1. ORGANIZATION

     P. H. Glatfelter Company and subsidiaries (“Glatfelter”) is a manufacturer of specialty papers and engineered products. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Chillicothe and Freemont, Ohio; Gloucestershire (Lydney), England; Caerphilly, Wales; Gernsbach, Germany; Scaër; France; and the Philippines. Our products are marketed throughout the United States and in over 85 other countries, either through wholesale paper merchants, brokers and agents or directly to customers.

2. ACCOUNTING POLICIES

     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.

     Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. 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.

3. RECENT PRONOUNCEMENTS

     Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This standard defines the term “fair value”, establishes a framework for measurement and requires expanded disclosures about the fair value measurements. The adoption of SFAS No. 157, did not have an impact on our consolidated financial position or results of operations.

     In December 2007, SFAS No. 141(R), “Business Combinations” was issued. This statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. With respect to us, SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. However, after adoption of SFAS No. 141(R), changes in estimates of deferred tax assets and liabilities, and final settlements of all income tax uncertainties that related to a business combination which are made after the measurement period will impact income tax expense. We expect SFAS No. 141(R) will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.

     In June 2008, the FASB issued Staff Position (“FSP”) No. EITF No. 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This FSP affects entities that accrue cash dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the award. The FSP requires that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and are considered participating securities. The provisions of FSP No. EITF No. 03-6-1 are effective for fiscal years beginning after December 15, 2008. We are currently evaluating the requirements of FSP No. EITF 03-6-1, to determine the impact, if any, on our consolidated financial statements.

4. ACQUISITIONS

     Metallised Products Limited On November 30, 2007, through Glatfelter-UK Limited, a wholly-owned subsidiary, we completed our acquisition of Metallised Products Limited (“MPL”), a privately owned company that manufactures a variety of metallized paper products for consumer and industrial applications. MPL is based in Caerphilly, Wales.

     Under terms of the agreement, we purchased the stock of MPL for $6.8 million cash and assumed $5.8 million of debt in addition to $1.5 million of transaction costs. The amounts set forth above reflect a $0.4 million reduction in the original purchase based on final adjusted working capital as of the closing date. The acquisition, which was financed from our existing cash balance, employed about 165 people and had 2007 revenues of approximately $53.4 million.

     The following table summarizes the preliminary allocation of the purchase price to assets acquired and liabilities assumed:

In thousands
Assets acquired:
Cash		$	730
Accounts receivable			7,718
Inventory			4,747
Property and equipment			10,178
Other assets			922
Goodwill			1,885
			26,180
Less acquisition related liabilities including accounts payable and accrued expenses			11,978
Long term debt			5,830
			17,808
Total		$	8,372

5. GAIN ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS

     During the first six months of 2008 and 2007, we completed sales of timberlands which are summarized by the following table:

Dollars in thousands		Acres				Proceeds				Gain
2008
Timberlands			3,595			$	14,997			$	14,603
Other			n/a				—				(101	)
						$	14,997			$	14,502
2007
Timberlands			3,588			$	9,435			$	9,066

     In accordance with terms of our credit facility, we are required to use the proceeds from timberland sales to reduce amounts outstanding under our term loan.

6. EARNINGS PER SHARE

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

		Three Months Ended
		June 30
In thousands, except per share		2008				2007
Net income		$	3,156			$	1,998
Weighted average common shares outstanding used in basic EPS			45,227				45,040
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards			439				333
Weighted average common shares outstanding and common share equivalents used in diluted EPS			45,666				45,373
Earnings per share
Basic and diluted		$	0.07			$	0.04

		Six Months Ended
		June 30
In thousands, except per share		2008				2007
Net income		$	22,831			$	5,251
Weighted average common shares outstanding used in basic EPS			45,192				44,964
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards			402				344
Weighted average common shares outstanding and common share equivalents used in diluted EPS			45,594				45,308
Earnings per share
Basic		$	0.51			$	0.12
Diluted		$	0.50				0.12

     Approximately 688,500 and 691,500 of potential common shares have been excluded from the computation of diluted earnings per share for the three month and six month periods ended June 30, 2008, respectively, due to their anti-dilutive nature. Approximately 525,150 and 522,150 of potential common shares were excluded from the computation of diluted earnings per share for the three month and six month periods ended June 30, 2007, respectively.

7. INCOME TAXES

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

     As of June 30, 2008 and December 31, 2007, we had $27.7 million and $26.1 million of gross unrecognized tax benefits respectively. As of June 30, 2008, if such benefits were to be recognized, approximately $22.0 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate.

     We, or one of our subsidiaries, file income tax returns with the United States Internal Revenue Service, as well as various state and foreign authorities. The following table summarizes tax years that remain subject to examination by major jurisdiction:

		Open Tax Year
		Examination in				Not under
Jurisdiction		progress				examination
United States
Federal			2004 — 2006				2007
State			2004				2003 — 2007
Germany (1)			2003 — 2006				2007
France			N/A				2006 — 2007
United Kingdom			N/A				2006 — 2007
Philippines			2005 — 2006				2007

     The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues amounts for uncertain tax positions. Based on these reviews and the result of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are determined or resolved or as such statutes are closed. Due to potential for resolution of federal, state, and foreign examinations, and the expiration of various statutes of limitations, it is reasonably possible our gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $0.8 million.

     We recognize interest and penalties related to uncertain tax positions as income tax expense. Interest expense recognized in the second quarter of 2008 totaled $0.04 million and $0.1 million in the second quarter of 2007. Such amounts were $0.3 million in both the first half of 2008 and 2007. Accrued interest was $2.0 million and $1.8 million as of June 30, 2008 and December 31, 2007, respectively. We did not record any penalties associated with uncertain tax positions during 2008 or 2007.

