<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 JUNE 30, 2004              COMMISSION FILE NUMBER 0-49741

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

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

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

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

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

                                 Yes [X] No [ ]

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

                                 Yes [ ] No [X]

      At August 2, 2004, there were 9,681,504 shares of common stock, par value
$0.01 per share, outstanding.

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

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM  1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                      June 30,   December 31,
                                                                                       2004         2003
                                                                                      --------   ------------
                                      ASSETS
<S>                                                                                  <C>          <C>
Current Assets:
     Cash and cash equivalents ...................................................   $   1,262    $     453
     Accounts receivable trade (net of allowance for doubtful accounts of $477 and
       $375, respectively) .......................................................      25,664       24,751
     Inventories .................................................................      22,266       21,740
     Prepaid expenses and other ..................................................       2,631        2,567
                                                                                     ---------    ---------
          Total current assets ...................................................      51,823       49,511
                                                                                     ---------    ---------
Property, Plant and Equipment:
     Property, plant and equipment ...............................................      70,440       67,187
     Less - accumulated depreciation .............................................     (26,183)     (23,582)
                                                                                     ---------    ---------
          Total property, plant and equipment ....................................      44,257       43,605
                                                                                     ---------    ---------
Other Assets:
     Goodwill, net of accumulated amortization ...................................      42,969       43,724
     Miscellaneous ...............................................................       1,612        1,819
                                                                                     ---------    ---------
          Total other assets .....................................................      44,581       45,543
                                                                                     ---------    ---------
Total Assets .....................................................................   $ 140,661    $ 138,659
                                                                                     =========    =========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Current maturities of long-term debt ........................................   $   6,450    $   5,950
     Accounts payable ............................................................      21,938       20,385
     Accrued salary and wages ....................................................       4,138        4,081
     Other accrued liabilities ...................................................       6,218        6,276
                                                                                     ---------    ---------
          Total current liabilities ..............................................      38,744       36,692

Long-Term Debt ...................................................................      61,400       66,700
Other Liabilities ................................................................       2,712        2,692
Deferred Income Taxes ............................................................       3,477        1,185
                                                                                     ---------    ---------
Total Liabilities ................................................................     106,333      107,269
                                                                                     ---------    ---------

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

Stockholders' Equity:
     Common stock, $.01 par value -- 40,000,000 shares authorized;
    (9,681,504 shares issued and outstanding at June 30, 2004 and December 31,
     2003) .......................................................................          97           97
     Preferred stock, $.01 par value -- 5,000,000 shares authorized; (no shares
     issued or outstanding) ......................................................          --           --
     Paid in capital in excess of par value ......................................      46,003       46,003
     Accumulated other comprehensive income ......................................         164          190
     Accumulated Deficit .........................................................     (11,936)     (14,900)
                                                                                     ---------    ---------
          Total stockholders' equity .............................................      34,328       31,390
                                                                                     ---------    ---------
Total Liabilities and Stockholders' Equity .......................................   $ 140,661    $ 138,659
                                                                                     =========    =========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                        2
<PAGE>

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

<TABLE>
<CAPTION>
                                                             For the Three Months Ended,     For the Six Months Ended,
                                                              June 30,         June 30,        June 30,       June 30,
                                                                2004           2003             2004            2003
                                                            ------------    ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>             <C>
Net sales ...............................................   $     69,742    $     60,990    $    138,276    $    120,467
Cost of goods sold ......................................         59,575          52,165         119,049         103,714
                                                            ------------    ------------    ------------    ------------
Gross profit ............................................         10,167           8,825          19,227          16,753
                                                            ------------    ------------    ------------    ------------
Operating expenses:
      Selling, general and administrative ...............          4,378           3,398           8,930           7,388
      Depreciation and amortization .....................             69             199             285             393
                                                            ------------    ------------    ------------    ------------
Total operating expenses ................................          4,447           3,597           9,215           7,781
                                                            ------------    ------------    ------------    ------------
Income from operations ..................................          5,720           5,228          10,012           8,972

Interest expense (net) ..................................          1,158           1,391           2,358           2,627
                                                            ------------    ------------    ------------    ------------

Income before income taxes ..............................          4,562           3,837           7,654           6,345
Income tax provision ....................................          1,802           1,516           3,023           2,501
                                                            ------------    ------------    ------------    ------------
Income from continuing operations .......................          2,760           2,321           4,631           3,844
Loss from discontinued operations, net of tax benefit....           (310)           (806)           (699)         (1,262)
                                                            ------------    ------------    ------------    ------------

Net income ..............................................   $      2,450    $      1,515    $      3,932    $      2,582
                                                            ============    ============    ============    ============

Income (loss) per share:
       Basic:
         Continuing operations ..........................   $       0.29    $       0.24    $       0.48    $       0.40
         Discontinued operations ........................          (0.04)          (0.08)          (0.07)          (0.13)
                                                            ------------    ------------    ------------    ------------
         Net income .....................................   $       0.25    $       0.16    $       0.41    $       0.27
                                                            ============    ============    ============    ============

       Fully diluted:

         Continuing operations ..........................   $       0.28    $       0.24    $       0.46    $       0.40
         Discontinued operations ........................          (0.04)          (0.08)          (0.07)          (0.13)
                                                            ------------    ------------    ------------    ------------
         Net income .....................................   $       0.24    $       0.16    $       0.39    $       0.27
                                                            ============    ============    ============    ============
Weighted average shares outstanding:

