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, 2002 1-3560

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

PENNSYLVANIA 23-0628360
(State or other jurisdiction of (IRS 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

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. [X]

Based the closing price, as of June 28, 2002, the aggregate market value of
the Common Stock of the Registrant held by non-affiliates on February 26, 2003
was $533,695,277.

COMMON STOCK OUTSTANDING AT MARCH 6, 2003 WAS
43,697,855 SHARES.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in this
Annual Report on Form 10-K: Proxy Statement dated March 28, 2003 (Part III).

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P. H. GLATFELTER COMPANY

FORM 10-K

YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

PART I

This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on expectations, estimates
and projections as of the date of this filing. Actual results may differ
materially from those expressed in forward-looking statements. See Item 7 of
Part II -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Forward-Looking Statements".

ITEM 1. BUSINESS

OVERVIEW

Glatfelter began operations in 1864 in Spring Grove, Pennsylvania and in
1905 incorporated under the laws of the Commonwealth of Pennsylvania. Today we
are one of the world's leading manufacturers of specialized printing papers and
engineered products. Headquartered in York, Pennsylvania, we own and operate
paper mills located in Spring Grove, Pennsylvania and Neenah, Wisconsin. In 1998
we expanded our global reach with the acquisition of Schoeller & Hoesch GmbH &
Co. ("S&H"). Based in Gernsbach, Germany, S&H operates paper mills in Gernsbach
and in Scaer, France and an abaca pulp mill in the Philippines. Our products are
marketed worldwide either through wholesale paper merchants, brokers and agents,
or directly to our customers.

In August 2001, we completed the divestiture of our Ecusta Division, a
supplier of paper primarily to the tobacco and financial printing industries.
Product sales for the Ecusta Division totaled approximately $90.8 million in
2001.

Our common stock is listed on the New York Stock Exchange under the symbol
"GLT". As used herein, "Glatfelter," "we," "our" and similar terms include P. H.
Glatfelter Company and its subsidiaries unless the context indicates otherwise.

OUR BUSINESS STRATEGY

Our business strategy is to be the global supplier of choice in two key
product areas -- specialized printing papers and engineered products. As
discussed below, we have aligned our organization along business units focused
to understand and meet the needs of our customers. The financial information
presented within the Business Unit discussion excludes the Ecusta Division.

BUSINESS UNITS

Beginning in 2001, we organized our company into three business units:
Engineered Products, Long-Fiber & Overlay Paper, and Printing and Converting
Papers. In addition, we supply tobacco papers to fulfill obligations of a supply
agreement entered into in connection with the sale of our Ecusta Division.

Engineered Products accounted for approximately 23%, 21% and 19% of
total product sales in 2002, 2001 and 2000, respectively. The Engineered
Products unit is focused on highly technical "engineered" paper products
designed for multiple end uses, such as papers for pressure sensitive
postage stamps, disposable medical garments, playing cards and digital
inkjet applications. This business unit comprises an array of products in
distinct business niches that are in a continual state of evolution. Some
are high growth; others are further along on the development curve. Because
the products are technically complex and require substantial "development
capital" generated through the customer-supplier relationship, product
pricing in this business unit remains relatively constant.

Long-Fiber & Overlay Papers represented approximately 20%, 18% and 17%
of total product sales in 2002, 2001 and 2000, respectively. Long-fiber is
the generic term we use to describe products primarily made from abaca
pulp. This business unit focuses on products such as paper for tea bags and
decorative laminates used for furniture, flooring and other commercial
applications. Long-fiber papers, primarily tea bags and related papers,
accounted for 70%, 72% and 64% of this business unit's sales in 2002, 2001
and 2000, respectively. Similar to engineered products, long-fiber and
overlay papers are technically sophisticated. We believe we are uniquely
positioned to produce these extremely lightweight papers

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because we understand their complexities, which require the use of highly
specialized fiber and specifically designed papermaking equipment.

Printing and Converting Papers accounted for approximately 53%, 54%
and 58% of total product sales in 2002, 2001 and 2000, respectively. Its
products include papers for the production of high-quality hardbound books.
Book publishing papers represented 73%, 74% and 67% of this business unit's
sales in 2002, 2001 and 2000, respectively. We believe we are acknowledged
as the leading supplier of papers for this market in the United States. In
addition to book paper, this business unit also produces other papers,
including paper that is converted into specialized envelopes in a wide
array of colors, finishes and capabilities. These markets are in more
mature phases of their lifecycles, exhibiting modest growth characteristics
that normally parallel the U.S. Gross Domestic Product.

Tobacco Papers represented approximately 4%, 6% and 6% of our product
sales in 2002, 2001 and 2000, respectively. Sales in 2002 were made almost
entirely pursuant to a supply agreement between S&H and Purico (IOM)
Limited, et al ("Purico"), the buyers of the Ecusta Division. Under the
supply agreement we will sell tobacco papers to Purico through mid-2004,
although at significantly lower levels each year (See Item 8 -- Financial
Statements and Supplementary Data -- Note 14).

We are continuously developing and refining strategies to position our
business for the future, in addition to improving the efficiency of our
operations. Execution of these strategies is intended to capitalize on our
strength in customer relationships, technology and people and on our leadership
position in certain markets.

In 2002, no single customer represented more than 10% of consolidated net
sales. Net sales to one customer, Central National Gottesman, Inc. (which buys
paper through its division, Lindenmeyr Book Publishing), in 2001 were
approximately 11% of net sales, excluding the Ecusta Division.

RAW MATERIAL

The following table provides an overview of the principal raw materials of
each of our manufacturing facilities:

Our Spring Grove mill is a vertically integrated operation producing in
excess of 85% of the annual pulp required for paper production. The balance of
our pulp needs is acquired from third-party suppliers. The principal raw
material used to produce this pulp is pulpwood, of which both hardwoods and
softwoods are used. At December 31, 2002, we owned 114,000 acres of woodlands.
In addition to these sources, hardwoods are available within a relatively short
distance of our Spring Grove mill. Softwoods are 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.

On December 18, 2002, we signed a definitive agreement to sell
approximately 25,000 acres of our Maryland forestland to a subsidiary of The
Conservation Fund, a national nonprofit land conservation fund. The agreement is
contingent upon certain conditions, including, but not limited to, the
successful negotiation

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of an agreement to supply us with pulpwood, and other financing and legal
contingencies and is expected to close by the end of March 2003.

The Neenah mill is a recycled-paper mill that uses high-grade wastepaper as
its primary raw material. During 2002, approximately 83% of the Neenah mill's
fiber requirements were met with pulp made at Neenah from high-grade 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 Neenah mill supplements the
pulp it produces with purchases of off-quality wood pulp and pulp substitutes.

Our Philippine mill processes abaca fiber into abaca pulp. This abaca pulp
production provides a unique competitive advantage by supplying a key raw
material used by our Long Fiber & Overlay business unit in Germany and France.
As part of our ongoing business planning processes, we have reevaluated our
previously announced intentions to expand the production capabilities of the
abaca pulpmill. We do not expect to initiate these plans in the foreseeable
future.

Events may arise from the relatively unstable geopolitical environment in
which the Philippine facility operates that could interrupt the production of
abaca pulp. Management periodically evaluates the supply chain, including the
supply of abaca pulp to our Gernsbach and Scaer facilities. Any extended
interruption of the Philippine operation could have a material impact on our
consolidated financial position and/or results of operations. We believe we have
approximately three months of abaca pulp in the pipeline.

The Spring Grove facility generates 100% of the steam and electricity
required for its operations. Principal fuel sources used by the Spring Grove
facility are coal, recycled pulping chemicals, bark and wood waste, and oil (#2
and #6). This facility also produces excess electricity that is sold to the
local power company under a long-term co-generation contract expiring in 2010.
Net energy sales were $9.8 million and $9.7 million in 2002 and 2001,
respectively.

During 1998, the Neenah facility began purchasing steam under a twenty-year
contract from a facility of Minergy Corporation ("Minergy"). This facility,
which is located adjacent to our Neenah facility, processes paper mill sludge
from our Neenah facility as well as from other mills in the Neenah area. During
2002, the Neenah facility generated 24% of its required steam and purchased the
balance from Minergy. The Neenah facility generates a portion of its electric
power requirements (14% in 2002) and purchases the remainder. Natural gas was
used to produce almost all of the facility's internally generated steam during
2002; fuel oil was used to generate the remainder.

The Gernsbach and Scaer facilities both generate all the steam required for
their operations. The Gernsbach facility generated approximately 30% of its 2002
electricity needs and purchased the balance. Natural gas was used to produce
substantially all of Gernsbach's internally generated energy during 2002. The
Scaer facility purchased all of its 2002 electric power requirements.

Costs to operate our facilities, including natural gas, are subject to
price variations determined in the marketplace. In the first quarter of 2003, we
experienced significant fluctuations in the price of natural gas. Continued
increases in prices could have a significant adverse effect on our consolidated
financial position and/or results of operations. Management continuously
evaluates the most effective and efficient sources for steam generation.

Based on information currently available, we believe that we will continue
to have ready access to all principal raw materials used in the production of
our products. The cost of our raw material is subject to change, including, but
not limited to, costs of wood and pulp products, wastepaper and gas and oil
energy costs.

BACKLOG

Backlogs are generally not significant in our U.S.-based business, as
substantially all of our customer orders are filled within 30 days of receipt.
Backlogs at our S&H operation generally are 60-90 days. 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 production. In

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these circumstances, certain paper machines may be temporarily shut down until
backlog and inventory levels justify a resumption of operations.

COMPETITION

The competitiveness of the markets in which we sell our products varies.
The necessity for technical expertise and specialized manufacturing equipment
limits the number of companies competing with us in the engineered product and
long-fiber and overlay paper markets. 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.

There are a number of companies in the United States that manufacture
printing and converting papers. We believe we are the recognized leader in book
publishing papers and compete with, among others, Domtar and Weyerhaeuser. In
the envelope sector we compete with, among others, International Paper,
Weyerhaeuser and Blue Ridge. Capacity in the worldwide uncoated free-sheet
industry, which includes specialized printing papers, has declined in recent
years and is not expected to increase significantly for the next few years.

