GLATFELTER P H CO - 10-K Annual Report

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

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 2001 1-3560

P. H. GLATFELTER COMPANY
(Exact name of registrant as specified in its charter)

PENNSYLVANIA 23-0628360
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

96 SOUTH GEORGE STREET, SUITE 500 17401
YORK, PENNSYLVANIA (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(717) 225-4711
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

COMMON STOCK NEW YORK STOCK EXCHANGE
(Title of each class) (Name of each exchange on which registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of Class)

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the Common Stock of the Registrant held by
non-affiliates at February 27, 2002 was $465,893,015.

COMMON STOCK OUTSTANDING AT MARCH 19, 2002:
43,454,214 SHARES
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in this
Report on Form 10-K: Proxy Statement dated April 9, 2002 (Part III)

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P. H. GLATFELTER COMPANY

FORM 10-K

YEAR ENDED DECEMBER 31, 2001

INDEX

PART I

ITEM 1. BUSINESS

Glatfelter, a paper manufacturing company, began operations in Spring
Grove, Pennsylvania in 1864 and was incorporated as a Pennsylvania corporation
in 1905. We have two paper mills located in the United States: Spring Grove,
Pennsylvania and Neenah, Wisconsin. We also have paper mills in Gernsbach,
Germany and Scaer, France and own and operate a manufacturing facility in
Wisches, France and an abaca pulpmill in the Philippines. We manufacture
engineered papers and specialized printing papers.

Our engineered papers are used in the manufacture of a variety of products,
including tea bags, metalized beverage labels, decorative laminates, food
product casings, stencil papers, photo-glossy ink jet papers, greeting cards,
medical dressings, highway signs and striping, billboard graphics, decorative
shopping bags, playing cards, postage stamps, filters, cigarette papers, labels
and surgical gowns. Sales of these papers are generally made directly to the
converter of the paper. Engineered papers are manufactured in each of our mills.

Most of our specialized printing paper products are directed at the
uncoated free-sheet portion of the industry. Our specialized printing paper
products are used principally for the printing of case bound and quality
paperback books, envelope converting and commercial and financial printing.
Specialized printing papers are manufactured in each of our mills except the
Scaer mill.

In 2001, sales of paper for book publishing and commercial printing
generally were made through wholesale paper merchants, whereas sales of paper to
converters and financial printers generally were made directly. Net sales to
each of our customers were less than 10% of net sales during 1999, 2000 and
2001. Net sales to one customer, Central National-Gottesman Inc. (which buys
paper through its division, Lindenmeyr Book Publishing), in 2001 were
approximately 11% of total net sales excluding the Ecusta Division, which was
sold in 2001.

During August 2001, we completed the sale of our Ecusta facility in Pisgah
Forest, North Carolina and its operating subsidiaries ("Ecusta Division"). The
impact of this sale is described in the "Unusual Items" section of our
Management's Discussion and Analysis of Financial Condition and Results of
Operations (see Item 7).

Prior to our sale of the Ecusta Division, approximately 49% and 25% of the
Ecusta Division and Gernsbach mill's 2001 net sales, respectively, were made to
a limited number of tobacco companies. Subsequent to the sale of the Ecusta
Division, all tobacco papers sales of the Gernsbach mill, or approximately 19%
of its net sales, were sold to the buyer of the Ecusta Division under a supply
agreement. The supply agreement, which expires on July 31, 2004, calls for a
reduction in supply of these papers in each year through the agreement's
expiration. We plan to replace the lost volume of tobacco papers sales with
other engineered papers, specifically overlay papers. In connection with this
plan, we are proceeding with an investment of approximately $30 million to
expand our capacity to produce overlay and other papers at the Gernsbach mill.
This project will be complete upon the expiration of the supply agreement. Our
decision to sell the Ecusta Division and transition our Gernsbach mill's tobacco
papers sales to overlay papers greatly reduces our exposure to the difficult
economic and competitive conditions facing paper suppliers of the tobacco
industry.

See Note 10 to our 2001 Consolidated Financial Statements in Item 8 for
other sales and geographic disclosure.

We are continuously developing and refining strategies to position our
business for the future. Execution of these strategies is intended to result in
a reorganization of our business to capitalize on our strength in customer
relationships, technology and people and our leadership position in certain
markets. Internally, we are working to improve the efficiency of our operations.
Externally, we are looking to strengthen our business through strategic
alliances and joint ventures, as well as potential acquisition opportunities or
dispositions of under-performing or non-strategic assets.

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The competitiveness of the markets in which we sell our products varies.
The necessity for technical expertise limits the number of competitors for our
engineered papers. There are a number of companies in the United States
manufacturing specialized printing papers, and no one company holds a dominant
position. Capacity in the worldwide uncoated free-sheet industry, which includes
uncoated specialized printing papers, has declined in recent years and is not
expected to increase significantly for the next few years. Service, product
performance and technological advances are important competitive factors with
respect to all our products. We believe our reputation in these areas continues
to be excellent.

Backlogs are generally not significant in our business, as substantially
all of our customer orders are produced within 30 days of receipt. A backlog of
unmade customer orders is monitored primarily for purposes of scheduling
production to optimize paper machine performance. From time to time, we may
determine that the backlog of unmade orders, along with high finished goods
inventory levels, may be insufficient to warrant a full schedule of paper
machine production. In these circumstances, certain paper machines may be
temporarily shut down until backlog and inventory levels justify a resumption of
operations.

The principal raw material used at the Spring Grove mill is pulpwood. In
2001, we acquired approximately 75% of our pulpwood from saw mills and
independent logging contractors and 25% from Company-owned timberlands located
in Delaware, Maryland, Pennsylvania, and Virginia. These timberlands are
maintained for the purpose of providing wood to our Spring Grove mill.
Occasionally, some product from our timberlands may be sold to outside parties,
but such transactions are not significant. During 2001, hardwood and softwood
purchases constituted 49% and 51% of the pulpwood acquired, respectively.
Hardwoods are available within a relatively short distance of our Spring Grove
mill. Softwood is obtained primarily from Maryland, Delaware and Virginia. To
protect our sources of pulpwood, we actively promote conservation and forest
management among suppliers and woodland owners. Over the past five years, we
have acquired 5,144 acres of woodlands and now supply approximately 38% of the
softwood and 5% of hardwood requirements of the Spring Grove mill from our own
timberland.

The Spring Grove pulpmill converts pulpwood into wood pulp for use in its
papermaking operations. In addition to the pulp it produces, the Spring Grove
mill purchases market pulp from others. During 2001, approximately 11% of the
Spring Grove mill's pulp requirements were supplied through the purchase of pulp
from third parties.

During 2001, approximately 71% of the Neenah mill's fiber requirements were
met with pulp made at Neenah from high-grade, recycled wastepaper. The quality
of different types of high-grade wastepaper varies significantly depending on
the amount of contamination. It is anticipated that there will be an adequate
supply of wastepaper in the future.

The principal raw materials used by the Schoeller & Hoesch ("S&H") mills in
Gernsbach and Scaer are purchased wood pulp and abaca pulp provided by S&H's
Philippine pulpmill. The current supply of such materials is sufficient for the
present operations of these mills. We plan to invest $6,000,000 in capital to
expand the capacity of the abaca pulpmill by 2004 in order to meet the
anticipated future needs of the Gernsbach and Scaer facilities. This expansion
is part of our strategy to transition our remaining tobacco papers to long-fiber
and overlay papers.

Wood and other pulp purchased from others for all our current facilities
comprised approximately 101,000 short tons or 24% of our total 2001 fiber
requirements. The average cost of purchased pulp during 2001 was lower than in
2000. Market pulp prices decreased steadily through August 2000 and increased
slightly in October. Aside from minor price decreases in the first quarter of
2002, pulp prices are expected to remain steady throughout 2002.

The Spring Grove facility generates 100% of the steam and electricity
required for operations. This facility also produces excess electricity, which
is sold to the local power company under a long-term co-generation contract.
These net energy sales were $9,661,000 in 2001. Principal fuel sources used by
the Spring Grove facility are coal, recycled pulping chemicals, bark and wood
waste, and oil (#2 and #6), which were used to produce approximately 59%, 35%,
5% and 1%, respectively, of the total energy generated at the Spring Grove
facility in 2001.

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During 1998, the Neenah facility began purchasing steam under a twenty-year
contract from a facility of Minergy Corporation. This facility, which is located
adjacent to our Neenah facility, processes paper mill sludge from our Neenah
facility as well as other mills in the Neenah area. During 2001, the Neenah
facility generated 21% of its required steam and purchased the balance from
Minergy Corporation. The Neenah facility generates a portion of its electric
power requirements (12% in 2001) and purchases the remainder. Gas was used to
produce almost all of the mill's internally generated steam during 2001; fuel
oil was used to generate the remainder.

The Gernsbach and Scaer facilities both generate all the steam required for
operations. The Gernsbach facility generated approximately 32% of its 2001
electricity and purchased the balance. Gas was used to produce almost all of
Gernsbach's internally generated energy during 2001. The Scaer facility
purchased all of its 2001 electric power requirements.

We have approximately 2,400 active full-time employees and consider the
overall relationship with our employees to be satisfactory.

Hourly employees at our U.S. facilities are represented by different locals
of the Paper, Allied-Industrial, Chemical and Energy Workers International
Union. A five-year labor agreement that covers approximately 300 employees at
the Neenah facility was ratified in August 1997 and will expire in August 2002.
A five-year labor agreement that covers approximately 700 employees in Spring
Grove was ratified in January 1998 and will expire in January 2003. Under these
agreements, wages increase by 3% per year for the duration of the agreements.

Approximately 860 of our S&H employees are represented by various unions. A
labor agreement covering approximately 640 employees at the Gernsbach facility
expired on February 28, 2002. A labor agreement covering approximately 140
employees at the Scaer facility expired on January 31, 2002. The terms and
conditions of these expired agreements will remain in effect until the new
agreements are negotiated, though any wage increase negotiated in the new
agreements will be retroactive to the respective expiration dates of the old
agreements. We are not directly involved in these negotiations as paper industry
representatives are negotiating the agreements. This situation is not unusual in
Germany and France, and we do not believe that the lack of an agreement will
result in any significant operational interruptions.

Approximately 50 employees at our abaca pulpmill in the Philippines are
covered by a labor agreement, which expires in September 2002. Under this
agreement, employees received a 2001 wage increase of 42.50 Philippine Pesos per
day. The 2002 wage increase will be determined by the new agreement in September
2002.

ENVIRONMENTAL MATTERS

We are subject to loss contingencies resulting from regulation by various
federal, state, local and foreign governmental authorities with respect to the
environmental impact of our mills. To comply with environmental laws and
regulations, we have incurred substantial capital and operating expenditures in
past years. We anticipate that environmental regulation of our operations will
continue to become more burdensome and that capital and operating expenditures
necessary to comply with environmental regulations will continue, and perhaps
increase, in the future. In addition, we may incur obligations to remove or
mitigate any adverse effects on the environment resulting from our operations,
including the restoration of natural resources, and liability for personal
injury and for damages to property and natural resources. Because environmental
regulations are not consistent worldwide, our ability to compete in the world
marketplace may be adversely affected by capital and operating expenditures
required for environmental compliance. For information with respect to such
compliance, reference is made to Item 3 of this report.

Compliance with governmental and environmental regulations and requirements
is an absolute necessity. To meet environmental requirements, we have undertaken
a variety of projects. Subject to permit approvals, we have undertaken an
initiative at our Spring Grove facility under the Voluntary Advanced Technical
Incentive Program set forth by the United States Environmental Protection Agency
("EPA") in the "Cluster Rule". This initiative, the "New Century Project," will
require capital expenditures currently estimated at

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approximately $32,500,000 to be incurred before April 2004. Through 2001, we
have invested approximately $2,400,000 in this project including $900,000 in
2001. We estimate that $6,700,000, $18,000,000 and $5,400,000 will be spent on
this project during 2002, 2003 and 2004, respectively. The Cluster Rule is a
1998 federal regulation in which the EPA aims to regulate air and water
emissions from certain pulp and paper mills, including kraft pulp mills such as
our Spring Grove facility. Issued under both the Clean Air Act and the Clean
Water Act, the Cluster Rule establishes baseline emissions limits for toxic and
non-conventional pollutant releases to both water and air.

In total, we spent $1,700,000 on environmental capital projects in 2001 and
we estimate spending $7,400,000, $19,900,000 and $6,800,000 in 2002, 2003 and
2004, respectively, for such projects. In our 2000 Form 10-K, we estimated
environmental capital expenditures for 2001 and 2002 that were higher than the
amounts noted above. Our actual 2001 and current estimates for projected
environmental related capital expenditures reflect a change in the timing of
these expenditures, primarily due to a delay in the receipt of permits related
to several of these projects. The aggregate amount of projected environmental
related capital expenditures has not changed significantly; however, a more
significant amount of these expenditures is now expected to be incurred
subsequent to 2002.

SPRING GROVE, PENNSYLVANIA -- AIR. In 1999, EPA and the Pennsylvania
Department of Environmental Protection ("Pennsylvania DEP") issued to us
separate Notices of Violation ("NOVs") alleging violations of air pollution
control laws, primarily for purportedly failing to obtain appropriate
pre-construction air quality permits in conjunction with certain modifications
to our Spring Grove facility. EPA and the Pennsylvania DEP primarily alleged
that our modifications produced significant net emissions increases in certain
air pollutants that should have been covered by permits containing reduced
emissions limitations.

For all but one of the modifications cited by EPA, we applied for and
obtained from the Pennsylvania DEP the pre-construction permits that we
concluded were required by applicable law. EPA reviewed those applications
before the permits were issued. The Pennsylvania DEP's NOV pertained only to the
modification for which we did not receive a pre-construction permit. We
conducted an evaluation at the time of this modification and determined that the
pre-construction permit cited by EPA and the Pennsylvania DEP was not required.
We have been informed that EPA and the Pennsylvania DEP will seek substantial
emissions reductions, as well as civil penalties, to which we believe we have
meritorious defenses. Nevertheless, we are unable to predict the ultimate
outcome of these matters or the costs involved.

NEENAH, WISCONSIN -- WATER. We have previously reported with respect to
potential environmental claims arising out of the presence of polychlorinated
biphenyls ("PCBs") in sediments in the lower Fox River and in the Bay of Green
Bay, downstream of our Neenah, Wisconsin facility. We acquired the Neenah
facility in 1979 as part of the acquisition of the Bergstrom Paper Company. In
part, this facility uses wastepaper as a source of fiber. At no time did the
Neenah facility utilize PCBs in the pulp and paper making process, but
discharges from the facility containing PCBs from wastepaper may have occurred
from 1954 to the late 1970s. Any PCBs that the Neenah facility discharged into
the Fox River resulted from the presence of NCR(R)-brand carbonless copy paper
in the wastepaper that was received from others and recycled.

As described below, various state and federal governmental agencies have
formally notified seven potentially responsible parties ("PRPs"), including
Glatfelter, that they are potentially responsible for response costs and
"natural resource damages" ("NRDs") arising from PCB contamination in the lower
Fox River and in the Bay of Green Bay, under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and other statutes. The six
other identified PRPs include NCR Corporation, Appleton Papers Inc., Georgia
Pacific Corp., WTM I Co. (a subsidiary of Chesapeake Corp.), Riverside Paper
Company, and U.S. Paper Mills Corp. (now owned by Sonoco Products Company).

CERCLA establishes a two-part liability structure that makes responsible
parties liable for (1) "response costs" associated with the remediation of a
release of hazardous substances and (2) NRDs related to that release. Courts
have interpreted CERCLA to impose joint and several liability on responsible
parties, subject to equitable allocation in certain instances. Prior to a final
settlement by all responsible parties and the final cleanup of the
contamination, uncertainty regarding the application of such liability will
persist.

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On October 2, 2001, the Wisconsin Department of Natural Resources
("Wisconsin DNR") and EPA issued drafts of the reports resulting from the
remedial investigation and the feasibility study of the PCB contamination of the
lower Fox River and the Bay of Green Bay. On that same day, the Wisconsin DNR
and EPA issued a Proposed Remedial Action Plan ("PRAP") for the cleanup of the
lower Fox River and the Bay of Green Bay, estimating the total costs associated
with the proposed response action at $307,600,000 (without a contingency factor)
over a 7-to-18-year time period. The most significant component of the estimated
costs is attributable to large-scale sediment removal by dredging. Based on cost
estimates of large-scale dredging response actions at other sites, we believe
that the PRAP's cost projections may underestimate actual costs of the proposed
remedy by over $800,000,000.

