<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------
                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2005

                                       or

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

For the transition period from _________________ to _____________________

                         COMMISSION FILE NUMBER: 0-49741

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

              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)

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

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

                                 Yes [X] No [ ]

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

                                 Yes [ ] No [X]

      At August 8, 2005, there were 10,551,839 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>
                                                                                            JUNE 30,            DECEMBER 31,
                                                                                              2005                 2004
                                                                                           ---------             ---------
                                                                                          (unaudited)
<S>                                                                                       <C>                   <C>
                   ASSETS
Current Assets:
         Cash and cash equivalents                                                         $      91             $   1,175
         Accounts receivable trade (net of allowance for doubtful accounts
              of $758 and $825)                                                               30,280                31,174
         Inventories, net                                                                     40,612                36,506
         Prepaid expenses and other assets                                                     5,694                 5,962
                                                                                           ---------             ---------
              Total current assets                                                            76,677                74,817
                                                                                           ---------             ---------
Property, Plant and Equipment
         Property, plant and equipment                                                        83,477                80,978
         Less-Accumulated depreciation                                                       (32,837)              (29,284)
                                                                                           ---------             ---------
              Total property, plant and equipment                                             50,640                51,694
                                                                                           ---------             ---------
Other Assets:
         Goodwill                                                                             81,263                81,263
         Intangibles and other assets, net                                                    20,282                20,893
                                                                                           ---------             ---------
              Total other assets                                                             101,545               102,156
                                                                                           ---------             ---------
Total Assets                                                                               $ 228,862             $ 228,667
                                                                                           =========             =========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
         Current maturities of long-term debt                                              $   6,593             $   6,093
         Accounts payable and other                                                           28,819                27,132
         Accrued salary and wages                                                              2,761                 3,420
         Other accrued liabilities                                                             8,375                 8,207
                                                                                           ---------             ---------
              Total current liabilities                                                       46,548                44,852

Long-term Debt                                                                               107,565               110,386
Other Liabilities                                                                              5,351                 7,592
Deferred Income Taxes                                                                         16,640                15,975
                                                                                           ---------             ---------
Total Liabilities                                                                            176,104               178,805
                                                                                           ---------             ---------
Commitments and Contingencies

Stockholders' Equity:
         Common stock, $.01 par value - 40,000,000 shares authorized;
               10,551,839 and 10,514,837 shares issued and outstanding at
               June 30, 2005 and December 31, 2004, respectively                                 106                   105
         Preferred stock, $.01 par value - 5,000,000 shares authorized; no
               shares issued and outstanding                                                       -                     -
         Paid in capital in excess of par value                                               57,936                57,570
         Accumulated other comprehensive income                                                  594                   486
         Accumulated deficit                                                                  (5,878)               (8,299)
                                                                                           ---------             ---------
              Total stockholders' equity                                                      52,758                49,862
                                                                                           ---------             ---------
Total Liabilities and Stockholders' Equity                                                 $ 228,862             $ 228,667
                                                                                           =========             =========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                    FOR THE THREE MONTHS ENDED          FOR THE SIX MONTHS ENDED
                                                  ------------------------------      ------------------------------
                                                    JUNE 30,          JUNE 30,          JUNE 30,          JUNE 30,
                                                      2005              2004              2005              2004
                                                  ------------      ------------      ------------      ------------
<S>                                               <C>               <C>               <C>               <C>
Net sales                                         $     89,055      $     69,742      $    175,839      $    138,276
     Cost of goods sold                                 78,052            59,575           152,162           119,049
                                                  ------------      ------------      ------------      ------------
Gross profit                                            11,003            10,167            23,677            19,227
     Operating expenses                                  5,802             4,447            12,737             9,215
                                                  ------------      ------------      ------------      ------------
Income from operations                                   5,201             5,720            10,940            10,012
     Interest expense                                    2,043             1,158             4,131             2,358
                                                  ------------      ------------      ------------      ------------
Income before income taxes                               3,158             4,562             6,809             7,654
     Income tax provision                                1,215             1,802             2,621             3,023
                                                  ------------      ------------      ------------      ------------
Income from continuing operations                        1,943             2,760             4,188             4,631
Loss from discontinued operations, net of tax             (174)             (310)             (397)             (699)
                                                  ------------      ------------      ------------      ------------
Net income                                        $      1,769      $      2,450      $      3,791      $      3,932
                                                  ============      ============      ============      ============
Income (loss) per share:
  Basic:
     Continuing operations                        $       0.19      $       0.29      $       0.40      $       0.48
     Discontinued operations                             (0.02)            (0.04)            (0.04)            (0.07)
                                                  ------------      ------------      ------------      ------------
         Net income                               $       0.17      $       0.25      $       0.36      $       0.41
                                                  ============      ============      ============      ============
  Fully diluted:
     Continuing operations                        $       0.18      $       0.28      $       0.38      $       0.46
     Discontinued operations                             (0.02)            (0.04)            (0.03)            (0.07)
                                                  ------------      ------------      ------------      ------------
         Net income                               $       0.16      $       0.24      $       0.35      $       0.39
                                                  ============      ============      ============      ============