EMPLOYEES

As of December 31, 2002, we had approximately 2,375 active full-time
employees. Our recent restructuring will reduce our workforce by approximately
2%. We 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
(PACE). On October 22, 2002, hourly employees at our Neenah, Wisconsin facility
ratified a five-year labor agreement covering approximately 285 workers with an
expiration date of August 1, 2007. Under this agreement, wages increased 3%
effective August 1, 2002 and will increase 3% per year for the duration of the
agreement.

A five-year labor agreement that covers approximately 725 employees in
Spring Grove was ratified in November 2002 effective for the five-year period
ending January 2008. Among other changes, the contract provides for wage
increases of 2.5% in each of the first two years of the contract and 3% for the
remaining years. The early ratification of the contract was the first in our
history; wage increases were effective in November 2002.

Various unions represent approximately 830 of our S&H employees. One-year
labor agreements covering approximately 600 employees at the Gernsbach, Germany
facility and 150 employees at the Scaer, France facility were entered into
during 2002 with terms retroactive to the expiration dates of the respective
agreements. These expire in the first quarter of 2003. The terms and conditions
of the agreements will remain in effect until new agreements are negotiated,
although 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. Negotiations began in March 2003. 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 80 employees at our abaca pulpmill in the Philippines are
covered by a five-year labor agreement, which was negotiated at the end of 2002.
Under this agreement, employees received a wage increase of approximately 57
Philippine Pesos per day.

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
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not consistent worldwide, our ability to compete in the world marketplace may be
adversely affected by capital and operating expenditures required for
environmental compliance.

Additional information is included in Item 7 -- Management's Discussion &
Analysis of Results of Operations and Financial Condition and in Item 8
- -- Financial Statements and Supplementary Data -- Notes 3 and 13.

AVAILABLE INFORMATION

Our investor relations website is www.glatfelter.com/e/invesrelations.htm.
We make available on our site free of charge our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as
reasonably practical after they are filed with the Securities and Exchange
Commission.

ITEM 2. PROPERTIES

Our leased executive offices are located in York, Pennsylvania. We own and
operate paper mills located in Spring Grove, Pennsylvania; Neenah, Wisconsin;
Gernsbach, Germany; and Scaer, France. In addition, we own and operate a pulp
mill in the Philippines.

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 our
properties, other than those that are leased, are free from any material liens
or encumbrances, except for the agreement to sell 25,000 acres of timberland
discussed below. 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.

The Spring Grove facility includes six uncoated paper machines with daily
capacities ranging from 18 to 305 tons and an aggregate annual capacity of
315,000 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 66,000 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
allows us to expand our more profitable engineered paper products business.
During 2002, we produced a total of 63,585 tons of coated paper.

The Spring Grove facility also includes a pulpmill which has a production
capacity of approximately 650 tons of bleached pulp per day. 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 mill and a warehouse is located
at two sites. The Neenah mill includes three paper machines, with an aggregate
annual capacity of approximately 161,000 tons and a wastepaper de-inking and
bleaching plant with an annual capacity of approximately 86,000 tons.

Our wholly-owned subsidiary, S&H, owns and operates paper mills in
Gernsbach, Germany and Scaer, 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. As discussed in Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations, we are installing a new long fiber & overlay paper machine. We
expect the installation of this machine to take approximately four months,
during which time production will be interrupted. The Gernsbach facility also
has the capacity to produce 8,300 tons of metalized papers annually, using a
lacquering machine and two metalizers. The base paper used to manufacture the
metalized paper is

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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.

The Glatfelter Pulp Wood Company, a wholly-owned subsidiary of ours, owns
and manages approximately 114,000 acres of land, most of which is timberland. On
December 18, 2002, we signed a definitive agreement to sell approximately 25,000
acres of our Maryland forestland to a subsidiary of The Conservation Fund, a
national nonprofit land conservation fund. The agreement is contingent upon
certain conditions, including, but not limited to, the successful negotiation of
an agreement to supply us with pulpwood, and other financing and legal
contingencies and is expected to close by the end of March 2003.

ITEM 3. LEGAL PROCEEDINGS

For a discussion of the separate Notices of Violation ("NOVs") issued to
Glatfelter by the United States Environmental Protection Agency ("EPA") and the
Pennsylvania Department of Environmental Protection ("Pennsylvania DEP") and the
potential legal proceedings involving the lower Fox River and the Bay of Green
Bay, see "Environmental Matters" in Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations and in Item
8 -- Financial Statements and Supplementary Data -- Note 13.

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
the environment. We are currently engaged in negotiations with the Pennsylvania
DEP regarding these matters. The accompanying consolidated financial statements
(see Item 8 -- Financial Statements and Supplementary Data -- Notes 3 and 13)
include accruals as of December 31, 2002, associated with probable costs to
settle this matter.

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

Not Applicable

EXECUTIVE OFFICERS

The following table sets forth certain information with respect to
executive officers of Glatfelter as of March 2003.

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
organizational meeting of the Board of Directors held immediately after the
annual meeting of shareholders.

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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.

MR. NEWCOMER currently serves as President, Chief Operating Officer and Acting
Chief Financial 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 Financial Officer. In January 2003, Mr. Newcomer announced
his plans to retire effective June 30, 2003.

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.

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.

MR. INNERS became Vice President -- Operations 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.

MR. MISSIMER became Corporate Director -- Environmental Affairs in January 2003.
From February 2001 to December 2002 he was Vice President -- Environment, Health
and Safety. 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.

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.

MR. PARRINI became Senior Vice President and General Manager in January 2003.
From December 2000 to January 2003, he served as Vice President -- Sales and
Marketing. From July 2000 to December 2000, he was Vice President -- Sales and
Marketing, Glatfelter Division and Corporate Strategic Marketing. From June 1999
to July 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.

MR. YAFFE became Vice President -- Governmental Affairs in January 2003. From
September 2000 to December 2002 he was Vice President -- Government and Public
Affairs. 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.

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. From December 1993 to October 1998, he was
Director of Human Resources for the Trubyte Division of Dentsply.

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PART II

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

COMMON STOCK PRICES AND DIVIDENDS DECLARED 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 dividend declared per
share for each quarter during the past two years.

As of February 26, 2003, we had 2,489 shareholders of record. A number of the
shareholders of record are nominees.

ITEM 6. SELECTED FINANCIAL DATA

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

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(a) The Ecusta Division was sold in August 2001.
(b) After impact of restructuring and contingent liability charges partially
offset by one-time gain from settlement of escrow claims in connection with
acquisition of S&H (unusual items, net -- $1.9 million after tax).
(c) After impact of charge primarily related to a loss on disposition of the
Ecusta Division (unusual item) of $39.7 million after tax.
(d) After impact of restructuring charge (unusual item) of $2.1 million after
tax.
(e) After impact of charge for voluntary early retirement enhancement program
(unusual item) of $6.0 million after tax.

OTHER FINANCIAL DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31

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

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, including statements
regarding industry prospects and future consolidated financial position or
results of operations, made in this Annual Report on Form 10-K are forward
looking. We use words such as anticipates, believes, expects, future, intends
and similar expressions to identify forward-looking statements. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. Our actual results may differ significantly from management's
expectations. The following discussion includes forward-looking statements
regarding expectations of, among others, net sales, cost of products sold,
pension costs, environmental costs and liquidity, all of which are inherently
difficult to predict. 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 that might be projected, forecasted or estimated in any
such forward-looking statements:

i. variations in demand for, or pricing of, our products;

ii. changes in the cost or availability of raw materials we use, in
particular market pulp, pulp substitutes and wastepaper; abaca fiber, and
changes in energy-related costs;

iii. our ability to develop new, high value-added engineered
products;

iv. 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;

v. 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 NOVs issued by the EPA
and the 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 permits;

vi. the gain or loss of significant customers and/or on-going
viability of such customers;

vii. risks associated with our international operations, including
local economic and political environments and fluctuations in currency
exchange rates;

viii. geopolitical events, including war and terrorism;

ix. enactment of adverse state, federal or foreign legislation or
changes in government policy or regulation;

x. our ability to identify, finance and consummate future alliances
or acquisitions;

xi. adverse results in litigation;

xii. disruptions in production and/or increased costs due to labor
disputes;

xiii. the effect on us, if any, associated with the financial
condition of the buyers of the Ecusta Division; and,

xiv. our ability to realize the value of our timberlands.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of our consolidated financial
position 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 of America. The preparation of these
consolidated financial

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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 financial derivative 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.

i. 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.

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

iii. 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
amounts 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.

iv. Accounting for defined-benefit pension plans requires various
assumptions, including, but not limited to, discount rates, expected rates
of return on plan assets and future compensation growth rates. Accounting
for our retiree medical plans also requires 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 recorded benefit plan assets and
liabilities.

v. 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 assured
beyond a reasonable doubt.

vi. We have made estimates and accrued for liabilities assumed by the
buyers of the Ecusta Division. In addition, we have recorded receivables
due from the buyers to reimburse us for such liabilities as well as for
other expenses we were to pay on the buyers' behalf. We continue to
evaluate the collectibility of the receivables due from the buyers and, at
December 31, 2002, have determined that no reserves are necessary for such
receivables. However, reserves may be necessary in future periods.

Refer to Item 8 -- Financial Statements and Supplementary Data -- Note 2 for a
discussion of our accounting policies with respect to these and other items.

10

OVERVIEW

We are one of the world's leading manufacturers of specialized printing
papers and engineered products. The Glatfelter Division, which includes the
Spring Grove, Pennsylvania and Neenah, Wisconsin paper mills, produces both
specialized printing papers and engineered products. The S&H Division includes
paper mills in Gernsbach, Germany and Scaer, France. S&H produces specialized
printing papers and engineered products (including tobacco papers). During 2002
we completed the reorganization of the way we manage our business. We now
operate three business units: Engineered Products, Long-Fiber & Overlay Papers
and Printing and Converting Papers. We also completed our IMPACT project, which
included the installation of a worldwide enterprise resource planning
information system. This system will provide more complete financial results by
business unit beginning in 2003.

RESULTS OF OPERATIONS

2002 COMPARED TO 2001

The following table sets forth summarized results of operations.

For the year ended December 31, 2002, net income totaled $37.6 million, or
$.86 per diluted share, compared with $7.0 million and $.16 per diluted share in
2001. The comparison of reported results is affected by unusual items that are
discussed in detail below. Excluding the unusual items from each period, 2002
net income and diluted earnings per share were $39.5 million and $.90,
respectively, compared with $46.7 million and $1.09, respectively, in 2001.