         Basic ..........................................      9,681,504       9,668,304       9,681,504       9,652,862
                                                            ============    ============    ============    ============
         Fully diluted ..................................     10,014,800       9,760,456       9,993,806       9,713,611
                                                            ============    ============    ============    ============
</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 Six Months Ended,
                                                                                    June 30, 2004  June 30, 2003
                                                                                    -------------  -------------
<S>                                                                                 <C>            <C>
Cash flows from operating activities:
     Net income .................................................................    $   3,932       $   2,582
       Adjustments to reconcile net income to net cash from operating activities:
          Depreciation and amortization .........................................        2,819           4,097
          Amortization of deferred financing costs ..............................          172             522
          Loss on disposal of equipment .........................................           --               7
          Provision for doubtful accounts and allowances ........................           98             (66)
          Deferred income taxes .................................................        2,292              --
         Changes in assets and liabilities:
             Accounts receivable ................................................       (1,316)         (1,240)
             Inventories ........................................................         (439)          1,201
             Other assets .......................................................       (1,140)           (201)
             Accounts payable and accrued liabilities ...........................        4,621           2,567
                                                                                     ---------       ---------
                   Net cash from continuing operating activities ................       11,039           9,469)
                   Net cash used by discontinued operating activities ...........       (1,779)         (1,891)
                                                                                     ---------       ---------
                   Net cash from operating activities ...........................        9,260           7,578
                                                                                     ---------       ---------
Cash flows used by investing activities:
         Additions to property, plant and equipment .............................       (3,653)         (2,566)
         Acquisition, net of cash acquired ......................................          704            (198)
         Proceeds from sale of assets ...........................................           --               2
                                                                                     ---------       ---------
                   Net cash used by continuing investing activities .............       (2,949)         (2,762)
                   Net cash from (used by) discontinued investing activities ....          411            (574)
                                                                                     ---------       ---------
                   Net cash used by investing activities ........................       (2,538)         (3,336)
                                                                                     ---------       ---------
Cash flows used by financing activities:
          Principal payments for loan obligations ...............................       (2,500)         (3,360)
          Proceeds under revolving line of credit ...............................       27,800          23,500
          Repayments under revolving line of credit .............................      (30,100)        (23,500)
          Payment of dividends ..................................................         (968)             --
          Other, net ............................................................         (145)            131
                                                                                     ---------       ---------
                   Net cash used by financing activities ........................       (5,913)         (3,229)
                                                                                     ---------       ---------
Net increase in cash and cash equivalents .......................................          809           1,013
Cash and cash equivalents at beginning of period ................................          453           1,864
                                                                                     ---------       ---------
Cash and cash equivalents at end of period ......................................    $   1,262       $   2,877
                                                                                     =========       =========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                        4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                           Retained
                                                 Common Stock                              Earnings
                                                 ------------                             (Accumulated
                                               Shares      Amount     Paid In Capital       Deficit)
                                               ------      ------     ---------------       --------
<S>                                          <C>           <C>        <C>                 <C>
Balance at December 31, 2002                  9,618,767    $    96     $     45,560       $        304

Net loss..................................                                                     (14,720)
Exercise of common stock options..........       62,737          1              443
Other comprehensive income (loss):

   Net change in fair value of derivative
       instruments, net of income taxes...

           Other comprehensive income (loss)

Cash dividend ($.05 per share) ...........                                                        (484)
                                              ---------    -------     ------------       ------------
Balance at December 31, 2003..............    9,681,504    $    97     $     46,003       $    (14,900)

Net income................................                                                       3,932
Other comprehensive income (loss):
    Net change in fair value of derivative
       instruments, net of income taxes...

           Other comprehensive income.....

Cash dividend ($.10 per share) ...........                                                        (968)
                                              ---------    -------     ------------       ------------
Balance at June 30, 2004..................    9,681,504    $    97      $    46,003       $    (11,936)
                                              =========    =======      ===========       ============

<CAPTION>
                                               Accumulated
                                                  Other
                                              Comprehensive    Stockholders'   Comprehensive
                                              Income (Loss)       Equity       Income (Loss)
                                              -------------       ------       -------------
<S>                                           <C>              <C>             <C>
Balance at December 31, 2002                  $        (253)   $    45,707

Net loss..................................                         (14,720)        (14,720)
Exercise of common stock options..........                             444
Other comprehensive income (loss):

   Net change in fair value of derivative
       instruments, net of income taxes...              443            443             443
                                                                               -----------
           Other comprehensive income (loss)                                   $   (14,277)
                                                                               ===========
Cash dividend ($.05 per share) ...........                           (484)
                                              -------------    -----------
Balance at December 31, 2003..............    $         190    $    31,390

Net income................................                           3,932           3,932
Other comprehensive income (loss):
    Net change in fair value of derivative
       instruments, net of income taxes...              (26)           (26)            (26)
                                                                               -----------
           Other comprehensive income.....                                     $     3,906
                                                                               ===========
Cash dividend ($.10 per share) ...........                            (968)
                                              -------------    -----------
Balance at June 30, 2004..................    $         164    $    34,328
                                              =============    ===========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                        5
<PAGE>

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

NOTE 1 -- BASIS OF PRESENTATION

GENERAL

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

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PROPERTY, PLANT AND EQUIPMENT

      The Company capitalizes expenditures for additions and major improvement
at cost and charges to operating expenses the cost of maintenance and repairs.
Provisions for depreciation have been computed principally on the straight-line
method over the estimated useful lives (generally 31 years for buildings, 15 to
31 years for improvements and 7 to 20 years for machinery and equipment). During
the second quarter of 2004, the Company changed the estimate of useful lives for
certain of its major converting machinery and equipment from 12 years to 20
years resulting in a net reduction of annual depreciation expense of $110.
Assets recorded under capital leases are amortized over the shorter of the life
of the lease or useful life.

