UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003
or

For the transition period from            to

Commission file number 1-3560

P. H. Glatfelter Company

Securities registered pursuant to Section 12(b) of the Act:

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 at least the past 90 days. Yes [X] No [  ].

Indicate by check mark whether the filer is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ].

Based on the closing price as of June 30, 2003, the aggregate market value of Common Stock of the Registrant held by non-affiliates on March 3, 2004 was $417,250,390.

Common Stock outstanding on March 3, 2004 totaled 43,804,310 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in this Annual Report on Form 10-K: Proxy Statement to be dated on or about March 24, 2004 (Part III).

P. H. GLATFELTER COMPANY
ANNUAL REPORT ON FORM 10-K
for the YEAR ENDED

DECEMBER 31, 2003

Table of Contents

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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 — “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 specialty 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 Scaër, France, and has 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, which are included in net sales in the Consolidated Statements of Income in Item 8 – Financial Statements and Supplementary Data, 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 Vision is to be the global supplier of choice in specialty papers and engineered products. We are organized into three business units: Engineered Products, Long-Fiber & Overlay Papers, and Printing & Converting Papers. We also supply tobacco papers to fulfill obligations of a supply agreement entered into in connection with the sale of our Ecusta Division. This supply agreement expires in mid-2004.

The financial information presented within this section excludes the Ecusta Division. The following table summarizes consolidated net sales and the relative net sales contribution of each business unit for the past three years ended December 31:

Additional business unit financial information is included in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Engineered Products 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 continuous 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 relationships, product pricing in this business unit has remained relatively stable.

Long-Fiber & Overlay Papers 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, (the generic term we use to describe products primarily made from abaca pulp) primarily tea bag and related papers accounted for 72%, 70% and 72% of this business unit’s sales in 2003, 2002 and 2001, respectively. The balance of this unit’s sales represented overlay and casing products. Similar to engineered products, long-fiber and overlay papers are technically sophisticated. We believe we are uniquely positioned to produce these extremely lightweight papers because we understand their complexities, which require the use of highly specialized fiber and specifically designed papermaking equipment.

Printing & Converting Papers products include papers for the production of high-quality hardbound books. Book publishing papers represented 69% 73% and 74% of this business unit’s sales in 2003, 2002 and 2001, 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 historically parallel the U.S. Gross Domestic Product; however, the current industry conditions have adversely impacted the performance of this unit.

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Table of Contents

Tobacco Papers sales in 2003 and 2002 were made pursuant to a supply agreement between S&H and Purico (IOM) Limited, et al (“Purico”), the buyers of the Ecusta Division. We will sell tobacco papers to an affiliate of Purico through mid-2004.

The industry in which we operate has been challenged by an imbalance between supply and demand, particularly for more commodity-like products offered by the Printing & Converting Papers business unit. Weakening demand and declining prices and higher production costs characterize the operating environment in this business unit.

To be successful in this environment, our strategy is to aggressively reduce costs and reposition our product portfolios to better align with our customers’ changing needs.

Our growth strategy is market focused and includes investments in developing products to meet the changing needs of our customers. During 2003, 2002 and 2001, we spent $5.1 million, $5.1 million and $5.2 million, respectively, on research and development activities. We continue to derive a significant portion of our revenue as a result of these activities. Revenue generated from products new to us in the past five years represented approximately 47%, 37% and 25% during 2003, 2002 and 2001, respectively, of consolidated revenue.

We are also focused on fully developing the benefits from our recently completed investment in a specialized, state-of-the-art inclined wire paper machine serving growth markets in our Long Fiber & Overlay Papers business unit. The investment in this machine supports our development of a new market of technical specialty papers, the global penetration of certain markets and our focus on cost reduction efforts within the Long Fiber & Overlay Papers business unit.

In September 2003, we initiated a restructuring of our Neenah, WI facility (the “Neenah restructuring”). The Neenah restructuring included permanently shutting down a paper making machine and the deinking process at the Neenah facility. The abandoned paper machine represented approximately 25% of the annual production capacity of the Neenah facility, and the deinking facility processed recycled wastepaper to produce pulp. This pulp source has been replaced by purchased market pulp. These actions will allow us to focus on our highest value-added products, fortify our leadership position in premium book publishing papers, and support growth in our Engineered Products and the Long Fiber & Overlay Products businesses.

