facility and Term A Loan will
terminate on September 29, 2008 and the Term B Loan will terminate on September
29, 2009.

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

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

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

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<PAGE>

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

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

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

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

         On July 14, 1999, Packaging Holdings issued a $3,000 note to the
sellers in connection with the acquisition of International Converter, Inc.
Interest on this note is 7.5% payable semi-annually commencing on December 31,
1999. This note is unsecured and subordinated to the senior credit facility. The
note, which was scheduled to mature on July 14, 2004, was paid off in full on
September 29, 2003, in conjunction with the refinancing of our 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.

         We have outstanding obligations under debt agreements with the U.S.
Department of Housing and Urban Development, or HUD, in the form of promissory
notes payable to the City of Baxter Springs. This loan was refinanced in the
third quarter of 2003. The remaining unpaid principal of these notes as of
September 30, 2003 was $700 and bear interest at 1.21%, as determined by HUD,
and interest is payable on a semi-annual basis. These notes are payable in
annual installments of $700 through August 2004. Borrowings are collateralized
by a first lien on the land and building at our Baxter Springs, Kansas
production facility and by a second lien on specified machinery and equipment.
Under specified circumstances, repayment of the borrowings is subordinated to
the repayment of obligations under the senior credit facility.

         To reduce the impact of changes in interest rates on our variable rate
debt, the Company has entered into interest rate derivative instruments, which
are discussed in " - Quantitative and Qualitative Disclosures About Market
Risk".

         We made capital expenditures for the nine months ended September 30,
2003 and September 28, 2002 of $4,675 and $3,551, respectively. The increase in
capital expenditures during 2003 compared to 2002 resulted primarily from
expenditures incurred for four new bag machines. At September 30, 2003, we have
capital projects ongoing at all converting locations. In 2003, capital
expenditures are expected to approximate $6,000.

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<PAGE>

         The Senior Credit Facility requires PDOC to maintain specified
financial ratios and levels of tangible net worth. PDOC was in compliance with
those covenants as of September 30, 2003, the latest measurement date. The
occurrence of any default of these covenants could result in acceleration of our
obligations under the Senior Credit Facility ($73,000 as of September 30, 2003)
and foreclosure on the collateral securing those obligations.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with generally accepted
accounting principles (GAAP) requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses.
A summary of the company's significant accounting policies is included in Note 2
to the company's annual consolidated financial statements for the year ended
December 31, 2002. Certain of the company's accounting policies are considered
critical, as these policies are the most important to the depiction of the
company's financial statements and require significant, difficult or complex
judgments by management, often employing the use of estimates about the effects
of matters that are inherently uncertain. Estimation methodologies are applied
consistently from year to year. There have been no significant changes in the
company's application of its critical accounting policies since December 31,
2002. The following is a summary of accounting policies management considers
critical to the company's consolidated financial statements.

REVENUE RECOGNITION

The Company recognizes revenue primarily at the time title transfers to the
customer (generally upon shipment of products). Our revenue recognition policies
are in accordance with Staff Accounting Bulletin, or SAB, No. 101, "Revenue
Recognition in Financial Statements". Shipping and handling costs are included
as a component of cost of goods sold.

INVENTORIES

The Company states inventories at the lower of cost or market using the
first-in, first-out, or FIFO, method to determine the cost of raw materials and
finished goods. This cost includes raw materials, direct labor and manufacturing
overhead. Valuing inventories at the lower of cost or market requires the use of
estimates and judgment. Our policy is to evaluate all inventory quantities for
amounts on-hand that are potentially in excess of estimated usage requirements,
and to write down any excess quantities to estimated net realizable value.
Inherent in estimates of net realizable value are manufacturing schedules,
customer demand, possible alternative uses and ultimate realization of
potentially excess inventory.

ACCOUNTS RECEIVABLE

Accounts receivable from sales to customers are unsecured, and we value accounts
receivable net of allowances for doubtful accounts. These allowances are based
on estimates of the portion of the receivables that will not be collected in the
future. However, the ultimate collectibility of a receivable is significantly
dependent upon the financial condition of the individual customer, which can
change rapidly and without advance warning.

LONG-LIVED ASSETS

Long-lived assets, including property, plant and equipment and intangibles with
finite lives, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. If the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset, an impairment
loss is recognized.

INCOME TAXES

In the normal course of business, the company is regularly audited by federal
and state authorities, and is periodically challenged regarding the amount of
taxes due. These challenges include questions regarding the timing and amount of
deductions and the allocation of income among various tax jurisdictions.
Management believes the company's tax positions comply with applicable tax law
and intends to defend its positions. In evaluating the exposure associated with
various tax filing positions, the company records reserves for uncertain tax
positions, and management believes these reserves are adequate. The company's
effective tax rate in a given financial statement

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<PAGE>

period could be impacted if the company prevailed in matters for which reserves
have been established, or was required to pay amounts in excess of established
reserves.