We do not believe that the response action proposed by the Wisconsin DNR
and EPA is appropriate or cost effective. We believe that a protective remedy
for Little Lake Butte des Morts, the portion of the river that is closest of our
Neenah facility, can be implemented at a much lower actual cost than would be
incurred performing large-scale dredging. We also believe that an aggressive
effort to remove the PCB-contaminated sediment, much of which is buried under
cleaner sediment or is otherwise unlikely to move and which is abating
naturally, would be environmentally detrimental and, therefore, inappropriate at
all locations of the river. We have proposed to dredge and cap certain
delineated areas with relatively higher concentrations of PCBs in Little Lake
Butte des Morts. We have accrued an amount to cover this project, potential NRD
claims, claims for reimbursement of expenses of other parties and residual
liabilities.

We have submitted comments to the PRAP that advocate vigorously for the
implementation of environmentally protective alternatives that do not rely upon
large-scale dredging. EPA, in consultation with the Wisconsin DNR, will consider
comments on the PRAP and will then select a remedy to address the contaminated
sediment. Because we have thus far been unable to persuade the EPA and the
Wisconsin DNR of the correctness of our assessment (as evidenced by the issuance
of the PRAP), we are becoming less confident that an alternative remedy totally
excluding large-scale dredging will be implemented. Therefore, we have increased
the reasonably possible estimate of our potential cost in this matter. The
issuance of the PRAP has not materially impacted the amount we have accrued for
this matter, however, as we continue to believe that ultimately we will be able
to convince the EPA and the Wisconsin DNR that large-scale dredging is
inappropriate.

As noted above, NRD claims are theoretically distinct from costs related to
the primary remediation of a Superfund site. Calculating the value of NRD claims
is difficult, especially in the absence of a completed remedy of the underlying
contamination. The State of Wisconsin has informally asserted claims for NRDs
against the identified PRPs regarding alleged injuries to natural resources
under its alleged trusteeship in the lower Fox River and the Bay of Green Bay.
To date, Wisconsin has not prepared any estimates of the alleged value of its
NRD settlements nor finalized any claims from which that value could be
estimated. Based on available information, we believe that any NRD claims that
Wisconsin may bring will likely be legally and factually without merit.

The United States Fish and Wildlife Service ("FWS"), the National Oceanic
and Atmospheric Administration ("NOAA"), four Indian tribes and the Michigan
Attorney General also assert that they possess NRD claims related to the lower
Fox River and the Bay of Green Bay. In June 1994, FWS notified the seven
identified PRPs that it considered them potentially responsible for NRDs. The
federal, tribal and Michigan agencies claiming to be NRD trustees have proceeded
with the preparation of an NRD assessment separate from the Wisconsin DNR. While
the final assessment will be delayed until after the selection of a remedy, the
federal trustees released a plan on October 25, 2000 that values the NRDs for
injured natural resources between $176,000,000 and $333,000,000. We believe that
the federal NRD assessment is technically and procedurally flawed. We also
believe that the NRD claim alleged by the federal, tribal and Michigan entities
are legally and factually without merit.

We are seeking settlement with the Wisconsin agencies and with the federal
government for all of our potential liabilities for response costs and NRDs
associated with the contamination. The Wisconsin DNR and FWS have published
studies, the latter in draft form, estimating the amount of PCBs discharged by
each PRP that estimate the volumetric share of the discharge from our Neenah
facility to be as high as 27%. We do not

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believe the volumetric estimates used in these studies are accurate because the
studies themselves disclose that they are not accurate and are based on
assumptions for which there is no evidence. We believe that our volumetric
contribution is significantly lower. We further maintain that we do not believe
that a volumetric allocation would constitute an equitable distribution of the
potential liability for the contamination. Other factors, such as the location
of contamination, location of discharge and a party's role in causing discharge
must be considered in order for the allocation to be equitable. We have entered
into interim cost-sharing agreements with four of the other six PRPs, pursuant
to which the PRPs have agreed to share both defense costs and costs for
scientific studies relating to PCBs discharged into the Lower Fox River. These
interim cost-sharing agreements have no bearing on the final allocation of costs
related to this matter. Based upon our evaluation of the magnitude, nature and
location of the various discharges of PCBs to the river and the relationship of
those discharges to identified contamination, we believe our share of any
liability among the seven identified PRPs is much less than one-seventh of the
whole.

We also believe that additional potentially responsible parties exist other
than the seven identified PRPs, which are all paper companies. For instance,
certain of the identified PRPs discharged their wastewater through public
wastewater treatment facilities, which we believe makes the owners of such
facilities potentially responsible in this matter. We also believe that entities
providing wastepaper containing PCBs to each of the recycling mills, including
our Neenah facility, are also potentially responsible for this matter.

We currently are unable to predict our ultimate cost related to this
matter, because we cannot predict which remedy will be selected for the site,
the costs thereof, the ultimate amount of NRDs, or our share of these costs or
NRDs.

We continue to believe it is likely that this matter will result in
litigation. We maintain that the removal of a substantial amount of
PCB-contaminated sediments is not an appropriate remedy. There can be no
assurance, however, that we will be successful in arguing that removal of
PCB-contaminated sediments is inappropriate or that we would prevail in any
resulting litigation.

The amount and timing of future expenditures for environmental compliance,
cleanup, remediation and personal injury, NRDs and property damage liability,
including but not limited to those related to the lower Fox River and the Bay of
Green Bay cannot be ascertained with any certainty due to, among other things,
the unknown extent and nature of any contamination, the extent and timing of any
technological advances for pollution abatement, the response actions that may be
required, the availability of qualified remediation contractors, equipment and
landfill space and the number and financial resources of any other PRPs. We have
established reserves, relating to unasserted claims, for environmental
remediation and other environmental liabilities for those environmental matters
for which it is probable that an assertion will be made and an obligation exists
and for which the amount of the obligation is reasonably estimable. As of
December 31, 2001 and December 31, 2000, we have accrued reserves of
approximately $28,800,000 and $26,400,000, respectively, representing our best
estimate within a range of possible outcomes, which would cover the cost of our
proposed project regarding Little Lake Butte des Morts, potential NRD claims,
claims for reimbursement of expenses of other parties and residual liabilities.
Changes to the accrual reflect our best estimate of the ultimate outcome and
considers changes in the extent and cost of the remedy, the status of
negotiations with the various parties, including other PRPs, and our assessment
of potential NRD claims, claims for reimbursement of expenses of other parties
and residual liabilities. Based upon our assessment as to the ultimate outcome
to this matter, we accrued and charged $2,400,000 to pre-tax earnings each year
in 2001, 2000 and 1999.

Based on analysis of currently available information and experience with
respect to the cleanup of hazardous substances, we believe that it is reasonably
possible that our costs associated with these matters may exceed current
reserves by amounts that may prove to be insignificant or that could range, in
the aggregate, up to approximately $200,000,000 over a period that is
undeterminable but could range between 10 to 20 years or beyond. The upper limit
of such range is substantially larger than the amount of our reserves. The
estimate of the range of reasonably possible additional costs is less certain
than the estimates upon which reserves are based. In order to establish the
upper limit of such range, we used assumptions that are the least favorable to
us among the range of assumptions pertinent to reasonably possible outcomes. We
believe that the

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likelihood of an outcome in the upper end of the range is significantly less
than other possible outcomes within the range and that the possibility of an
outcome in excess of the upper end of the range is remote.

In our estimate of the upper end of the range, we have assumed full-scale
dredging as set forth in the PRAP, at a significantly higher cost than estimated
in the PRAP. We have also assumed our share of the ultimate liability to be 18%,
which is significantly higher than we believe is appropriate or will occur, and
a level of NRD claims and claims for reimbursement of expenses from other
parties that, although reasonably possible, is unlikely. In estimating both our
current reserve for environmental remediation and other environmental
liabilities and the possible range of additional costs, we have not assumed that
we will bear the entire cost of remediation and damages to the exclusion of
other known PRPs who may be jointly and severally liable. The ability of other
PRPs to participate has been taken into account, based generally on their
financial condition and probable contribution. Our evaluation of the other PRPs'
financial condition included the review of publicly disclosed financial
information. The relative probable contribution is based upon our knowledge that
at least two PRPs manufactured the paper that included the PCBs and as such, in
our opinion, bear a higher level of responsibility. In addition, our assessment
is based upon the magnitude, nature and location of the various discharges of
PCBs to the river and the relationship of those discharges to identified
contamination. We did not consider the financial condition of a smaller,
non-public PRP as financial information is not available, and we do not believe
its contribution to be material. We have also considered that over a number of
years, certain PRPs were under the ownership of large multinational companies,
who appear to retain some liability for this matter. We continue to evaluate our
exposure and the level of our reserves, including, but not limited to, our
potential share of the costs and NRDs (if any) associated with the lower Fox
River and the Bay of Green Bay.

We believe that we are insured against certain losses related to the lower
Fox River and the Bay of Green Bay, depending on the nature and amount of the
losses. Insurance coverage, which is currently being investigated under
reservation of rights by various insurance companies, is dependent upon the
identity of the plaintiff, the procedural posture of the claims asserted and how
such claims are characterized. We do not know when the insurers' investigations
as to coverage will be completed, and we are uncertain as to what the ultimate
recovery will be and whether it will be significant in relation to the losses
for which we have accrued.

SUMMARY. Our current assessment is that we should be able to manage these
environmental matters without a long-term, material adverse impact on us. These
matters could, however, at any particular time or for any particular year or
years, have a material adverse effect on our consolidated financial condition,
liquidity or results of operations or could result in a default under our loan
covenants. Moreover, there can be no assurance that our reserves will be
adequate to provide for future obligations related to these matters, that our
share of costs and/or damages for these matters will not exceed our available
resources, or that such obligations will not have a long-term, material adverse
effect on our consolidated financial condition, liquidity or results of
operations. With regard to the lower Fox River and the Bay of Green Bay, if we
are not successful in managing the matter and are ordered to implement the
remedy proposed in the PRAP, such order would have a material adverse effect on
our consolidated financial condition, liquidity and results of operations and
would result in a default under our loan covenants.

ITEM 2. PROPERTIES

Our executive offices are located in York, Pennsylvania and our paper mills
are located in Spring Grove, Pennsylvania; Neenah, Wisconsin; Gernsbach,
Germany; and Scaer, France.

The Spring Grove facility includes six uncoated paper machines with a daily
capacity ranging from 18 to 305 tons and an aggregate annual capacity of about
308,000 tons of finished paper. The machines have been rebuilt and modernized
from time to time. The Spring Grove facility has a Specialty Coater ("S-Coater")
and an off-line combi-blade coater, which yield a potential annual production
capacity for coated paper of approximately 62,000 tons. Since uncoated paper is
used in producing coated paper, this does not represent an increase in the
Spring Grove mill capacity. We view the S-Coater as an important asset, which
will allow us to expand our more profitable engineered paper products. The
Spring Grove facility also includes a pulpmill, which has a production capacity
of approximately 650 tons of bleached pulp per day.

7

We also have a precipitated calcium carbonate ("PCC") plant at our Spring
Grove facility. This plant produces PCC at a lower cost than could be purchased
from others and lowers the need for higher-priced raw material typically used
for increasing the opacity and brightness of certain papers.

The Neenah facility, consisting of a paper manufacturing mill and offices,
is located at two sites. The Neenah mill includes three paper machines, with an
aggregate annual capacity of approximately 158,000 tons and a wastepaper
de-inking and bleaching plant with an annual capacity of approximately 95,000
tons.

Our subsidiary, S&H, owns and operates paper mills in Gernsbach, Germany
and Scaer, France, as well as a manufacturing facility in Wisches, France. S&H
also owns a pulpmill in the Philippines which supplies substantially all of the
abaca pulp requirements of the S&H paper mills.

The Gernsbach facility includes five uncoated paper machines with an
aggregate annual lightweight capacity of about 38,000 tons. In addition, the
Gernsbach facility has the capacity to produce 8,700 tons of metalized papers
annually, using a lacquering machine and two metalizers. The base paper used to
manufacture the metalized paper is purchased. The Scaer facility includes two
paper machines with an aggregate annual lightweight capacity of approximately
4,400 tons of finished paper. The Philippine pulpmill has an aggregate annual
capacity of approximately 9,300 tons of abaca pulp. Of this amount,
approximately 7,700 tons are supplied to the Gernsbach and Scaer paper mills,
with the remainder being sold to outside parties. The Gernsbach and Scaer paper
mills obtain all of their abaca pulp from the Philippine pulpmill.

The Glatfelter Pulp Wood Company, a subsidiary of ours, owns and manages
approximately 115,000 acres of land, most of which is timberland.

We own substantially all of the properties used in our papermaking
operations, except for certain land leased from the City of Neenah under leases
expiring in 2050, on which wastewater treatment, storage and other facilities
and a parking lot are located. The leases with the City of Neenah cover
approximately seven acres of land at an annual rent of approximately $3,500. We
own our operating equipment with the exception of some leased vehicles. All of
our properties, other than those which are leased, are free from any material
liens or encumbrances. We consider all our buildings to be in good structural
condition and well maintained and our properties to be suitable and adequate for
present operations.

ITEM 3. LEGAL PROCEEDINGS

For a discussion of the separate NOVs issued to Glatfelter by EPA and the
Pennsylvania DEP and the potential legal proceedings involving the lower Fox
River and the Bay of Green Bay, see "Environmental Matters" in Item 1 of this
report.

In June 1999, the Pennsylvania Public Interest Research Group and several
other parties (collectively, "PennPIRG") filed a citizens suit under the federal
Clean Water Act and the Pennsylvania Clean Streams Law alleging that we had been
operating our Spring Grove facility in violation of a 1984 wastewater discharge
permit. We disagreed with this allegation; however, the parties settled the
litigation, as described below, prior to the issuance of a final adjudication.
In its citizens suit, PennPIRG sought civil penalties, reimbursement for costs
of litigation and a reduction in the Spring Grove facility's discharge of color
(a) immediately and (b) to a level lower than that achievable with the New
Century Project. This project, as described in Item 1, is intended, among other
things, to achieve by April 2004 a level of color in the receiving stream
consistent with the level required in all similar streams in Pennsylvania.

A "discharge of color" describes the presence in the facility's water
effluent of materials, primarily lignins and tannins, which are natural glues
and saps, found in trees, which discolor the water. The lignins and tannins are
not themselves toxic, and we believe that the receiving stream is not
environmentally impacted by the color. In September 2000, the Pennsylvania DEP
issued a renewed permit that required us to comply with more stringent limits on
color discharges than had been in place. We appealed the permit, as did
PennPIRG.

On October 26, 2001, the United States District Court for the Middle
District of Pennsylvania approved a settlement between the parties to the
citizens suit to which the Pennsylvania DEP joined. Under this settlement, the
Court established a compliance schedule that would require achievement of water
quality

8

limits consistent with those contemplated under the New Century Project by April
2004. We also agreed to the implementation of certain projects encompassed by
the New Century Project consistent with the timetable set forth in our water
discharge permit requiring completion of the projects by April 2004. These
projects include improvements in brownstock washing, installation of an oxygen
delignification bleaching process and 100 percent chlorine dioxide substitution.
We believe these projects will enable us to achieve compliance with the final
permit limits. We presently do not anticipate difficulties in implementing the
New Century Project; however, we have not yet received all the required
governmental approvals, nor have we installed all the necessary equipment.

In addition to these projects, under the terms of the settlement, we have
created a permanent endowment for certain environmental and recreational
improvement projects in the Codorus Creek watershed, and have paid PennPIRG
certain litigation costs related to this lawsuit. Our total cost accrued and
paid under this settlement in 2001 was $2,500,000. The administrative appeals
filed by Glatfelter and PennPIRG have been dismissed as moot.

We are voluntarily cooperating with an investigation by the Pennsylvania
DEP, which commenced in February 2002, of our Spring Grove facility related to
certain discharges which are alleged to be unpermitted, to the Codorus Creek.
There is no indication that these discharges had an impact on human health or on
the environment. Although this investigation could result in the imposition of a
fine or other punitive measures, we currently do not know what, if any, actions
will be taken.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

Officers are elected to serve at the pleasure of the Board of Directors.
Except in the case of officers elected to fill a new position or a vacancy
occurring at some other date, officers are generally elected at the annual
meeting of the Board of Directors held immediately after the annual meeting of
shareholders.
- ---------------

(a) Mr. Glatfelter currently serves as Chairman and Chief Executive Officer.
From April 2000 to February 2001, he was Chairman, President and Chief
Executive Officer. From June 1998 to April 2000, he was Chief Executive
Officer and President. From September 1995 to June 1998, he was Senior Vice
President.