NET SALES

Net sales decreased $91.9 million in 2002 compared with 2001. The decline
was substantially due to the Ecusta divestiture in 2001. Excluding Ecusta
Division net sales in 2001, net sales declined $1.0 million, or 0.2%. On this
basis, the decline was primarily due to the effect of a 3.5% decrease in average
net selling price partially offset by the effect of a 2.1% increase in net sales
volume. The decline in average net selling price was

11

also mitigated by the effect of a stronger Euro relative to the U.S. Dollar
resulting in an increase of approximately $6.4 million in translated net sales
in 2002 versus 2001.

We manage our organization along separate business units: Engineered
Products, Long-Fiber & Overlay Paper, and Printing and Converting Papers, as
well as Tobacco Papers, which is being exited. In 2002, we completed the
implementation of a new information system to provide, among other things, more
complete business unit reporting. However, we are currently unable to provide
detail business unit profitability reporting for periods prior to the system
implementation.

The following table sets forth information with respect to net sales by
business unit, excluding Ecusta:

During 2002, sales volume for our Engineered Products increased by
approximately 12% compared to 2001, offset somewhat by lower average selling
prices. Our Long-Fiber & Overlay Papers business unit experienced increased
sales volume for its products that more than offset adverse pricing pressures it
experienced during the year. In the Printing and Converting Papers business
unit, our net sales volume was substantially the same as the prior year at lower
average selling prices. During the fourth quarter of 2002, Printing and
Converting Papers experienced declining prices, reversing favorable pricing
trends that were seen during the third quarter of 2002. Tobacco Papers represent
a business unit that we are exiting pending completion of our agreement to
provide tobacco papers to the buyer of our Ecusta Division. We expect sales from
this unit to approximate $5.0 million to $10.0 million in 2003; however, the
lower proportion of tobacco papers sales relative to our total sales is expected
to have a favorable impact on our gross margin.

Thus far in 2003, demand for printing and converting papers has remained
sluggish. Recently announced increases in pulp costs indicate a possibility of
increasing selling prices for Printing and Converting Papers during the year.
Historically, pulp price increases have preceded selling price increases for
this business unit by several months. The outlook for the Engineered Products
and Long-Fiber & Overlay Papers business units is relatively stable. We
anticipate a loss in sales volume during 2003 for Long-Fiber & Overlay Papers
due to downtime associated with the rebuild of a paper machine in Gernsbach.

ENERGY SALES, NET

Energy sales, net totaled $9.8 million in 2002 compared with $9.7 million
in 2001. Energy sales represent net revenue earned from the sale of excess power
generated by certain of our paper mills.

COST OF PRODUCTS SOLD AND GROSS PROFIT

Cost of products sold declined $76.8 million, or 15.2%, in the year-to-year
comparison. Excluding the Ecusta Division, cost of products sold increased $1.3
million, or 0.3%. The increase in cost of products sold is primarily due to the
increase in net sales volume. Cost of products sold is approximately $4.3
million higher in 2002 than in 2001 due to the weakening of the U.S. Dollar
compared to the Euro and the resulting impact on translated U.S. Dollar results.
These factors more than offset the effect of a decrease in the unit cost of pulp
and the benefits of our 2002 cost control initiatives. We expect the cost of
market pulp and wastepaper to be higher in 2003 based on recent announcements of
price increases in the pulp market. As a percent of sales, our gross margin
increased to 22.9% for the full year 2002 from 22.0% in 2001. Excluding the
Ecusta Division, our gross margin was slightly lower in 2002 than in 2001.

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Our gross margin includes net non-cash pension income resulting from the
overfunded status of our defined benefit pension plans. Cost of products sold
was reduced for such income by $26.9 million in 2002 and by $24.4 million in
2001. Partially offsetting this benefit was expense attributable to other
post-retirement benefits totaling $4.6 million and $2.9 million in 2002 and
2001, respectively. The primary cause of the increase in other-post retirement
benefits was a change in our estimate of liability based upon recent claims
history.

The following table is presented to provide additional analysis of the
changes in cost of products sold, eliminating the benefit of net non-cash
pension income and the cost of products sold at Ecusta in 2001.

Our net non-cash pension income allocable to cost of products sold is
expected to be $18.6 million in 2003. Non-cash pension income is estimated each
year using certain actuarial assumptions and certain other factors, including
the fair value of our pension assets as of the first date of the calendar year.
The fair value of our pension assets has decreased significantly since January
1, 2002. See Item 8 -- Financial Statements and Supplementary Data -- Note 12.

The cost of natural gas is a significant component of our Neenah and
Gernsbach facilities' production costs. Thus far during the first quarter of
2003, we experienced adverse price increases in the cost of natural gas used by
Neenah. The Neenah and Gernsbach facilities require approximately 1.4 million
decatherms and .9 million decatherms of heat, respectively, annually. The cost
of Neenah's natural gas usage is dependent on market prices. Based on expected
production levels, a $1 per decatherm increase in the cost of gas is expected to
increase the cost of operating our Neenah facility by approximately $1.4 million
per year. In some instances, we can partially mitigate the effects of price
increases in natural gas by internally generating a portion of our steam needs
at the Neenah facility. Under a supply contract, the cost of gas consumed by
Gernsbach is based on the price of oil. Thus far during 2003, Gernsbach has
experienced much less volatility in its cost of natural gas.

Pennsylvania Drought Conditions Pulp and paper manufacturing operations
rely upon an adequate supply of water to sustain production. Our Spring Grove,
Pennsylvania facility is located in an area that was under drought warning
conditions throughout much of 2002. The drought warning and drought emergency
proclamation were lifted in the fourth quarter of 2002. The drought-imposed
restrictions did not have a material impact on our results of operations.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES

SG&A expenses declined $6.4 million, or 10.5%, in the year to year
comparison due to the Ecusta divestiture together with disciplined cost control
initiatives. Excluding the Ecusta Division, SG&A expenses declined 1.4%. SG&A is
approximately $.7 million higher in 2002 than in 2001 due to the weakening of
the U.S. Dollar compared to the Euro, and the resulting impact on translated
U.S. Dollar results. Costs incurred in 2002 include resources dedicated to
implementing our strategic initiatives, including depreciation expense and
increased service fees related to implementing information technology.

13

Net non-cash pension income reduced reported SG&A expenses $5.7 million in
2002 and $6.3 million in 2001. The following table is presented to provide
additional analysis of SG&A expenses eliminating the benefit of net non-cash
pension income and SG&A of Ecusta in 2001.

Post-retirement expense included in SG&A expenses was $ 1.0 million and $.5
million in 2002 and 2001, respectively. The primary cause of the increase in
post-retirement expense was a change in our estimate of liability based upon
recent claims history. SG&A expenses were lower in 2002 compared with 2001
primarily due to a decrease in compensation expense related to certain stock
awards that varies with the price of our common stock. Our common stock price
declined during 2002.

The fair value of our pension assets has decreased significantly since
January 1, 2002. For 2003, non-cash pension income allocable to SG&A expenses is
projected to be $2.6 million.

LOSS (GAIN) ON SALES OF PLANT, EQUIPMENT AND TIMBERLANDS

During 2002, we recorded $.2 million loss from the sale of certain fixed
assets compared with a gain of $2.0 million in 2001. The gain in 2001 primarily
resulted from the sale of a 413-acre tract of land from which we recognized a
$1.7 million gain. There were no significant sales of properties completed in
2002. On December 18, 2002, we signed a definitive agreement to sell
approximately 25,000 acres of our Maryland forestland to a subsidiary of The
Conservation Fund, a national nonprofit land conservation fund. The agreement is
contingent upon certain conditions, including, but, not limited to, the
successful negotiation of an agreement to supply us with pulpwood, and other
financing and legal contingencies and is expected to close by the end of March
2003.

UNUSUAL ITEMS

Unusual items totaled $2.2 million and $60.9 million in 2002 and 2001,
respectively. Amounts recorded in 2002 included a $4.2 million restructuring
charge related to severance and related benefit costs and a $1.5 million
contingent liability related to on-going negotiations with the Pennsylvania DEP.
These charges were partially offset by a $3.5 million one-time, pretax gain for
the settlement of certain escrow claims, including interest and associated
liabilities related to the 1998 acquisition of our S&H subsidiary.

On August 9, 2001, we completed the sale of the Ecusta Division, consisting
of our Ecusta paper-making facility and two of its operating subsidiaries,
including plant and equipment, inventory, accounts receivable and essentially
all other operating assets and certain other receivables related to our Tobacco
Papers business. As part of this transaction, the buyer assumed certain
liabilities related to the operation of the Ecusta Division. Our total charge to
earnings associated with the sale was $58.4 million, including a $50.0 million
impairment charge recognized during the second quarter of 2001. We also
recognized a $2.5 million pretax charge in the second quarter of 2001 due to the
settlement of an environmental matter in connection with the Spring Grove,
Pennsylvania facility's wastewater discharge permit.

14

INTEREST EXPENSE, NET

Interest expense, net consisted of the following:

Interest expense declined in the year-to-year comparison primarily due to
lower debt outstanding, together with lower effective interest rates. During
2002, approximately $71.8 million was used to repay debt. Interest expense is
approximately $0.2 million higher in 2002 than in 2001 due to the weakening of
the U.S. Dollar compared to the Euro, and the resulting impact on translated
U.S. Dollar results. Interest income declined in the comparison due to lower
interest earning funds.

OTHER INCOME, NET

Other income, net increased $.9 million in the year-to-year comparison.
Other income, net consists of gains from the disposition of miscellaneous
non-operating assets, none of which were material.

INCOME TAXES

Income taxes increased $16.8 million to $21.5 million for the year ended
December 31, 2002. The change in the income tax provision for 2002 compared to
2001 is primarily due to a $47.4 million increase in earnings before income
taxes. The effective tax rate decreased to 36.3% in 2002 compared with 40.6% in
2001 primarily due to the lower proportion of nondeductible items relative to
pretax income in 2002 compared to 2001.