      The cost and accumulated depreciation relating to assets retired or
otherwise disposed of are eliminated from the respective accounts at the time of
disposition. The resulting gain or loss is included in the current operating
results.

EARNINGS PER SHARE

      Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during each
period. Diluted earnings per share reflects the potential dilution that could
occur if common stock options are exercised and is computed by dividing net
income by the weighted average number of common shares outstanding, including
common stock equivalent shares, issuable upon exercise of outstanding stock
options, to the extent that they would have a dilutive effect on the per share
amounts. Dilution of the Company's weighted average shares outstanding results
from common stock issuable upon exercise of outstanding stock options (333,296
and 92,152 for the three months ended June 30, 2004 and 2003, respectively and
312,302 and 60,749 for the six months ended June 30, 2004 and 2003,
respectively).

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

                                        6
<PAGE>

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

<TABLE>
<CAPTION>
                                                               FOR THE THREE MONTHS            FOR THE SIX MONTHS
                                                                   ENDED JUNE 30,                ENDED JUNE 30,
                                                               2004           2003            2004           2003
                                                            -----------    -----------    -----------    -----------
<S>                                                         <C>            <C>            <C>            <C>
Income from continuing operations ......................    $     2,760    $     2,321    $     4,631    $     3,844
                                                            ===========    ===========    ===========    ===========
Weighted average shares used to determine basic earnings
   per share from continuing operations ................      9,681,504      9,668,304      9,681,504      9,652,862
Common stock equivalents ...............................        333,296         92,152        312,302         60,749
                                                            -----------    -----------    -----------    -----------
Weighted average shares used to determine diluted
  earnings per share from continuing operations ........     10,014,800      9,760,456      9,993,806      9,713,611
                                                            ===========    ===========    ===========    ===========
Basic earnings per share from continuing operations ....    $      0.29    $      0.24    $      0.48    $      0.40
                                                            ===========    ===========    ===========    ===========
Diluted earnings per share from continuing operations ..    $      0.28    $      0.24    $      0.46    $      0.40
                                                            ===========    ===========    ===========    ===========
</TABLE>

DERIVATIVES AND OTHER COMPREHENSIVE INCOME (LOSS)

      The Company recognizes all derivative instruments which are cash flow
hedges as assets or liabilities at fair value, with the related gain or loss
reflected within stockholders' equity through accumulated other comprehensive
income (loss) or within operations depending upon the nature of the derivative
instrument. The Company maintains interest rate swap agreements that are
designated as cash flow hedges to manage the market risk from changes in
interest rates on a portion of its variable rate term loans. Such derivative
financial instruments are recorded at fair value, and at June 30, 2004 and
December 31, 2003, the fair value approximates a loss of $410 and $394,
respectively, which is included in accrued liabilities within the accompanying
consolidated balance sheet. Changes in fair value, based upon the amount at
which the swap could be settled with a third party, are recorded in other
comprehensive income (loss) only to the extent of effectiveness. Any
ineffectiveness on the swap would be recognized in the consolidated statement of
operations. The differentials to be received or paid under the interest rate
swap agreements are recognized in income over the life of the contract as
adjustments to interest expense.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and variable rate debt
approximates their estimated fair value based either on the short-term maturity
of these instruments or on market prices for the same or similar type of
financial instruments. The fair market value and carrying value of the Company's
interest rate swaps were a loss of $410 and $394 at June 30, 2004 and December
31, 2003, respectively.

ESTIMATES

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

RECLASSIFICATION

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

NOTE 3 -- DISCONTINUED OPERATIONS

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

                                        7
<PAGE>
      The following table details selected income statement information for the
Specialty Paper operation.
<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED        SIX MONTHS ENDED
                                        JUNE 30,                  JUNE 30,
                                 ---------------------     ---------------------
                                   2004         2003         2004         2003
                                 --------     --------     --------     --------
<S>                              <C>          <C>          <C>          <C>
Sales
  External ..................    $     --     $  4,573     $     --     $  9,661
  Intercompany ..............          --        6,928           --       13,983
  Discounts & Returns .......          --         (146)          --         (257)
                                 --------     --------     --------     --------
  Net Sales .................    $     --     $ 11,355     $     --     $ 23,387
                                 ========     ========     ========     ========
(Loss) income from operations    $   (513)    $ (1,070)    $ (1,156)    $ (1,590)
Interest expense ............          --          263           --          496
                                 --------     --------     --------     --------
Loss before income taxes ....        (513)      (1,333)      (1,156)      (2,086)
Income tax benefit ..........         203          527          457          824
                                 --------     --------     --------     --------
Net loss ....................    $   (310)    $   (806)    $   (699)    $ (1,262)
                                 ========     ========     ========     ========
</TABLE>

      The net loss for the three and six months ended June 30, 2004 represents
approximately $772 and $1,567, respectively, of pretax administrative costs
associated with the ongoing program to clear the site, recover assets and
dispose of the Detroit property offset by approximately $259 and $411,
respectively, of proceeds from the liquidation of equipment.