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

Raw Material and Energy

The following table provides an overview of the amount of principal raw materials (“PRM”) estimated to be used by each of our manufacturing facilities on an annual basis:

Our Spring Grove mill is a vertically integrated operation producing in excess of 85% of the annual pulp required for paper production. The principal raw material used to produce this pulp is pulpwood, of which both hardwoods and softwoods are used. At December 31, 2003, we owned approximately 89,000 acres of woodlands. During 2003, we sold approximately 25,500 acres of timberland and we entered into a Supply Agreement (the “Agreement”) with the buyers of the timberlands pursuant to which we agreed to purchase from the buyer,

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.

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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 $10.0 million, $9.8 million, and $9.7 million in 2003, 2002 and 2001, respectively.

Until the fourth quarter of 2003, the Neenah facility recycled high-grade wastepaper as its primary raw material. Since the initiation of the Neenah restructuring discussed above, the pulp requirements for this facility are fulfilled with purchased pulp and hardwood pulp substitutes.

The Neenah facility purchases steam under a twenty-year contract, expiring in 2018, from a third party steam supplier which processes sludge from our Neenah facility and from other mills in the Neenah area. Under the contract, the cost of the steam is based on the market price of natural gas and we are required to purchase an annual minimum of 1.1 million k lbs. of steam. Based on expected production levels in 2004, we anticipate our needs will approximate 1 million k lbs. The Neenah facility generated approximately 15% of its required electrical power and purchases the remainder.

Our Philippine mill processes abaca fiber to produce abaca pulp. This abaca pulp production provides a unique advantage by supplying a key raw material used by our Long Fiber & Overlay business unit in Gernsbach and Scaër. 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 Scaër 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 four months of abaca pulp supply available to us. In addition, we have established contingency plans for alternative sources of abaca pulp.

The Gernsbach and Scaër facilities both generate all the steam required for their operations. The Gernsbach facility generated approximately 30% of its 2003 electricity needs and purchased the balance. Natural gas was used to produce substantially all of Gernsbach’s internally generated energy during 2003. The Scaër facility purchased all of its 2003 electric power requirements.

Based on information currently available, we believe that we will continue to have ready access, for the foreseeable future, 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 and gas and oil energy costs.

Concentration of Customers

In 2003 and 2002, no single customer represented more than 10% of our consolidated net sales. In 2001, net sales to one customer, Central National Gottesman, Inc. (which buys paper through its division, Lindenmeyr Book Publishing) were approximately 11% of net sales, excluding the Ecusta Division.

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.

Competition

The competitiveness of the markets in which we sell our products varies. In our Engineered Products and Long-Fiber & Overlay Papers business units, competition is product line specific as the necessity for technical expertise and specialized manufacturing equipment limits the number of companies offering multiple product lines. We compete with specialty divisions of large companies such as, among others, Stora Enso, Mead/Westvaco, Sappi and International Paper. 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 in these markets 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 specialty papers, has exceeded demand in recent years. Although we believe demand increases will narrow this gap, the worldwide excess capacity is not expected to decline significantly for the next few years.

Our ability to compete in a global market place is also influenced by the relative value of the functional currency of our operations compared to the currency of the markets in which we sell our products and the location of our competitors. Due to the significant strengthening of the Euro relative to the U.S. dollar and other currencies over the last year, our European-based facilities have seen increasing pricing and competitive pressures.

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Employees

The following table summarizes our workforce as of December 31, 2003:

⁽¹⁾ As discussed elsewhere in this Annual Report, we initiated a significant headcount reduction at Neenah that is expected to be completed by the end of March 2004.

Different locals of the Paper, Allied-Industrial, Chemical and Energy Workers International Union (PACE) represent the hourly employees at our US facilities.

A five-year labor agreement that covers 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.

On October 22, 2002, hourly employees at our Neenah, Wisconsin facility ratified a five-year labor agreement with an expiration date of August 1, 2007. Under this agreement, effective August 1^st of each year, wages increase 3% for the duration of the agreement.

Various unions represent employees at our S&H facility. One-year labor agreements covering employees at the Gernsbach, Germany and Scaër, France facilities were entered into during 2003 with terms retroactive to the expiration dates of the respective agreements. These expire in the first quarter of 2004. 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. Wages are expected to increase 2.5% in 2004. We are not directly involved in these negotiations as paper industry representatives are negotiating the agreements. This situation is not unusual in Germany and France, and we do not believe that the lack of an agreement will result in any significant operational interruptions.

Employees at our pulpmill in the Philippines are covered by a five-year labor agreement, which was negotiated at the end of 2002.

We consider the overall relationship with our employees to be satisfactory.