2001 COMPARED TO 2000

Overall, net sales in 2001 decreased $89.0 million, or 12.3%, compared to
2000. Excluding the Ecusta Division, net sales in 2001 decreased $10.0 million,
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 cost of products sold decreased $87.6 million, or 14.8%, in 2001
compared to 2000. Excluding the Ecusta Division, cost of products sold decreased
by $5.7 million, or 1.3%. Cost of products sold was lower in 2001 versus 2000
primarily due to lower market pulp prices, savings from our cost reduction
initiatives and increased pension income. Pension income, which is non-cash,
reduced cost of products sold by $24.4 million in 2001 compared to $22.9 million
in 2000. Partially offsetting such cost reductions were higher energy costs for
2001. See Item 8 -- Financial Statements and Supplementary Data -- Note 12 for
disclosure related to our retirement plans, including pension income.

SG&A expenses increased by $386,000 in 2001 over 2000. Excluding the Ecusta
Division, SG&A expenses net of changes in non-cash pension income, increased by
$5.7 million, or 11.5%, from 2000 to 2001, which was due primarily to increased
salaries and professional fees related to building our capabilities to
effectively implement our strategic initiatives. Pension income reduced SG&A
expense by $6.3 million in 2001 versus $5.2 million in 2000. See Item 8 --
Financial Statements and Supplementary Data -- Note 12.

Gain on sales of plant, equipment and timberlands for 2001 increased to
$2.0 million from a loss of $.5 million in 2000. In 2001, we sold a 413-acre
tract of land for which we received $1.73 million in net cash proceeds resulting
in a realized pre-tax gain of approximately $1.70 million. No significant sales
of such properties occurred in 2000.

15

Interest expense on debt was $15.7 million in 2001 compared to $16.4
million 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.

During the first quarter of 2000, we finalized a 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 $3.3 million ($2.1
million 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, $2.2 million 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 $1.1 million 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.

FINANCIAL CONDITION

CAPITAL RESOURCES AND LIQUIDITY

Total assets were $957.0 million and $966.6 million at December 31, 2002
and 2001, respectively, and shareholders' equity was $373.8 million and $353.5
million, in the year to year comparison. The following table summarizes cash
flow information for 2002 and 2001 (See Item 8 -- Financial Statements and
Supplementary Data).

Cash and cash equivalents decreased $59.4 million in the year to year
comparison primarily due to debt reduction activities, capital expenditures
related to the IMPACT and New Century Projects, and dividends paid on common
stock.

On June 24, 2002, we entered into a new unsecured $102.5 million
multi-currency revolving credit facility ("Facility") with a syndicate of three
major banks. An additional $22.5 million was added to the Facility on September
24, 2002 with a fourth major bank. The Facility, which replaced the old
facility, enables us to borrow up to the equivalent of $125.0 million in certain
currencies. Borrowings incur interest based on the domestic prime rate or a
Eurocurrency rate, at our option, plus a margin ranging from .525% to 1.05%.
Borrowings can be made for any time period from one day to six months. The
margin and a facility fee on the commitment balance are based on the higher of
our debt ratings as published by Standard & Poor's and Moody's. The Facility
requires Glatfelter to meet certain leverage and interest coverage ratios, with
both of which we are in compliance.

The Facility also provides an additional source of liquidity in the form of
a $50.0 million accounts receivable securitization program. Should we elect to
do so, we have the ability to securitize certain eligible domestic accounts
receivable. Although the Facility provides this financing vehicle, we have no
plans to use it in the foreseeable future.

16

As the Facility matures on June 24, 2006, it has been classified on the
Balance Sheet as "Long-term debt." As of December 31, 2002, we had $67.7 million
(E64.6 million) of borrowings under the Facility. As of December 31, 2002, an
additional $57.3 million was available under the Facility.

On June 24, 2002, we repaid $133.0 million in borrowings under the
previously existing $200.0 million multi-currency revolving credit agreement.
This repayment was made using $71.1 million of our existing cash and a borrowing
of $62.0 million under the Facility.

In conjunction with our refinancing, we entered into a cross-currency swap
transaction with a major financial institution, effective June 24, 2002, with a
termination date of June 24, 2006. Under this transaction, we swapped $70.0
million for approximately E73 million and will pay interest on the Euro portion
of the swap at a floating Eurocurrency Rate, plus applicable margins and will
receive interest on the dollar portion of the swap at a floating U.S. Dollar
LIBOR rate, plus applicable margins. The cross-currency swap effectively hedges
exposure to foreign currency risk associated with certain intercompany
borrowings through 2006.

Also in conjunction with the refinancing, we terminated two existing
interest rate swap agreements on June 24, 2002, each having a total notional
principal amount of DM 50.0 million (approximately $25.0 million as of June 24,
2002). We recognized a $100,000 gain in connection with the early termination of
these swap arrangements and the repayment of the outstanding debt under the
previously existing $200.0 million multi-currency revolving credit agreement.

PNC Financial Services Group, Inc. ("PNC") beneficially owns approximately
35% of our common stock, primarily as a trustee for numerous trusts for the
benefit of Glatfelter family members. PNC Bank, National Association, a
subsidiary of PNC, is a member of a syndicate of banks under the Facility. One
member of our Board of Directors is the retired Regional Chairman of PNC Bank,
National Association, Philadelphia/South Jersey markets.

In 1997, we issued $150.0 million 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.

CAPITAL SPENDING During 2002 capital expenditures totaled $51.2 million
compared with $47.8 million in 2001. Capital expenditures are expected to be
$75.2 million in 2003.

The following table summarizes capital spending by major project, by year:

IMPACT Project -- Our IMPACT project was focused on identifying and
implementing changes in our organization and business processes. In 2002, we
successfully completed the implementation of an enterprise resource planning
system. This system provides a common platform for purchasing, accounts payable,
sales orders, cost accounting and general ledgers, among other things.

New Century Project -- The New Century Project is an initiative underway at
our Spring Grove facility under the Voluntary Advanced Technical Incentive
Program as set forth by the EPA's "Cluster Rule". This

17

project includes new hardwood brownstock washing, installation of hardwood
oxygen delignification, 100% chlorine dioxide substitution on both the hardwood
and softwood fiber lines, and a hardwood ozone bleaching system. To comply with
the Cluster Rule, we will also install equipment to reduce air emissions of air
pollutants and odorous compounds.

Long-Fiber & Overlay Papers ("L&OP") Gernsbach -- During 2002, we began our
project to expand long-fiber and overlay papers capacity in Gernsbach, Germany.
The rebuild of our #9 paper machine is expected to allow us to produce new and
advanced products and achieve greater cost efficiency.

The following table summarizes costs related to environmental capital
projects and operating costs incurred to comply with environmental rules and
regulations:

On December 18, 2002, we signed a definitive agreement to sell
approximately 25,000 acres of our Maryland forestland to a subsidiary of The
Conservation Fund, a national nonprofit land conservation fund. The agreement is
contingent upon certain conditions, including, but not limited to, the
successful negotiation of an agreement to supply us with pulpwood and other
financing and legal contingencies and is expected to close by the end of March
2003.

Based on the agreement, we will receive a 10-year installment note from a
subsidiary of The Conservation Fund for approximately $38.0 million,
representing the full amount of the consideration for the property. The 10-year
note will be secured by a letter of credit. We intend to pledge the installment
note and the letter of credit as collateral for a term loan from a financial
institution for approximately $34.0 million. Upon closing of the transaction, we
expect to recognize a pretax gain for book purposes of approximately $30.0
million.

DIVIDEND PAYMENTS During 2002 and 2001, cash dividends paid on common
stock totaled $30.3 million and $29.9 million, respectively. Our Board of
Directors determines what, if any, dividend will be paid to our shareholders.
Dividend payment decisions are based upon then existing factors and conditions
and, therefore, historical trends of dividend payments are not necessarily
indicative of future payments.

We expect to meet all our near- and longer-term cash needs from a
combination of operating cash flow, cash and cash equivalents, sale of
timberlands, our existing credit facility or other bank lines of credit and
other long-term debt. However, as discussed in Item 8 -- Financial Statements
and Supplementary Data -- Note 13, an unfavorable outcome of various
environmental matters could have a material adverse impact on our consolidated
financial position, liquidity and/or results of operations.

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.

18

SPRING GROVE, PENNSYLVANIA We are subject to the "Cluster Rule," 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 conventional
pollutant releases to both water and air.

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 EPA in the Cluster Rule. This initiative, the "New Century
Project," will require capital expenditures currently estimated to be
approximately $37.0 million to be incurred before April 2004. The New Century
Project includes improvements in brownstock washing, installation of an oxygen
delignification bleaching process, 100 percent chlorine dioxide substitution,
and a hardwood ozone bleaching system. Through December 31, 2002, we have
invested approximately $12.3 million in this project. We expect to commit $22.8
million in 2003 and $1.9 million in 2004. 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.

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
the environment. We are currently engaged in negotiations with the Pennsylvania
DEP regarding these matters. (See Item 8 -- Financial Statements and
Supplementary Data -- Notes 3 and 13).

In 1999, EPA and the Pennsylvania DEP issued us separate 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.

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, if any, involved.

NEENAH, WISCONSIN We have previously reported with respect to potential
environmental claims arising out of the presence of 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 are NCR Corporation, Appleton Papers Inc., Georgia Pacific
Corp. (successor to Fort Howard Corp. and Fort James Corp.), WTM I Co. (a
subsidiary of Chesapeake Corp.), Riverside Paper Company, and U.S. Paper Mills
Corp. (a subsidiary of Sonoco Products Company). We believe some of these PRPs
may have corporate or contractual relationships with unidentified entities that
may shift monetary obligations arising from the lower Fox River and Bay of Green
Bay.

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

19

release. Courts have interpreted CERCLA to impose joint and several liability on
responsible parties for response costs, 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 January 7, 2003, the Wisconsin Department of Natural Resources (the
"Wisconsin DNR") and EPA issued a Record of Decision ("ROD") for the cleanup of
reaches of the lower Fox River known as Operable Unit 1 ("OU1") (which consists
of Little Lake Butte des Morts, the portion of the river that is closest to our
Neenah facility) and Operable Unit 2 ("OU2") (which is the portion of the river
between dams at Appleton and Little Rapids). This ROD does not address the
entire lower Fox River or the Bay of Green Bay nor does it place any value on
claims for NRDs associated with this matter. The environmental agencies have
stated that the Record of Decision related to the remainder of the river and the
Bay of Green Bay is expected to be issued during mid-2003.