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

<TABLE>
<CAPTION>
                                                              JUNE 30,     DECEMBER 31,
                                                               2004           2003
                                                             ---------      ---------
<S>                                                          <C>           <C>
Accounts receivable trade (net of allowance for doubtful
  accounts of $37 and $33, respectively) ...............     $      15      $     346
Other current assets ...................................            80          1,092
                                                             ---------      ---------
Total assets of discontinued operations ................            95          1,438
                                                             ---------      ---------
Accounts payable .......................................            95            827
Accrued liabilities ....................................         1,384          3,363
                                                             ---------      ---------
Total liabilities of discontinued operations ...........         1,479          4,190
                                                             ---------      ---------
Net liabilities of discontinued operations .............     $  (1,384)     $  (2,752)
                                                             =========      =========
</TABLE>

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

<TABLE>
<CAPTION>
                                 SEVERANCE       PENSION
                                AND BENEFIT      CHARGE         TOTAL
                                -----------     ---------     --------
<S>                             <C>             <C>           <C>
Balance at December 31, 2002     $      --      $      --     $      --
  Charges to expense .......         2,800            816         3,616
  Cash Payments ............        (1,849)            --        (1,849)
  Reversals ................            --             --            --
                                 ---------      ---------     ---------
Balance at December 31, 2003     $     951      $     816     $   1,767
                                 ---------      ---------     ---------
  Cash Payments ............          (732)            --          (732)
  Charges to expense .......           181             --           181
                                 ---------      ---------     ---------
Balance at June 30, 2004 ...     $     400      $     816     $   1,216
                                 =========      =========     =========
</TABLE>

NOTE 4 - ACQUISITIONS

      On December 4, 2003, the Company acquired the net assets of the Iuka
Lamination Division ("Iuka") of Ormet Corporation ("Ormet") for $4,296 comprised
of $5,000 in cash paid at closing less $704 received during the second quarter
of 2004 pursuant to a settlement agreement with Ormet, as approved by the United
States Bankruptcy court presiding over Ormet's bankruptcy case, with respect to
the working capital adjustment mechanism contained in the agreement of sale. In
addition, the Company incurred $218 in other direct costs related to the
acquisition. The purchase price allocations reflected in the consolidated
balance sheet at December 31, 2003 and March 31, 2004 were based upon
preliminary information. During the second quarter of 2004, the purchase price
allocation was revised to reflect receipt of the $704 pursuant to the working
capital adjustment. The following table summarizes

                                        8
<PAGE>

the estimated fair values of the assets acquired and liabilities assumed at the
date of acquisition as reflected at June 30, 2004.

<TABLE>
<S>                               <C>
Current assets ..............     $   5,233
Property, plant and equipment         1,218
Intangible assets ...........            --
Goodwill ....................            --
                                  ---------
  Total assets acquired .....         6,451
                                  ---------
Current liabilities .........        (1,937)
                                  ---------
  Total liabilities assumed .        (1,937)
                                  ---------
Net operating assets acquired         4,514
  Debt assumed ..............            --
                                  ---------
Net assets acquired .........     $   4,514
                                  =========
</TABLE>

NOTE 5 -- STOCK BASED COMPENSATION

      At June 30, 2004, the Company has a stock-based compensation plan. The
Company accounts for this plan under the recognition and measurement provisions
of Accounting Principles Board Opinion ("APB") No. 25 "Accounting for Stock
Issued to Employees," and related interpretations. Stock-based employee
compensation cost is reflected in earnings to the extent that option grants
under those plans had an exercise price below the market value of the underlying
common stock on the date of grant. SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") issued subsequent to APB No. 25 and amended by
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure," ("SFAS No. 148") defines a fair value based method of accounting
for employees stock options but allows companies to continue to measure
compensation cost for employee stock options using the intrinsic value based
method described in APB No. 25. The Company's stock-based compensation plans are
accounted for under the intrinsic value based method. No compensation expense is
reflected in net income in the three and six months ended June 30, 2004 and June
30, 2003, as all options granted under the plan had an exercise price that was
equal to the market price on the date of grant.

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

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED                        SIX MONTHS ENDED
                                                                     JUNE 30,                                JUNE 30,
                                                       -----------------------------------     -----------------------------------
                                                            2004                2003                2004                2003
                                                       ---------------     ---------------     ---------------     ---------------
<S>                                                    <C>                 <C>                 <C>                 <C>
Net Income .......................................     $         2,450     $         1,515     $         3,932     $         2,582
Deduct:  Stock-based employee compensation expense
determined under fair value based method .........                (222)                (16)               (444)                (16)
                                                       ---------------     ---------------     ---------------     ---------------
Pro forma net income .............................     $         2,228     $         1,499     $         3,488     $         2,566
                                                       ===============     ===============     ===============     ===============
 Income per share:

     Basic - as reported .........................     $          0.25     $          0.16     $          0.41     $          0.27
                                                       ===============     ===============     ===============     ===============
     Basic - proforma ............................     $          0.23     $          0.16     $          0.36     $          0.27
                                                       ===============     ===============     ===============     ===============
     Diluted - as reported .......................     $          0.24     $          0.16     $          0.39     $          0.27
                                                       ===============     ===============     ===============     ===============
     Diluted - proforma ..........................     $          0.22     $          0.15     $          0.35     $          0.26
                                                       ===============     ===============     ===============     ===============
</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:

<TABLE>
<CAPTION>
                                                   June 30,     June 30,
                                                    2004          2003
                                                  ---------     ---------
<S>                                               <C>           <C>
Expected option life (years) ................            5             5
Work-Risk-free weighted average interest rate         2.92%         2.42%
Stock price volatility ......................         27.5%           35%
Dividend yield ..............................          1.9%          0.0%
</TABLE>