Environmental Matters

We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the impact on the environment of mills we operate, or have operated. To comply with environmental laws and regulations, we will continue to incur substantial capital and operating expenditures. 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 the operation of our mills, 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.

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 – Note 19.

Available Information

Our investor relations website can be accessed at www.glatfelter.com/e/investock.asp. 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 and other related information as soon as reasonably practical after they are filed with the Securities and Exchange Commission. In addition, our website includes a Corporate Governance page consisting of, among others, our Governance Principles and Code of Business Conduct, Board of Directors and Executive Officers, Nominating, Audit and Compensation committees of the Board of Directors and their respective Charters, Code of Business Ethics for the CEO and Senior Financial Officers of Glatfelter, our “whistle-blower” policy and other related material. We intend on satisfying the disclosure requirement for any future amendments to, or waivers from, our Code of Ethics by posting such information on our website. We will provide a copy of the Code of Ethics, without charge, to any person who requests one, by calling (717) 225-2703.

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 Scaër, France. In addition, we own and operate a pulp mill in the Philippines.

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We own substantially all of the properties used in our papermaking operations. We own our operating equipment with the exception of some leased vehicles. All of our properties, other than those that are leased, are free from any material liens or encumbrances. We consider all of our buildings to be in good structural condition and well maintained and our properties to be suitable and adequate for present operations.

Estimated Annual Production Capacity (short tons)

The Spring Grove facility includes five uncoated paper machines that have been rebuilt and modernized from time to time. The Spring Grove facility has an off-line combi-blade coater and a Specialty Coater (“S-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 that allows us to expand our more profitable engineered paper products business.

The Spring Grove facility also includes a pulpmill that has a production capacity of approximately 650 tons of bleached pulp per day. We have a precipitated calcium carbonate (“PCC”) plant at our Spring Grove facility that 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.

Our wholly-owned subsidiary S&H owns and operates paper mills in Gernsbach, Germany and Scaër, France. S&H also owns a pulpmill in the Philippines that supplies substantially all of the abaca pulp requirements of the S&H paper mills.

In 2004, our Philippine facility, which supplies abaca pulp to S&H, expects to begin operation of a new globe digester that should increase our annual abaca pulp production by approximately 8%.

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, in 2003, we rebuilt a paper machine with a new state-of-the-art inclined wire paper machine (PM #9). We believe this machine provides us greater flexibility and technological capabilities. The Gernsbach facility also has the capacity to produce 8,800 tons of metalized papers annually, using a lacquering machine and two metalizers. We purchase the base paper used to manufacture the metalized paper.

ITEM 3. LEGAL PROCEEDINGS

In 1999, the 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 the EPA, we applied for and obtained from the Pennsylvania DEP the pre-construction permits that we concluded were required by applicable law. The 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 the EPA and the Pennsylvania DEP was not required. We have been informed that the EPA and the Pennsylvania DEP will seek substantial emissions reductions, as well as civil penalties, to which we believe we have meritorious defenses. We are unable to predict whether these defenses would prevail in litigation. Should a government plaintiff obtain a judgment against us regarding these matters, it is likely that such a judgment would be material to our results of operations or financial condition.

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

For a discussion of commitments and contingencies, see Item 8 – Financial Statements and Supplementary Data - Note 19.

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

Not Applicable – no matters were submitted to a vote of security holders during the fourth quarter of 2003.

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EXECUTIVE OFFICERS

The following table sets forth certain information with respect to executive officers of Glatfelter as of March 10, 2004.

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.

George H. Glatfelter II currently serves as Chairman and Chief Executive Officer of the Company. From April 2000 to February 2001, Mr. Glatfelter was Chairman, President and Chief Executive Officer. From June 1998 to April 2000, he was Chief Executive Officer and President.

Mr. Glatfelter serves as Director of the American Forest and Paper Association; the National Council for Air and Stream Improvements; and the Institute of Paper Science and Technology. Mr. Glatfelter is also a trustee of the York College of Pennsylvania.

John P. Jacunski joined us in October 2003, and currently serves as Vice President & Corporate Controller. Mr. Jacunski was previously Vice President and Chief Financial Officer at WCI Steel, Inc. from June 1999 to October 2003. From May 1995 to June 1999 he was WCI’s Corporate Controller. Prior to joining WCI, Mr. Jacunski was with KPMG, an international accounting and consulting firm, where he served in various capacities.

Markus R. Mueller became Corporate Counsel and Director of Policy & Compliance in June 2000. Mr. Mueller has also served as Secretary since December 1999. Mr. Mueller was Associate Counsel from June 1998 to June 2000 for P. H. Glatfelter Company.