Subject to extenuating circumstances and alternative solutions arising
during the cleanup, the ROD requires the removal of approximately 784,000 cubic
yards of sediment from Little Lake Butte des Morts. The ROD also requires the
monitoring of the two operable units. Wisconsin DNR and EPA estimate that the
remedy for these two reaches will cost approximately $75 million but could cost
within a range from approximately $52 million to $112 million. The $75 million
estimate is approximately the same amount estimated for these sections of the
river in the Proposed Remedial Action Plan ("PRAP") issued in October, 2001
related to this matter. We are continuing to analyze the ROD to determine the
viability of the remedy set forth therein and its potential impact on us.

The total cost estimate of the PRAP, including OU1 and OU2, was $307.6
million (without a contingency factor) over a 7-18 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 the PRAP's cost projections may
underestimate actual costs of the proposed remedy by approximately $450 million.

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 for the underlying
contamination. The State of Wisconsin, the United States Fish and Wildlife
Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"),
four Indian tribes and the Michigan Attorney General have asserted 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. 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 million and $333
million. We believe that the federal NRD assessment is technically and
procedurally flawed. We also believe that the NRD claims alleged by the various
alleged trustees are legally and factually without merit.

On June 20, 2002, the United States, the State of Wisconsin and the Fort
James Operating Company ("Fort James") lodged a consent decree with the U.S.
District Court for the Eastern District of Wisconsin. If entered, that consent
decree would resolve certain outstanding claims, primarily NRD claims, against
Fort James and a related entity. Under the terms of the proposed consent decree,
Fort James would pay $6.2 million in cash to the United States and the State of
Wisconsin in settlement of various claims related to NRDs and cost recovery
related to dredging of sediments at Deposits 56/57. Fort James also agrees to
convey 1,063 acres of land to the State and to perform delineated NRD
"restoration" projects at a cost of up to $3.9 million.

We submitted comments on the proposed consent decree to the U.S. Department
of Justice. These comments suggest that the United States, the State of
Wisconsin and certain alleged natural resource trustees not move to enter this
proposed consent decree, due to various procedural and substantive infirmities.
We

20

cannot predict whether the governments will ultimately make such a motion or
whether the Court will enter the proposed consent decree as it is written.
Because the plaintiffs have yet to provide a factual or legal justification for
the settlement, we are not able to extrapolate an estimated settlement amount
for Glatfelter from the proposed consent decree.

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 identified PRP to the lower Fox River and the Bay of Green Bay. These
reports estimate our Neenah facility's share of the volumetric discharge to be
as high as 27%. We do not 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 than the estimates. Further, 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 such 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. 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 continue to believe that this matter will likely result in litigation,
but cannot predict the timing, nature, extent or magnitude of such litigation.
We currently are unable to predict our ultimate cost related to this matter.

RESERVES FOR ENVIRONMENTAL LIABILITIES 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 liabilities for those matters
for which it is probable that a claim will be made, that an obligation may exist
and for which the amount of the obligation is reasonably estimable. As of
December 31, 2002, and December 31, 2001, we had accrued reserves for all
contingent liabilities related to environmental matters of approximately $30.3
million and $28.8 million, respectively. These accruals are primarily included
in "other long-term liabilities" on the Consolidated Balance Sheets. During the
fourth quarter of 2002, we accrued and charged $1.5 million as an unusual
item.(See Item 8 -- Financial Statements and Supplementary Data -- Notes 3 and
13.) We accrued and charged $2.4 million to pretax earnings each year in 2001
and 2000 related to the lower Fox River and the Bay of Green Bay.

NEENAH, WISCONSIN -- RANGE OF REASONABLY POSSIBLE OUTCOMES Based on
analysis of currently available information and experience regarding the cleanup
of hazardous substances, we believe that it is reasonably possible that our
costs associated with the lower Fox River and the Bay of Green Bay may exceed
current reserves by amounts that may prove to be insignificant or that could
range, in the aggregate, up to approximately $125 million, over a period that is
undeterminable but could range beyond 20 years. We believe that the likelihood
of an outcome in the upper end of the monetary range is significantly less than
other
21

possible outcomes within the range and that the possibility of an outcome in
excess of the upper end of the monetary range is remote. We have reduced the
upper end of the monetary range previously disclosed due to our belief that
technological advances and improved remediation techniques would result in lower
costs to remediate. In our estimate of the upper end of the range, we have
assumed full-scale dredging as set forth in the ROD for Operable Unit 1 and 2.
We have also assumed full-scale dredging for the remainder of the river and the
Bay of Green Bay, 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 have also considered that over
a number of years, certain PRPs were under the ownership of large multinational
companies, which 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
reservations 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 position,
liquidity and/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 position, 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 ROD and the PRAP, such an order would have a material
adverse effect on our consolidated financial position, liquidity and results of
operations and would result in a default under our loan covenants.

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 middle of 2004.

22

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
Voluntary Advanced Technology Incentive Program under the "Cluster Rules." As
described in the Capital Spending section above, we expect to spend
approximately $37.0 million 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.

RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," was issued in June 2001 effective for fiscal years
beginning after December 15, 2001, and establishes revised reporting
requirements for goodwill and other intangible assets. We adopted SFAS No. 142
on January 1, 2002 and, therefore, we no longer amortize goodwill unless
evidence of impairment exists; goodwill will be evaluated on at least an annual
basis (Item 8 -- Financial Statements and Supplementary Data -- Note 6).

SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
June 2001 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 adopted SFAS No. 143 on
January 1, 2003, and it did not impact our consolidated financial position or
results of operation.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets," was 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 did not impact our consolidated
financial position or results of operations.

SFAS No. 145, "Recission of SFAS No. 4, 44 and 64, Amendment of SFAS No.
13, and Technical Corrections," was issued April 2002 and is effective for
fiscal years beginning after May 15, 2002. This statement, among other things,
rescinds the requirement to classify a gain or loss upon the extinguishment of
debt as an extraordinary item on the income statement. It also requires lessees
to account for certain modifications to lease agreements in a manner consistent
with sale-leaseback transaction accounting. We adopted SFAS No. 145 on January
1, 2003, and it did not impact our consolidated financial position or results of
operations.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", was issued in June 2002 and requires recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002, and, as such, has no impact on our consolidated financial position or
results of operations.

SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure, an Amendment to SFAS No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. As of December 31, 2002, we have elected to continue accounting for
stock-based compensation in accordance with APB Opinion No. 25.

In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires
entities to establish liabilities for certain types of guarantees, and expands
financial statement disclosures for others. The accounting requirements of FIN
No. 45 are effective for guarantees issued or modified after December 31, 2002,
and the disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. We do not expect the

23

adoption of FIN No. 45 to have any significant accounting implications as all of
our commitments and guarantees are on behalf of our subsidiaries. We have
adopted the disclosure requirements of FIN No. 45.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk exposure primarily results from changes in interest rates
and currency exchange rates. At December 31, 2002, we had debt outstanding of
approximately $219.5 million, of which $67.7 million, or 31%, was variable rate.

The table below presents average principal outstanding and related interest
rates for the next five years. Fair values included herein have been determined
based upon rates currently available to us for debt with similar terms and
remaining maturities. The table should be read in conjunction with Item
8 -- Financial Statements and Supplementary Data -- Notes 9 and 10.

Variable rate debt outstanding represents borrowing under our revolving
credit facility. Borrowings incur interest based on the domestic prime rate or a
Eurocurrency rate, at our option, plus a margin. At December 31, 2002, the
interest rate paid was 4.02%. An instantaneous 100 basis point increase or
decrease in the interest rate on variable rate debt would increase or decrease
interest expense by $0.7 million.

At December 31, 2002, all of our variable-rate debt was recorded at S&H,
our wholly-owned subsidiary in Gernsbach, Germany, where the functional currency
is the Euro.

At December 31, 2002, we had outstanding a cross-currency swap agreement
with a termination date of June 24, 2006. Under this transaction, we swapped
$70.0 million for approximately E73 million and will pay interest on the Euro
portion of the swap at a floating Eurocurrency Rate (EURIBOR), plus applicable
margins and will receive interest on the dollar portion of the swap at a
floating U.S. Dollar LIBOR rate, plus applicable margins. The cross-currency
swap is designed to provide protection from the impact that changes in currency
rates have on certain U.S. Dollar-denominated debt obligations recorded at our
S&H subsidiary in Gernsbach, Germany. The cross currency swaps are recorded at
fair value on the Consolidated Balance Sheet and changes in fair value are
recognized in current earnings in the Consolidated Statements of Income. Changes
in fair value of the cross-currency swap transaction are substantially offset by
changes in the value of US Dollar denominated obligations when they are
remeasured in Euros, the functional currency of S&H. (See Item 8 -- Financial
Statements and Supplementary Data -- Note 10).

We are subject to certain risks associated with changes in foreign currency
exchange rates to the extent our operations are conducted in currencies other
than the U.S. dollar. At December 31, 2002, approximately 71% of our net sales
shipped from the United States, 24% from Germany, and 5% from other
international locations.

24

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 of America 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

ROBERT P. NEWCOMER
President and Chief Operating Officer
and
Acting Chief Financial Officer

25

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, 2002 and 2001, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2002. Our audits
also included the financial statement schedule listed in the Index at Item 15.
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, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 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.

As discussed in Note 6 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," effective January 1, 2002.

Deloitte & Touche LLP

Philadelphia, Pennsylvania
February 28, 2003

26

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these Consolidated Financial
Statements.
27

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these Consolidated Financial
Statements.
28

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these Consolidated Financial
Statements.
29

P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

The accompanying notes are an integral part of these Consolidated Financial
Statements.
30

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION

P. H. Glatfelter Company and subsidiaries (d/b/a Glatfelter) is a
manufacturer of specialized printing papers and engineered products.
Headquartered in York, Pennsylvania, our manufacturing facilities are located in
Spring Grove, Pennsylvania; Neenah, Wisconsin; Gernsbach, Germany; Scaer, France
and the Philippines. Our products are marketed throughout the United States and
in many foreign countries, either through wholesale paper merchants, brokers and
agents or directly to customers.

NOTE 2. ACCOUNTING POLICIES

(A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of Glatfelter and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated.

(B) ACCOUNTING ESTIMATES The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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.

(C) RECLASSIFICATIONS Certain reclassifications have been made to the
prior years' consolidated financial statements and notes thereto to conform to
those classifications used in the current year.