                                        9
<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 June 30, 2004 and December 31,
2003 consist of the following:

<TABLE>
<CAPTION>
                          June 30,      December 31,
                            2004            2003
                         ----------     ------------
<S>                      <C>            <C>
Raw materials ......     $   10,244      $    9,892
Work-Work-in-process          1,442           1,488
Finished goods .....         10,806          10,672
                         ----------     -----------
                             22,492          22,052
Obsolescence Reserve           (226)           (312)
                         ----------     -----------
Net ................     $   22,266      $   21,740
                         ==========     ===========
</TABLE>

NOTE 7 -- LONG-TERM DEBT

      Long-term debt at June 30, 2004 and December 31, 2003 consists of the
following:

<TABLE>
<CAPTION>
                                          June 30,      December 31,
                                            2004            2003
                                         ----------     ------------
<S>                                      <C>            <C>
Senior Credit Facility:
    Tranche A Term Loan ............     $   27,000      $   29,000
    Tranche B Term Loan ............         39,250          39,750
    Revolving credit loan ..........            900           3,200
Baxter Springs facility HUD loan ...            700             700
                                         ----------     -----------
    Subtotal .......................         67,850          72,650
Current maturities of long term debt         (6,450)         (5,950)
                                         ----------     -----------
Long-term debt .....................     $   61,400      $   66,700
                                         ==========     ===========
</TABLE>

      During the third quarter of 2003, the Company refinanced its existing
credit facility with a new credit facility (the "Senior Credit Facility"). The
Senior Credit Facility provides for a Term A Loan and Term B Loan totaling
$70,000 and a $40,000 revolving credit facility, up to $5,000 of which may be in
the form of letters of credit. As of June 30, 2004, the Term A Loan had a
balance of $27,000 and will mature in 2008. The required aggregate annual
payments, payable in equal quarterly installments, total $4,250, $5,250 $6,250,
$7,250 and $6,000 in years 2004 through 2008, respectively, of which $1,000 was
paid during the current quarter. As of June 30, 2004, the Term B Loan had a
balance of $39,250 and will mature in 2009. The aggregate annual payments,
payable in equal quarterly installments, total $1,000 in years 2004 through 2008
and $34,750 in 2009, of which $250 was paid during the current quarter. The
revolver had a balance of $900 as of June 30, 2004.

      Loans under the Senior Credit Facility are designated from time to time,
at our election, either (1) as Eurodollar Rate Loans, which bear interest at a
rate based on the London Interbank Offered Rate, or LIBOR, adjusted for
regulatory reserve requirements, or (2) as Base Rate Loans, which bear interest
at a rate based on the Federal Funds rate or the prime rate. The interest rate
on Eurodollar Rate Loans is equal to LIBOR plus an applicable percentage that
varies with the leverage ratio of the Company and its consolidated subsidiaries.
The interest rate on Base Rate 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 June 30, 2004, the interest rates on borrowings under the Tranche A
Term Loan and the Tranche B Term Loan were 3.0% plus LIBOR (1.59%) and 3.5% plus
LIBOR (1.59%), respectively, compared with 3.0% plus

                                       10
<PAGE>

LIBOR (1.21%) and 3.75% plus LIBOR (1.21%), respectively, at June 30, 2003. As
of June 30, 2004, we had interest rate swap agreements with a group of banks
having notional amounts totaling $50,000 and with various maturity dates. These
agreements effectively fix our LIBOR rate for $25,000 and $25,000 of our Senior
Credit Facility indebtedness at rates of 2.34% and 2.91%, respectively.

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

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

      -     under the leverage ratio covenant, as of the last day of each fiscal
            quarter, the ratio of total funded debt of the Company and its
            consolidated subsidiaries to consolidated EBITDA of the Company and
            its consolidated subsidiaries for the 12-month period then ended
            must not exceed specified levels, decreasing various levels from 4.5
            to 1 at June 30, 2004 to 4 to 1;

      -     under the senior leverage ratio covenant, as of the last day of each
            fiscal quarter, the ratio of total funded debt (other than
            subordinated debt) of the Company and its consolidated subsidiaries
            to consolidated EBITDA of the Company and its consolidated
            subsidiaries for the 12-month period then ended must not exceed
            specified levels, decreasing various levels from 3.5 to 1 at June
            30, 2004 to 3 to 1;

      -     under the fixed charge coverage ratio covenant, as of the last day
            of each fiscal quarter, for the 12-month period then ended, the
            ratio of consolidated EBITDA less capital expenditures and cash tax
            payments of the Company and its consolidated subsidiaries to cash
            interest expense and scheduled funded debt payments of the Company
            and its consolidated subsidiaries must be equal to or greater than
            certain levels increasing from 1.1 to 1 at June 30, 2004 to 1.2 to
            1; and

      -     under the net worth covenant, Packaging Dynamics' consolidated net
            worth as of the last day of each fiscal quarter must be equal to or
            greater than 80% of the net worth as of September 30, 2003 increased
            on a cumulative basis by (1) as of the last day of each fiscal
            quarter, 50% of the consolidated net income of Packaging Dynamics
            (to the extent positive) for the fiscal quarter then ended, 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.

      The Senior Credit Facility includes terms that limit changes in our
ownership structure. Modifications to the ownership structure outside the limits
prescribed by such agreements could place us in default under these debt
instruments. The Senior Credit Facility requires Packaging Dynamics Operating
Company ("PDOC") to maintain specified financial ratios and levels of tangible
net worth. PDOC was in compliance with those covenants as of June 30, 2004, the
latest measurement date. The occurrence of any default of these covenants could
result in acceleration of our obligations under the Senior Credit Facility
($67,150 as of June 30, 2004) and foreclosure on the collateral

                                       11
<PAGE>

securing those obligations.