Dante C. Parrini became Senior Vice President and General Manager in January 2003. From December 2000 until January 2003, Mr. Parrini was 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.

Mr. Parrini serves as Director of the Pennsylvania Chamber of Business and Industry and of Junior Achievement of Southcentral Pennsylvania.

C. Matthew Smith currently serves as Vice President and Treasurer, and until December 18, 2003 served as Corporate Controller, having assumed that role in September 2001. From June 2000 to September 2001, Mr. Smith 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.

Mr. Smith has also served as a director of the United Way of York County since 1999.

John C. van Roden, Jr., since April 8, 2003, serves as Senior Vice President and Chief Financial Officer. From September 1998 to September 2002, Mr. van Roden was Senior Vice President and Chief Financial Officer of Conectiv of Wilmington, DE.

Mr. van Roden is a Director of HB Fuller Company and Ascendant Capital Partners, LLC.

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William T. Yanavitch II became Vice President - Human Resources in July 2000. From October 1998 to July 2000, Mr. Yanavitch was Director of Human Resources for the Ceramco and Trubyte Divisions of Dentsply.

In addition to the above executive officers of our company, the following individuals serve in a significant capacity with business unit responsibilities and/or policy-making capacities:

William W. Beible, Jr., is our Vice President Business Improvement. In this capacity, Mr. Beible is responsible for program management of all significant corporate projects including the North American restructuring program. Other key responsibilities include corporate information technology and leadership of sustainable business improvement efforts.

John R. Blind serves as our Director of Manufacturing – Specialty Papers. Mr. Blind has over 22 years of experience with our company in various capacities including Director of Manufacturing North America, Mill Manager of our Neenah facility, production management and other technical and engineering related positions.

Timothy R. Hess is our Director of Specialty Papers Business. Prior to being promoted to this position in January 2004, Mr. Hess was our Engineered Products Business Unit Director. Since joining Glatfelter in 1994, Mr. Hess has held various technical, manufacturing, sales and business development positions in the specialty papers arena.

Werner A. Ruckenbrod is Vice President Long Fiber & Overlay Papers with responsibilities for the operations and performance of this business unit. Mr. Ruckenbrod joined our subsidiary, S&H, in 1984. Since joining our company, Mr. Ruckenbrod has held various production related positions.

Mark A. Sullivan joined our company in December 2003, as Chief Procurement Officer. Mr. Sullivan’s experience includes a broad array of operations and supply chain management responsibilities during 20 years with the DuPont Company. He served with T-Mobile USA as an independent contractor during 2003, and Concur Technologies from 1999 until 2002.

PART II

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

Common Stock Prices and Dividends Declared Information

The following table 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 March 3, 2004, we had 2,299 shareholders of record. A number of the shareholders of record are nominees.

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ITEM 6. SELECTED FINANCIAL DATA

Summary of Selected Consolidated Financial Data

1.		Our Ecusta Division was sold in August 2001.
2.		The above Summary of Selected Consolidated Financial Data, and the comparability thereof, includes the impact of certain charges and gains from asset dispositions. For a discussion of these restructuring charges, unusual items and gains from sales of plant, equipment and timberlands that affect the comparability of this information, see Item 8 – Financial Statements and Supplemental Data Notes 5 to 8.

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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 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, costs of products sold, restructuring charges, non-cash pension income, 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 abaca fiber, and changes in energy-related costs;
	iii.		our ability to develop new, high value-added engineered products and long fiber & overlay papers;
	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.		the execution of our growth strategies and cost reduction initiatives;
	vi.		cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damages 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 costs of environmental matters at our former Ecusta Division mill;
	vii.		the gain or loss of significant customers and/or on-going viability of such customers;
	viii.		risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;
	ix.		geopolitical events, including war and terrorism;
	x.		enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;
	xi.		our ability to identify, finance and consummate future alliances or acquisitions;
	xii.		adverse results in litigation;
	xiii.		disruptions in production and/or increased costs due to labor disputes;
	xiv.		our ability to realize the value of our timberlands;
	xv.		recovery of environmental losses under our insurance policies; and
	xvi.		the level of declared common stock dividends

Introduction

We manufacture, both domestically and internationally, a wide array of specialty papers and engineered products. Substantially all of our revenue is earned from the sale of our products to customers in numerous markets, including book publishing, food and beverage, decorative laminates for furniture and flooring, and other highly technical niche markets. Refer to Item 1 – Business for additional information.