(D) CASH AND CASH EQUIVALENTS We classify all highly liquid instruments
with an original maturity of three months or less at the time of purchase as
cash equivalents.

(E) INVENTORIES Inventories are stated at the lower of cost or market. Raw
materials and in-process and finished inventories of our domestic manufacturing
operations are valued using the last-in, first-out (LIFO) method, and the
supplies inventories are valued principally using the average-cost method.
Inventories at our foreign operations are valued using a method which
approximates average cost. See Note 4.

(F) PLANT, EQUIPMENT AND TIMBERLANDS For financial reporting purposes,
depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. For income taxes purposes, depreciation
is primarily calculated 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 2(i) and 5.

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

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

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.

31

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

(G) INVESTMENT SECURITIES Investments in debt securities are classified as
held-to-maturity and recorded at amortized cost in the Consolidated Balance
Sheets when we have the positive intent and ability to hold until maturity. At
December 31, 2002 and 2001, investments in debt securities classified as
held-to-maturity totaled $10.1 million and $10.3 million, respectively, and the
noncurrent portion is included in "Other assets" on the Consolidated Balance
Sheets. The corresponding fair market values were $11.9 million and $11.4
million, as of December 31, 2002 and 2001, respectively.

(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 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) INCOME TAXES Income taxes are accounted for under the liability
method. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances, if any, are provided
when a portion or all of a deferred tax asset may not be realized. See Note 8.

(J) TREASURY STOCK Common stock purchased for treasury is recorded at
cost. At the date of subsequent reissue, the treasury stock account is reduced
by the cost of such stock on the weighted-average cost basis.

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

(L) REVENUE RECOGNITION We recognize revenue on product sales upon
shipment and on energy sales when electricity is delivered to our customers.
Certain costs associated with the production of electricity, such as fuel,
labor, depreciation and maintenance are netted against energy sales for
presentation on the Consolidated Statements of Income. Costs netted against
energy sales totaled $7.1 million, $6.4 million and $5.3 million for the years
ended December 31, 2002, 2001 and 2000, respectively. 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.

(M) 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 principally classified as "Other long-term liabilities" on the
Consolidated Balance Sheets. Such undiscounted liabilities are exclusive of any
insurance or other claims against third

32

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

parties. Recoveries of environmental remediation costs from other parties,
including insurance carriers, are recorded as assets when their receipt is
assured beyond a reasonable doubt. 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 13.

(N) STOCK-BASED COMPENSATION Stock-based compensation is accounted for in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, as permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
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. No compensation expense is recorded for stock options
granted to employees.

PRO FORMA INFORMATION No compensation expense has been recognized for
non-qualified stock options issued. The weighted-average grant date fair value
of options granted during 2002, 2001 and 2000 was $2.48, $3.84 and $2.60,
respectively. The fair value of each option on the date of grant was estimated
using the Black-Scholes option pricing using the following assumptions:

Had compensation cost for non-qualified stock options been determined
consistent with SFAS No. 123, our net income and earnings per share would have
been reduced to the following pro forma amounts:

(O) FINANCIAL DERIVATIVES On January 1, 2001, we adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires the recognition of the fair value of any derivative financial
instrument on the balance sheet. Changes in fair value of the derivative and, in
certain instances, changes in the fair value of an underlying hedged asset or
liability, are recognized either through income or as a component of other
comprehensive income. The adoption of this statement did not have a material
impact on our consolidated financial position or results of operations.

33

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(P) EARNINGS PER SHARE Basic earnings per share are computed by dividing
net income by the weighted-average common shares outstanding during the
respective periods. Diluted earnings per share are computed by dividing net
income by the weighted-average common shares and common share equivalents
outstanding during the period. The dilutive effect of common share equivalents
is considered in the diluted earnings per share computation using the treasury
stock method.

(Q) FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts reported on the
Consolidated Balance Sheets for cash and cash equivalents, accounts receivable,
other assets, and short-term debt approximate fair value. Financial derivatives
are recorded at fair value. The following table sets forth carrying value and
fair value for investment securities and long-term debt:

(R) RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 142, "Goodwill and Other
Intangible Assets," was issued in June 2001, effective for fiscal years
beginning after December 15, 2001, and establishes revised reporting
requirements for goodwill and other intangible assets. We adopted SFAS No. 142
on January 1, 2002 and, therefore, we no longer amortize goodwill unless
evidence of impairment exists; goodwill will be evaluated on at least an annual
basis (Note 6). The statement requires that goodwill be evaluated on at least an
annual basis. We performed the first step of the transitional goodwill
impairment test as of January 1, 2002 and determined that no impairment to our
goodwill existed. We performed our first annual impairment test as of September
30, 2002 and determined that no impairment to our goodwill existed.

SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in
June 2001 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 adopted SFAS No. 143 on
January 1, 2003, and it did not impact our consolidated financial position or
results of operations.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets," was 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 did not impact our consolidated
financial position or results of operations.

SFAS No. 145, "Recission of SFAS No. 4, 44 and 64, Amendment of SFAS No.
13, and Technical Corrections," was issued April 2002 and is effective for
fiscal years beginning after May 15, 2002. This statement, among other things,
rescinds the requirement to classify a gain or loss upon the extinguishment of
debt as an extraordinary item on the income statement. It also requires lessees
to account for certain modifications to lease agreements in a manner consistent
with sale-leaseback transaction accounting. We adopted SFAS No. 145 on January
1, 2003, and it did not impact our consolidated financial position or results of
operations.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and requires recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002, and, as such, has no impact on our consolidated financial position or
results of operations.

SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure, an Amendment to SFAS No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to

34

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As of December 31, 2002, we have
elected to continue accounting for stock-based compensation in accordance with
APB Opinion No. 25.

In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires
entities to establish liabilities for certain types of guarantees, and expands
financial statement disclosures for others. The accounting requirements of FIN
No. 45 are effective for guarantees issued or modified after December 31, 2002,
and the disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. We do not expect the
adoption of FIN No. 45 to have any significant accounting implications as all of
our commitments and guarantees are on behalf of our subsidiaries. We have
adopted the disclosure requirements of FIN No. 45.

NOTE 3. UNUSUAL ITEMS

2002

Unusual items totaled $2.2 million, $60.9 million and $3.3 million in 2002,
2001 and 2000, respectively. Amounts recorded in 2002 included a $4.2 million
restructuring charge and a $1.5 million contingent liability related to on-going
negotiations with the Pennsylvania Department of Environmental Protection
("Pennsylvania DEP") (see Note 13). These charges were partially offset by a
$3.5 million gain for the settlement of certain escrow claims, including
interest and associated liabilities related to the 1998 acquisition of our
Schoeller & Hoesch ("S&H") subsidiary. The $4.2 million restructuring charge
related to the reduction of our workforce by 76 positions, including 36
positions eliminated through attrition. The workforce reduction was
substantially completed in the first quarter of 2003. Of the $4.2 million
restructuring charge, $1.6 million related to enhanced pension benefits to be
paid out of our retirement plans as discussed in our disclosure of Retirement
Plans and Other Post-Retirement Benefits (see Note 12). The remaining $2.6
million of this charge related to severance and other employee benefits to be
paid using our assets.

2001

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 $61.5 million after
we recorded an impairment write down of $50.0 million in the second quarter to
reflect the fair value of the Ecusta Division. These assets were sold for $22.7
million plus the assumption by the buyer of certain liabilities totaling $21.4
million 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 $58.4 million, including the $50.0 million
impairment charge recognized during the second quarter of 2001.

35

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The $58.4 million pretax charge included $6.1 million in transaction and
other costs incurred upon sale of the Ecusta Division. Of this amount,
approximately $1.9 million 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 ($2.0 million) and
facility maintenance ($.9 million) 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 $58.4 million pretax charge was net of a
$15.0 million pretax 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 $7.2 million in
operating profit during 2001 until its sale in August and had an operating loss
of approximately $1.0 million during 2000.

A calculation of the unusual item related to the 2001 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 $2.5 million pretax 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 $60.9 million.

2000

During the first quarter of 2000, we finalized a 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 $3.3 million ($2.1
million 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, $2.2 million related to enhanced pension benefits to be paid out of
our retirement plans as discussed in our disclosure of Retirement Plans and
Other Post-Retirement Benefits (see Note 12). The remaining $1.1 million 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.

36

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following schedule summarizes the activity of our restructuring
reserve:

NOTE 4. INVENTORY

Inventories at December 31 were as follows:

If we had valued all inventories using the average-cost method, inventories
would have been $9.3 million and $11.3 million higher than reported at December
31, 2002 and 2001, 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, 2002 and 2001, the recorded value of the above inventories
was approximately $1.3 million and $.3 million, respectively, lower than
inventories for income tax purposes.

NOTE 5. PLANT, EQUIPMENT AND TIMBERLANDS

Plant, equipment and timberlands at December 31 were as follows:

NOTE 7. EARNINGS PER SHARE

The following table sets forth the details of basic and diluted earnings
per share:

NOTE 8. 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

38

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consolidated financial statements or tax returns. The effects of income taxes
are measured based on effective tax law and rates.

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

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

At December 31, 2002, and December 31, 2001, unremitted earnings of
subsidiaries outside the United States totaled $37.0 million and $18.8 million,
respectively, and 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:

39

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:

At December 31, 2002, we had federal, state and foreign tax net operating
loss ("NOL") carryforwards of $.6 million, $50.8 million and $12.6 million,
respectively. These NOL carryforwards are available to offset future taxable
income, if any. A valuation allowance of $8.4 million has been recorded against
the net deferred tax assets primarily due to the uncertainty regarding our
ability to utilize state NOL carryforwards and certain foreign deferred tax
assets. The federal NOL carryforward expires in 2022; state NOL carryforwards
expire between 2004 and 2017, and the foreign NOL carryforwards do not expire.