Cash dividend declared per share:                 $      0.065      $       0.05      $       0.13      $       0.10
                                                  ============      ============      ============      ============
Weighted average shares outstanding:
     Basic                                          10,546,197         9,681,504        10,535,982         9,681,504
                                                  ============      ============      ============      ============
     Diluted                                        10,935,721        10,014,800        10,930,040         9,993,806
                                                  ============      ============      ============      ============
</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,
                                                                                      ---------------------------------
                                                                                           2005               2004
                                                                                        ---------         ----------
<S>                                                                                   <C>                 <C>
Cash flows from operating activities:
    Net income                                                                          $  3,791           $  3,932
    Adjustments to reconcile net income to net cash from operating activities:
         Depreciation and amortization                                                     4,032              2,819
         Amortization and write-off of deferred finance costs                                329                172
         Provision for doubtful accounts                                                     (67)                98
         Deferred income taxes                                                               630              2,292
         Changes in operating assets and liabilities:
         Accounts receivable                                                                 962             (1,316)
         Inventories                                                                      (4,106)              (439)
         Other assets                                                                        358             (1,140)
         Accounts payable and accrued liabilities                                          1,144              2,508
                                                                                        --------           --------
                   Net cash from continuing operating activities                           7,073              8,926
                   Net cash used by discontinued operating activities                        (43)            (1,779)
                                                                                        --------           --------
                   Net cash from operating activities                                      7,030              7,147
                                                                                        --------           --------
Cash flows used by investing activities:
         Acquisitions, net of cash acquired                                                    -                704
         Additions to property, plant and equipment                                       (2,501)            (3,653)
                                                                                        --------           --------
                   Net cash used by continuing investing activities                       (2,501)            (2,949)
                   Net cash from discontinued investing activities                             -                411
                                                                                        --------           --------
                   Net cash used by investing activities                                  (2,501)            (2,538)
                                                                                        --------           --------
Cash flows used by financing activities:
         Principal payments for loan obligations                                          (2,921)            (2,500)
         Proceeds under revolving line of credit                                          36,500             27,800
         Repayments under revolving line of credit                                       (35,900)           (30,100)
         Payment of dividends to stockholders                                             (1,370)              (968)
         Other, net                                                                       (1,922)             1,968
                                                                                        --------           --------
                   Net cash used by financing activities                                  (5,613)            (3,800)
                                                                                        --------           --------
Net increase (decrease) in cash and cash equivalents                                      (1,084)               809
Cash and cash equivalents at beginning of period                                           1,175                453
                                                                                        --------           --------
Cash and cash equivalents at end of period                                              $     91           $  1,262
                                                                                        ========           ========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       4
<PAGE>

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

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

 Net Income                                                                    3,791                      3,791       $ 3,791
 Issuance of common stock                         37,002      1      366                                    367
 Other comprehensive income (loss):
  Net change in fair value of derivative
   instruments, net of  income taxes of $68                                                 108             108           108
                                                                                                                      -------
    Comprehensive Income                                                                                              $ 3,899
                                                                                                                      =======
 Cash Dividend ($.13 per share)                                               (1,370)                    (1,370)
                                              ----------  ----- --------   ---------     ------        --------
Balance at June 30, 2005                      10,551,839  $ 106 $ 57,936   $  (5,878)    $  594        $ 52,758
                                              ==========  ===== ========   =========     ======        ========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       5
<PAGE>

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

NOTE 1 -- BASIS OF PRESENTATION

GENERAL

      In the opinion of management, the information in the accompanying
unaudited condensed consolidated financial statements reflects all adjustments
necessary for a fair statement of the results of operations, cash flows and
stockholders' equity for the three and six months ended June 30, 2005 and June
30, 2004 and the financial positions at June 30, 2005. The interim results are
not necessarily indicative of results for a full year and do not contain
information included in the Company's annual consolidated financial statements
and notes for the year ended December 31, 2004. The consolidated balance sheet
as of December 31, 2004 was derived from audited financial statements, but does
not include all disclosures required by accounting principles generally accepted
in the United States of America. These interim financial statements should be
read in conjunction with our audited annual consolidated financial statements
and notes thereto included with the Company's filings with the Securities and
Exchange Commission.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

EARNINGS PER SHARE

      Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during each
period. Diluted earnings per share reflects the potential dilution that could
occur if common stock options are exercised and is computed by dividing net
income by the weighted average number of common shares outstanding, including
common stock equivalent shares issuable upon exercise of outstanding stock
options, to the extent that they would have a dilutive effect on the per share
amounts. Dilution of the Company's weighted average shares outstanding results
from common stock issuable upon exercise of outstanding stock options (389,524
and 333,296 for the three months ended June 30, 2005 and 2004, respectively and
394,058 and 312,302 for the six months ended June 30, 2005 and 2004,
respectively).

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

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

<TABLE>
<CAPTION>
                                                                     FOR THE THREE MONTHS        FOR THE SIX MONTHS
                                                                         ENDED JUNE 30,             ENDED JUNE 30,
                                                                  -------------------------   -------------------------
                                                                     2005           2004         2005           2004
                                                                  -----------   -----------   -----------   -----------
<S>                                                               <C>           <C>           <C>           <C>
Income from continuing operations.............................    $     1,943   $     2,760   $     4,188   $     4,631
                                                                  ===========   ===========   ===========   ===========
Weighted average shares used to determine basic earnings
   per share from continuing operations.......................     10,546,197     9,681,504    10,535,982     9,681,504
Common stock equivalents......................................        389,524       333,296       394,058       312,302
                                                                  -----------   -----------   -----------   -----------
Weighted average shares used to determine diluted earnings
  per share from continuing operations........................     10,935,721    10,014,800    10,930,040     9,993,806
                                                                  ===========   ===========   ===========   ===========
Basic earnings per share from continuing operations...........    $      0.18   $      0.29   $      0.40   $      0.48
                                                                  ===========   ===========   ===========   ===========
Diluted earnings per share from continuing operations.........    $      0.18   $      0.28   $      0.38   $      0.46
                                                                  ===========   ===========   ===========   ===========
</TABLE>

                                       6
<PAGE>

DERIVATIVES AND OTHER COMPREHENSIVE INCOME (LOSS)

      The Company maintains interest rate derivative instruments (typically
swaps or collars) that are designated as cash flow hedges to manage the market
risk from changes in interest rates on a portion of its variable rate term
loans. The Company recognizes all derivative instruments which are cash flow
hedges as assets or liabilities at fair value, with the related gain or loss
reflected within stockholders' equity through accumulated other comprehensive
income. Such instruments are recorded at fair value, and at June 30, 2005 and
December 31, 2004, the fair value approximates an asset of $590 and $471,
respectively, which is included in other current assets within the accompanying
condensed consolidated balance sheet. Changes in fair value, based upon the
amount at which the instrument could be settled with a third party, are recorded
in other comprehensive income only to the extent of effectiveness. Any
ineffectiveness on the instrument would be recognized in the consolidated
statement of operations. The differentials to be received or paid under the
instrument are recognized in income over the life of the contract as adjustments
to interest expense.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