Our industry has been adversely impacted by an imbalance between supply and demand for certain of our products. In this environment during 2003, we experienced declining sales volumes and lower average selling prices primarily in our more commodity-like products offered by our Printing & Converting Papers business unit.

A number of events occurred that impacted our results of operations and financial condition in 2003, including:

•

We experienced difficult market conditions in our Printing & Converting Papers business unit, resulting in a decline in revenue of $35 million, or 12.3%.

•

We increased unit volumes in Engineered Products by 8.8% and in Long Fiber & Overlay Papers by 8.5%.

•

During 2003, the U.S. dollar weakened by approximately 17% compared to the Euro. This favorably impacted translated results of operations by approximately $4.2 million in 2003.

•

The benefit reported from non-cash pension income declined by $15.5 million in 2003 compared to 2002.

•

We initiated the Neenah restructuring, which included permanently shutting down certain equipment and processes, and eliminating approximately 200 positions. These actions resulted in pre-tax charges totaling $13.5 million in 2003.

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•

We recorded an $11.5 million pre-tax charge relating to our former Ecusta Division. Of this amount, $5.5 million was to fully reserve for receivables due from parties that purchased Ecusta from us. The remaining $6.0 million is for contingent landfill closure costs.

•

We completed a $35 million investment in a new, state-of-the-art, inclined wire papermaking machine in Gernsbach, Germany to support growth initiatives in Long Fiber & Overlay Papers.

•

We entered into a Consent Decree with certain governmental agencies that requires us to contribute a total of $27.0 million to fund the clean up of contamination of the Lower Fox River near our Neenah facility.

•

Our Board of Directors declared, effective in the third quarter of 2003, a $0.09 per common share cash dividend, or 49% lower than previous amounts. On an annualized basis, this reduced dividend will conserve approximately $15.0 million in cash.

•

We strengthened our financial position by completing a $37 million sale of timberlands and entered into agreements to sell an additional $31 million worth of property.

RESULTS OF OPERATIONS

2003 versus 2002

The following table sets forth summarized results of operations:

The consolidated results of operations for the years ended December 31, 2003 and 2002 include the following significant items:

The above items increased earnings from continuing operations by $1.9 million, or $0.04 per diluted share in 2003, and decreased earnings from continuing operations in 2002 by $1.9 million, or $0.04 per share. The decline in earnings was primarily due to lower sales volumes and selling prices in the Printing & Converting Papers business unit and higher costs of products sold, primarily due to lower non-cash pension income, higher raw material prices, and increased market-related down time.

Business Units

We manage our organization along separate business units: Engineered Products, Long-Fiber & Overlay Papers and Printing & Converting Papers, as well as Tobacco Papers, which are sold pursuant to a supply agreement that expires in mid-2004. In the latter part of 2002, we completed the implementation of a new information system to provide, among other things, more complete business unit reporting. However, we are unable to provide detailed business unit profitability reporting for periods prior to the system implementation, including full-year 2002.

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The following table sets forth profitability information by business unit and the composition of consolidated income from continuing operations before income taxes:

Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Costs to produce products sold are allocated to the respective business unit based on standard costs and a proportion of manufacturing variances. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services.

Management evaluates results of operations before energy sales, non-cash pension income, restructuring related charges, unusual items and effects of asset dispositions because it believes this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from core operations. This presentation is closely aligned with the management and operating structure of our Company. It is also on this basis that Company’s performance is evaluated internally and by our Board of Directors.

Sales and Costs of Products Sold

The decline in net sales was primarily due to a $19.8 million net sales volume-related decline as lower volumes in our Printing & Converting Papers and tobacco papers more than offset sales volume growth in our Engineered Products and Long Fiber & Overlay Papers business units. In addition each business unit experienced lower average selling prices, in constant currency rates, aggregating $13.3 million. The impact of lower sales volumes and selling prices was partially offset by a $27.9 million favorable effect of a weaker U.S. dollar on translated international results.

The following tables set forth net sales information by business unit:

Costs of products sold increased $39.8 million in the comparison due to the following significant items:

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In the preceding table, “other” primarily consisted of depreciation, market-related downtime and assets write-offs.

The market price of natural gas is a significant component of our Neenah facility’s production costs as the cost of the facility’s steam is dependent on natural gas market prices. During 2003 we experienced increases in natural gas market prices. Based on expected production levels and contractual obligations, a $1 per decatherm increase in the cost of natural gas is expected to increase the cost of operating our Neenah facility by approximately $1.4 million per year. Thus far in 2004, natural gas market prices appear to have stabilized and we expect the price to decline moderately compared with the levels during 2003.