(b) Mr. Newcomer currently serves as President and Chief Operating Officer.
From June 2000 to February 2001, he was Executive Vice President. From June
1998 to June 2000, he was Executive Vice President and Chief Financial
Officer. From May 1997 to June 1998, he was Senior Vice President and Chief

9

Financial Officer. From September 1995 to April 1997, he was Senior Vice
President, Treasurer and Chief Financial Officer. Mr. Newcomer is a
director of the Burnham Corporation, Lancaster, Pennsylvania.

(c) Mr. MacKenzie became Executive Vice President and Chief Financial Officer
in September 2001. From November 2000 to September 2001 he was Vice
Chairman of Hercules Incorporated. From April 2000 to October 2000, he was
Executive Vice President and Chief Financial Officer of Hercules
Incorporated. From 1999 to March 2000, he was Executive Vice President,
Hercules Incorporated, President, Chemical Specialties Segment and Chief
Financial Officer. From 1996 to 1999 he was Senior Vice President and Chief
Financial Officer of Hercules Incorporated. Mr. MacKenzie is a member of
the Board of Trustees of the Medical Center of Delaware and the Investment
Committee at the University of Delaware. He is also on the board of
directors of C&D Technologies, Inc., Blue Bell, Pennsylvania where he is
chair of the Audit Committee and a member of the board of directors of
Central Vermont Public Service Corporation.

(d) Mr. Smith became Corporate Controller in September 2001. From June 2000 to
September 2001 he was Chief Financial Officer and continued to serve as
Assistant Secretary. From December 1999 to June 2000, he was Assistant
Secretary and Vice President -- Finance. From December 1998 to December
1999, he was Vice President -- Finance. From August 1998 to December 1998,
he was Vice President -- Finance, Assistant Secretary and Controller. From
May 1993 to August 1998, he was Controller.

(e) Mr. Wood became Chief Strategy Officer in June 2000. From December 1999 to
June 2000, he was Vice President -- Administration. From August 1998 to
December 1999, he was Vice President -- Administration and Secretary. From
May 1997 to August 1998, he was Secretary and Treasurer. From October 1992
to May 1997, he was Secretary and Assistant Treasurer.

(f) Mr. Anke became Treasurer in September 1998. From June 1997 to September
1998, he was Chief Financial Officer for the Senator John Heinz Pittsburgh
Regional History Center. From September 1996 to June 1997, he was a
consultant to AMSCO International, Inc. From April 1994 to September 1996,
he was Vice President and Treasurer of AMSCO International, Inc., where he
was responsible for treasury, insurance, retirement plan and international
functions and supervised approximately forty employees.

(g) Mr. Federer became Vice President -- Finance and Business Support in
December 2000. From June 1997 to December 2000, he was Managing Director,
Papierfabrik Schoeller & Hoesch GmbH & Co. KG. From December 1992 to June
1997, he was Director of Finance, Papierfabrik Schoeller & Hoesch GmbH &
Co. KG.

(h) Mr. Inners became Vice President -- Operation and Supply Chain in June
2000. From August 1998 to June 2000, he was Director of Operations,
Glatfelter Division. From October 1995 to August 1998, he was Spring Grove
Mill Manager.

(i) Mr. Missimer became Vice President -- Environment, Health and Safety in
February 2001. From July 2000 to February 2001 he was Vice
President -- Environmental Affairs. From January 1999 to July 2000, he was
Corporate Environmental Director. From November 1990 to January 1999, he
was Assistant Corporate Environmental Manager.

(j) Mr. Mueller became Corporate Counsel and Director of Policy and Compliance
in June 2000 and has served as Secretary since December 1999. He was
Associate Counsel from June 1998 to June 2000. From September 1996 to June
1998, he was a co-owner and Vice President of Scheller, Inc., where he was
responsible for the administration of the company.

(k) Mr. Parrini became Vice President -- Sales and Marketing in December 2000.
From July 2000 to December 2000, he was Vice President -- Sales and
Marketing, Glatfelter Division and Corporate Strategic Marketing. From June
1999 to December 2000, he was Vice President -- Sales and Marketing,
Glatfelter Division. From August 1998 to June 1999, he was National Sales
and Marketing Manager, Glatfelter Division. From December 1997 to August
1998, he was National Sales Manager, Glatfelter Division. From 1993 to
December 1997 he was North American Sales Manager -- Technical Products &
ARC Divisions, A.W. Chesterton Company, where he was responsible for sales,
marketing

10

and business development for the specialty chemical and polymer composite
divisions and supervised approximately thirty employees.

(l) Mr. Yaffe became Vice President -- Government and Public Affairs in
September 2000. From March 1997 to September 2000, he was Vice
President -- Public Policy of Philadelphia Gas Works, where he was
responsible for establishing advocacy communications and corporate
responsibility programs and supervised approximately ten employees. From
December 1995 to March 1997, he was owner of the Yaffe Group, where he
consulted with clients on government relations and public affairs.

(m) Mr. Yanavitch became Vice President -- Human Resources in July 2000. From
October 1998 to July 2000, he was Director of Human Resources for the
Ceramco and Trubyte Divisions of Dentsply, where he was responsible for all
human resources activities and acted as chief spokesperson for union
contracts and employee benefits. From December 1993 to October 1998, he was
Director of Human Resources for the Trubyte Division of Dentsply, where he
was responsible for daily human resources activities. In his positions with
Dentsply, Mr. Yanavitch supervised approximately ten employees.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

COMMON STOCK PRICES AND DIVIDENDS PAID INFORMATION

The table below shows the high and low prices of our common stock traded on
the New York Stock Exchange under the symbol "GLT" and the dividends paid per
share for each quarter during the past two years.

As of March 19, 2002, we had 2,584 shareholders of record. A number of the
shareholders of record are nominees.

11

ITEM 6. SELECTED FINANCIAL DATA

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

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

(a)Does not reflect reclassification of prior-period shipping and handling costs
from net sales to cost of products sold in accordance with recent accounting
pronouncements. Pre-1996 shipping and handling costs have not been
reclassified.
(b)After impact of an after-tax charge relating primarily to a loss on
disposition of the Ecusta Division (unusual item) of $39,709,000.
(c)After impact of an after-tax restructuring charge (unusual item) of
$2,120,000.
(d)After impact of an after-tax charge for voluntary early retirement
enhancement program (unusual item) of $5,988,000.
(e)After impact of an after-tax charge for a writedown of impaired assets
(unusual items) of $127,981,000.
(f)After impact of a pre-tax charge for a writedown of impaired assets (unusual
items) of $208,949,000.
(g)After impact of an after-tax charge for rightsizing and restructuring
(unusual items) of $8,430,000 and the effect of an increased federal
corporate income tax rate of $3,587,000.
(h)Includes an increase of $61,062,000 for the adoption of Statement of
Financial Accounting Standards No. 109.

OTHER FINANCIAL DATA

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

(a)Does not reflect reclassification of prior-period shipping and handling costs
from net sales to cost of products sold in accordance with accounting
pronouncements.

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

Any statements we set forth in this annual report or otherwise made in
writing or orally with regard to our goals for revenues, cost reductions and
return on capital, execution of our business model in a timely manner,
expectations as to industry conditions and our financial results and cash flow,
demand for or pricing of our products, margin enhancement, retention of key
accounts, income growth, market penetration, development of new products and new
and existing markets for our products, environmental matters, implementation of
our integrated information technology platform, our ability to identify and
execute future acquisitions which will enhance both our business growth and
return on capital and other aspects of our business may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although we make such statements based on
assumptions that we believe to be reasonable, there can be no assurance that
actual results will not differ materially from our expectations. Accordingly, we
identify the following important factors, among others, which could cause our
results to differ from any results which might be projected, forecasted or
estimated in any such forward-looking statements: (i) variations in demand for
or pricing of our products; (ii) our ability to identify, finance and consummate
future alliances or acquisitions; (iii) our ability to develop new, high
value-added engineered products; (iv) our ability to realize cost reductions
pursuant to our DRIVE project and changes to business processes contemplated by
our IMPACT project; (v) changes in the cost or availability of raw materials we
use, in particular market pulp, pulp substitutes and wastepaper, and changes in
energy-related costs; (vi) changes in industry paper production capacity,
including the construction of new mills, the closing of mills and incremental
changes due to capital expenditures or productivity increases; (vii) the gain or
loss of significant customers and/or on-going viability of such customers;
(viii) cost and other effects of environmental compliance, cleanup, damages,
remediation or restoration, or personal injury or property damage related
thereto, such as costs associated with the Notices of Violation ("NOVs") issued
by the United States Environmental Protection Agency ("EPA") and the
Pennsylvania Department of Environmental Protection ("Pennsylvania DEP"), the
costs of natural resource restoration or damages related to the presence of
polychlorinated biphenyls ("PCBs") in the lower Fox River on which our Neenah
mill is located and the effect of complying with the wastewater discharge
limitations of the Spring Grove mill permit; (ix) enactment of adverse state,
federal or foreign legislation or changes in government policy or regulation;
(x) adverse results in litigation; (xi) fluctuations in currency exchange rates;
(xii) disruptions in production and/or increased costs due to labor disputes;
and (xiii) our ability to enter into a new debt facility.

SIGNIFICANT AND SUBJECTIVE ESTIMATES

The following discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to sales returns, doubtful accounts, inventories, investments and
derivative financial instruments, long-lived assets, and contingencies,
including environmental matters. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the
circumstances; the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.

We believe the following represent the most significant and subjective
estimates used in the preparation of our consolidated financial statements.

We maintain reserves for expected sales returns and allowances based
principally on our return practices and our historical experience. If actual
sales returns differ from the estimated return rates projected, we may need to
increase or decrease our reserves for sales returns and allowances, which could
affect our reported income.

13

We maintain allowances for doubtful accounts for estimated losses resulting
from our customers' failure to make required payments. If customer payments were
to differ from our estimates, we may need to increase or decrease our allowances
for doubtful accounts, which could affect our reported income.

We maintain reserves for excess and obsolete inventories to reflect our
inventory at the lower of its stated cost or market value. Our estimate for
excess and obsolete inventory is based upon our assumptions about future demand
and market conditions. If actual market conditions are more or less favorable
than those we have projected, we may need to increase or decrease our reserves
for excess and obsolete inventories, which could affect our reported income.

We evaluate the recoverability of our long-lived assets, including
property, equipment and intangible assets periodically or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Our evaluations include analyses based on the cash flows generated
by the underlying assets, profitability information, including estimated future
operating results, trends or other determinants of fair value. If the value of
an asset determined by these evaluations is less than its carrying amount, a
loss is recognized for the difference between the fair value and the carrying
value of the asset. Future adverse changes in market conditions or poor
operating results of the related business may indicate an inability to recover
the carrying value of the assets, thereby possibly requiring an impairment
charge in the future.

Accounting for defined-benefit pension plans require various assumptions,
including but not limited to, discount rates, expected rate of return on plan
assets and future compensation growth rates. Our retiree medical plans also
require various assumptions, which include but are not limited to, discount
rates and annual rates of increase in the per-capita costs of health care
benefits. We evaluate these assumptions at least once each year and make changes
as conditions warrant. Changes to these assumptions will increase or decrease
our reported income, which will result in changes to the assets and liabilities
associated with our benefit plans.

We maintain accruals for losses associated with environmental obligations
when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated based on existing legislation and
remediation technologies. These accruals are adjusted periodically as assessment
and remediation actions continue and/or further legal or technical information
develops. Such undiscounted liabilities are exclusive of any insurance or other
claims against third parties. Recoveries of environmental remediation costs from
other parties, including insurance carriers, are recorded as assets when their
receipt is deemed probable.

Refer to Note 1 to our consolidated financial statements for a discussion
of our accounting policies with respect to these and other items.

OVERVIEW

We classify our sales into two product groups: (1) specialized printing
papers and (2) engineered papers (including tobacco papers). The Glatfelter
Division, which includes the Spring Grove, Pennsylvania and Neenah, Wisconsin
paper mills, produces both specialized printing and engineered papers. The
Schoeller & Hoesch Division ("S&H") includes paper mills in Gernsbach, Germany
and Scaer, France. S&H produces specialized printing papers and engineered
papers (including tobacco papers). We are in the process of changing our
organization and information systems to manage our business in three separate
business units: (1) engineered products, (2) printing and converting papers and
(3) long fiber and overlay papers. Our information systems do not currently
provide the information necessary for reporting by business unit. Such
information is expected to be available by the end of 2002.

Overall demand for our products was fairly stable throughout 2001. Of our
two product groups, specialized printing papers typically are more influenced by
the impact of changes in economic conditions. During 2001, this portion of our
business experienced some decline in demand and a resulting decrease in sales
volume and some selling price concessions. Despite this weakness, we had some
successes during 2001, including an increase in shipments for our book
publishing papers in a year when overall industry shipments were down
significantly. The current outlook for our specialized printing papers is for
demand to remain weak

14

throughout the first and second quarters of 2002. We believe that some
improvement in conditions could occur in the third quarter of 2002.

Our engineered papers tend to be less influenced by changing economic
conditions. Demand for these products, excluding tobacco papers, remained fairly
stable during 2001 and overall sales volume increases were realized. Pricing
also remained fairly stable, although some price reductions did occur in
selected markets. Our current outlook for these products is for stability to
continue until mid-year, with the potential for improved conditions thereafter.

After several years of declining market conditions, demand for our tobacco
papers continued to weaken during the first half of 2001. In May 2001, we
announced our intent to sell the Ecusta Division as the tobacco papers market
was no longer compatible with our strategic direction (see "Unusual Items"
below). As part of the sale, which was completed on August 9, 2001, we entered
into a supply agreement with the buyer of the Ecusta Division. Under this
agreement, which expires mid-year 2004, we will continue the manufacture and
sale of tobacco papers at our Gernsbach, Germany facility exclusively for the
buyer. This agreement allows us to transition our product mix from tobacco
papers to other engineered products, more specifically to long-fiber and overlay
papers. See "Capital Resources" below for a description of capital spending
related to this transition.

We have defined our Vision to become the global supplier of choice in
specialty papers and engineered products and established goals to achieve
revenue of $1 billion by 2004 with a sustainable average return on capital
employed ("ROCE") of 17%. Despite our best efforts, economic conditions that
have adversely affected our industry for the last several years have inhibited
our progress in reaching our ROCE goal. In addition, a lack of external growth
opportunities and the sale of our Ecusta Division have hindered our ability to
achieve our revenue growth target. Therefore, it is doubtful that we will be
able to achieve these financial goals in the foreseeable future.

2001 COMPARED TO 2000

Overall, net sales in 2001 decreased $89,029,000, or 12.3%, compared to
2000. Excluding the Ecusta Division, net sales in 2001 decreased $10,044,000, or
1.8%, compared to 2000 due to a 2.1% decrease in average net selling prices,
which were slightly offset by a net sales volume increase of 0.3%. Average net
selling prices decreased primarily due to lower prices because of weaker
economic conditions, as well as a weaker mix of products sold and the
unfavorable impact of foreign currency translation. The following net sales
analysis for both product groups, specialized printing papers and engineered
products, excludes the results of the Ecusta Division.

Net sales of specialized printing papers were lower in 2001 than in 2000 by
7.3% due principally to a 5.1% decrease in average net selling prices in
addition to a decrease in net sales volume of 2.3%. The decreased average net
selling prices resulted almost entirely from lower pricing as product mix
remained relatively stable.

Net sales of engineered papers (excluding tobacco papers) increased by 6.2%
in 2001 versus 2000, as a 10.7% increase in net sales volume was partially
offset by a 4.1% decrease in average net selling prices. Lower average net
selling prices were due chiefly to reduced prices, as well as the unfavorable
impact of foreign currency translation and a weaker mix of products sold.

The cost of products sold decreased $87,632,000, or 14.8%, in 2001 compared
to 2000. Excluding the Ecusta Division, cost of products sold decreased by
$5,738,000, or 1.3%. Cost of products sold was lower in 2001 versus 2000
primarily due to lower market pulp prices, savings from our DRIVE initiative
(see "DRIVE and IMPACT Projects" below) and increased pension income. Pension
income, which is non cash, reduced cost of products sold by $24,346,000 in 2001
compared to $22,914,000 in 2000. Partially offsetting such cost reductions were
higher energy costs for 2001. See Note 8 to the Consolidated Financial
Statements for disclosure related to our retirement plans, including pension
income.