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

                                       7
<PAGE>

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and variable rate debt
approximates their estimated fair value based either on the short-term maturity
of these instruments or on market prices for the same or similar type of
financial instruments. The fair market value and carrying value of the Company's
interest rate swaps were a net asset of $590 and $471 at June 30, 2005 and
December 31, 2004, respectively. At June 30, 2005, the fair value of the
remaining amounts payable under a non-compete agreement (nine quarterly payments
totaling $3,000) was estimated to be $2,824 determined by discounting the
payment using a 5% discount rate. Also at June 30, 2005, the fair value of a
$7,000 note payable on September 14, 2006 and bearing a 5% annual interest rate
payable quarterly approximates recorded value.

PAPERCON ACQUISITION

      On September 14, 2004, the Company completed the acquisition of 100% of
the issued and outstanding shares of capital stock of 3141276 Canada Inc. from
the sole shareholder (the "Seller") pursuant to an acquisition agreement dated
August 6, 2004. 3141276 Canada Inc. was a Canadian corporation and the ultimate
parent holding company of Papercon, Inc. (Papercon, Inc. and 3141276 Canada Inc.
are collectively referred to as "Papercon"), a Georgia corporation, which
conducts all of Papercon's business operations.

      The purchase price allocation is subject to change based on the receipt of
additional information with respect to the fair value of certain assets and
obligations and the resolution of the net asset purchase price adjustment
provision contained in the acquisition agreement. The final valuation of assets
and liabilities and the associated purchase price allocation and the purchase
price adjustment process is ongoing and is expected to be resolved this year.

PRODUCT CLAIM COST

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

ESTIMATES

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

                                       8
<PAGE>

NOTE 3 -- DISCONTINUED OPERATIONS

      During the fourth quarter of 2003, the Company shut down its paper mill,
located in Detroit, Michigan, and exited the Specialty Paper operation. The
Specialty Paper operation is classified as a discontinued operation.

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

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED        SIX MONTHS ENDED
                                                JUNE 30,                  JUNE 30,
                                           ------------------        ----------------
                                           2005         2004         2005         2004
                                          -------      -------      -------      -------
<S>                                      <C>          <C>          <C>          <C>
Sales
  External..........................     $     --     $     --     $     --     $     --
  Intercompany......................           --           --           --           --
  Discounts & Returns...............           --           --           --           --
                                         --------     --------     --------     --------
  Net Sales.........................     $     --     $     --     $     --     $     --
                                         ========     ========     ========     ========
(Loss) income from operations.......     $   (283)    $   (513)    $   (645)    $ (1,156)
Interest expense....................           --           --           --           --
                                          -------      -------      -------      -------
Loss before income taxes............         (283)        (513)        (645)      (1,156)
Income tax benefit..................          109          203          248          457
                                         --------     --------     --------     --------
Net loss............................     $   (174)    $   (310)    $   (397)    $   (699)
                                         ========     ========     ========     ========
</TABLE>

      The net loss for the three and six months ended June 30, 2005 represents
approximately $283 and $645, respectively, of pretax administrative costs
associated with the ongoing program to maintain and dispose of the Detroit
property. The Company is working towards a resolution of the Detroit property
this year.

      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,
                                                              2005         2004
                                                             -------      -------
<S>                                                          <C>        <C>
Accounts receivable trade (net of allowance for doubtful
  accounts of $22 and $45, respectively)..................   $     5      $     4
Other current assets......................................        39          138
                                                             -------      -------
Total assets of discontinued operations...................        44          142
                                                             -------      -------
Accounts payable..........................................        16          156
Accrued liabilities.......................................     1,387        1,388
                                                             -------      -------
Total liabilities of discontinued operations..............     1,403        1,544
                                                             -------      -------
Net liabilities of discontinued operations................   $(1,359)     $(1,402)
                                                             =======      =======
</TABLE>

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

<TABLE>
<CAPTION>
                                              SEVERANCE          PENSION
                                             AND BENEFIT         CHARGE            TOTAL
                                         -----------------       ------            -----
<S>                                      <C>                     <C>               <C>
Balance at December 31, 2003.......            $   951           $   816           $ 1,767
  Charges to expense...............                228               398               626
  Cash payments....................             (1,064)               --            (1,064)
                                               -------           -------           -------
Balance at December 31, 2004.......            $   115           $ 1,214           $ 1,329
                                               -------           -------           -------
  Charges to expense...............                210                --               210
  Cash payments....................               (230)              (30)             (260)
                                               -------           -------           -------
Balance at June 30, 2005...........            $    95           $ 1,184           $ 1,279
                                               =======           =======           =======
</TABLE>

                                       9
<PAGE>

NOTE 4 -- GOODWILL AND INTANGIBLE ASSETS

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

<TABLE>
<CAPTION>
                                                       Weighted Average   Carrying    Accumulated
                                                         Life (Years)      Amount     Amortization      Net
                                                         ------------      ------     ------------      ---
<S>                                                    <C>                <C>         <C>            <C>
Intangible assets subject to amortization
  Customer contracts and relationships...............        19.4         $  10,880      $     796   $  10,084
  Covenants not to compete...........................         9.6             4,014            538       3,476
                                                                          ---------      ---------   ---------
                                                                          $  14,894      $   1,334   $  13,560
Intangible assets not subject to amortization
  Trademarks and trade names.........................                     $   4,800      $      --   $   4,800
  Goodwill...........................................                        81,263             --      81,263
                                                                          ---------      ---------   ---------
                                                                          $  86,063      $      --   $  86,063
                                                                          ---------      ---------   --------
Total intangible assets and goodwill                                      $ 100,957      $   1,334   $  99,623
                                                                          =========      =========   =========
</TABLE>

      Changes in the carrying value of goodwill during 2005 are as follows:

<TABLE>
<S>                                                         <C>
Balance at December 31, 2004:                               $    81,263
  Adjustments - purchase accounting.....................             --
  Additions.............................................             --
                                                            -----------
Balance at June 30, 2005................................    $    81,263
                                                            ===========
</TABLE>

      Amortization expense for intangible assets subject to amortization was
$227 and $21 for the three months and $477 and $103 for the six months ended
June 30, 2005 and 2004, respectively. Amortization expense for the remaining
year of 2005 and years 2006, 2007, 2008, 2009 and 2010 is estimated to be $452,
$906, $906, $906, $904 and $904, respectively.