Non-Cash Pension Income

Non-cash pension income results from the considerably over-funded status of our plans. The amount of pension income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. Because the value of our plan assets as of January 1, 2003, was lower than the previous year and due to changes in actuarial assumptions, the amount of non-cash pension income recognized in 2003 was less than 2002. The following summarizes non-cash pension income for each year.

Non-cash pension income in 2004 is expected to approximate amounts recognized in 2003.

Operating Expenses

Selling, general and administrative (“SG&A”) SG&A expenses increased $5.4 million during 2003 compared to 2002. During 2003, a weaker U.S dollar resulted in a $2.6 million increase in translated SG&A expenses for our international operations. The remaining increase was primarily due to a lower benefit from non-cash pension income and higher depreciation, primarily attributable to an information technology system implemented in the latter part of 2002.

Restructuring Charge In September 2003, we announced the decision to permanently shut down a paper making machine and the deinking process at our Neenah, WI facility. The abandoned machines and processes had been primarily supporting our Printing & Converting Papers business unit. The Neenah restructuring was initiated to allow us to reallocate resources to more fully support opportunities in higher growth, more profitable specialty markets. These initiatives will result in the elimination of approximately 200 positions and is expected to be completed by March 31, 2004. The results of operations include related pre-tax charges of approximately $13.5 million, of which $6.5 million are reflected in the consolidated income statements as components of costs of products sold, and $7.0 million are reflected as “restructuring charges.”

The following table sets forth information with respect to Neenah restructuring charges.

Additional charges may be required in 2004 depending on the resolution of certain contractual matters.

In 2002 we recorded a $4.2 million charge related to a workforce reduction at our corporate and Spring Grove, PA locations.

Unusual Items Unusual items during 2003 reflect a charge of $11.5 million related to our former Ecusta Division, which was sold in 2001. Under the Ecusta Division acquisition agreement, we are indemnified for certain liabilities that have been assumed by the buyers. We had previously accrued liabilities related to certain post-retirement benefits, workers compensation claims and vendor payables and established a corresponding receivable due from the buyers. We paid the portion of these liabilities that became due and sought reimbursement from the buyers, which, to date, they have refused. The 2003 charge includes $5.5 million to fully reserve such receivables and an additional $6.0 million related to contingent landfill closure costs at the Ecusta facility. In 2002, we recognized a $3.5 million gain from the settlement of an escrow account with the previous owners of our Schoeller & Hoesch Division. This was partially offset by a $1.5 million charge for certain environmental matters related to the Pennsylvania DEP.

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Gain on Sales of Plant, Equipment and Timberlands During 2003 we recognized a net gain from the sale of plant, equipment and timberlands of $32.3 million. This primarily includes a $31.2 million pre-tax gain from the March 2003 sale of approximately 25,500 acres of timberlands (the “Maryland Timberlands”) to a subsidiary of The Conservation Fund, a non-profit land conservation fund (the “Timberland Buyer”).

In the fourth quarter of 2003, we entered into agreements to sell approximately 2,300 acres of timberlands for an aggregate cash consideration of approximately $30.8 million, of which $24.8 million has been completed to date. The sales are expected to result in a pre-tax gain of approximately $29 million during the first quarter of 2004.

Foreign Currency

We own and operate paper and pulp mills in Germany, France and the Philippines. The local currency in Germany and France is the Euro, while in the Philippines the currency is the Peso. These operations generate approximately 31% of our sales and operating expenses. The translation of the results from these international operations into U.S. dollars is subject to changes in foreign currency exchange rates.

The following table summarizes the effect from foreign currency translation on reported results compared to 2002:

The above table only presents the financial reporting impact of foreign currency translations. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in a global, multi-currency environment. In 2003, the strengthening of the Euro relative to certain other currencies adversely affecting average selling prices, in the functional currency, of products sold by S&H.

Discontinued Operations

In July 2003, we sold our Wisches, France subsidiary for approximately $2.0 million and the assumption of approximately $1.1 million of debt owed to us by our subsidiary. At closing, we received $1.7 million and the remaining amounts are to be paid in annual installments over two years beginning July 2004. The financial results of this subsidiary are reported as discontinued operations for all periods presented. Prior to the sale, the underlying assets were recorded at the lower of carrying amount or fair value less cost to sell. Accordingly, loss from discontinued operations for the year ended December 31, 2003, includes a charge of $0.5 million, after tax, to write-down the carrying value of the assets prior to the sale. Revenue included in determining results from discontinued operations totaled $2.6 million and $3.5 million for 2003 and 2002, respectively. The financial results of this operation were previously reported in the Engineered Products business unit.