Selling, general and administrative ("SG&A") expenses increased by $386,000
in 2001 over 2000. Excluding the Ecusta Division, SG&A expenses increased by
$5,698,000 net of changes in pension income, or 11.5%, from 2000 to 2001, which
was due primarily to increased salaries and professional fees related to
15

building our capabilities to effectively implement our strategic initiatives.
Pension income, which is non cash, reduced SG&A expense by $6,332,000 in 2001
versus $5,195,000 in 2000. See Note 8 to the Consolidated Financial Statements.

Gain from property dispositions, etc. -- net for 2001 increased to
$3,598,000 from $2,029,000 in 2000. In the third quarter of 2001, we sold a
413-acre tract of land for which we received $1,729,000 in net cash proceeds
resulting in a realized pre-tax gain of approximately $1,700,000. No significant
sales of such properties occurred in 2000. From time to time, we divest certain
tracts of our timberlands when we are offered attractive prices. While we do not
actively solicit the sale of our timberlands, we are currently evaluating our
overall timberland strategy.

Earnings (excluding unusual items) before interest income and expense and
taxes were $84,728,000 in 2001 compared to $84,524,000 in 2000. Excluding the
Ecusta Division, earnings (excluding unusual items) before interest income and
expense and taxes decreased by $7,891,000, or 9.2%. This was due to higher SG&A
expenses and a lower gross margin, which were partially offset by higher gains
from property dispositions, etc. -- net.

Interest on investments and other -- net declined slightly in 2001 from
2000 from $3,820,000 to $3,589,000 primarily due to lower interest rates in 2001
compared to 2000 while higher average cash balances nearly offset such lower
interest rates in 2001.

Interest on debt was $15,689,000 in 2001 compared to $16,405,000 in 2000.
This decrease was a result of lower average borrowings. Additionally, a stronger
U.S. dollar relative to the Deutsche Mark ("DM") during 2001 caused lower
reported interest expense from DM-denominated debt.

2000 COMPARED TO 1999

Overall, net sales in 2000 increased $19,229,000, or 2.7%, compared to
1999. Though net sales volume was 0.8% higher in 2000 versus 1999, the majority
of the net sales increase was due to a 1.9% increase in average net selling
price.

Sales of specialized printing papers were higher in 2000 than 1999 by
14.4%, primarily due to a 9.3% increase in average net selling prices resulting
from improved pricing and product mix. Increased demand for these papers
resulted in increased net sales volume of 4.6%.

Sales of engineered papers (including tobacco papers) fell by 8.2% in 2000
versus 1999, as an 8.9% decrease in net sales volume was slightly offset by a
0.7% increase in average net selling price. The decrease in sales of engineered
papers was largely due to a 17.6% decrease in net sales of tobacco papers. The
majority of this decrease was due to a 16.2% decrease in net sales volume. The
remainder results from a 1.7% decrease in average price. This decrease in sales
was in large part a result of our 1999 announcement of tobacco papers selling
price increases. As we expected, subsequent to the announcement, some of our
tobacco papers customers sought other suppliers. During the year 2000, Ecusta
Division tobacco paper sales declined by approximately 24% compared to 1999.

The cost of products sold increased by 1.8% in 2000 compared to 1999. With
energy costs abnormally high and market pulp price increases
uncharacteristically outpacing selling price increases, we would have expected
cost of products sold from 1999 to 2000 to have increased more than the 2.7% net
sales increase. Pension income, which is non cash, reduced cost of products sold
by $22,914,000 in 2000 compared to $20,100,000 in 1999. In addition,
implementation of the DRIVE project reduced cost of products sold. Primarily as
a result of the increase in pension income and cost savings associated with the
DRIVE project, gross margin as a percentage of net sales increased to 18.4% for
2000 from 17.7% for 1999.

The increase in selling, general and administrative expenses of $4,011,000
in 2000 versus 1999 was due primarily to increased spending on outside
consulting services relating to our DRIVE and IMPACT projects.

Gain from property dispositions, etc. -- net for 2000 decreased to about
half of the 1999 gain from $4,076,000 to $2,029,000. In the first quarter of
1999, we sold a 268-acre tract of timberland for $1,000,000 in cash resulting in
a realized gain of $976,000. During the remainder of 1999, we sold various
fully-depreciated
16

items, in addition to the rights to standing timber on select tracts of land.
Subsequent to the first quarter of 1999, no single sale was material to our
results of operations. No significant sales of such properties occurred in 2000.

Earnings before interest income and expense and taxes were $84,524,000
(excluding the unusual item) in 2000 compared to $81,582,000 in 1999. This
increase was driven primarily by improved profit margins at the Glatfelter and
S&H divisions as increased sales volume spread fixed costs over a greater number
of tons produced and sold. The Ecusta Division experienced lower sales volume,
which decreased profit margins, thus partially negating the gains of the other
divisions. The strengthening of the U.S. dollar with respect to the DM in 2000
also adversely affected earnings as foreign profits translated into fewer
dollars. Finally, savings from our DRIVE project contributed to profits, but
such savings were offset by the effects of a weaker economy as well as
additional consulting costs incurred in 2000.

Interest on investments and other -- net nearly doubled in 2000 from 1999
from $1,994,000 to $3,820,000. Our average cash holdings in 2000 were
significantly higher than in 1999, yielding higher interest income.
Additionally, cash was invested in higher yielding debt instruments throughout
2000 as compared to 1999.

Interest on debt was $16,405,000 in 2000 compared to $18,424,000 in 1999.
This decrease was a result of lower average borrowings, offset partially by
higher interest rates. Such lower average borrowings were related to an 80%
decrease in short-term debt stemming from payments made. Additionally, a
stronger U.S. dollar relative to the DM during 2000 caused lower reported
interest expense.

UNUSUAL ITEMS

On May 16, 2001, we announced that we had entered into an agreement to sell
our Ecusta facility and two of its operating subsidiaries ("Ecusta Division").
Because our Board of Directors had committed to a plan to dispose of the Ecusta
Division by accepting an offer to sell the Division, subject to certain closing
conditions, at a loss, on that date the assets of the Ecusta Division were
reclassified as assets held-for-disposal, and thus the carrying amount of these
assets was reduced to fair value. The decision to sell the Ecusta Division was
made due to the determination that the business of the Ecusta Division,
principally tobacco papers, did not fit with our long-term strategic plans.

On August 9, 2001, we completed the sale of the Ecusta Division including
plant and equipment, inventory, accounts receivable and essentially all other
operating assets and certain other receivables related to our tobacco papers
business. The carrying value of the Ecusta Division totaled $61,467,000, after
we recorded an impairment write down of $50,000,000 in the second quarter to
reflect the fair value of the Ecusta Division. These assets were sold for
$22,726,000 plus the assumption by the buyer of certain liabilities totaling
$21,440,000 related to the Ecusta Division's business. The liabilities assumed
by the buyer included accounts payable, accrued expenses and other liabilities
related to the operation of the Ecusta Division's business. Our total charge to
earnings associated with the sale was $58,408,000 including the $50,000,000
impairment charge recognized during the second quarter of 2001. The $58,408,000
pre-tax charge included $6,095,000 in transaction and other costs incurred upon
sale of the Ecusta Division. Of this amount, approximately $1,900,000 related to
transaction costs. The remainder related to certain liabilities accrued related
to the transaction. Under the terms of the sale agreement, we are obligated to
incur costs in the future related to certain long-term liabilities related to
employee benefits ($2,000,000) and facility maintenance ($900,000) which would
not have been necessary had we retained ownership interest in the Ecusta
Division but were agreed to in order to consummate the transaction. The
$58,408,000 pre-tax charge was net of a $14,988,000, pre-tax gain related to the
curtailment and settlement of pension obligations and other retiree benefits
related to employees who transferred to the buyer. The Ecusta Division
contributed approximately $7,200,000 in operating profit during 2001 until its
sale in August, had an operating loss of approximately $1,000,000 during 2000
and contributed approximately $13,300,000 in operating profit during 1999.

We also recognized a $2,500,000 pre-tax charge during the second quarter of
2001 related to the settlement of an environmental matter in connection with the
Spring Grove facility's wastewater discharge permit. The total unusual items
recorded in 2001 were $60,908,000.
17

During the first quarter of 2000, we finalized our restructuring plan and
shortly thereafter began to reduce the workforce at Ecusta. The workforce
reduction was completed during the first quarter of 2001 and resulted in the
reduction of over 200 salaried and hourly jobs associated with our tobacco paper
production capacity. We accrued and charged to expense $3,336,000 ($2,120,000
after tax) in the first quarter of 2000 primarily as a result of the voluntary
portion of this restructuring, specifically 42 salaried employees. Of this
amount, $2,182,000 related to enhanced pension benefits to be paid out of our
retirement plans as discussed in our disclosure of retirement and other
post-retirement benefits. The remaining $1,154,000 of this charge related to
severance and other employee benefits to be paid using our assets. Approximately
$800,000 of these liabilities were transferred to the buyer of the Ecusta
Division. Unpaid amounts as of December 31, 2001 are expected to be paid by the
end of 2005.

DRIVE AND IMPACT PROJECTS

As of November 1, 2001, we completed the implementation of cost reduction
programs designed to realize $40,000,000 at our current operations of annual
cash cost savings identified during our on-going DRIVE project. Our employees
generated over 7,000 cost savings ideas under DRIVE of which over 950 ideas were
identified for implementation. DRIVE ideas included, among others, procurement
initiatives and production process improvements to reduce the cost of raw
materials, efficiency increases to improve paper machine speeds and quality
yields, energy conservation programs and the outsourcing of our sheeting
operation at the Neenah, Wisconsin facility. Because of the complex and highly
integrated nature of our operations and the number of projects implemented, it
is extremely difficult and cost prohibitive to determine the actual amount of
cost savings realized. We do recognize, however, that upon completing the
implementation of the DRIVE project, realized cost reductions have been largely
offset by increases in on-going operating costs such as wages and salaries,
fringe benefits, energy costs and professional and other costs. We continue to
review our manufacturing processes for opportunities to improve efficiencies and
effectiveness.

Our IMPACT project is focused on identifying and implementing changes in
our organization and business processes. We are currently in the second phase of
IMPACT, which includes the installation of an enterprise resource planning
system. This system, which will provide a common platform for purchasing,
accounts payable, sales orders, cost accounting and general ledgers, among other
things, is planned to be implemented at our U.S. based locations during the
second quarter of 2002. Installation at our larger European locations will be
completed in the fall of 2002. Total spending on the IMPACT project is expected
to be approximately $49,000,000, of which approximately $45,000,000 is capital
related. Through December 31, 2001, we have capitalized approximately
$24,000,000 on the IMPACT project.

The implementation of an enterprise resource planning system requires
significant and pervasive change and thus subjects our business to significant
implementation risk. Based on our progress to date, we believe we will complete
an effective implementation within budget and without a material adverse impact
on our business.

LIQUIDITY

During 2001, our cash and cash equivalents decreased by $15,051,000,
principally due to cash used in financing activities and investing activities of
$48,710,000 and $30,576,000, respectively. Cash used in financing activities was
mainly for dividend payments and net payment of debt. Cash used in investing
activities was for additions to plant, equipment and timberlands, partially
offset by cash provided from net proceeds from the sale of the Ecusta Division
(see "Unusual Items"). Cash used in investing and financing activities was
partially offset by cash provided by operations of $63,899,000.

Our Consolidated Statement of Cash Flows ("Cash Flow Statement") for 2001
reflects the pre-tax loss on the disposition of the Ecusta Division as an
"unusual item." Changes in the Ecusta Division's assets and liabilities, with
the exception of taxes, are not reflected as changes in assets and liabilities
in the Cash Flow Statement.

18

The significant decreases reflected in our Consolidated Balance Sheet
("Balance Sheet") related to accounts receivable, inventory, plant, equipment
and timberlands -- net and current liabilities from December 31, 2000 to
December 31, 2001 are primarily due to the disposition of the Ecusta Division.

We expect to meet all our near- and long-term cash needs from a combination
of internally generated funds, cash, cash equivalents and our existing Revolving
Credit Facility or other bank lines of credit and other long-term debt. We are
subject to certain financial covenants under the Revolving Credit Facility and
are in compliance with all such covenants. As the Revolving Credit Facility
matures on December 22, 2002, it has been reclassified on the Balance Sheet to
"Current portion of long-term debt." As of December 31, 2001, we had
$122,515,000 of borrowings under the Revolving Credit Facility and an additional
$77,485,000 was available under our Revolving Credit Facility. We intend to
repay the Revolving Credit Facility during 2002 using a portion of our cash and
cash equivalents as well as through borrowings under a new debt facility to be
negotiated.

INTEREST RATE RISK

We use our Revolving Credit Facility and proceeds from the issuance of our
6 7/8% Notes to finance a significant portion of our operations. The Revolving
Credit Facility provides for variable rates of interest and exposes us to
interest rate risk resulting from changes in the Euro London Interbank Offered
Rate. We use interest rate swap agreements to partially hedge interest rate
exposure associated with the Revolving Credit Facility. All of our derivative
financial instrument transactions are entered into for non-trading purposes.

To the extent that our financial instruments expose us to interest rate
risk and market risk, they are presented in the table below. The table presents
principal cash flows and related interest rates by year of maturity for our
Revolving Credit Facility, and 6 7/8% Notes and other long-term debt as of
December 31, 2001. For interest rate swap agreements, the table presents
notional amounts and the related reference interest rates by year of maturity.
Fair values included herein have been determined based upon (1) rates currently
available to us for debt with similar terms and remaining maturities, and (2)
estimates obtained from dealers to settle interest rate swap agreements. The
table should be read in conjunction with Notes 5 and 6 to the consolidated
financial statements.

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," requires us to record the
interest rate swaps from the table above on the balance sheet at fair value
beginning January 1, 2001. SFAS No. 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Because these swaps are designated in a cash-flow hedge, changes in the fair
value of the derivative are recorded in other comprehensive income ("OCI") and
are recognized in the income statement when the hedged item affects earnings.
Effective January 1, 2001, we recorded $845,000 in OCI as a cumulative
transition adjustment for derivatives designated in cash flow-type

19

hedges prior to adopting SFAS No. 133. As of December 31, 2001, the balance in
OCI related to derivatives was $21,000.

CAPITAL RESOURCES

During 2001, we expended $47,845,000 on capital projects compared to
$29,215,000 in 2000. Of the 2001 capital spending, approximately $18,400,000 was
spent on our IMPACT project and approximately $900,000 was spent on the New
Century Project. Capital spending is expected to be approximately $56,000,000 in
2002. Included in this total is an expected additional $21,000,000 capital
expenditure for our IMPACT project and $6,700,000 for the New Century Project.
The New Century Project will also require an estimated $18,000,000 and
$5,400,000 in spending during 2003 and 2004, respectively. The total capital
spending on the New Century Project is expected to be approximately $32,500,000,
including $1,500,000 that was spent during preliminary phases prior to 2001.

Other significant capital expenditures expected during 2002 include
$6,000,000 to begin the expansion of our long-fiber and overlay papers capacity
in Gernsbach and $4,200,000 to begin the expansion of our abaca pulp making
capacity in the Philippines. Capital expenditures of $25,800,000 are expected on
these projects in 2003.

In our 2000 Form 10-K, we estimated our 2001 total capital expenditures to
be $67,000,000. Actual spending was less than that amount due to the
cancellation and delay of certain projects. Capital spending on environmental
related projects was approximately $7,000,000 lower than expected due to the
delay in the receipt of certain necessary permits. Spending on our IMPACT
project in 2001 was approximately $5,600,000 less than anticipated.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board issued SFAS No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS
No. 143, "Accounting for Asset Retirement Obligations," in June 2001 and issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
in August 2001.

SFAS No. 141 is effective for all business combinations occurring after
June 30, 2001 and requires that all business combinations be accounted for under
the purchase method only and that certain acquired intangible assets in a
business combination be recognized as assets apart from goodwill. The adoption
of SFAS No. 141 had no impact on our consolidated financial position or results
of operations.

SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 and establishes revised reporting requirements for goodwill and other
intangible assets. Upon adoption, we no longer amortize goodwill unless evidence
of impairment exists; goodwill will be evaluated on at least an annual basis. As
of December 31, 2001 and using the 2001 foreign exchange translation rates, we
had $8,170,000 in unamortized goodwill and recorded $518,000 in goodwill
amortization expense in 2001. We adopted SFAS No. 142 on January 1, 2002.