NOTE 5 -- STOCK BASED COMPENSATION

      At June 30, 2005, the Company has a stock-based compensation plan. The
Company accounts for this plan under the recognition and measurement provisions
of Accounting Principles Board Opinion ("APB") No. 25 "Accounting for Stock
Issued to Employees," and related interpretations. Stock-based employee
compensation cost is reflected in earnings to the extent that option grants
under those plans had an exercise price below the market value of the underlying
common stock on the date of grant. SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") issued subsequent to APB No. 25 and amended by
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure," ("SFAS No. 148") defines a fair value based method of accounting
for employees' stock options but allows companies to continue to measure
compensation cost for employee stock options using the intrinsic value based
method described in APB No. 25. The Company's stock-based compensation plans are
accounted for under the intrinsic value based method. No compensation expense is
reflected in net income in the three and six months ended June 30, 2005 and June
30, 2004, as all options granted under the plan had an exercise price that was
equal to the market price on the date of grant.

                                       10
<PAGE>

      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,
                                                            ---------------------------   ------------------------
                                                                2005           2004          2005          2004
                                                            -----------    -----------    -----------   ----------
<S>                                                         <C>            <C>            <C>           <C>
Net Income...........................................       $     1,769    $     2,450    $     3,791   $    3,932
Deduct:  Stock-based employee compensation expense
determined under fair value based method.............               (98)           (69)          (166)        (139)
                                                            -----------    -----------    -----------   ----------
Pro forma net income.................................       $     1,671    $     2,381    $     3,625   $    3,793
                                                            ===========    ===========    ===========   ==========
 Income per share:
     Basic - as reported.............................       $      0.17    $      0.25    $      0.36   $     0.41
                                                            ===========    ===========    ===========   ==========
     Basic - proforma................................       $      0.16    $      0.25    $      0.34   $     0.39
                                                            ===========    ===========    ===========   ==========
     Diluted - as reported...........................       $      0.16    $      0.24    $      0.35   $     0.39
                                                            ===========    ===========    ===========   ==========
     Diluted - proforma..............................       $     0. 15    $      0.24    $      0.33   $     0.38
                                                            ===========    ===========    ===========   ==========
</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,
                                                      2005       2004
                                                      ----       ----
<S>                                                 <C>         <C>
Expected option life (years)                             5          5
Work-Risk-free weighted average interest rate         3.60%      2.92%
Stock price volatility                                25.1%      27.5%
Dividend yield                                         1.7%       1.9%
</TABLE>

NOTE 6 -- INVENTORIES

      Inventories are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method. Such cost includes raw materials, direct
labor and manufacturing overhead. Inventories at June 30, 2005 and December 31,
2004 consist of the following:

<TABLE>
<CAPTION>
                                                     June 30,     December 31,
                                                       2005           2004
                                                       ----           ----
<S>                                                  <C>          <C>
Raw materials                                        $ 21,908      $ 18,609
Work-Work-in-process                                    4,212         3,580
Finished goods                                         14,784        14,608
                                                     --------      --------
                                                       40,904        36,797
Obsolescence reserve                                     (292)         (291)
                                                     --------      --------
Net                                                  $ 40,612      $ 36,506
                                                     ========      ========
</TABLE>

                                       11
<PAGE>

NOTE 7 -- LONG-TERM DEBT

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

<TABLE>
<CAPTION>

                                          June 30,     December 31,
                                            2005          2004
                                            ----          ----
<S>                                      <C>           <C>
Senior Credit Facility:
    Term A Loan                          $  22,250      $  24,750
    Term B Loan                             83,408         83,829
    Revolving credit loan                    1,500            900
Seller note payable                          7,000          7,000
                                         ---------      ---------
    Subtotal                               114,158        116,479
Current maturities of long term debt        (6,593)        (6,093)
                                         ---------      ---------
Long-term debt                           $ 107,565      $ 110,386
                                         =========      =========
</TABLE>

SENIOR CREDIT FACILITY

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

      As of June 30, 2005, the Term A Loan had a balance of $22,250 and will
mature in 2008. The required aggregate annual payments, payable in quarterly
installments, total $5,250 $6,250, $7,250 and $6,000 in years 2005 through 2008,
respectively, of which $2,500 was paid during the six months ended June 30,
2005. As of June 30, 2005, the Term B Loan had a balance of $83,408 and will
mature in 2009. The aggregate annual payments, payable in equal quarterly
installments, total $843 in years 2005 through 2008 and $80,459 in 2009 of which
$421 was paid during the six months ended June 30, 2005. The revolver had a
balance of $1,500 as of June 30, 2005. The revolving credit facility is due in
2008. The revolving credit facility and Term A Loan will terminate on September
29, 2008 and the Term B Loan will terminate on September 29, 2009.

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

      At June 30, 2005, the Term A Loan and revolving loans were bearing
interest at rates of up to 1.25% plus the base rate, in the case of Base Rate
Loans, and up to 2.25% plus LIBOR, in the case of Eurodollar Loans. The Term B
Loan was bearing interest at rates of 1.25% plus the base rate, in the case of
Base Rate Loans, and 2.25% plus LIBOR, in the case of Eurodollar Loans. At June
30, 2005, the interest rates on borrowings under the Term A Loan and the Term B
Loan were 2.00% plus LIBOR (3.10%) and 2.25% plus LIBOR (3.10%), respectively,
compared with 3.0% plus LIBOR (1.59%) and 3.5% plus LIBOR (1.59%), respectively,
at June 30, 2004.