2002 versus 2001

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. Unusual items discussed in detail below affect the comparison of reported results.

Net Sales

Net sales decreased $92.3 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 $1.5 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 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.

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 & 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 & Converting Papers experienced declining prices, reversing favorable pricing trends that were seen during the third quarter of 2002.

Cost of Products Sold and Gross Profit

Cost of products sold declined $77.3 million, or 15.4%, in the year-to-year comparison. Excluding the Ecusta Division, cost of products sold increased $1.8 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 international results. These factors more than offset the effect of a decrease in the unit cost of pulp and benefits of our cost control initiatives. As a percent of sales, our gross margin increased to 23.0% for the full year 2002 from 22.3% 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.

Selling, General and Administrative Expenses

SG&A expenses declined $6.5 million, or 10.8%, 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 $0.7 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. SG&A expenses were also lower in 2002 compared with 2001 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.

Net non-cash pension income reduced reported SG&A expenses $5.7 million in 2002 and $6.3 million in 2001. Post-retirement expense included in SG&A expenses was $1.0 million and $0.5 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.

Gains on Sales of Plant, Equipment and Timberlands

During 2002, we recorded $1.3 million gain 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.

Unusual Items

Unusual items totaled a gain of $2.0 million and a charge of $60.9 million in 2002 and 2001, respectively. Amounts recorded in 2002 included 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. The gain was partially offset by a $1.5 million liability related to the Pennsylvania DEP.

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.

LIQUIDITY AND CAPITAL RESOURCES

Our business is capital intensive and requires significant expenditures for new or enhanced equipment, for environmental compliance matters and to support our business strategy and research and development efforts.

The following table summarizes cash flow information for each of the years presented.

The decline in cash generated from operations is primarily due to the changes in our results of operations discussed previously in this report.

Cash spent in 2003 on investing activities primarily reflects the investments made to install a state-of-the-art inclined wire paper machine (“PM #9”) to support growth opportunities in the Long-Fiber & Overlay Papers business unit and capital expenditures for the “New Century” project. In 2002, cash spent on investing activities included the implementation of an enterprise resource planning system (“IMPACT”), the New Century Project, and the rebuild of PM #9. The New Century Project is a substantially completed initiative at our Spring Grove facility under the Voluntary Advanced Technical Incentive Program as set forth by the EPA’s “Cluster Rule”. This project includes new hardwood brownstock washing, installation of hardwood oxygen delignification,

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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.

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

Capital expenditures in 2004 are expected to approximate one-half of our annual depreciation expense. The reduction in capital expenditures is not expected to have a significant effect on our results of operations, as we will continue to complete necessary repairs and maintenance activities.

The following table sets forth our outstanding long-term indebtedness:

The significant terms of the debt obligations are set forth in Item 7 – Financial Statements and Supplementary Data, Note 17.

Sales of Timberlands During 2003, we completed the sale of approximately 25,500 acres of timberlands (the “Maryland Timberlands”) to a subsidiary of The Conservation Fund, a non-profit land conservation fund (the “Timberland Buyer”). As consideration for the sale of the Maryland Timberlands, we received a 10-year note from the Timberland Buyer in the principal amount of $37.9 million (the “Note”). The Note bears interest at 3.22% per annum with interest-only payments due in quarterly installments. After five years, the interest rate on the Note will be adjusted to the then existing bank prime rate. The full amount of the Note is secured by a letter of credit issued by a financial institution. We pledged the Note and letter of credit as collateral for a $34.0 million term loan payable to SunTrust.

In connection with the Maryland Timberland sale, we entered into a Supply Agreement (the “Agreement”) with the Timberland Buyer pursuant to which we agreed to purchase from the Timberland Buyer at market prices, a minimum annual amount of pine pulpwood averaging 34,425 tons per annum over the eight-year term of the Agreement.

Dividend Payments During 2003 and 2002, cash dividends paid on common stock totaled $26.9 million and $30.3 million, respectively. Our Board of Directors determines what, if any, dividends 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. Beginning in the third quarter of 2003, our Board of Directors declared a $0.09 per common share quarterly cash dividend, or 49% lower than previous quarterly dividends. On an annualized basis, this reduced dividend will conserve approximately $15.0 million in cash.

In the first quarter of 2004, we expect to complete the sale of approximately 2,300 acres of timberlands for a total of $30.8 million in cash, of which $24.8 million has been received to date.

These strategic timberland sales are designed to monetize the underlying value of certain assets.