SFAS No. 143 is effective for fiscal years beginning after June 15, 2002
and applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset. We will adopt SFAS No. 143 on January 1,
2003. We are currently evaluating the effects that the adoption of SFAS No. 143
may have on our consolidated financial position and results of operations.

SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and establishes
new guidelines for the valuation of long-lived assets. We adopted SFAS No. 144
on January 1, 2002. The adoption of SFAS No. 144 had no impact on our
consolidated financial position or results of operations.

20

ENVIRONMENTAL MATTERS

We are subject to loss contingencies resulting from regulation by various
federal, state, local and foreign governmental authorities with respect to the
environmental impact of our mills. To comply with environmental laws and
regulations, we have incurred substantial capital and operating expenditures in
past years. During 2001, 2000 and 1999, we incurred approximately $15,600,000,
$16,700,000 and $15,800,000, respectively, in operating costs related to
complying with environmental laws and regulations. We anticipate that
environmental regulation of our operations will continue to become more
burdensome and that capital and operating expenditures necessary to comply with
environmental regulations will continue, and perhaps increase, in the future. In
addition, we may incur obligations to remove or mitigate any adverse effects on
the environment allegedly resulting from our operations, including the
restoration of natural resources, and liability for personal injury and for
damages to property and natural resources.

In particular, we remain open to negotiations with the EPA and the
Pennsylvania DEP regarding the NOVs under the federal and state air pollution
control laws. In addition, we continue to negotiate with the State of Wisconsin
and the United States regarding natural resources damages and response costs
related to the discharge of PCBs and other hazardous substances in the lower Fox
River, on which our Neenah facility is located. We have settled with the
Pennsylvania DEP and with the Pennsylvania Public Interest Research Group and
several other parties (collectively "PennPIRG") regarding the wastewater
discharge permit for our Spring Grove facility. Under this settlement, we agreed
to the implementation of certain projects encompassed by the New Century Project
consistent with the time table set forth in our water discharge permit,
requiring completion of the project by April 2004. This settlement also required
a one-time, pre-tax charge of $2,500,000 during the second quarter of 2001. We
are also voluntarily cooperating with an investigation by the Pennsylvania DEP,
which commenced in February 2002 of our Spring Grove facility related to certain
discharges, which are alleged to be unpermitted, to the Codorus Creek.

The costs associated with environmental matters are presently unknown but
could be substantial and perhaps exceed our available resources. Our current
assessment is that we should be able to manage these environmental matters
without a long-term, material adverse impact. These matters could, however, at
any particular time or for any particular year or years, have a material adverse
effect on our consolidated financial condition, liquidity or results of
operations or could result in a default under our loan covenants. Moreover,
there can be no assurance that our reserves will be adequate to provide for
future obligations related to these matters, that our share of costs and/or
damages for these matters will not exceed our available resources, or that such
obligations will not have a long-term, material adverse effect on our
consolidated financial condition, liquidity or results of operations. With
regard to the lower Fox River and the Bay of Green Bay, if we are not successful
in managing the matter and are ordered to implement the remedy set forth in the
proposed remedial action plan issued by the State of Wisconsin and the United
States, such order would have a material adverse effect on our consolidated
financial condition, liquidity and results of operations and would result in a
default under our loan covenants. We have accrued an amount to cover this matter
which represents our best estimate within a range of possible outcomes. Changes
to the accrual reflect our best estimate of the ultimate outcome and considers
changes in the extent and cost of the remedy, the status of negotiations with
the various parties, including other PRPs, and our assessment of potential NRD
claims, claims for reimbursement of expenses of other parties and residual
liabilities. For further discussion, see Note 9 of the Consolidated Financial
Statements.

ENVIRONMENTAL ACHIEVEMENTS

We continue to strive for ISO 14001 certification for our environmental
management system as a component of our commitment to environmental excellence.
ISO 14001 requires that an organization have an environmental policy that
includes commitments to prevention of pollution, compliance with environmental
laws and regulations and continual improvements in its environmental management
systems. Our Spring Grove, Pennsylvania, Neenah, Wisconsin and Gernsbach,
Germany facilities are already ISO 14001 certified. As a part of maintaining our
certification, each facility's environmental management system is audited by an
independent third party on an ongoing, periodic basis. We plan to have our
Scaer, France facility ISO 14001 certified by the end of 2002.
21

On April 20, 1999, we announced our "New Century Project." The New Century
Project is our commitment to participate at our Spring Grove facility in EPA's
Advanced Technology Incentive Program under the "Cluster Rules." As described in
the Capital Resources section above, we expect to spend approximately
$32,500,000 prior to April 2004 to eliminate the use of elemental chlorine in
our bleaching process, reduce odor emissions and improve water quality. The New
Century Project demonstrates our commitment to minimizing our impact on natural
resources.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the discussion under the heading "Interest Rate Risk" in Item 7 as well
as Notes 6 and 7 to our consolidated financial statements in Item 8.

22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
MANAGEMENT'S RESPONSIBILITY REPORT

The management of P. H. Glatfelter Company has prepared and is responsible
for the Company's consolidated financial statements and other corroborating
information contained herein. Management bears responsibility for the integrity
of these statements which have been prepared in accordance with accounting
principles generally accepted in the United States and include management's best
judgments and estimates. All information in this annual report consistently
reflects the data contained in the consolidated financial statements.

The Company maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, transactions are executed and
recorded in accordance with their authorizations, and financial records are
maintained so as to permit the preparation of reliable financial statements. The
system of internal controls is enhanced by written policies and procedures, an
organizational structure providing appropriate segregation of duties, careful
selection and training of qualified people, and periodic reviews performed by
both its internal audit department and independent public auditors.

The Audit Committee of the Board of Directors, consisting exclusively of
directors who are not Company employees, provides oversight of financial
reporting. The Company's internal audit department and independent auditors meet
with the Audit Committee on a periodic basis to discuss financial reporting,
audit and internal control issues and have completely free access to the Audit
Committee.

GEORGE H. GLATFELTER II
Chairman and Chief Executive Officer

GEORGE MACKENZIE
Executive Vice President and Chief
Financial Officer

23

INDEPENDENT AUDITORS' REPORT

P. H. Glatfelter Company,
Its Shareholders and Directors:

We have audited the accompanying consolidated balance sheets of P. H.
Glatfelter Company and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of P. H. Glatfelter Company and
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

Deloitte & Touche LLP

Philadelphia, Pennsylvania
February 28, 2002

24

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 2001, 2000 AND 1999

The accompanying notes are an integral part of these consolidated financial
statements.
25

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

The accompanying notes are an integral part of these consolidated financial
statements.
26

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

The accompanying notes are an integral part of these consolidated financial
statements.
27

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 2001, 2000 AND 1999

The accompanying notes are an integral part of these consolidated financial
statements.
28

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION We are
manufacturers of engineered papers and specialized printing papers.
Headquartered in York, Pennsylvania, our paper mills are located in Spring
Grove, Pennsylvania; Neenah, Wisconsin; Gernsbach, Germany; and Scaer, France.
Our products are marketed throughout the United States and in many foreign
countries, either through wholesale paper merchants, brokers and agents or
direct to customers. Our accounts, and those of our subsidiaries, are included
in the consolidated financial statements. All intercompany transactions have
been eliminated. Our operating locations have been aggregated into a single
reportable segment since they have similar economic characteristics, products,
production processes, types of customers and distribution methods. Certain
reclassifications have been made to the prior years' consolidated financial
statements to conform to those classifications used in 2001.

(B) CASH AND CASH EQUIVALENTS We consider all highly liquid financial
instruments with effective maturities at date of purchase of three months or
less to be cash equivalents.

(C) INVENTORIES Inventories are stated at the lower of cost or market. Raw
materials and in-process and finished inventories of our domestic operations are
valued using the last-in, first-out (LIFO) method, and the supplies inventories
are valued principally using the average-cost method. Inventory at our foreign
operations is valued using a method which approximates average cost. Inventories
at December 31 are summarized as follows:

If we had valued all inventories using the average-cost method, inventories
would have been $3,790,000 and $8,121,000 higher than reported at December 31,
2001 and 2000, respectively. During 2001 and 2000, we liquidated certain LIFO
inventories. The effect of the liquidations did not have a significant impact on
net income.

At December 31, 2001, the recorded value of the above inventories was
approximately $300,000 lower than inventories for income tax purposes while the
recorded value of the above inventories exceeded inventories for income tax
purposes by approximately $22,400,000 as of December 31, 2000. The difference at
December 31, 2000 was primarily related to the Ecusta Division, which was sold
during 2001. Inventory for the Ecusta Division at December 31, 2000 was
$34,849,000. See Note 2.

(D) PLANT, EQUIPMENT AND TIMBERLANDS Depreciation is computed for
financial reporting using the straight-line method over the estimated useful
lives of the respective assets and for income taxes principally using
accelerated methods over lives established by statute or U.S. Treasury
Department procedures. Provision is made for deferred income taxes applicable to
this difference. See Notes 1(f) and 4.

The range of estimated service lives used to calculate financial reporting
depreciation for principal items of property, plant and equipment are as
follows:

Buildings................................................... 10 - 45 Years
Machinery and equipment..................................... 7 - 35 Years
Other....................................................... 4 - 40 Years

29

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

All timber costs related to the reforestation process, including interest,
taxes, site preparation, planting, fertilization, herbicide application and
thinning are capitalized. After 20 years, the timber is considered merchantable
and depletion is computed on a unit rate of usage by growing area based on
estimated quantities of recoverable material. For purchases of land tracts with
existing timber, inventoried merchantable timber is subject to immediate
depletion based upon usage. Costs related to the purchase of pre-merchantable
timber are transferred to merchantable timber over a 10-year period, whereupon
it is eligible for depletion.

Estimated timber volume is based upon its current stage in the growth
cycle. Growth and yield data is developed through the use of published growth
and yield studies as well as our own historical experience. This data is used to
calculate volumes for established timber stands. Timber is depleted on an actual
usage basis. For purchased timber tracts, a systematic timber inventory is
completed and volume is estimated for merchantable timber. Pre-merchantable
timber of purchased tracts is estimated based upon its current stage in the
growth cycle using growth and yield data.

Maintenance and repairs are charged to income and major renewals and
betterments are capitalized. At the time property is retired or sold, the cost
and related reserve are eliminated and any resultant gain or loss is included in
income.

Plant, equipment and timberlands at December 31 are summarized as follows:

Plant and equipment -- net for the Ecusta Division at December 31, 2000 was
$52,577,000.

(E) INVESTMENTS IN DEBT SECURITIES Long-term investments, which are due
over a remaining 13-year period and are classified as held-to-maturity, are
included in "Other assets" on the Consolidated Balance Sheets at December 31,
2001 and 2000. The investments consist of approximately $10,300,000 in U.S.
Treasury and government obligations at both December 31, 2001 and 2000. The fair
market value of such investments approximated the amortized cost, and therefore,
there were no significant unrealized gains or losses as of December 31, 2001 and
2000.

(F) INCOME TAX ACCOUNTING We recognize deferred tax assets and liabilities
for temporary differences between the financial reporting basis and the tax
basis of our assets and liabilities. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the consolidated
financial statements in the period of enactment. See Note 4.

(G) FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts reported on the
Consolidated Balance Sheets for cash and cash equivalents, accounts receivable,
other assets, short-term debt and long-term debt approximate fair value.

(H) VALUATION OF LONG-LIVED ASSETS We evaluate long-lived assets for
impairment periodically or when a specific event indicates that the carrying
value of an asset may not be recoverable. Recoverability is

30

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assessed based on estimates of future cash flows expected to result from the use
and eventual disposition of the asset. If the sum of expected undiscounted cash
flows is less than the carrying value of the asset, an impairment loss is
recognized. The impairment loss is measured as the amount by which the carrying
amount of the asset exceeds its fair value.

(I) ACCOUNTING ESTIMATES The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires the use of management's estimates and assumptions. Management believes
the estimates and assumptions used in the preparation of these consolidated
financial statements are reasonable, based upon currently available facts and
known circumstances, but recognizes that actual results may differ from those
estimates and assumptions. See Note 9.

(J) REVENUE RECOGNITION We recognize revenue on product sales upon
shipment and on energy sales when electricity is delivered to our customer.
Certain costs associated with the production of electricity, such as fuel,
labor, depreciation and maintenance are netted against the energy sales for
presentation on the Consolidated Statements of Income and Comprehensive Income.
Our current contract to sell electricity generated in excess of our own use
expires in the year 2010 and requires that the customer purchase all of our
excess electricity up to a certain level. The price for the electricity is
determined pursuant to a formula and varies depending upon the amount sold in
any given year.

(K) ENVIRONMENTAL LIABILITIES Accruals for losses associated with
environmental obligations are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated based
on existing legislation and remediation technologies. These accruals are
adjusted periodically as assessment and remediation actions continue and/or
further legal or technical information develops. Accrued environmental
liabilities are classified as "Other long-term liabilities" on the Consolidated
Balance Sheets. Such undiscounted liabilities are exclusive of any insurance or
other claims against third parties. Recoveries of environmental remediation
costs from other parties, including insurance carriers, are recorded as assets
when their receipt is deemed probable. We have not recorded any such recoveries.

Costs related to environmental remediation are charged to expense.
Environmental costs are capitalized if the costs extend the life of the asset,
increase its capacity and/or mitigate or prevent contamination from future
operations. See Note 9.

(L) STOCK-BASED COMPENSATION We account for stock-based compensation in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation." Compensation expense for stock options is measured as
the excess, if any, of the average quoted market price of our stock at the date
of grant over the amount an employee must pay to acquire the stock. Compensation
expense for both restricted stock and performance stock awards is recognized
ratably over the performance period based on changes in quoted market prices of
Glatfelter stock and the likelihood of achieving the performance goals. This
variable plan accounting recognition is due to the uncertainty of achieving
performance goals and determining the resulting number of shares to ultimately
be issued. See Note 7.

(M) DERIVATIVE FINANCIAL INSTRUMENTS We use interest rate swap agreements
to manage our exposure to fluctuations in interest rates. Amounts to be paid or
received under interest rate swap agreements are recognized as interest expense
or interest income during the period in which they accrue. We do not hold any
derivative financial instruments for trading purposes. The credit risks
associated with our interest rate swap agreements are controlled through the
evaluation and monitoring of creditworthiness of the counterparties. Although we
may be exposed to losses in the event of nonperformance by counterparties, we do
not expect such losses, if any, to be significant. See Notes 1(o) and 6.

(N) FOREIGN CURRENCY TRANSLATION Our subsidiaries outside the United
States use their local currency as the functional currency. Accordingly,
translation gains and losses and the effect of exchange rate changes on
transactions designated as hedges of net foreign investments are included as a
component of other
31

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

comprehensive income (loss). Transaction gains and losses are included in income
in the period in which they occur.

(O) RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2001, we adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated in a fair-value hedge, changes in
the fair value of the derivative and the hedged item are recognized in earnings.
If the derivative is designated as a cash-flow hedge, changes in the fair value
of the derivative are recorded in other comprehensive income ("OCI") and are
recognized in the income statement when the hedged item affects earnings. SFAS
No. 133 defines new requirements for designation and documentation of hedging
relationships, as well as ongoing effectiveness assessments and measurements to
use hedge accounting. The ineffective portion of a hedging derivative's change
in fair value is immediately recognized in earnings. For a derivative that does
not qualify as a hedge, changes in fair value are recognized in earnings.

The adoption of SFAS No. 133 on January 1, 2001 resulted in an $845,000
increase in OCI as a cumulative transition adjustment for derivatives designated
in cash flow-type hedges prior to adopting SFAS No. 133. Due to our limited use
of derivative instruments, the effect on earnings of adopting SFAS No. 133 was
immaterial.

The Financial Accounting Standards Board issued SFAS No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS
No. 143, "Accounting for Asset Retirement Obligations," in June 2001 and issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
in August 2001.

SFAS No. 141 is effective for all business combinations occurring after
June 30, 2001 and requires that all business combinations be accounted for under
the purchase method only and that certain acquired intangible assets in a
business combination be recognized as assets apart from goodwill. The adoption
of SFAS No. 141 had no impact on our consolidated financial position or results
of operations.

SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 and establishes revised reporting requirements for goodwill and other
intangible assets. Upon adoption, we no longer amortize goodwill unless evidence
of impairment exists; goodwill will be evaluated on at least an annual basis. As
of December 31, 2001 and using the 2001 foreign exchange translation rates, we
had $8,170,000 in unamortized goodwill and recorded $518,000 in goodwill
amortization expense in 2001. We adopted SFAS No. 142 on January 1, 2002.

SFAS No. 143 is effective for fiscal years beginning after June 15, 2002
and applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset. We will adopt SFAS No. 143 on January 1,
2003. We are currently evaluating the effects that the adoption of SFAS No. 143
may have on our consolidated financial position and results of operations.

SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and establishes
new guidelines for the valuation of long-lived assets. We adopted SFAS No. 144
on January 1, 2002. The adoption of SFAS No. 144 had no impact on our
consolidated financial position or results of operations.

32

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2. UNUSUAL ITEMS

On May 16, 2001, we announced that we had entered into an agreement to sell
our Ecusta facility and two of its operating subsidiaries ("Ecusta Division").
Because our Board of Directors had committed to a plan to dispose of the Ecusta
Division by accepting an offer to sell the Division, subject to certain closing
conditions, at a loss, on that date the assets of the Ecusta Division were
reclassified as assets held-for-disposal, and thus the carrying amount of these
assets was reduced to fair value. The decision to sell the Ecusta Division was
made due to the determination that the business of the Ecusta Division,
principally tobacco papers, did not fit with our long-term strategic plans.

On August 9, 2001, we completed the sale of the Ecusta Division including
plant and equipment, inventory, accounts receivable and essentially all other
operating assets and certain other receivables related to our tobacco papers
business. The carrying value of the Ecusta Division totaled $61,467,000, after
we recorded an impairment write down of $50,000,000 in the second quarter to
reflect the fair value of the Ecusta Division. These assets were sold for
$22,726,000 plus the assumption by the buyer of certain liabilities totaling
$21,440,000 related to the Ecusta Division's business. The liabilities assumed
by the buyer included accounts payable, accrued expenses and other liabilities
related to the operation of the Ecusta Division's business. Our total charge to
earnings associated with the sale was $58,408,000 including the $50,000,000
impairment charge recognized during the second quarter of 2001.

The $58,408,000 pre-tax charge included $6,095,000 in transaction and other
costs incurred upon sale of the Ecusta Division. Of this amount, approximately
$1,900,000 related to transaction costs. The remainder related to certain
liabilities accrued related to the transaction. Under the terms of the sale
agreement, we are obligated to incur costs in the future related to certain
long-term liabilities related to employee benefits ($2,000,000) and facility
maintenance ($900,000) which would not have been necessary had we retained
ownership interest in the Ecusta Division but were agreed to in order to
consummate the transaction. The $58,408,000 pre-tax charge was net of a
$14,988,000, pre-tax gain related to the curtailment and settlement of pension
obligations and other retiree benefits related to employees who transferred to
the buyer. The Ecusta Division contributed approximately $7,200,000 in operating
profit during 2001 until its sale in August, had an operating loss of
approximately $1,000,000 during 2000 and contributed approximately $13,300,000
in operating profit during 1999.

A calculation of the unusual item related to the sale of the Ecusta
Division is as follows (in thousands):

Asset impairment recognized................................. $(50,000)
Loss recognized upon sale
Consideration received.................................... $ 44,166
Book value of net assets sold............................. (61,467)
--------
(17,301)
Transaction and other costs............................... (6,095)
Gain on retiree benefit plans............................. 14,988
--------
Loss on disposition excluding impairment charge........ (8,408) (8,408)
-------- --------
Total loss on disposition................................. $(58,408)
========

We also recognized a $2,500,000 pre-tax charge during the second quarter of
2001 related to the settlement of an environmental matter in connection with the
Spring Grove facility's wastewater discharge permit. See Note 9. The total
unusual items recorded in 2001 were $60,908,000.

During the first quarter of 2000, we finalized our restructuring plan and
shortly thereafter began to reduce the workforce at Ecusta. The workforce
reduction was completed during the first quarter of 2001 and resulted

33

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in the reduction of over 200 salaried and hourly jobs associated with our
tobacco paper production capacity. We accrued and charged to expense $3,336,000
($2,120,000 after tax) in the first quarter of 2000 primarily as a result of the
voluntary portion of this restructuring, specifically 42 salaried employees. Of
this amount, $2,182,000 related to enhanced pension benefits to be paid out of
our retirement plans as discussed in our disclosure of retirement and other
post-retirement benefits (see Note 8). The remaining $1,154,000 of this charge
related to severance and other employee benefits to be paid using our assets.
Approximately $800,000 of these liabilities were transferred to the buyer of the
Ecusta Division. Unpaid amounts as of December 31, 2001 are expected to be paid
by the end of 2005. The following schedule summarizes the activity of the
liability since the initial accrual (in thousands):

NOTE 3. EARNINGS PER SHARE ("EPS")

Basic EPS excludes the dilutive impact of common stock equivalents and is
computed by dividing net income by the weighted-average number of shares of
common stock outstanding for the period. Diluted EPS includes the effect of
potential dilution from the issuance of common stock, pursuant to common stock
equivalents, using the treasury stock method. A reconciliation of our basic and
diluted EPS follows with the net income and share amounts in thousands:

The 2001 and 2000 basic and diluted EPS of $0.16 and $1.04, respectively,
as presented on the Consolidated Statements of Income and Comprehensive Income,
reflect an after-tax charge (unusual item) of $0.93 per share primarily related
to the sale of the Ecusta Division in 2001 and the negative impact of an after-
tax restructuring charge (unusual item) of $.05 per share for 2000 (see Note 2).

NOTE 4. INCOME TAXES

Income taxes are recognized for the amount of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in our consolidated financial
statements or tax returns. The effects of income taxes are measured based on
effective tax law and rates.

34

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following are domestic and foreign components of pre-tax income for the
years ended December 31:

The income tax provision for the years ended December 31 consists of the
following:

We have deferred income taxes of $0 and $1,217,000 on undistributed
earnings of foreign subsidiaries as of December 31, 2001 and 2000, respectively.
At December 31, 2001, unremitted earnings of subsidiaries outside the United
States totaling $7,071,000 were deemed to be permanently reinvested. No deferred
tax liability has been recognized with regard to the remittance of such
earnings. It is not practicable to estimate the income tax liability that might
be incurred if such earnings were remitted to the United States.

The net deferred tax amounts reported on our Consolidated Balance Sheets as
of December 31 are as follows:

35

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following are components of the net deferred tax balances as of
December 31:

The tax effects of temporary differences as of December 31 are as follows:

36

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation between the income tax provision, computed by applying the
statutory federal income tax rate of 35% to income before income taxes, and the
actual income tax provision for the years ended December 31 follows:

At December 31, 2001, we had net operating loss ("NOL") carryforwards for
foreign and state income tax purposes of $26,360,000 and $35,777,000,
respectively, which relate to foreign and state NOL deferred tax assets of
$5,749,000 and $3,351,000, respectively. These foreign and state NOL
carryforwards are available to offset future taxable income, if any. A valuation
allowance of $3,351,000 has been recorded against these NOL deferred tax assets
due to the uncertainty regarding our ability to utilize the state NOL
carryforwards. The foreign NOL carryforwards do not expire, and the state NOL
carryforwards expire between 2004 and 2021.

NOTE 5. BORROWINGS

Long-term debt at December 31 is summarized as follows:

The aggregate maturities of long-term debt as of December 31, 2001 are as
follows (in thousands):

2002...................................................... $123,709
2003...................................................... 1,058
2004...................................................... 883
2005...................................................... 530
2006...................................................... 122
Thereafter................................................ 150,000
--------
$276,302
========

On December 22, 1997, we entered into a $200,000,000 multi-currency
revolving credit facility ("Revolving Credit Facility") with a syndicate of
major lending institutions. The Revolving Credit Facility enables us to borrow
up to the equivalent of $200,000,000 in certain currencies in the form of
revolving credit loans with a final maturity date of December 22, 2002, and with
interest periods determined, at our option, on a daily or one- to six-month
basis. Interest on the revolving credit loans is at variable rates based, at our
option,

37

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on the Eurocurrency Rate or the Base Rate (lender's prime rate), plus applicable
margins. Margins are based on the higher of our debt ratings as published by
Standard & Poor's and Moody's. We are subject to certain financial covenants
under the Revolving Credit Facility and are in compliance with all such
covenants as of December 31, 2001. We must pay an annual administrative fee of
$25,000 as well as an annual facility fee of $200,000. As of December 31, 2001,
we had $122,515,000 of borrowings under the Revolving Credit Facility and thus
$77,485,000 was available under the Revolving Credit Facility. We intend to
repay the Revolving Credit Facility during 2002 using a portion of our cash and
cash equivalents as well as through borrowings under a new debt facility to be
negotiated.

We had $3,030,000 of letters of credit outstanding as of December 31, 2001.
We bear the credit risk on this amount to the extent that we do not comply with
the provisions of certain agreements. The letters of credit do not reduce the
amount available under our lines of credit.

On July 22, 1997, we issued $150,000,000 principal amount of 6 7/8% Notes
due July 15, 2007. Interest on the 6 7/8% Notes is payable semiannually on
January 15 and July 15. The 6 7/8% Notes are redeemable, in whole or in part, at
our option at any time at a calculated redemption price plus accrued and unpaid
interest to the date of redemption, and constitute unsecured and unsubordinated
indebtedness. The net proceeds from the sale of the 6 7/8% Notes were used
primarily to repay certain short-term unsecured debt and related interest.

NOTE 6. INTEREST RATE SWAP AGREEMENTS

In January 1999, we entered into two interest rate swap agreements, each
having a total notional principal amount of DM 50,000,000 (approximately
$22,549,000 as of December 31, 2001). Under these agreements, which were
effective April 6, 1999 and July 6, 1999 and which expire December 22, 2002, we
receive a floating rate of the three-month DM/Euro LIBOR plus twenty basis
points and pay a fixed rate of 3.41% and 3.43%, respectively, for the term of
the agreements. We recognized net interest income of $783,000 and $461,000 in
2001 and 2000, respectively, and net interest expense of $167,000 in 1999
related to these agreements. As of December 31, 2001, our gain from termination
of these interest rate swap agreements would have been $32,000. Both of our
interest rate swap agreements convert a portion of our borrowings from a
floating rate to fixed-rate basis. Although we can terminate either of our swap
agreements at any time, we intend to hold both of our swap agreements until
maturity.

NOTE 7. KEY EMPLOYEE LONG-TERM INCENTIVE PLAN

On April 23, 1997, the common shareholders amended the 1992 Key Employee
Long-Term Incentive Plan ("1992 Plan") to authorize, among other things, the
issuance of up to 5,000,000 shares of Glatfelter common stock to eligible
participants. The 1992 Plan provides for restricted stock awards, non-qualified
stock options, performance shares, incentive stock options and performance
units. To date, there have been no grants of incentive stock options or
performance units.

RESTRICTED STOCK AWARDS During December 2001, December 2000, December 1999
and December 1998, 64,430, 81,780, 101,730 and 60,465 shares, respectively, of
common stock were awarded under the 1992 Plan. Awarded shares are subject to
forfeiture, in whole or in part, if the recipient ceases to be an employee
within a specified time period. The shares awarded under the 1992 Plan are also
subject to forfeiture if defined minimum earnings levels are not met. We may
reduce the number of shares otherwise required to be delivered by an amount that
would have a fair market value equal to the taxes we withhold on delivery. We
may also, at our discretion, elect to pay to the recipients in cash an amount
equal to the fair market value of the shares that would otherwise be required to
be delivered.

We recognized expense of $856,000 in 2001, $936,000 in 2000, including
$512,000 related to "Unusual Items" described in Note 2, and $262,000 in 1999
related to these awards. Each Restricted Stock Award has a

38

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

four-year vesting period. The shares awarded in December 2001 under the 1992
Plan cease to be subject to forfeiture by the end of 2005.

PERFORMANCE SHARES On January 1, 1996, January 1, 1997 and January 1,
1998, we awarded, under the 1992 Plan, 44,860, 40,060 and 45,740 shares,
respectively, subject to certain conditions, to certain key employees to be
issued in whole or in part depending on our degree of success in achieving
certain financial performance goals during defined four-year performance
periods. Based upon the financial performance levels achieved during the periods
ended December 31, 1999, 2000 and 2001, 27,668, 16,492 and 16,178 shares,
respectively, were earned for distribution. During February 2000, in lieu of
delivering 27,668 shares of common stock, we elected to pay cash equal to the
fair value of 21,620 shares as of December 31, 1999, and deliver 6,048 shares
from treasury. During February 2001, in lieu of delivering 16,492 shares of
common stock, we elected to pay cash equal to the fair value of 13,003 shares as
of December 31, 2000, and deliver 3,489 shares from treasury. During February
2002, in lieu of delivering 16,178 shares of common stock, we elected to pay
cash equal to the fair value of 10,139 shares as of December 31, 2001, and
deliver 6,039 shares from treasury.

We recognized income of $127,000 and $169,000 in 2001 and 2000,
respectively, and expense of $357,000 in 1999 related to these performance stock
awards. The fair market value per share of the shares granted during 1998, 1997
and 1996 was $18.38, $17.88 and $17.16, respectively.

NON-QUALIFIED STOCK OPTIONS The following summarizes the activity with
respect to non-qualified options to purchase shares of common stock granted
under the 1992 Plan during the years ended December 31, 2001, 2000 and 1999:

The following table summarizes information about stock options outstanding
at December 31, 2001:

An additional 409,705 options became exercisable January 1, 2002, at a
weighted-average exercise price of $12.73. The weighted-average fair value of
options granted during 2001, 2000, and 1999 was $3.84, $2.60 and $3.06,
respectively, on the date of grant. The fair value of each option on the date of
grant is estimated

39

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

using the Black-Scholes option pricing model with expected lives of ten years
and the following weighted-average assumptions:

Options typically become exercisable for 25% of the shares of common stock
issuable on exercise thereof, beginning January 1 of the year following the date
of grant, assuming six months has passed, with options for an additional 25% of
such shares becoming exercisable on January 1 of each of the next three years.
Options not exercisable in this format are exercisable in full either six months
or one year from the date of grant. All options expire on the earlier of
termination or, in some instances, a defined period subsequent to termination of
employment, or ten years from the date of grant.

The exercise price represents the average quoted market price of Glatfelter
common stock on the date of grant, or the average quoted market prices of
Glatfelter common stock on the first day before and after the date of grant for
which quoted market price information was available if such information was not
available on the date of grant.

PRO FORMA INFORMATION We account for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized for the non-qualified stock
options and for which compensation cost has been recognized for stock awards, as
described in Note 1(l). Had compensation cost for these plans been determined
consistent with SFAS No. 123, our net income and EPS for the years ended
December 31, 2001, 2000, and 1999 would have been reduced to the following pro
forma amounts:

NOTE 8. RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS

We have trusteed noncontributory defined benefit pension plans covering
substantially all our employees. The benefits are based, in the case of certain
plans, on average salary and years of service and, in the case of other plans,
on a fixed amount for each year of service. Plan provisions and funding meet the
requirements of the Employee Retirement Income Security Act of 1974. Pension
income of $44,702,000, $25,927,000 and $20,490,000 was recognized in 2001, 2000,
and 1999, respectively. Before the impact of unusual items discussed in Note 2,
pension income for 2001 and 2000 was $30,678,000 and $28,109,000, respectively.
We provide certain health care benefits to eligible retired employees. These
benefits include a comprehensive medical plan for retirees prior to age 65 and
fixed supplemental premium payments to retirees over age 65 to help defray the
costs of Medicare. The plan is not funded; claims are paid as incurred.

40

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the status of our defined benefit pension
plans and other post-retirement benefit plans at December 31, 2001 and 2000 (in
thousands):

The net prepaid pension cost for qualified pension plans is included in
"Other assets," and the accrued pension cost for non-qualified pension plans and
accrued post-retirement benefit costs are principally included in "Other
long-term liabilities" on the Consolidated Balance Sheets at December 31, 2001
and 2000.

41

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net periodic benefit (income) cost includes the following components (in
thousands):

The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $25,055,000, $22,083,000 and $0, respectively, as
of December 31, 2001 and $23,271,000, $20,708,000 and $0, respectively, as of
December 31, 2000.