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

                                       12
<PAGE>

these caps for a cap premium of $376 of which $56 was amortized during the six
months ended June 30, 2005. These caps limit our LIBOR rate for $30,000 of our
Senior Credit Facility indebtedness at a maximum rate of 4.00%.

      Under the Senior Credit Facility, as amended, the Company is required to
comply on a quarterly basis with the following four financial covenants:

      -     under the leverage ratio covenant, as of the last day of each fiscal
            quarter, the ratio of total funded debt of the Company and its
            consolidated subsidiaries to consolidated EBITDA of the Company and
            its consolidated subsidiaries for the 12-month period then ended
            must not exceed specified levels, decreasing from 4.5 to 1 at June
            30, 2005 to 4 to 1;

      -     under the senior secured leverage ratio covenant, as of the last day
            of each fiscal quarter, the ratio of total secured funded debt of
            the Company and its consolidated subsidiaries to consolidated EBITDA
            of the Company and its consolidated subsidiaries for the 12-month
            period then ended must not exceed specified levels, decreasing from
            3.75 to 1 at June 30, 2005 to 3 to 1;

      -     under the fixed charge coverage ratio covenant, as of the last day
            of each fiscal quarter, for the 12-month period then ended, the
            ratio of consolidated EBITDA less capital expenditures and cash tax
            payments of the Company and its consolidated subsidiaries to cash
            interest expense and scheduled funded debt payments (excluding the
            $7,000 seller note issued in connection with the Papercon
            acquisition) of the Company and its consolidated subsidiaries must
            be equal to or greater than certain specified levels, increasing
            from 1.1 to 1 at June 30, 2005 to 1.2 to 1; and

      -     under the net worth covenant, Packaging Dynamics' consolidated net
            worth as of the last day of each fiscal quarter must be equal to or
            greater than 80% of the net worth as of September 30, 2003 increased
            on a cumulative basis by (1) as of the last day of each fiscal
            quarter, 50% of the consolidated net income of Packaging Dynamics
            (to the extent positive) for the fiscal quarter then ended, (2) 75%
            of the net cash proceeds from any equity issuance by Packaging
            Dynamics or any subsidiary of Packaging Dynamics, and (3) 75% of the
            amount added to the equity of Packaging Dynamics in accordance with
            GAAP in connection with the Papercon acquisition.

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

      The Senior Credit Facility also contains various negative covenants that,
among other things, require Packaging Dynamics and its subsidiaries to limit
future borrowings and payments to related parties and restricts Packaging
Dynamics' ability and the ability of its subsidiaries to merge or consolidate.
In addition, the Senior Credit Facility prohibits changes in the nature of
business conducted by the Company and its subsidiaries. The failure to comply
with the covenants would result in a default under the Senior Credit Facility
and permit the lenders under the Senior Credit Facility to accelerate the
maturity of the indebtedness governed by the Senior Credit Facility.

      The Senior Credit Facility includes terms that limit changes in our
ownership structure. Modifications to the ownership structure outside the limits
prescribed by such agreements could place us in default under these debt
instruments. The Senior Credit Facility requires Packaging Dynamics Operating
Company ("PDOC") to maintain specified financial ratios and levels of tangible
net worth. PDOC was in compliance with those covenants as of June 30, 2005, the
latest measurement date. The occurrence of any default of these covenants could
result in acceleration of our obligations under the Senior Credit Facility
($107,158 as of June 30, 2005) and foreclosure on the collateral securing those
obligations.

                                       13
<PAGE>

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

SELLER NOTE PAYABLE

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

NOTE 8 - OPERATING SEGMENT INFORMATION

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

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

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED JUNE 30,  SIX MONTHS ENDED JUNE 30,
                                                   ---------------------------  -------------------------
                                                        2005         2004          2005           2004
                                                    ----------   ------------   -----------   -----------
<S>                                                 <C>          <C>            <C>           <C>
Net Sales:
  Food Packaging............................        $  70,599    $    45,851    $   138,008   $    90,507
  Specialty Laminations.....................           19,952         24,597         40,095        49,187
  Elimination of Specialty Laminations
     intercompany sales                                (1,496)          (706)        (2,264)       (1,418)
                                                    ---------    -----------    -----------   -----------
       Total................................        $  89,055    $    69,742    $   175,839   $   138,276
                                                    =========    ===========    ===========   ===========
Segment Operating Income:
  Food Packaging............................        $   4,999    $     3,310    $     9,171   $     5,437
  Specialty Laminations.....................              202          2,410          1,769         4,575
                                                    ---------    -----------    -----------   -----------
Income From Operations......................            5,201          5,720         10,940        10,012
Interest expense............................           (2,043)        (1,158)        (4,131)       (2,358)
                                                    ---------    -----------    -----------   -----------
Income before income taxes..................        $   3,158    $     4,562    $     6,809   $     7,654
                                                    =========    ===========    ===========   ===========
Depreciation and Amortization:
  Food Packaging............................        $   1,584    $       899    $     3,204   $     1,922
  Specialty Laminations.....................              405            436            828           897
                                                    ---------    -----------    -----------   -----------
       Total................................        $   1,989    $     1,335    $     4,032   $     2,819
                                                    =========    ===========    ===========   ===========
</TABLE>

                                       14
<PAGE>

NOTE 9 -- 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,
                                                       --------------------     -------------------
                                                        2005         2004        2005          2004
                                                       -------      -------     -------     -------
<S>                                                    <C>          <C>         <C>         <C>
Net income                                             $ 1,769      $ 2,450     $ 3,791     $ 3,932
Net change in fair value of derivative instruments        (251)         148         108         (26)
                                                       -------      -------     -------     -------
Comprehensive income                                   $ 1,518      $ 2,598     $ 3,899     $ 3,906
                                                       =======      =======     =======     =======
</TABLE>