In determining whether a valuation allowance is warranted, management evaluates
factors such as prior earnings history, expected future earnings, carry-back and
carry-forward periods, and tax strategies that could potentially enhance the
likelihood of realization of a deferred tax asset.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We use interest rate swaps and collars to modify our exposure to
interest rate movements and to reduce borrowing costs. We have designated these
instruments as cash flow hedges and consider these instruments effective at
offsetting our risk to variable interest rates on debt. Our exposure to interest
rate risk consists of floating rate debt instruments that are benchmarked to
LIBOR. As of September 30, 2003, we had interest rate swap agreements with a
group of banks having notional amounts totaling $55,000 and with various
maturity dates through December 10, 2004. These agreements effectively fix our
LIBOR rate for $40,000 and $15,000 of our Senior Credit Facility indebtedness at
rates of 3.83% and 1.61%, respectively. Beginning on December 10, 2003, we have
a no-cost collar agreement with a notional amount of $25,000 maturing on
December 10, 2004. This collar agreement effectively fixes the LIBOR base rate
for $25,000 of our Senior Credit Facility indebtedness at a maximum of 3.97% and
allows for us to pay the market LIBOR from a floor of 2.34% to the maximum rate.
If LIBOR falls below 2.34%, we are required to pay the floor rate of 2.34%.
Beginning on December 31, 2003, we have an interest rate swap agreement with a
notional amount of $25,000 maturing on December 29, 2006. This agreement
effectively fixes the LIBOR base rate for $25,000 of our Senior Credit Facility
indebtedness at 2.9%. A 10% unfavorable movement in LIBOR would not expose us to
material losses of earnings or cash flows.

         Income or expense related to settlements under these agreements is
recorded as adjustments to interest expense in our financial statements. The
fair market value of our derivative instruments outlined above approximates a
loss of $823 as of September 30, 2003 and is based upon the amount at which it
could be settled with a third party, although we have no current intention to
trade any of these instruments and plan to hold them as hedges for the Senior
Credit Facility. The fair market value of our derivative instruments, net of
income tax, was recorded in other comprehensive income (loss).

ITEM 4.  CONTROLS AND PROCEDURES

         (a) 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
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 recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act.

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

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<PAGE>

SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS

         Certain statements included in this form, including without limitation,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - For the Three and Nine Months Ended
September 30, 2003 and September 28, 2002 - Liquidity and Capital Resources, --
Recently Issued Accounting Pronouncements, and - Quantitative and Qualitative
Disclosure About Market Risk" constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Among the factors that could cause results to differ
materially from current expectations are: (i) changes in consumer demand and
prices resulting in a negative impact on revenues and margins; (ii) raw material
substitutions and increases in the costs of raw materials, utilities, labor and
other supplies; (iii) increased competition in the Company's product lines; (iv)
changes in capital availability or costs; (v) workforce factors such as strikes
or labor interruptions; (vi) the ability of the Company and it subsidiaries to
develop new products, identify and execute capital programs and efficiently
integrate acquired businesses; (vii) the cost of compliance with applicable
governmental regulations and changes in such regulations, including
environmental regulations; (viii) the general political, economic and
competitive conditions in markets and countries where the Company and its
subsidiaries operate, including currency fluctuations and other risks associated
with operating in foreign countries; and (ix) the timing and occurrence (or
non-occurrence) of transactions and events which may be subject to circumstances
beyond the control of the Company and its subsidiaries.

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                           Exhibit No.               Description

                             10.1       Amended and Restated Credit Agreement,
                                        dated September 29, 2003 among Packaging
                                        Dynamics Operating Company, Packaging
                                        Dynamics Corporation, each of the
                                        subsidiaries of Packaging Dynamics
                                        Operating Company, Bank of America, as
                                        Administrative Agent and L/C Issuer,
                                        National City Bank, as Syndication
                                        Agent, LaSalle Bank National
                                        Association, as Documentation Agent, and
                                        the Lenders party thereto

                             10.2       Deferred Compensation Agreement, dated
                                        August 14, 2003

                             31.1       Certification of Chief Executive Officer
                                        pursuant to Section 302 of the
                                        Sarbanes-Oxley Act of 2002.

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

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

         (b)      Reports on Form 8-K

                           Current Report, Form 8-K regarding Packaging Dynamics
                           Corporation's second quarter 2003 earnings release
                           and conference call, filed on July 24, 2003.

                             SIGNATURE PAGE FOLLOWS

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<PAGE>

                                    SIGNATURE

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

                                      PACKAGING DYNAMICS CORPORATION

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

November 13, 2003

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