The assumptions used in computing the information above were as follows:

For measurement purposes, a 5.5%, 5.5% and 6.0% annual rate of increase in
the per capita cost of covered health care benefits was assumed for 2001, 2000
and 1999 respectively. The rate is assumed to remain level at 5.5% going
forward.

A one percentage-point change in assumed health care cost trend rates would
have the following effects:

We maintain 401(k) plans for certain hourly and salaried employees.
Employees may contribute up to 15% of their salary to these plans, subject to
certain restrictions. We will match a portion of the employee's contribution,
subject to certain limitations, in the form of shares of Glatfelter common stock
into the Glatfelter stock fund maintained under the 401(k) plans. During 2001,
2000 and 1999, we contributed shares of Glatfelter common stock valued at
$1,409,000, $1,681,000, and $1,626,000, respectively, to these 401(k) plans.

NOTE 9. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

We are subject to loss contingencies resulting from regulation by various
federal, state, local and foreign governmental authorities with respect to the
environmental impact of our mills. To comply with environmental

42

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

laws and regulations, we have incurred substantial capital and operating
expenditures in past years. We anticipate that environmental regulation of our
operations will continue to become more burdensome and that capital and
operating expenditures necessary to comply with environmental regulations will
continue, and perhaps increase, in the future. In addition, we may incur
obligations to remove or mitigate any adverse effects on the environment
resulting from our operations, including the restoration of natural resources,
and liability for personal injury and for damages to property and natural
resources. Because environmental regulations are not consistent worldwide, our
ability to compete in the world marketplace may be adversely affected by capital
and operating expenditures required for environmental compliance.

Subject to permit approvals, we have undertaken an initiative at our Spring
Grove facility under the Voluntary Advanced Technical Incentive Program set
forth by the United States Environmental Protection Agency ("EPA") in the
"Cluster Rule." This initiative, the "New Century Project," will require capital
expenditures currently estimated at approximately $32,500,000 to be incurred
before April 2004. Through 2001, we have invested approximately $2,400,000 in
this project including $900,000 in 2001. We estimate that $6,700,000,
$18,000,000 and $5,400,000 will be spent on this project during 2002, 2003 and
2004, respectively. The Cluster Rule is a 1998 federal regulation in which the
EPA aims to regulate air and water emissions from certain pulp and paper mills,
including kraft pulp mills such as our Spring Grove facility. Issued under both
the Clean Air Act and the Clean Water Act, the Cluster Rule establishes baseline
emissions limits for toxic and non-conventional pollutant releases to both water
and air.

SPRING GROVE, PENNSYLVANIA -- WATER. We intend the New Century Project,
among other things, to achieve by April 2004 a level of color in the receiving
stream consistent with the level required in all similar streams in
Pennsylvania. In June 1999, the Pennsylvania Public Interest Research Group and
several other parties (collectively, "PennPIRG") filed a citizens suit under the
federal Clean Water Act and the Pennsylvania Clean Streams Law alleging that we
had been operating our Spring Grove facility in violation of a 1984 wastewater
discharge permit. We disagreed with this allegation; however, the parties
settled the litigation, as described below, prior to the issuance of a final
adjudication. In its citizens suit, PennPIRG sought civil penalties,
reimbursement for costs of litigation and a reduction in the Spring Grove
facility's discharge of color (a) immediately and (b) to a level lower than that
achievable with the New Century Project.

A "discharge of color" describes the presence in the facility's water
effluent of materials, primarily lignins and tannins, which are natural glues
and saps, found in trees, which discolor the water. The lignins and tannins are
not themselves toxic, and we believe that the receiving stream is not
environmentally impacted by the color. In September 2000, the Pennsylvania
Department of Environmental Protection ("Pennsylvania DEP") issued a renewed
permit that required us to comply with more stringent limits on color discharges
than had been in place. We appealed the permit, as did PennPIRG.

On October 26, 2001, the United States District Court for the Middle
District of Pennsylvania approved a settlement between the parties to the
citizens suit to which the Pennsylvania DEP joined. Under this settlement, the
Court established a compliance schedule that would require achievement of water
quality limits consistent with those contemplated under the New Century Project
by April 2004. We also agreed to the implementation of certain projects
encompassed by the New Century Project consistent with the timetable set forth
in our water discharge permit requiring completion of the projects by April
2004. These projects include improvements in brownstock washing, installation of
an oxygen delignification bleaching process and 100 percent chlorine dioxide
substitution. We believe these projects will enable us to achieve compliance
with the final permit limits. We presently do not anticipate difficulties in
implementing the New Century Project; however, we have not yet received all the
required governmental approvals, nor have we installed all the necessary
equipment.

In addition to these projects, under the terms of the settlement, we have
created a permanent endowment for certain environmental and recreational
improvement projects in the Codorus Creek watershed, and have
43

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

paid PennPIRG certain litigation costs related to this lawsuit. Our total cost
accrued and paid under this settlement was $2,500,000 (see Note 2). The
administrative appeals filed by Glatfelter and PennPIRG have been dismissed as
moot.

We are voluntarily cooperating with an investigation by the Pennsylvania
DEP, which commenced in February 2002, of our Spring Grove facility related to
certain discharges, which are alleged to be unpermitted, to the Codorus Creek.
There is no indication that these discharges had an impact on human health or on
the environment. Although this investigation could result in the imposition of a
fine or other punitive measures, we currently do not know what, if any, actions
will be taken.

SPRING GROVE, PENNSYLVANIA -- AIR. In 1999, EPA and the Pennsylvania DEP
issued to us separate Notices of Violation ("NOVs") alleging violations of air
pollution control laws, primarily for purportedly failing to obtain appropriate
pre-construction air quality permits in conjunction with certain modifications
to our Spring Grove facility. EPA and the Pennsylvania DEP primarily alleged
that our modifications produced significant net emissions increases in certain
air pollutants that should have been covered by permits containing reduced
emissions limitations.

For all but one of the modifications cited by EPA, we applied for and
obtained from the Pennsylvania DEP the pre-construction permits that we
concluded were required by applicable law. EPA reviewed those applications
before the permits were issued. The Pennsylvania DEP's NOV pertained only to the
modification for which we did not receive a pre-construction permit. We
conducted an evaluation at the time of this modification and determined that the
pre-construction permit cited by EPA and the Pennsylvania DEP was not required.
We have been informed that EPA and the Pennsylvania DEP will seek substantial
emissions reductions, as well as civil penalties, to which we believe we have
meritorious defenses. Nevertheless, we are unable to predict the ultimate
outcome of these matters or the costs involved.

NEENAH, WISCONSIN -- WATER. We have previously reported with respect to
potential environmental claims arising out of the presence of polychlorinated
biphenyls ("PCBs") in sediments in the lower Fox River and in the Bay of Green
Bay, downstream of our Neenah, Wisconsin facility. We acquired the Neenah
facility in 1979 as part of the acquisition of the Bergstrom Paper Company. In
part, this facility uses wastepaper as a source of fiber. At no time did the
Neenah facility utilize PCBs in the pulp and paper making process, but
discharges from the facility containing PCBs from wastepaper may have occurred
from 1954 to the late 1970s. Any PCBs that the Neenah facility discharged into
the Fox River resulted from the presence of NCR(R)-brand carbonless copy paper
in the wastepaper that was received from others and recycled.

As described below, various state and federal governmental agencies have
formally notified seven potentially responsible parties ("PRPs"), including
Glatfelter, that they are potentially responsible for response costs and
"natural resource damages" ("NRDs") arising from PCB contamination in the lower
Fox River and in the Bay of Green Bay, under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and other statutes. The six
other identified PRPs include NCR Corporation, Appleton Papers Inc., Georgia
Pacific Corp., WTM I Co. (a subsidiary of Chesapeake Corp.), Riverside Paper
Company, and U.S. Paper Mills Corp. (now owned by Sonoco Products Company).

CERCLA establishes a two-part liability structure that makes responsible
parties liable for (1) "response costs" associated with the remediation of a
release of hazardous substances and (2) NRDs related to that release. Courts
have interpreted CERCLA to impose joint and several liability on responsible
parties, subject to equitable allocation in certain instances. Prior to a final
settlement by all responsible parties and the final cleanup of the
contamination, uncertainty regarding the application of such liability will
persist.

On October 2, 2001, the Wisconsin Department of Natural Resources
("Wisconsin DNR") and EPA issued drafts of the reports resulting from the
remedial investigation and the feasibility study of the PCB contamination of the
lower Fox River and the Bay of Green Bay. On that same day, the Wisconsin DNR
and EPA issued a Proposed Remedial Action Plan ("PRAP") for the cleanup of the
lower Fox River and the Bay
44

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of Green Bay, estimating the total costs associated with the proposed response
action at $307,600,000 (without a contingency factor) over a 7-to-18-year time
period. The most significant component of the estimated costs is attributable to
large-scale sediment removal by dredging. Based on cost estimates of large-
scale dredging response actions at other sites, we believe that the PRAP's cost
projections may underestimate actual costs of the proposed remedy by over
$800,000,000.

We do not believe that the response action proposed by the Wisconsin DNR
and EPA is appropriate or cost effective. We believe that a protective remedy
for Little Lake Butte des Morts, the portion of the river that is closest of our
Neenah facility, can be implemented at a much lower actual cost than would be
incurred performing large-scale dredging. We also believe that an aggressive
effort to remove the PCB-contaminated sediment, much of which is buried under
cleaner sediment or is otherwise unlikely to move and which is abating
naturally, would be environmentally detrimental and, therefore, inappropriate at
all locations of the river. We have proposed to dredge and cap certain
delineated areas with relatively higher concentrations of PCBs in Little Lake
Butte des Morts. We have accrued an amount to cover this project, potential NRD
claims, claims for reimbursement of expenses of other parties and residual
liabilities.

We have submitted comments to the PRAP that advocate vigorously for the
implementation of environmentally protective alternatives that do not rely upon
large-scale dredging. EPA, in consultation with the Wisconsin DNR, will consider
comments on the PRAP and will then select a remedy to address the contaminated
sediment. Because we have thus far been unable to persuade the EPA and the
Wisconsin DNR of the correctness of our assessment (as evidenced by the issuance
of the PRAP), we are becoming less confident that an alternative remedy totally
excluding large-scale dredging will be implemented. Therefore, we have increased
the reasonably possible estimate of our potential cost in this matter. The
issuance of the PRAP has not materially impacted the amount we have accrued for
this matter, however, as we continue to believe that ultimately we will be able
to convince the EPA and the Wisconsin DNR that large-scale dredging is
inappropriate.

As noted above, NRD claims are theoretically distinct from costs related to
the primary remediation of a Superfund site. Calculating the value of NRD claims
is difficult, especially in the absence of a completed remedy of the underlying
contamination. The State of Wisconsin has informally asserted claims for NRDs
against the identified PRPs regarding alleged injuries to natural resources
under its alleged trusteeship in the lower Fox River and the Bay of Green Bay.
To date, Wisconsin has not prepared any estimates of the alleged value of its
NRD claims settlements nor finalized any settlements from which that value could
be estimated. Based on available information, we believe that any NRD claims
that Wisconsin may bring will likely be legally and factually without merit.

The United States Fish and Wildlife Service ("FWS"), the National Oceanic
and Atmospheric Administration ("NOAA"), four Indian tribes and the Michigan
Attorney General also assert that they possess NRD claims related to the lower
Fox River and the Bay of Green Bay. In June 1994, FWS notified the seven
identified PRPs that it considered them potentially responsible for NRDs. The
federal, tribal and Michigan agencies claiming to be NRD trustees have proceeded
with the preparation of an NRD assessment separate from the Wisconsin DNR. While
the final assessment will be delayed until after the selection of a remedy, the
federal trustees released a plan on October 25, 2000 that values their NRDs for
injured natural resources between $176,000,000 and $333,000,000. We believe that
the federal NRD assessment is technically and procedurally flawed. We also
believe that the NRD claim alleged by the federal, tribal and Michigan entities
are legally and factually without merit.

We are seeking settlement with the Wisconsin agencies and with the federal
government for all of our potential liabilities for response costs and NRDs
associated with the contamination. The Wisconsin DNR and FWS have published
studies, the latter in draft form, estimating the amount of PCBs discharged by
each PRP that estimate the volumetric share of the discharge from our Neenah
facility to be as high as 27%. We do not believe the volumetric estimates used
in these studies are accurate because the studies themselves disclose
45

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that they are not accurate and are based on assumptions for which there is no
evidence. We believe that our volumetric contribution is significantly lower. We
further maintain that we do not believe that a volumetric allocation would
constitute an equitable distribution of the potential liability for the
contamination. Other factors, such as the location of contamination, location of
discharge and a party's role in causing discharge must be considered in order
for the allocation to be equitable. We have entered into interim cost-sharing
agreements with four of the other six PRPs, pursuant to which the PRPs have
agreed to share both defense costs and costs for scientific studies relating to
PCBs discharged into the Lower Fox River. These interim cost-sharing agreements
have no bearing on the final allocation of costs related to this matter. Based
upon our evaluation of the magnitude, nature and location of the various
discharges of PCBs to the river and the relationship of those discharges to
identified contamination, we believe our share of any liability among the seven
identified PRPs is much less than one-seventh of the whole.

We also believe that additional potentially responsible parties exist other
than the seven identified PRPs, which are all paper companies. For instance,
certain of the identified PRPs discharged their wastewater through public
wastewater treatment facilities, which we believe makes the owners of such
facilities potentially responsible in this matter. We also believe that entities
providing wastepaper containing PCBs to each of the recycling mills, including
our Neenah facility, are also potentially responsible for this matter.

We currently are unable to predict our ultimate cost related to this
matter, because we cannot predict which remedy will be selected for the site,
the costs thereof, the ultimate amount of NRDs, or our share of these costs or
NRDs.

We continue to believe it is likely that this matter will result in
litigation. We maintain that the removal of a substantial amount of
PCB-contaminated sediments is not an appropriate remedy. There can be no
assurance, however, that we will be successful in arguing that removal of
PCB-contaminated sediments is inappropriate or that we would prevail in any
resulting litigation.

The amount and timing of future expenditures for environmental compliance,
cleanup, remediation and personal injury, NRDs and property damage liability,
including but not limited to those related to the lower Fox River and the Bay of
Green Bay, cannot be ascertained with any certainty due to, among other things,
the unknown extent and nature of any contamination, the extent and timing of any
technological advances for pollution abatement, the response actions that may be
required, the availability of qualified remediation contractors, equipment and
landfill space and the number and financial resources of any other PRPs. We have
established reserves, relating to unasserted claims, for environmental
remediation and other environmental liabilities for those environmental matters
for which it is probable that an assertion will be made and an obligation exists
and for which the amount of the obligation is reasonably estimable. As of
December 31, 2001 and December 31, 2000, we have accrued reserves of
approximately $28,800,000 and $26,400,000, respectively, representing our best
estimate within a range of possible outcomes, which would cover the cost of our
proposed project regarding Little Lake Butte des Morts, potential NRD claims,
claims for reimbursement of expenses of other parties and residual liabilities.
This accrual is included in "Other long-term liabilities" on the Consolidated
Balance Sheets. Changes to the accrual reflect our best estimate of the ultimate
outcome and considers changes in the extent and cost of the remedy, the status
of negotiations with the various parties, including other PRPs, and our
assessment of potential NRD claims, claims for reimbursement of expenses of
other parties and residual liabilities. Based upon our assessment as to the
ultimate outcome to this matter, we accrued and charged $2,400,000 to pre-tax
earnings each year in 2001, 2000 and 1999.

Based on analysis of currently available information and experience with
respect to the cleanup of hazardous substances, we believe that it is reasonably
possible that our costs associated with these matters may exceed current
reserves by amounts that may prove to be insignificant or that could range, in
the aggregate, up to approximately $200,000,000 over a period that is
undeterminable but could range between 10 to 20 years or beyond. The upper limit
of such range is substantially larger than the amount of our reserves. The
estimate of the range of reasonably possible additional costs is less certain
than the estimates upon which
46

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reserves are based. In order to establish the upper limit of such range, we used
assumptions that are the least favorable to us among the range of assumptions
pertinent to reasonably possible outcomes. We believe that the likelihood of an
outcome in the upper end of the range is significantly less than other possible
outcomes within the range and that the possibility of an outcome in excess of
the upper end of the range is remote.