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

NOTE 10 -- COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

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

LEASE COMMITMENTS

      The Company occupies certain facilities under lease arrangements and
leases certain machinery, automobiles, and equipment. Future minimum rental
commitments, including capital lease obligations, with noncancelable terms in
excess of one year are as follows:

<TABLE>
<S>                                                   <C>
Year ended December 31:
2005 (third through fourth quarter).............         1,434
2006............................................         2,358
2007............................................         1,790
2008............................................         1,522
2009............................................         1,222
Thereafter......................................         3,733
                                                      --------
Total...........................................      $ 12,059
                                                      ========
</TABLE>

      Accumulated amortization on capital leases as of June 30, 2005 is $131.

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

                                       15
<PAGE>

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 2005, we will have additional costs related to our ongoing program to
maintain and dispose of the Detroit property, although the total amount of such
costs are not currently estimable. There can be no assurance, however, that
items will not require additional expenditures beyond those that are anticipated
and that additional expenditures, if any, would not have a material adverse
effect on our operating results or financial condition.

      On June 10, 2005, the Company's subsidiary, Papercon, Inc. ("Papercon"),
received a notice and information request from the United States Environmental
Protection Agency ("EPA"). The notice indicated that Papercon has been
identified as a potentially-responsible-party under Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA") with respect to the
Constitution Road Drum Superfund Site located in Atlanta, Georgia by virtue of
having allegedly sent drums, totes, or other containers to the site containing
substances classified as hazardous under CERCLA. The Company is currently
assessing its potential liability, if any, with respect to the site and is not
currently able to estimate its potential liability. Factors which are likely to
impact the Company's potential liability include, but may not be limited to, the
amount and content of any hazardous substances that Papercon and other parties
may have sent to the site, the ultimate cost to remediate the site and the
contributions of other parties towards the cost of remediation. In addition, the
Company is evaluating its rights under indemnification provisions in agreements
executed in connection with the acquisition of Papercon.

NOTE 11 -- RELATED PARTY TRANSACTIONS

      Pursuant to an acquisition agreement (the "Acquisition Agreement") dated
August 6, 2004, Packaging Dynamics acquired 100% of the issued and outstanding
shares of capital stock of 3141276 Canada Inc., the parent holding company of
Papercon, Inc. ("Papercon"), from its sole shareholder (the "Seller"). The
acquisition closed on September 14, 2004. Prior to the Papercon acquisition, the
Seller was not affiliated with the Company. Effective with the closing, the
Seller became an officer of the Company. In connection with the Papercon
acquisition, the Company entered into the Acquisition Agreement and several
related agreements with the Seller. Certain of these agreements obligate the
Company to make payments to, or take other action for the benefit, of the Seller
as discussed below.

      Pursuant to the Acquisition Agreement, Packaging Dynamics acquired
Papercon for aggregate consideration of approximately $66,421, net of $22,650 of
cash acquired. The purchase price is subject to adjustment to the extent that
the net assets of Papercon (as defined in the Acquisition Agreement) are less
than $33,500.

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

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

      The Company entered into a Non-Competition Agreement with the Seller which
provides, among other things, that for a period of ten years following the
closing of the Acquisition, the Seller may not own, operate, manage, control,
engage in, invest in or participate in any manner in, act as a consultant or
advisor to, or render services for

                                       16
<PAGE>

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

      The Company and the Seller entered into a registration rights agreement,
dated September 14, 2004 (the "Papercon Seller Registration Rights Agreement"),
between the Company, the Seller and Packaging Investors, L.P. ("Packaging
Investors"). The Company also amended its existing registration rights agreement
(the "Initial Registration Rights Agreement") with, among others, Packaging
Investors. Pursuant to the Papercon Seller Registration Rights Agreement, the
Seller has the right, under certain circumstances, to require the Company to
register his shares of Seller Common Stock for sale in the public markets. The
Seller also has piggyback registration rights to include his shares in any
registration statement which the Company files on its own behalf (other than for
employee benefit plans and business acquisitions or corporate restructurings) or
on behalf of other stockholders. The Company amended the Initial Registration
Rights Agreement to provide for the piggyback registration rights granted to the
Seller under the Papercon Seller Registration Rights Agreement. In addition,
under the Papercon Seller Registration Rights Agreement, until the date on which
the Seller ceases to own at least 5% of the outstanding shares of Seller Common
Stock, at each annual meeting of stockholders, the Company has agreed to
nominate or cause to be nominated the Seller for election to the board of
directors of the Company. The Seller and Packaging Investors have agreed that
until the date (a) on which Packaging Investors ceases to own at least 20% of
the outstanding shares of Seller Common Stock, the Seller will vote any shares
of Seller Common Stock then owned by him to nominate and elect the individual
designated by Packaging Investors for election to the board of directors of the
Company and (b) on which the Seller ceases to own at least 5% of the outstanding
shares of Seller Common Stock, Packaging Investors will vote any shares of
Seller Common Stock then owned by it to nominate and elect the Seller for
election to the board of directors of the Company.

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

                                       17
<PAGE>

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

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

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

SUMMARY AND OUTLOOK

      During the balance of 2005, the Company will be focused on, among other
things, integrating the Papercon acquisition in the Food Packaging segment and
addressing the ongoing sales weakness in the Specialty Laminations segment. The
Company will incur additional management transition costs which are expected to
be as much as $1,000 related to putting a single Food Packaging management team
in place. Other priorities in each of the Company's operating segments include
expanding sales of new and existing products, improving manufacturing
productivity and reducing overall product costs.