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 mills we operate, or have operated. 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. (See Item 8 – Financial Statements – Note 19 for a summary of significant environmental matters.)

As more fully discussed in Item 8 – Financial Statements and Supplemental Data – Note 19 we entered into a Consent Decree with the various governmental agencies related to the remediation of Operable Unit 1 (“OU1”) of the Lower Fox River.

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The OU1 Consent Decree requires the Company to pay amounts under the following schedule:

The amounts due on November 1, 2003 and January 31, 2004, were paid.

In February 2004, we entered into settlement agreements with certain of our insurance carriers relating to coverage for various environmental liabilities incurred by the Company associated with the Lower Fox River and Bay of Green Bay in Wisconsin. Under terms of the settlement agreements, the insurance carriers agreed to pay us an aggregate of $25.2 million. We expect to receive the settlement proceeds in the first quarter of 2004. Our consolidated financial statements do not include any amounts for such recoveries.

We expect to meet all of our other near- and longer-term cash needs from a combination of operating cash flow, cash and cash equivalents, sale of additional timberlands, proceeds from insurance recoveries, 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 19, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.

Off-Balance-Sheet Arrangements As of December 31, 2003 and 2002, we had not entered into any off-balance-sheet arrangements. All derivative financial instruments to which we a party and guarantees of indebtedness, which solely consists of our subsidiaries obligations, are reflected in the consolidated balance sheets included herein in Item 8 – Financial Statements and Supplementary Data.

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Contractual Obligations The following table sets forth contractual obligations as of December 31, 2003.

(1)		Represents principal payments due on long-term debt. We have $150 million of debt maturing in July 2007 and bearing a fixed rate of interest at 6 7/8%, payable semiannually, $34 million note maturing in March 2008 and bearing a fixed rate of interest of 3.82%. In addition, at December 31, 2003, $64 million, bearing a variable interest rate, was outstanding under our revolving credit facility that matures June 2006.
(2)		Represents rental agreements for various land, buildings, and computer and office equipment.

(3)

Represents open purchase order commitments and other obligations, primarily for steam and pulpwood contracts with minimum annual purchase obligations. In certain situations, prices are subject to variations based on market prices. In such situations, the information above is based on prices in effect at December 31, 2003 or expectations based on historical experience and/or current market conditions.

(4)

Represents expected benefits to be paid pursuant to medical retirement plans and nonqualified pension plans over the next ten years.

Critical Accounting Policies and Estimates

The preceding 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 statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, pension and post-retirement obligations, environmental liabilities and income taxes. 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.

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

Long-lived Assets 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.

Pension and Other Post-Retirement Obligations Accounting for defined-benefit pension plans, and any curtailments thereof, 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, and any curtailments thereof, 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 or as facts and circumstances dictate 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.

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Environmental Liabilities 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.

Income Taxes We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our balance sheets, as well as operating loss and tax credit carry forwards. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our reported results.

Other significant accounting policies, not involving the same level of uncertainties as those discussed above, are nevertheless important to an understanding of the Consolidated Financial Statements. Refer to Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements for additional accounting policies.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At December 31, 2003, we had long-term debt outstanding of $249.3 million, of which $64.0 million, or 25.7% was at variable interest rates.

The table above presents average principal outstanding and related interest rates for the next five years and the amounts of cross-currency swap agreements. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.

Variable-rate debt outstanding represents borrowings under our revolving credit facility that incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin. At December 31, 2003, the interest rate paid was 2.69%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.6 million.

At December 31, 2003, we had a cross-currency swap agreement outstanding with a termination date of June 24, 2006. Under this transaction, we swapped $70.0 million for approximately €73 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 inter-company obligations recorded at our S&H subsidiary in Gernsbach, Germany. The cross

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currency swaps are recorded at fair value on the Consolidated Balance Sheet under the caption “Other long-term liabilities.” Changes in fair value are recognized in earnings as “Other income (expense)” 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 U.S. dollar-denominated inter-company obligations when they are re-measured in Euros, the functional currency of S&H (See Item 8 – Financial Statements and Supplementary Data – Note 18).

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. During year ended December 31, 2003, approximately 69% of our net sales were shipped from the United States, 26% from Germany, and 5% from other international locations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 15 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
March 10, 2004

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P. H. GLATFELTER COMPANY
CONSOLIDATED STATEMENTS OF INCOME

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

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P. H. GLATFELTER COMPANY
CONSOLIDATED BALANCE SHEETS

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

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P.H. GLATFELTER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2003, 2002 and 2001