In our estimate of the upper end of the range, we have assumed full-scale
dredging as set forth in the PRAP, at a significantly higher cost than estimated
in the PRAP. We have also assumed our share of the ultimate liability to be 18%,
which is significantly higher than we believe is appropriate or will occur, and
a level of NRD claims and claims for reimbursement of expenses from other
parties that, although reasonably possible, is unlikely. In estimating both our
current reserve for environmental remediation and other environmental
liabilities and the possible range of additional costs, we have not assumed that
we will bear the entire cost of remediation and damages to the exclusion of
other known PRPs who may be jointly and severally liable. The ability of other
PRPs to participate has been taken into account, based generally on their
financial condition and probable contribution. Our evaluation of the other PRPs'
financial condition included the review of publicly disclosed financial
information. The relative probable contribution is based upon our knowledge that
at least two PRPs manufactured the paper that included the PCBs and as such, in
our opinion, bear a higher level of responsibility. In addition, our assessment
is based upon the magnitude, nature and location of the various discharges of
PCBs to the river and the relationship of those discharges to identified
contamination. We did not consider the financial condition of a smaller,
non-public PRP as financial information is not available, and we do not believe
its contribution to be material. We have also considered that over a number of
years, certain PRPs were under the ownership of large multinational companies,
who appear to retain some liability for this matter. We continue to evaluate our
exposure and the level of our reserves, including, but not limited to, our
potential share of the costs and NRDs (if any) associated with the lower Fox
River and the Bay of Green Bay.

We believe that we are insured against certain losses related to the lower
Fox River and the Bay of Green Bay, depending on the nature and amount of the
losses. Insurance coverage, which is currently being investigated under
reservation of rights by various insurance companies, is dependent upon the
identity of the plaintiff, the procedural posture of the claims asserted and how
such claims are characterized. We do not know when the insurers' investigations
as to coverage will be completed, and we are uncertain as to what the ultimate
recovery will be and whether it will be significant in relation to the losses
for which we have accrued.

SUMMARY. Our current assessment is that we should be able to manage these
environmental matters without a long-term, material adverse impact on us. These
matters could, however, at any particular time or for any particular year or
years, have a material adverse effect on our consolidated financial condition,
liquidity or results of operations or could result in a default under our loan
covenants. Moreover, there can be no assurance that our reserves will be
adequate to provide for future obligations related to these matters, that our
share of costs and/or damages for these matters will not exceed our available
resources, or that such obligations will not have a long-term, material adverse
effect on our consolidated financial condition, liquidity or results of
operations. With regard to the lower Fox River and the Bay of Green Bay, if we
are not successful in managing the matter and are ordered to implement the
remedy proposed in the PRAP, such an order would have a material adverse effect
on our consolidated financial condition, liquidity and results of operations and
would result in a default under our loan covenants.

During 2001, 2000 and 1999, we expended approximately $1,700,000,
$2,600,000 and $2,600,000, respectively, on environmental capital projects. We
estimate total expenditures of $7,400,000 and $19,900,000 for environmental
capital projects in 2002 and 2003, respectively. During 2001, 2000 and 1999, we
incurred approximately $15,600,000, $16,700,000 and $15,800,000, respectively,
in operating costs related to complying with environmental laws and regulations.

47

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

We are also involved in other lawsuits. The ultimate outcome of these
lawsuits cannot be predicted with certainty, however, we do not expect that such
lawsuits will have a material adverse effect on our consolidated financial
position, results of operations or liquidity.

NOTE 10. OTHER SALES AND GEOGRAPHIC INFORMATION

We sell a significant portion of our specialized printing papers through
wholesale paper merchants. No individual customer accounted for more than 10% of
our net sales in 2001, 2000 or 1999. Excluding the net sales of the Ecusta
Division, net sales to one customer in 2001 were approximately 11% of total net
sales.

Our 2001, 2000 and 1999 net sales to external customers and location of net
plant, equipment and timberlands as of December 31, 2001, 2000 and 1999 are
summarized below. Net sales are attributed to countries based upon origin of
shipment. The net sales information below includes the results of the Ecusta
Division through August 9, 2001. Plant and equipment -- net for the Ecusta
Division at December 31, 2000 and 1999 were $52,577,000 and $52,876,000,
respectively. See Note 2.

Net sales information by product groups for the years ending December 31
follows:

NOTE 11. QUARTERLY RESULTS (UNAUDITED)

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

(a) After impact of an after-tax charge primarily for the impairment of Ecusta
assets (unusual item) of $33,595,000.

(b) After impact of an after-tax charge for the loss on the sale of Ecusta
(unusual item) of $6,114,000.

(c) After impact of an after-tax charge primarily for the loss on the sale of
Ecusta (unusual item) of $39,709,000.

(d) After impact of an after-tax charge for restructuring charge (unusual item)
of $2,120,000.

48

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

(a) Directors. The information with respect to directors required under
this Item is incorporated herein by reference to pages 4, 5 and 25 of our Proxy
Statement, dated April 9, 2002.

(b) Executive Officers of the Registrant. The information with respect to
the executive officers required under this Item is set forth in Part I of this
report.

ITEM 11. EXECUTIVE COMPENSATION.

The information required under this Item is incorporated herein by
reference to pages 9 through 21 of our Proxy Statement, dated April 9, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required under this Item is incorporated herein by
reference to pages 22 through 24 of our Proxy Statement, dated April 9, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required under this Item is incorporated herein by
reference to page 21 of our Proxy Statement, dated April 9, 2002.

49

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) 1. Our Consolidated Financial Statements as follows are included in
Part II, Item 8:

Consolidated Statements of Income and Comprehensive Income for the
Years Ended December 31, 2001, 2000 and 1999

Consolidated Balance Sheets, December 31, 2001 and 2000

Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999

Consolidated Statements of Cash Flows for the Years Ended December
31, 2001, 2000 and 1999

Notes to Consolidated Financial Statements for the Years Ended
December 31, 2001, 2000 and 1999

2. Financial Statement Schedules (Consolidated) are included in Part
IV:

For Each of the Three Years in the Period Ended December 31, 2001:

II -- Valuation and Qualifying Accounts (see S-1)

Schedules other than those listed above are omitted because of the
absence of conditions under which they are required or because the
required information is included in the Notes to the Consolidated
Financial Statements.

Our individual financial statements are not presented inasmuch as we
are primarily an operating company and our consolidated subsidiaries
are essentially wholly-owned.

3. Executive Compensation Plans and Arrangements: see Exhibits (10)(a)
through (10)(n), described below.

Exhibits:

(b) On October 2, 2001, we filed a Form 8-K dated October 2, 2001 to update
certain environmental matters disclosed in prior periodic filings.

53

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

P. H. GLATFELTER COMPANY
(Registrant)

March 27, 2002
By /s/ G. H. GLATFELTER II
------------------------------------
G. H. Glatfelter II
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:

SCHEDULE II
P. H. GLATFELTER COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001
VALUATION AND QUALIFYING ACCOUNTS

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

(a) Relates primarily to the disposition of the Ecusta Division.

The provision for doubtful accounts is included in administrative expense and
the provision for sales discounts and deductions is deducted from sales. The
related allowances are deducted from accounts receivable.

S-1

EXHIBIT INDEX

(2) Amended and Restated Acquisition Agreement dated as of August
9, 2001 by and among Purico (IOM) Limited, RF & Son Inc., RFS US
Inc. and RFS Ecusta Inc., as Buyers, and P. H. Glatfelter Company
and Mollanvick, Inc., as Sellers (incorporated by reference to
Exhibit 2 of our Form 8-K dated August 24, 2001).

(3)(a) Articles of Amendment dated April 27, 1977, including
restated Articles of Incorporation (incorporated by reference to
Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended
December 31, 1993) as amended by Articles of Merger dated January
30, 1979 (incorporated by reference to Exhibit (3)(a) of our Annual
Report on Form 10-K for the year ended December 31, 1993); a
Statement of Reduction of Authorized Shares dated May 12, 1980
(incorporated by reference to Exhibit (3)(a) of our Annual Report on
Form 10-K for the year ended December 31, 1993); a Statement of
Reduction of Authorized Shares dated September 23, 1981
(incorporated by reference to Exhibit (3)(a) of our Annual Report on
Form 10-K for the year ended December 31, 1993); a Statement of
Reduction of Authorized Shares dated August 2, 1982 (incorporated by
reference to Exhibit (3)(a) of our Annual Report on Form 10-K for
the year ended December 31, 1993); a Statement of Reduction of
Authorized Shares dated July 29, 1983 (incorporated by reference to
Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended
December 31, 1993); by Articles of Amendment dated April 25, 1984
(incorporated by reference to Exhibit (3)(a) of our Annual Report on
Form 10-K for the year ended December 31, 1994); a Statement of
Reduction of Authorized Shares dated October 15, 1984 (incorporated
by reference to Exhibit (3)(b) of our Form 10-K for the year ended
December 31, 1984); a Statement of Reduction of Authorized Shares
dated December 24, 1985 (incorporated by reference to Exhibit (3)(b)
of our Form 10-K for the year ended December 31, 1985); by Articles
of Amendment dated April 23, 1986 (incorporated by reference to
Exhibit (3) of our Quarterly Report on Form 10-Q for the quarter
ended March 31, 1986); a Statement of Reduction of Authorized Shares
dated July 11, 1986 (incorporated by reference to Exhibit (3)(b) of
our Form 10-K for the year ended December 31, 1986); a Statement of
Reduction of Authorized Shares dated March 25, 1988 (incorporated by
reference to Exhibit (3)(b) of our Form 10-K for the year ended
December 31, 1987); a Statement of Reduction of Authorized Shares
dated November 9, 1988 (incorporated by reference to Exhibit (3)(b)
of our Form 10-K for the year ended December 31, 1988); a Statement
of Reduction of Authorized Shares dated April 24, 1989 (incorporated
by reference to Exhibit (3)(b) of our Form 10-K for the year ended
December 31, 1989); Articles of Amendment dated November 29, 1990
(incorporated by reference to Exhibit (3)(b) of our Form 10-K for
the year ended December 31, 1990); Articles of Amendment dated June
26, 1991 (incorporated by reference to Exhibit (3)(b) of our Form
10-K for the year ended December 31, 1991); Articles of Amendment
dated August 7, 1992 (incorporated by reference to Exhibit (3)(b) of
our Form 10-K for the year ended December 31, 1992); Articles of
Amendment dated July 30, 1993 (incorporated by reference to Exhibit
(3)(b) of our Form 10-K for the year ended December 31, 1993); and
Articles of Amendment dated January 26, 1994 (incorporated by
reference to Exhibit (3)(b) of our Form 10-K for the year ended
December 31, 1993).

(3)(b) Articles of Incorporation, as amended through January 26,
1994 (restated for the purpose of filing on EDGAR) (incorporated by
reference to Exhibit (3)(c) of our Form 10-K for the year ended
December 31, 1993).

(3)(c) By-Laws as amended through March 8, 2002.

(4)(a) Indenture, dated as of July 22, 1997, between P. H. Glatfelter
Company and The Bank of New York, relating to the 6-7/8%
Notes due 2007 (incorporated by reference to Exhibit 4.1 to our Form
S-4 Registration Statement, Reg. No. 333-36395).

(4)(b) Registration Rights Agreement, dated as of July 22, 1997, among P. H.
Glatfelter Company, Bear, Stearns & Co. Inc. and BT Securities
Corporation, relating to the 6-7/8% Notes due 2007

(incorporated by reference to Exhibit 4.3 to our Form S-4
Registration Statement, Reg. No. 333-36395).

(9) P. H. Glatfelter Family Shareholders' Voting Trust dated July 1,
1993 (incorporated by reference to Exhibit 1 of the Schedule 13D
filed by P. H. Glatfelter Family Shareholders' Voting Trust dated
July 1, 1993).

(10)(a) P. H. Glatfelter Company Management Incentive Plan, adopted
as of January 1, 1994, as amended and restated December 19, 2000 and
effective January 1, 2001 (incorporated by reference to Exhibit
(10)(a) of our Form 10-K for the year ended December 31, 2000).

(10)(b) P. H. Glatfelter Company 1988 Restricted Common Stock Award
Plan, as amended and restated June 24, 1992 (incorporated by
reference to Exhibit (10)(c) of our Form 10-K for the year ended
December 31, 1992).

(10)(c) P. H. Glatfelter Company Supplemental Executive Retirement
Plan, as amended and restated effective April 23, 1998 and further
amended December 20, 2000 (incorporated by reference to Exhibit
(10)(c) of our Form 10-K for the year ended December 31, 2000).

(10)(d) Deferral Benefit Pension Plan of Ecusta Division, effective
May 22, 1986 (incorporated by reference to Exhibit (10)(e) of our
Form 10-K for the year ended December 31, 1987).

(10)(e) Description of Executive Salary Continuation Plan
(incorporated by reference to Exhibit (10)(g) of our Form 10-K for
the year ended December 31, 1990).

(10)(f) P. H. Glatfelter Company Supplemental Management Pension
Plan, effective as of April 23, 1998 (incorporated by reference to
Exhibit (10)(f) of our Form 10-K for the year ended December 31,
1998).

(10)(g) P. H. Glatfelter Company 1992 Key Employee Long-Term
Incentive Plan, as amended December 20, 2000 (incorporated by
reference to Exhibit (10)(g) of our Form 10-K for the year ended
December 31, 2000).

(10)(h) P. H. Glatfelter Company Deferred Compensation Plan for
Directors, effective as of April 22, 1998 (incorporated by reference
to Exhibit (10)(h) of our Form 10-K for the year ended December 31,
1998).

(10)(i) Change in Control Employment Agreement by and between P. H.
Glatfelter Company and George H. Glatfelter II, dated as of December
31, 2000 (incorporated by reference to Exhibit (10)(i) of our Form
10-K for the year ended December 31, 2000).

(10)(j) Change in Control Employment Agreement by and between P. H.
Glatfelter Company and Robert P. Newcomer, dated as of December 31,
2000 (along with a Schedule of Change in Control Employment
Agreements by and between P. H. Glatfelter Company and other
employees which have not been filed as exhibits to this Form 10-K).

(10)(k) Employment Agreement by and between P. H. Glatfelter Company
and Gerhard K. Federer, dated as of January 31, 2001.

(10)(l) Termination of Employment Contract by and between P. H.
Glatfelter Company and Robert L. Miller, dated as of March 22, 2001.

(10)(m) Termination of Employment Contract by and between P. H.
Glatfelter Company and Leland R. Hall, dated as of April 24, 2001.

(10)(n) Termination of Employment Contract by and between P. H.
Glatfelter Company and Robert S. Wood, dated as of February 13, 2002.

(10)(o) Loan Agreement, dated February 24, 1997, between P. H.
Glatfelter Company, as borrower, and GWS Valuch, Inc., as lender
(incorporated by reference to Exhibit (10)(h) of our Form 10-K for
the year ended December 31, 1996).

(10)(p) Agreement between the State of Wisconsin and Certain
Companies Concerning the Fox River, dated as of January 31, 1997,
among P. H. Glatfelter Company, Fort Howard Corporation, NCR
Corporation, Appleton Papers Inc., Riverside Paper Corporation, U.S.
Paper Mills, Wisconsin Tissue Mills Inc. and the State of Wisconsin
(incorporated by reference to Exhibit (10)(i) of our Form 10-K for
the year ended December 31, 1996).

(10)(q) Credit Agreement, dated as of December 22, 1997, among P. H.
Glatfelter Company, various subsidiary borrowers, Bankers Trust
Company, as Agent, and various lending institutions with Deutsche
Bank AG, as Documentation Agent, PNC Bank, National Association, as
Syndication Agent, and First National Bank of Maryland and Wachovia
Bank, N.A., as Managing Agents (incorporated by reference to Exhibit
(10)(j) of our Form 10-K for the year ended December 31, 1997).

(10)(r) First Amendment to Credit Agreement dated as of August 6,
2001 by and among P. H. Glatfelter Company, various subsidiaries of
the Company party hereto, the financial institutions party to the
Credit Agreement dated as of December 22, 1997 in their capacities
as lenders, and Bankers Trust Company, as agent for the lenders
(incorporated by reference to Exhibit 10 of our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001).

(10)(s) Supply and Service Agreement dated as of August 1, 2001 by
and among Purico GmbH, Purico (IOM) Limited and Papierfabrik
Schoeller & Hoesch GmbH & Co.

(10)(t) Arrangement Letter by and between P. H. Glatfelter Company
and Accenture LLP, dated as of January 16, 2001.

(21) Subsidiaries of the Registrant

(23) Consent of Independent Auditors

(b) On October 2, 2001, we filed a Form 8-K dated October 2, 2001 to
update certain environmental matters disclosed in prior periodic
filings.