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

FINANCIAL PERFORMANCE

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

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

Food Packaging

<TABLE>
<CAPTION>
                                        FOR THE THREE  MONTHS ENDED          FOR THE SIX MONTHS ENDED
                                        ---------------------------          ------------------------
                                           JUNE 30,      JUNE 30,             JUNE 30,      JUNE 30,
                                             2005          2004                 2005         2004
                                           --------      --------             --------      --------
<S>                                     <C>              <C>                  <C>           <C>
Net Sales............................      $ 70,599      $ 45,851             $138,008      $ 90,507
Segment Operating Income.............      $  4,999      $  3,310             $  9,171      $  5,437
Segment Operating Income Margin......           7.1%          7.2%                 6.6%          6.0%

Depreciation and Amortization........      $  1,584      $    899             $  3,204      $  1,922
</TABLE>

                                       18
<PAGE>

      Net sales increased $24,748, or 54.0%, during the second quarter of 2005
compared to the same period in 2004 primarily due to the September 14, 2004
acquisition of Papercon as well as increased sales in key market segments.

      Segment Operating Income increased $1,689, or 51.0%, during the second
quarter of 2005 compared to the same period in 2004 and Segment Operating Income
margin was essentially flat between the second quarter of 2005 and the same
period in 2004. The increase in Segment Operating Income was primarily due to
incremental earnings from Papercon and reduced incentive compensation expense,
partially offset by increased raw material costs.

      Net sales increased $47,501 or 52.5% during the six months ended June 30,
2005 compared to the same period in 2004, primarily due to the Papercon
acquisition as well as increased sales in key market segments.

      Segment Operating Income for the six months ended June 30, 2005 increased
$3,734, or 68.7%, compared to the same period in 2004 and Segment Operating
Income margin increased to 6.6% from 6.0% during the six months ended June 30,
2005 compared to the same period in 2004. The increase in Segment Operating
Income was primarily due to incremental earnings from Papercon, cost and
productivity initiatives and reduced incentive compensation expense, partially
offset by increased raw material costs. In addition, the first quarter of 2005
was negatively impacted by approximately $0.3 million of management severance
costs.

Specialty Laminations

<TABLE>
<CAPTION>
                                     FOR THE THREE  MONTHS ENDED      FOR THE SIX MONTHS ENDED
                                     ---------------------------      ------------------------
                                       JUNE 30,        JUNE 30,        JUNE 30,        JUNE 30,
                                        2005            2004            2005            2004
                                       -------         -------         -------         -------
<S>                                  <C>               <C>             <C>             <C>
Net Sales.........................     $19,952         $24,597         $40,095         $49,187
Segment Operating Income..........     $   202         $ 2,410         $ 1,769         $ 4,575
Segment Operating Income Margin...         1.0%            9.8%            4.4%            9.3%

Depreciation and Amortization.....     $   405         $   436         $   828         $   897
</TABLE>

      Net sales decreased $4,645, or 18.9%, during the second quarter of 2005
compared to the same period in 2004. The decrease was primarily due to continued
volume weakness for products sold into the building products market and the
$1,100 charge for a product quality claim discussed below, partially offset by
increased sales of other specialty lamination products.

      Segment Operating Income decreased $2,208, or 91.6%, during the second
quarter of 2005 compared to the same period in 2004 and Segment Operating Income
Margin decreased to 1.0% from 9.8% in the second quarter of 2005 compared to the
same period in 2004. Approximately 50% of the decline in Segment Operating
Income resulted from a $1,100 charge related to a customer product claim
discussed below. The remainder of the decline in Segment Operating Income was
primarily due to the impact of decreased sales volume.

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

                                       19
<PAGE>

alternative uses. The charge was recorded as sales returns and allowances and is
reflected in "Net sales" for the Company's Specialty Laminations segment in the
Company's Condensed Consolidated Statement of Operations.

      Net sales decreased $9,092 or 18.5%, during the six months ended June 30,
2005 compared to the same period in 2004. The decrease was primarily due to
continued volume weakness for products sold into the building products market
and the $1,100 charge for a product quality claim.

      Segment Operating Income for the six months ended June 30, 2005 decreased
$2,806 or 61.3% compared to the same period in 2004 and Segment Operating Income
margin decreased to 4.4% from 9.3% during the six months ended June 30, 2005
compared to the same period in 2004. The decline in Segment Operating Income was
primarily due to the impact of decreased sales volume and the $1,100 customer
product claim recorded in the second quarter of 2005.

INTEREST EXPENSE

      Interest expense increased $885 and $1,773 during the quarter and six
months ended June 30, 2005, respectively. The increase in interest expense was
primarily due to increased average outstanding indebtedness of approximately
$50,000 during the quarter and six months ended June 30, 2005 compared to the
same periods in 2004 and a higher average borrowing rate. The average interest
rate on borrowings in the second quarter of 2005 was approximately 5.54%
compared to 4.54% in the same period in 2004. The average interest rate on
borrowings during the six months ended June 30, 2005 was approximately 5.61%
compared to 4.54% in the same period in 2004.

INCOME TAXES

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

INCOME FROM CONTINUING OPERATIONS

      Income from continuing operations was $1,943 and $2,760 for the quarters
ended June 30, 2005 and 2004, respectively. The decrease in income from
continuing operations of $817 or 29.6% during the quarter ended June 30, 2005
compared to 2004 was primarily due to the increased interest expense associated
with the Papercon acquisition and reduced Segment Operating Income from
Specialty Laminations, partially offset by increased Segment Operating Income
from Food Packaging which includes incremental earnings from the Papercon
acquisition.

      For the six month periods ended June 30, 2005 and 2004, income from
continuing operations was $4,188 and $4,631, respectively. The decrease in
income from continuing operations of $443 or 9.6% during the six months ended
June 30, 2005 was primarily due to increased interest expense associated with
the Papercon acquisition and decreased Segment Operating Income from Specialty
Laminations, partially offset by increased Segment Operating Income from Food
Packaging which includes incremental earnings from the Papercon acquisition.