40

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:

NOTE 9. LONG-TERM DEBT

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

The aggregate maturities of long-term debt as of December 31, 2002 are as
follows (in thousands):

2003........................................................ $ 795
2004........................................................ 670
2005........................................................ 335
2006........................................................ 67,704
2007........................................................ 150,000
Thereafter.................................................. --
--------
$219,504
========

On June 24, 2002, we entered into a new unsecured $102.5 million
multi-currency revolving credit facility ("Facility") with a syndicate of three
major banks. An additional $22.5 million was added to the Facility on September
24, 2002 with a fourth major bank. The Facility, which replaced an old facility,
enables Glatfelter or its subsidiaries to borrow up to the equivalent of $125.0
million in certain currencies. Borrowings can be made for any time period from
one day to six months and incur interest based on the domestic prime rate or a
Eurocurrency rate, at our option, plus a margin ranging from .525% to 1.05%. The
margin and a facility fee on the commitment balance are based on the higher of
our debt ratings as published by Standard & Poor's and Moody's. The Facility
requires us to meet certain leverage and interest coverage ratios, with both of
which we are in compliance.

Prior to entering into the Facility, borrowings were made under a $200.0
million multi-currency revolving credit facility ("Old Facility") with a
syndicate of major lending institutions. Interest paid the Old Facility

41

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

borrowings were variable rates based, at our option, on the Eurocurrency Rate or
the Base Rate (lender's prime rate), plus applicable margins. Margins were based
on the higher of our debt ratings as published by Standard & Poor's and Moody's.
This agreement was to mature in December 2002. On June 24, 2002, we repaid all
amounts outstanding under the Old Facility using $71.1 million of our existing
cash and a borrowing of $62.0 million under the Facility.

On July 22, 1997, we issued $150.0 million principal amount of 6 7/8% Notes
due July 15, 2007. Interest on the Notes is payable semiannually on January 15
and July 15. The 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 Notes were used primarily to repay certain
short-term unsecured debt and related interest.

P. H. Glatfelter Company guarantees debt obligations of all its
subsidiaries. All such obligations are recorded in these consolidated financial
statements.

At December 31, 2002 and 2001, we had $3.0 million of letters of credit
issued to us by a financial institution. The letters of credit are for the
benefit of certain state workers compensation insurance agencies in conjunction
with our self-insurance program. At December 31, 2002 and 2001, no amounts were
outstanding under the letters of credit. 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.

NOTE 10. FINANCIAL DERIVATIVES

In conjunction with our 2002 refinancing, we entered into a cross-currency
swap transaction effective June 24, 2002. Under this transaction, we swapped
$70.0 million for approximately E73.0 million and will pay interest on the Euro
portion of the swap at a floating Eurocurrency Rate, plus applicable margins and
will receive interest on the dollar portion of the swap at a floating U.S.
Dollar LIBOR, plus applicable margins. The contract matures on June 24, 2006.
The cross-currency swap is designed to provide protection from the impact that
changes in currency rates have on certain U.S. Dollar-denominated debt
obligations recorded at our subsidiary in Gernsbach, Germany. The cross-currency
swap is recorded at fair value of $(6.5) million in the Consolidated Balance
Sheets and changes in fair value are recognized in current earnings in the
Consolidated Statements of Income. The mark-to-market adjustment was offset by a
gain on the related remeasurement of the US Dollar denominated debt obligations.

The credit risks associated with our financial derivatives 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.

In January 1999, we entered into two interest rate swap agreements, each
having a total notional principal amount of DM 50.0 million. Under these
agreements, which were to expire December 22, 2002, we received a floating rate
based on the three-month DM/Euro LIBOR plus twenty basis points and paid a fixed
rate of 3.41% and 3.43%, respectively, for the term of the agreements. We
recognized net interest income of $.8 million and $.5 million in, 2001 and 2000,
respectively, related to these agreements. This amount is included as a
reduction to interest expense in the accompanying Consolidated Statements of
Income. Both of our interest rate swap agreements converted a portion of our
borrowings from a floating-rate to fixed-rate basis.

In conjunction with the refinancing, we terminated the two existing
interest rate swap agreements on June 24, 2002. We recognized a $100,000 gain in
connection with the early termination of these swap arrangements and the
repayment of the outstanding debt under the previously existing $200.0 million
multi-currency revolving credit agreement.

42

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11. 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 2002, December 2001 and December
2000, 29,926, 64,430 and 81,780, 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 in 2001 and 2000 under the 1992 Plan are also subject
to forfeiture if defined minimum earnings levels are not met. Awards made in
2002 are subject to forfeiture if targeted shareholder return measures 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 $362,000 in 2002, $856,000 in 2001 and $936,000 in
2000, related to these awards. Restricted Stock Awards issued in 2002 vest
ratably over a three-year period. The Restricted Stock Awards issued in 2001 and
2000 vest ratably over a four-year period. Shares awarded in December 2002 under
the 1992 Plan cease to be subject to forfeiture by the end of 2005.

PERFORMANCE SHARES Grants of Performance Shares under the 1992 Plan of
44,060, 40,060 and 45,740 shares, were made during each of the three years ended
1998, 1997 and 1996, respectively. We recognized income of $127,000 and $169,000
in 2001 and 2000, respectively, related to these awards.

NON-QUALIFIED STOCK OPTIONS The following table summarizes the activity
with respect to non-qualified options to purchase shares of common stock granted
under the 1992 Plan:

The following table summarizes information about stock options outstanding
at December 31, 2002:

43

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

An additional 456,398 options became exercisable January 1, 2003 at a
weighted-average exercise price of $13.60.

Options granted prior to 2002 become exercisable for 25% of the grant
amount, beginning January 1 of the year following the date of grant, assuming
six months has passed. An additional 25% become 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. Stock options
granted in 2002 vest ratably over three years beginning January 1 of the year
following 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.

The 1992 plan, as amended, expires in 2007. As of December 31, 2002,
749,314 shares of common stock were available for future issuance under the 1992
Plan.

NOTE 12. 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 $31.0 million, $44.7 million and $25.9 was recognized in 2002, 2001,
and 2000, respectively. Before the impact of unusual items discussed in Note 3,
a portion of which were attributable to and recorded as pension expense, net
pension income for 2002, 2001 and 2000 was $32.6 million, $30.7 million and
$28.1 million, 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 reported.

The following table sets forth the status of our defined-benefit pension
plans and other post-retirement benefit plans at December 31, 2002 and 2001:

44

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The net prepaid pension cost for qualified pension plans is primarily
included in "Other assets," and the accrued pension cost for non-qualified
pension plans and accrued post-retirement benefit costs are primarily included
in "Other long-term liabilities" on the Consolidated Balance Sheets at December
31, 2002 and 2001.

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 $25.7 million, $23.1 million and $0, respectively,
as of December 31, 2002, and $25.1 million, $22.1 million and $0, respectively,
as of December 31, 2001.

45

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The weighted-average assumptions used in computing the net periodic benefit
(income) cost information above were as follows:

For measurement purposes, a 12% increase in the per capita cost of covered
health care benefits was assumed in 2002 and graded down by .5% per year to an
ultimate level of 5%.

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. The expense associated with our 401(k) match was $1.2 million, $1.4
million and $1.7 million in 2002, 2001 and 2000, respectively.

NOTE 13. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

ECUSTA DIVISION

In connection with the Ecusta Division sale (Note 3), the buyers assumed
certain liabilities related to the operation of the Ecusta Division. In July
2002, we received notice from the buyers' legal counsel asserting claims for
indemnification, without estimates of value, pursuant to the sale agreement. We
are currently investigating these claims and have not yet determined the
validity or value of these claims. As such, we cannot ascertain at this time
what effect, if any, these claims will have on our consolidated financial
position and/or results of operations.

46

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During August 2002, the buyers of the Ecusta Division shut down the paper
manufacturing operation of the paper mill in Pisgah Forest, North Carolina,
which was the most significant operation of the Ecusta Division. On October 23,
2002, two of the four related buyers of the Ecusta Division filed for bankruptcy
under Chapter 11 of the U.S. Bankruptcy Code. We do not expect to receive any
proceeds from the bankruptcy proceedings. As of December 31, 2002, we had
recorded liabilities totaling $2.6 million related to post-retirement benefits,
workers compensation and vendor payables. These liabilities were to be assumed
by the buyers or they have agreed to indemnify and hold us harmless. We also
recorded a corresponding receivable of $2.6 million for amounts due from the
buyers.

In addition to the workers compensation benefits included in the accrual
discussed above, we received notice from State of North Carolina indicating we
may be liable for $1.6 million in additional workers compensation benefits.
While we disagree with this position, if we are held liable, we are entitled to
indemnification by the buyers under terms of the sales agreement.

In addition to these amounts, as of December 31, 2002, our trade accounts
receivable include $2.3 million for products sold by our S&H subsidiary to one
of the buyers who has not filed for bankruptcy. Subsequent to year end, we have
been paid the full amount of the trade accounts receivable by the one buyer.

We are uncertain as to what additional claims, if any, resulting from the
bankruptcy filing may be asserted against us for other liabilities that were
assumed, or with respect to which we are indemnified, by the buyers or related
to our former operation of the paper mill. At this time, no reserves have been
recorded related to the receivables due from the buyers, as we are unable to
ascertain the financial condition and intention of all of the buyers.
Accordingly, we cannot ascertain at this time what effect, if any, these matters
will have on our consolidated financial position and/or results of operations.

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.

SPRING GROVE, PENNSYLVANIA We are subject to the "Cluster Rule," a 1998
federal regulation in which the United States Environmental Protection Agency
("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 conventional pollutant
releases to both water and air.

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 EPA in the Cluster Rule. This initiative, the "New Century
Project," will require capital expenditures currently estimated to be
approximately $37.0 million to be incurred before April 2004. The New Century
Project includes improvements in brownstock washing, installation of an oxygen
delignification bleaching process, 100 percent chlorine dioxide substitution and
a hardwood ozone bleaching system. Through December 31, 2002, we have invested
approximately $12.3 million in this project. We presently do not anticipate
difficulties in implementing the

47

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

New Century Project; however, we have not yet received all the required
governmental approvals, nor have we installed all the necessary equipment.

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
the environment. We are currently engaged in negotiations with the Pennsylvania
DEP regarding these matters (see Note 3).

In 1999, EPA and the Pennsylvania DEP issued 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.

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, if any, involved.

NEENAH, WISCONSIN 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 are NCR Corporation, Appleton Papers Inc., Georgia Pacific
Corp. (successor to Fort Howard Corp. and Fort James Corp.), WTM I Co. (a
subsidiary of Chesapeake Corp.), Riverside Paper Company, and U.S. Paper Mills
Corp. (a subsidiary of Sonoco Products Company). We believe some of these PRPs
may have corporate or contractual relationships with unidentified entities that
may shift monetary obligations arising from the lower Fox River and Bay of Green
Bay.