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

NOTE 8 -- COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED        SIX MONTHS ENDED
                                                              JUNE 30,                  JUNE 30,
                                                       ------------------------- ----------------------
                                                         2004         2003         2004          2003
                                                       --------     ------------ --------      --------
<S>                                                    <C>          <C>          <C>           <C>
Net Income .......................................     $  2,450     $  1,515     $  3,932      $  2,582
Net change in fair value of derivative instruments          148          108          (26)          174
                                                       --------     --------     --------      --------
Comprehensive income .............................     $  2,598     $  1,623     $  3,906      $  2,756
                                                       ========     ========     ========      ========
</TABLE>

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

NOTE 9 -- COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

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

ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION

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

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

                                       12
<PAGE>

NOTE 10 -- SUBSEQUENT EVENT

On August 6, 2004, we announced that we had entered into a definitive  agreement
to acquire Papercon,  Inc. ("Papercon") in a transaction valued at approximately
$68.4  million,  net of  cash  balances  acquired  and  subject  to  adjustment,
comprised of $46 million of cash payable at closing,  a $7 million two year note
payable bearing a 5% annual interest rate,  833,333 shares of Packaging Dynamics
common stock valued at $11.7  million based upon the August 5th closing price of
$13.99 per share,  and $3.7 million  representing  the present  value of amounts
payable  pursuant to a  non-compete  agreement.  The  transaction  is subject to
customary  closing  conditions for a transaction of this type and is expected to
close by the end of the third quarter,  2004. In addition,  we announced that we
reached an agreement to amend our existing  Senior  Credit  Facility in order to
finance the cash  requirements of the transaction and ongoing  corporate  needs.
The  amendment,  which becomes  effective  upon the closing of the  acquisition,
provides for an  incremental  $45 million  tranche B term loan and a $10 million
expansion of the revolving credit facility.

                                       13
<PAGE>

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

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

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

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

SUMMARY AND OUTLOOK

      The business is experiencing solid revenue performance in each of our
product areas. An increasing percentage of our top line growth will come from
new product introductions in the upcoming quarters. The Company continues to
invest in upgrading our product capabilities and improving productivity. The
Company is continuing to invest considerable time and effort into developing
logical acquisition candidates that have the potential to extend both geographic
presence and product.

RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 2004

NET SALES

      Net sales increased $8,752, or 14.3 %, to $69,742 from $60,990 for the
comparable quarter in the prior year. Approximately 50% of this increase was
attributable to the Iuka plant which the Company acquired in December 2003. The
remainder of the increase was attributable to a combination of unit volume
growth in key end markets as well as the impact of raw material related pricing
actions.

GROSS PROFIT

      Gross profit for the quarter ended June 30, 2004 increased $1,342, or
15.2%, to $10,167 from $8,825 for the comparable quarter in the prior year
mainly due to increased sales from the Company's base business and earnings from
the recently acquired Iuka plant and positive results from the Company's ongoing
cost and productivity initiatives, partially offset by timing differences in the
pass through of raw material cost increases and higher operating expenses. Gross
profit margin was 14.6% during the current quarter of 2004 compared to 14.5% for
the comparable quarter in the prior year.

OPERATING EXPENSES

      Operating expenses increased by $850, or 23.6%, to $4,447 for the quarter
ended June 30, 2004 compared with $3,597 for the comparable quarter in the prior
year. Operating expenses as a % of net sales was 6.4% for the quarter ended June
30, 2004 compared to 5.9% for the comparable quarter in the prior year. The
dollar increase is mainly due to increased employee related costs, consulting
expense and travel expenses related to the acquisition of Iuka, partially offset
by capitalized salary costs related to IT upgrades in financial reporting.

                                       14
<PAGE>

INCOME FROM OPERATIONS

      Income from operations for the quarter ended June 30, 2004 increased $492,
or 9.4%, to $5,720 from $5,228 for the comparable quarter in the prior year
mainly due to increased gross profit partially offset by increased operating
expenses as discussed above.

INTEREST EXPENSE

      Interest expense was $1,158 during the second quarter 2004. In the
comparable quarter of 2003, the total interest expense was $1,654, of which
$1,391 was allocated to continuing operations and $263 was allocated to
discontinued operations. The decrease in total interest expense resulted
primarily from decreased average outstanding indebtedness and lower interest
rates. The average interest rates on borrowings were approximately 4.54% during
the second quarter of 2004 compared to 5.35% during the corresponding 2003
period.

INCOME TAXES

      The Company recorded an income tax provision of $1,802 for the second
quarter of 2004 compared to a provision of $1,516 during the corresponding 2003
period. The Company's effective tax rate is approximately 39.5% for the second
quarter of 2004 and 2003.

INCOME FROM CONTINUING OPERATIONS

      Income from continuing operations for the second quarter of 2004 was
$2,760, or $0.28 per diluted share, a 18.9% increase over income from continuing
operations of $2,321, or $0.24 per diluted share, for the corresponding 2003
period. The increase resulted primarily from increased sales as well as the
various items impacting gross profit and operating expenses discussed above.