DISCONTINUED OPERATIONS

      Loss from discontinued operations during the second quarter of 2005 was
$174 compared to a loss of $310 in the same period in 2004. For the six months
ended June 30, 2005, loss from discontinued operations was $397 compared to a
loss of $699 in the same period in 2004. The net losses for 2005 represent the
administrative expenses associated with the ongoing program to maintain and
dispose of the Detroit property. During the balance of 2005, we will have
additional costs related to our ongoing program to maintain and dispose of the
Detroit property, although the total amount of such costs are not currently
estimable. There can be no assurance, however, that items will not require
additional expenditures beyond those that are anticipated and that additional
expenditures, if any, would not have a material adverse effect on our operating
results or financial condition.

                                       20
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      At June 30, 2005, we had cash and cash equivalents of $91, and $45,321 was
available under the revolving portion of the Senior Credit Facility, after
taking into account $3,179 in letter of credits outstanding. Our working capital
at June 30, 2005 was $30,129 compared to $29,965 at December 31, 2004.

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

      The Company generated $7,030 of cash from operating activities in the six
months ended June 30, 2005 compared to $7,147 for the same period in 2004.
Compared to the prior year, a decline in net income, an increase in cash used
for operating assets and liabilities and a decrease in non-cash tax expense were
nearly offset by increased non-cash depreciation and amortization expenses and
reduced cash used by discontinued operations. Cash used by discontinued
operations decreased significantly during the six months ended June 30, 2005
compared to the same period in 2004 as a result of a reduction in the costs to
maintain and dispose of the Detroit property during 2005.

      Cash used by investing activities was $2,501 for the six months ended June
30, 2005 compared to $2,583 for the same period in 2004. This change was
primarily due to decreased capital expenditures in 2005, partially offset by a
cash inflow of $704 during the second quarter of 2004 related to an acquisition
adjustment on the purchase of the Iuka facility. The Company is evaluating a
number of specific capital investment opportunities to expand product
capabilities and reduce production costs. The combination of projects which have
been approved and others under consideration are expect to result in total
capital expenditures of approximately $7,000 in 2005 compared to $6,081 in 2004
and an estimated normalized range of $7,000 to $8,000.

      Cash used by financing activities was $5,613 for the six months ended June
30, 2005 compared to $3,800 for the same period in 2004. The change was
primarily due to higher repayment of debt and a lower cash overdraft balance at
June 30, 2005. In June 2005, the Company announced a cash dividend of $0.065 per
common share, $686 in the aggregate, which was paid on July 5, 2005 to
shareholders of record as of June 15, 2005.

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

<TABLE>
<CAPTION>
                   LONG-TERM
                      DEBT           LEASE         NON-COMPETE         OTHER
                   MATURITIES     COMMITMENTS       AGREEMENT       COMMITMENTS       TOTAL
                   ----------    -------------      ---------       -----------      --------
<S>               <C>            <C>               <C>              <C>              <C>
2005........      $   3,171        $   1,434         $   667           $    38       $   5,310
2006........         14,092            2,358           1,333                97          17,880
2007........          8,093            1,790           1,000               103          10,986
2008........          8,343            1,522              --               110           9,975
2009........         80,459            1,222              --               117          81,798
Thereafter..             --            3,733              --               718           4,451
                  ---------        ---------         -------           -------       ---------
Total.......      $ 114,158        $  12,059         $ 3,000           $ 1,183       $ 130,400
                  =========        =========         =======           =======       =========
</TABLE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

                                       21
<PAGE>

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

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

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

                                       22
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            We use interest rate swaps, collars and caps to modify our exposure
to interest rate movements and to reduce borrowing costs. We have designated
these instruments as cash flow hedges and consider these instruments effective
at offsetting our risk to variable interest rates on debt. Our exposure to
interest rate risk consists of floating rate debt instruments that are
benchmarked to LIBOR. As of June 30, 2005, we had interest rate instruments in
effect with banks having notional amounts totaling $75,000 and varying maturity
dates through December 31, 2007. We have an interest rate swap agreement with a
notional value of $25,000 which became effective on December 31, 2003 and
matures on December 29, 2006. This swap fixes our LIBOR rate for $25,000 of our
Senior Credit Facility indebtedness at a rate of 2.91%. We have an interest rate
collar agreement with a notional amount of $20,000 which became effective on
December 31, 2004 and matures on December 31, 2007. This collar results in our
paying market LIBOR rates for $20,000 of our Senior Credit Facility indebtedness
from a floor of 3.08% to a cap of 5.00%. In addition, we have two interest rate
caps of $15,000 each which became effective on December 31, 2004 and mature on
December 31, 2007. We purchased these caps for a cap premium of $376 of which
$56 was amortized during the six months ended June 30, 2005. These caps limit
our LIBOR rate for $30,000 of our Senior Credit Facility indebtedness at a
maximum rate of 4.00%. A 10% unfavorable movement in LIBOR would not expose us
to material losses of earnings or cash flows.

            Income or expense related to settlements under these agreements is
recorded as adjustments to interest expense in our financial statements. The
fair market value of our derivative instruments outlined above approximates a
$590 asset as of June 30, 2005 and is based upon the amount at which it could be
settled with a third party, although we have no current intention to trade any
of these instruments and plan to hold them as hedges for the Senior Credit
Facility. The change in the fair market value of our derivative instruments, net
of income tax, was recorded in other comprehensive income (loss).

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

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

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

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

                                       23
<PAGE>

404 requirements. These efforts are likely to lead to changes in our internal
controls over financial reporting, including enhanced documentation of certain
of these internal controls.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

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

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

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

SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS

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

                                       24
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

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>

                             SIGNATURE PAGE FOLLOWS

                                       25
<PAGE>

                                    SIGNATURE

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

                                    PACKAGING DYNAMICS CORPORATION

                                    By: /s/ PATRICK T. CHAMBLISS
                                    -----------------------------
                                    PATRICK T. CHAMBLISS
                                    Vice President and Chief Financial Officer
                                    (Principal Financial Officer)

August 8, 2005

                                       26