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 for response costs, 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 January 7, 2003, the Wisconsin Department of Natural Resources (the
"Wisconsin DNR") and EPA issued a Record of Decision ("ROD") for the cleanup of
reaches of the lower Fox River known as Operable Unit 1 ("OU1") (which consists
of Little Lake Butte des Morts, the portion of the river that is closest to our
Neenah facility) and Operable Unit 2 ("OU2") (which is the portion of the river
between dams at Appleton
48

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and Little Rapids). This ROD does not address the entire lower Fox River or the
Bay of Green Bay nor does it place any value on claims for NRDs associated with
this matter. The environmental agencies have stated that the Record of Decision
related to the remainder of the river and the Bay of Green Bay is expected to be
issued during mid-2003.

Subject to extenuating circumstances and alternative solutions arising
during the cleanup, the ROD requires the removal of approximately 784,000 cubic
yards of sediment from Little Lake Butte des Morts. The ROD also requires the
monitoring of the two operable units. Wisconsin DNR and EPA estimate that the
remedy for these two reaches will cost approximately $75 million but could cost
within a range from approximately $52 million to $112 million. The $75 million
estimate is approximately the same amount estimated for these sections of the
river in the Proposed Remedial Action Plan ("PRAP") issued in October, 2001
related to this matter. We are continuing to analyze the ROD to determine the
viability of the remedy set forth therein and its potential impact on us.

The total cost estimate of the PRAP, including OU1 and OU2, was $307.6
million (without a contingency factor) over a 7-18 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 the PRAP's cost projections may
underestimate actual costs of the proposed remedy by approximately $450 million.

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 for the underlying
contamination. The State of Wisconsin, the United States Fish and Wildlife
Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"),
four Indian tribes and the Michigan Attorney General have asserted 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. 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 million and $333
million. We believe that the federal NRD assessment is technically and
procedurally flawed. We also believe that the NRD claims alleged by the various
alleged trustees are legally and factually without merit.

On June 20, 2002, the United States, the State of Wisconsin and the Fort
James Operating Company ("Fort James") lodged a consent decree with the U.S.
District Court for the Eastern District of Wisconsin. If entered, that consent
decree would resolve certain outstanding claims, primarily NRD claims, against
Fort James and a related entity. Under the terms of the proposed consent decree,
Fort James would pay $6.2 million in cash to the United States and the State of
Wisconsin in settlement of various claims related to NRDs and cost recovery
related to dredging of sediments at Deposits 56/57. Fort James also agrees to
convey 1,063 acres of land to the State and to perform delineated NRD
"restoration" projects at a cost of up to $3.9 million.

We submitted comments on the proposed consent decree to the U.S. Department
of Justice. These comments suggest that the United States, the State of
Wisconsin and certain alleged natural resource trustees not move to enter this
proposed consent decree, due to various procedural and substantive infirmities.
We cannot predict whether the governments will ultimately make such a motion or
whether the Court will enter the proposed consent decree as it is written.
Because the plaintiffs have yet to provide a factual or legal justification for
the settlement, we are not able to extrapolate an estimated settlement amount
for Glatfelter from the proposed consent decree.

49

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 identified PRP to the lower Fox River and the Bay of Green Bay. These
reports estimate our Neenah facility's share of the volumetric discharge to be
as high as 27%. We do not 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 than the estimates. Further, 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 such 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. 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 continue to believe that this matter will likely result in litigation,
but cannot predict the timing, nature, extent or magnitude of such litigation.
We currently are unable to predict our ultimate cost related to this matter.

RESERVES FOR ENVIRONMENTAL LIABILITIES. 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 liabilities for those matters
for which it is probable that a claim will be made, that an obligation may exist
and for which the amount of the obligation is reasonably estimable. As of
December 31, 2002, and December 31, 2001, we had accrued reserves for all
contingent liabilities related to environmental matters of approximately $30.3
million and $28.8 million, respectively. These accruals are primarily included
in "other long-term liabilities" on the Consolidated Balance Sheets. During the
fourth quarter of 2002, we accrued and charged $1.5 million as an unusual item
(see Note 3). We accrued and charged $2.4 million to pretax earnings each year
in 2001 and 2000 related to the lower Fox River and the Bay of Green Bay.

NEENAH, WISCONSIN -- RANGE OF REASONABLY POSSIBLE OUTCOMES. Based on
analysis of currently available information and experience regarding the cleanup
of hazardous substances, we believe that it is reasonably possible that our
costs associated with the lower Fox River and the Bay of Green Bay may exceed
current reserves by amounts that may prove to be insignificant or that could
range, in the aggregate, up to approximately $125 million, over a period that is
undeterminable but could range beyond 20 years. We believe that the likelihood
of an outcome in the upper end of the monetary 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 monetary range is remote. We have reduced the
upper end of the monetary range previously disclosed due to
50

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

our belief that technological advance and improved remediation techniques would
result in lower costs to remediate. In our estimate of the upper end of the
range, we have assumed full-scale dredging as set forth in the ROD for Operable
Unit 1 and 2. We have also assumed full-scale dredging for the remainder of the
river and the Bay of Green Bay, 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 have also considered that over
a number of years, certain PRPs were under the ownership of large multinational
companies, which 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
reservations 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 position,
liquidity and/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 position, 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
remedies proposed in the ROD and the PRAP, such orders would have a material
adverse effect on our consolidated financial position, liquidity and results of
operations and would result in a default under our loan covenants.

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

51

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14. 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 2002, 2001 or 2000. Excluding the net sales of the Ecusta
Division, net sales to one customer in 2001 were approximately 11% of total net
sales.

We manage our organization along separate business units: Engineered
Products, Long-Fiber & Overlay Paper, and Printing and Converting Papers, as
well as Tobacco Papers, which is being exited. In 2002, we completed the
implementation of a new information system to provide, among other things, more
complete business unit reporting. However, we are currently unable to provide
all of the financial information identified in SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information".

The following table sets forth information with respect to net sales for
each business unit, excluding the net sales of the Ecusta division, which was
sold in August 2001:

Our 2002, 2001 and 2000 net sales to external customers and location of net
plant, equipment and timberlands as of December 31, 2002, 2001 and 2000 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 of the Ecusta
Division at December 31, 2000 was $52.6 million (see Note 3).

52

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15. QUARTERLY RESULTS (UNAUDITED)

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

(a) After impact of an after-tax gain from settlement of certain escrow claims,
including interest and associated liabilities related to the 1998
acquisition of our S&H subsidiary (unusual items) of $2.3 million.

(b) After impact of an after-tax restructuring charge related to severance and
related costs and a contingent liability related to on-going state
regulatory negotiations (unusual item) of $4.1 million.

(c) After impact of an after-tax charge primarily for the impairment of Ecusta
assets (unusual item) of $33.6 million.

(d) After impact of an after-tax charge for the loss on the sale of Ecusta
(unusual item) of $6.1 million.

(e) After impact of an after-tax charge primarily for the loss on the sale of
Ecusta (unusual item) of $39.7 million.

53

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 3 through 5 of our Proxy
Statement, dated March 28, 2003.

(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 18 of our Proxy Statement, dated March 28, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required under this Item is incorporated herein by
reference to pages 20 through 22 of our Proxy Statement, dated March 28, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required under this Item is incorporated herein by
reference pages 19 through 20 of our Proxy Statement, dated March 28, 2003.

ITEM 14. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our chief executive officer and our acting chief financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)), within 90 days of the
filing of this Annual Report on Form 10-K, have concluded that, as of the
evaluation date, our disclosure controls and procedures were adequate and
effective to ensure that material information relating to P. H. Glatfelter
Company and its consolidated subsidiaries would be made known to them by others
within those entities.

CHANGES IN INTERNAL CONTROLS

There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of the evaluation, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions were
required or undertaken.

54

PART IV

ITEM 15. 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:

i. Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000
ii. Consolidated Balance Sheets as of December 31, 2002 and 2001
iii. Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000
iv. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
v. Notes to Consolidated Financial Statements for the Years
Ended December 31, 2002, 2001 and 2000

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

i. Schedule II -- Valuation and Qualifying Accounts -- For Each
of the Three Years in the Period Ended December 31, 2002
(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.

EXHIBIT INDEX

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

** Management contract or compensatory plan

58

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 14, 2003
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:

59

CERTIFICATION PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002

I, George H. Glatfelter II, Chief Executive Officer of P. H. Glatfelter Company,
certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended
December 31, 2002 of P. H. Glatfelter Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Glatfelter as of, and for the periods presented in this Annual Report;

4. Glatfelter's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Glatfelter and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to Glatfelter, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;

(b) evaluated the effectiveness of Glatfelter's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and

(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. Glatfelter's other certifying officer and I have disclosed, based on
our most recent evaluation, to Glatfelter's auditors and the audit committee of
the board of directors:

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Glatfelter's ability to
record, process, summarize and report financial data and have identified
for Glatfelter's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Glatfelter's internal
controls; and

6. Glatfelter's other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 14, 2003

/s/ GEORGE H. GLATFELTER II
--------------------------------------
George H. Glatfelter II
Chief Executive Officer

60

CERTIFICATION PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002

I, Robert P. Newcomer, Acting Chief Financial Officer of P. H. Glatfelter
Company, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended
December 31, 2002 of P. H. Glatfelter Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Glatfelter as of, and for the periods presented in this Annual Report;

4. Glatfelter's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Glatfelter and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to Glatfelter, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;

(b) evaluated the effectiveness of Glatfelter's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and

(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. Glatfelter's other certifying officer and I have disclosed, based on
our most recent evaluation, to Glatfelter's auditors and the audit committee of
the board of directors:

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Glatfelter's ability to
record, process, summarize and report financial data and have identified
for Glatfelter's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Glatfelter's internal
controls; and

6. Glatfelter's other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 14, 2003

/s/ ROBERT P. NEWCOMER
--------------------------------------
Robert P. Newcomer
Acting Chief Financial Officer

61

SCHEDULE II
P. H. GLATFELTER COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
VALUATION AND QUALIFYING ACCOUNTS

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

(a) Relates primarily to changes in currency exchange rates

(b) Relates primarily to the sale 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