DISCONTINUED OPERATIONS

      Loss from discontinued operations for the second quarter of 2004 was $310,
or $0.04 per diluted share, compared to a loss of $806, or $0.08 per diluted
share, in the corresponding 2003 period. The net loss for the second quarter of
2004 represents approximately $772 of pretax administrative costs associated
with the ongoing program to clear the site, recover assets and dispose of the
Detroit property offset by approximately $259 of proceeds from the liquidation
of equipment. The Company is evaluating various alternatives related to the site
clearance of the Detroit property as well as possible disposition methods.

EBITDA AND ADJUSTED EBITDA

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

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

                                       15
<PAGE>
      Adjusted EBITDA for the three months ended June 30, 2004 and 2003 is
computed as follows:

<TABLE>
<CAPTION>
                                                                      For the Three Months Ended,
                                                                   June 30, 2004     June 30, 2003
                                                                   --------------    -------------
<S>                                                                <C>               <C>
Income from continuing operations                                    $   2,760         $   2,321
Income tax provision                                                     1,802             1,516
Interest expense                                                         1,158             1,391
Depreciation and amortization                                            1,335             1,437
                                                                     ---------         ---------
   EBITDA                                                                7,055             6,665
Non-recurring and unusual items:                                            --                --
                                                                     ---------         ---------
Adjusted EBITDA                                                      $   7,055         $   6,665
                                                                     ---------         ---------
</TABLE>

RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2004

NET SALES

      Net sales increased $17,809, or 14.8 %, to $138,276 from $120,467 for the
comparable six months in the prior year. Approximately 50% of this increase was
attributable to the Iuka plant which the Company acquired in December 2003. The
remainder of the increase was attributable to a combination of unit volume
growth in key end markets as well as the impact of raw material related pricing
actions.

GROSS PROFIT

      Gross profit for the six months ended June 30, 2004 increased $2,474, or
14.8%, to $19,227 from $16,753 for the comparable period in the prior year
mainly due to increased sales from the Company's base business and earnings from
the recently acquired Iuka plant and positive results from the Company's ongoing
cost and productivity initiatives, partially offset by timing differences in the
pass through of raw material cost increases and higher operating expenses. Gross
profit margin was 13.9% for both six month periods

OPERATING EXPENSES

      Operating expenses increased by $1,434, or 18.4%, to $9,215 for the six
months ended June 30, 2004 compared with $7,781 for the comparable period in the
prior year. Operating expenses as a % of net sales was 6.7% for the six months
ended June 30, 2004 compared to 6.5% for the comparable period in the prior
year. The dollar increase is mainly due to increased employee related costs,
consulting expense and travel expenses related to the acquisition of Iuka,
partially offset by capitalized salary costs related to IT upgrades in financial
reporting.

INCOME FROM OPERATIONS

      Income from operations for the six months ended June 30, 2004 increased
$1,040, or 11.6%, to $10,012 from $8,972 for the comparable period in the prior
year mainly due to gross profit partially offset by increased operating expenses
as discussed above.

INTEREST EXPENSE

      Interest expense was $2,358 during the first six months of 2004. In the
comparable period of 2003, the total interest expense was $3,123, of which
$2,627 was allocated to continuing operations and $496 was allocated to
discontinued operations. The decrease in total interest expense resulted
primarily from decreased average outstanding indebtedness and lower interest
rates. The average interest rates on borrowings were approximately 4.54% during
the first six months of 2004 compared to 5.27% during the corresponding 2003
period.

                                       16
<PAGE>

INCOME TAXES

      The Company recorded an income tax provision of $3,023 for the first six
months of 2004 compared to a provision of $2,501 during the corresponding 2003
period. The Company's effective tax rate is approximately 39.5% for the first
six months of 2004 and 2003.

INCOME FROM CONTINUING OPERATIONS

      Income from continuing operations for the first six months of 2004 was
$4,631, or $0.46 per diluted share, a 20.5% increase over income from continuing
operations of $3,844, or $0.40 per diluted share, for the corresponding 2003
period. The increase resulted primarily from increased sales as well as the
various items impacting gross profit and operating expenses discussed above.

DISCONTINUED OPERATIONS

      Loss from discontinued operations for the first six months of 2004 was
$699, or $0.07 per diluted share, compared to a loss of $1,262, or $0.13 per
diluted share, in the corresponding 2003 period. The net loss for the first six
months of 2004 represents approximately $1,567 of pretax administrative costs
associated with the ongoing program to clear the site, recover assets and
dispose of the Detroit property offset by approximately $411 of proceeds from
the liquidation of equipment. The Company is evaluating various alternatives
related to the site clearance of the Detroit property as well as possible
disposition methods.

EBITDA AND ADJUSTED EBITDA

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

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

      Adjusted EBITDA for the six months ended June 30, 2004 and 2003 is
computed as follows:

<TABLE>
<CAPTION>
                                                                               For the Six Months Ended,
                                                                           June 30, 2004      June 30, 2004
                                                                           -------------      -------------
<S>                                                                        <C>                <C>
Income from continuing operations                                          $    4,631         $    3,844
Income tax provision                                                            3,023              2,501
Interest expense                                                                2,358              2,627
Depreciation and amortization                                                   2,819              2,956
                                                                           ----------         ----------
    EBITDA                                                                     12,831             11,928
Non-recurring and unusual items:                                                   --                 --
                                                                           ----------         ----------
Adjusted EBITDA                                                            $   12,831         $   11,928
                                                                           ==========         ==========

</TABLE>

                                       17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      At June 30, 2004, we had cash and cash equivalents of $1,262, and $37,361
was available under the revolving portion of the Senior Credit Facility, after
taking into account $1,739 in letter of credits outstanding. Our working capital
at June 30, 2004 was $13,079 compared to $12,819 for the comparable period at
December 31, 2003.

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

      We generated $9,260 of cash from operating activities in the six months
ended June 30, 2004 compared to $7,578 for the same period in 2003. This
increase was partially related to an increase in net income in the six months
ended June 30, 2004 compared to the same period in 2003. In addition, the
increase was due to the change in certain components of net working capital,
mainly in accounts payable and accrued liabilities, during the six months ended
June 30, 2004 compared to the same period in 2003.

      Cash used by discontinued operating activities in the six months ended
June 30, 2004 was $1,779 compared to $1,891 for the comparable period ended June
30, 2003. This decrease was due to the change in certain components of net
working capital of our discontinued operations during the six months ended June
30, 2004 compared to the same period in 2003.

      Cash used by investing activities was $2,538 for the six months ended June
30, 2004 compared to $3,336 for the same period in 2003. In the six months ended
June 30, 2004, there was a positive purchase price adjustment of $704 relating
to the acquisition of Iuka. In 2003, there was an acquisition expenditure of
$198 related to the acquisition of Wolf Packaging Inc. and $574 of capital
spending related to discontinued operations. In the first six months of 2004,
there were sales of assets related to discontinued operations generating cash
proceeds of $411. Capital expenditures in continuing operations were $3,653 and
$2,566 during the six months ended June 30, 2004 and 2003, respectively. Our
major capital expenditures in 2004 were IT upgrades in our financial reporting,
as well as building remodeling and supply chain operations capabilities. In the
first six months of 2003 we purchased two new bag machines. In 2004, capital
expenditures are expected to be between $6,000 and $7,000.

      Cash used by financing activities was $5,913 for the six months ended June
30, 2004 compared to $3,229 for the same period in 2003. The change was
primarily due to additional debt payments and two quarterly cash dividends paid
in the first six months of 2004. During the first six months of 2004 and 2003,
the Company paid $968 and zero, respectively, in cash dividends. In addition, in
June 2004, the Company announced a cash dividend of $0.05 per common share, $484
in the aggregate, which was paid on July 6, 2004 to shareholders of record on
June 15, 2004.

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 June 30, 2004, we had interest rate swap agreements with a group of
banks having notional amounts totaling $50,000 with various maturity dates
through December 10, 2006. Beginning on December 10, 2003, we have a no cost
collar agreement with a notional amount of $25,000 maturing on December 10,
2004. This collar agreement effectively fixes the LIBOR base rate for $25,000 of
our Senior Credit Facility indebtedness at a maximum of 3.97% and allow for us
to pay the market LIBOR from a floor of 2.34% to the maximum rate. Effective
December 31, 2003, the Company has an interest rate swap agreement effectively
fixing our LIBOR rate for $25,000 of our Senior Credit Facility indebtedness at
a rate of 2.91%. If LIBOR falls below 2.34%, we are required to pay the floor
rate of 2.91%. Beginning on December 31, 2004, we have a no cost collar
agreement with a notional amount of $20,000 maturing on December 31, 2007. This
collar agreement effectively fixes the LIBOR base rate for $20,000 of our Senior
Credit Facility indebtedness at a maximum of 5.0% and allow for us to pay the
market LIBOR from a floor of 3.08% to the maximum rate. 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

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<PAGE>

of $410 as of June 30, 2004 and is based upon the amount at which it could be
settled with a third party, although we have no current intention to trade any
of these instruments and plan to hold them as hedges for the Senior Credit
Facility. The fair market value of our derivative instruments, net of income
tax, was recorded in other comprehensive income (loss).

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

ITEM  4. CONTROLS AND PROCEDURES

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

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

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<PAGE>

SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS

      Certain statements included in this annual report, including without
limitation, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations - For the Three and Six Months
Ended June 30, 2004 and 2003 - Liquidity and Capital Resources, -- Recently
Issued Accounting Pronouncements, and - Quantitative and Qualitative Disclosure
About Market Risk" constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Among the
factors that could cause results to differ materially from current expectations
are: (i) changes in consumer demand and prices resulting in a negative impact on
revenues and margins; (ii) raw material substitutions and increases in the costs
of raw materials, utilities, labor and other supplies; (iii) increased
competition in the Company's product lines; (iv) changes in capital availability
or costs; (v) workforce factors such as strikes or labor interruptions; (vi) the
ability of the Company and it subsidiaries to develop new products, identify and
execute capital programs and efficiently integrate acquired businesses; (vii)
the cost of compliance with applicable governmental regulations and changes in
such regulations, including environmental regulations; (viii) the general
political, economic and competitive conditions in markets and countries where
the Company and its subsidiaries operate, including currency fluctuations and
other risks associated with operating in foreign countries; and (ix) the timing
and occurrence (or non-occurrence) of transactions and events which may be
subject to circumstances beyond the control of Packaging Dynamics and its
subsidiaries.

                           PART II. OTHER INFORMATION

ITEM  1. LEGAL PROCEEDINGS

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

ITEM  6. EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibits
<TABLE>
<CAPTION>
Exhibit No.                           Description
-----------                           -----------
<S>                <C>
  31.1             Certification of Chief Executive Officer pursuant to Section
                   302 of the Sarbanes-Oxley Act of 2002.

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

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

      (b)   Reports on Form 8-K

            Current Report on Form 8-K regarding Packaging Dynamics
            Corporation's first quarter 2004 earnings release and conference
            call, filed on April 30, 2004.

                             SIGNATURE PAGE FOLLOWS

                                       20
<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)
August 13, 2004

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