8. STOCK-BASED COMPENSATION

     During the first six months of 2008, we issued 274,240 Stock Only Stock Appreciation Rights (“SOSAR”) to members of executive management a grant date strike price of $13.44 per share. Under terms of the SOSAR, the recipients received the right to receive a payment in the form of shares of common stock equal to the difference if any, in the fair market value of one share of common stock at the time of exercising the SOSAR and the strike price. The SOSARs, which vest ratably over a three year period, had a grant date fair value, estimated using the Black-Scholes valuation model, of $3.72 per right, and an aggregate value of $1.0 million. In addition, 136,100 Restricted Stock Units (“RSU”) were issued in the first six months of 2008 with a weighted-average grant date fair value of $14.48 per unit and an aggregate value of $2.0 million. The RSUs vest over a period ranging from three years to five years.

     During the first six months of 2008 and 2007, we recognized stock-based compensation expense totaling $2.4 million and $2.1 million, respectively.

9. RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS

     The following table provides information with respect to the net periodic costs of our pension and post retirement medical benefit plans.

		Three Months Ended
		June 30
In thousands		2008				2007
Pension Benefits
Service cost		$	1,991			$	2,331
Interest cost			6,158				5,627
Expected return on plan assets			(13,037	)			(11,699	)
Amortization of prior service cost			597				589
Amortization of unrecognized loss			95				244
Net periodic benefit income		$	(4,196	)		$	(2,908	)
Other Benefits
Service cost		$	503			$	538
Interest cost			825				743
Expected return on plan assets			(216	)			(223	)
Amortization of prior service cost			(337	)			(275	)
Amortization of unrecognized loss			359				262
Net periodic benefit cost		$	1,134			$	1,045
		Six Months Ended
		June 30
In thousands		2008				2007
| |
Pension Benefits
Service cost		$	4,528			$	4,787
Interest cost			11,749				10,918
Expected return on plan assets			(25,632	)			(23,731	)
Amortization of prior service cost			1,197				1,199
Amortization of unrecognized loss			193				406
Net periodic benefit income		$	(7,965	)		$	(6,421	)
Other Benefits
Service cost		$	1,061			$	1,013
Interest cost			1,576				1,517
Expected return on plan assets			(417	)			(446	)
Amortization of prior service cost			(596	)			(517	)
Amortization of unrecognized loss			622				523
Net periodic benefit cost		$	2,246			$	2,090

10. COMPREHENSIVE INCOME

     The following table sets forth comprehensive income and its components:

		Three Months Ended
		June 30
In thousands		2008				2007
Net income		$	3,156			$	1,998
Foreign currency translation adjustment			(1,203	)			4,569
Additional pension liability amortization, net of tax			450				533
Comprehensive income		$	2,403			$	7,100
		Six Months Ended
		June 30
In thousands		2008				2007
Net income		$	22,831			$	5,251
Foreign currency translation adjustment			14,841				6,359
Additional pension liability amortization, net of tax			904				1,047
Comprehensive income		$	38,576			$	12,657

11. INVENTORIES

     Inventories, net of reserves, were as follows:

		June 30,				December 31,
In thousands		2008				2007
Raw materials		$	45,839			$	41,119
In-process and finished			99,779				102,219
Supplies			50,837				49,704
Total		$	196,455			$	193,042

12. LONG-TERM DEBT

     Long-term debt is summarized as follows:

		June 30,				December 31,
In thousands		2008				2007
Revolving credit facility, due April 2011		$	10,956			$	35,049
Term Loan, due April 2011			37,000				43,000
71/8% Notes, due May 2016			200,000				200,000
Term Loan, due January 2013			36,695				—
Note payable, due March 2013			34,000				34,000
Total long-term debt			318,651				312,049
Less current portion			(12,383	)			(11,008	)
Long-term debt, excluding current portion		$	306,268			$	301,041

     Our revolving credit facility provides for up to $200 million of aggregate borrowings on an unsecured basis. The term loan due in April 2011 requires quarterly repayments of principal outstanding that began on March 31, 2007 with the final principal payment due on April 2, 2011. In addition, if certain prepayment events occur, such as a sale of assets, the incurrence of additional indebtedness in excess of $40.0 million in the aggregate, or issuance of additional equity; we must repay a

specified portion of the term loan within five days of the prepayment event.

     Borrowings under the credit agreement bear interest, at our option, at either (a) the bank’s base rate described in the credit agreement as the greater of the prime rate or the federal funds rate plus 50 basis points, or (b) the EURO rate based generally on the London Interbank Offer Rate, plus an applicable margin that varies from 67.5 basis points to 137.5 basis points according to our corporate credit rating determined by S&P and Moody’s.

     The credit agreement, as amended, contains a number of customary covenants for financings of this type that, among other things, restrict our ability to: i) dispose of or create liens on assets; ii) transfer assets between borrowing or guaranteeing subsidiaries and non guaranteeing subsidiaries; iii) incur additional indebtedness; iv) repay other indebtedness; or v) make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios, including a consolidated minimum net worth test, a maximum debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio and a minimum interest coverage ratio. A breach of these requirements, of which we were not aware of any at June 30, 2008, would give rise to certain remedies under the credit agreement as amended, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility.

     The 7¹/₈% Senior Note agreement contains a “cross-default” clause that provides if there were to be an event of default under the credit agreement discussed earlier, we would also be in default under the 7¹/₈% Senior Notes.

     In November 2007, we sold timberlands and as consideration received a $43.2 million, 20-year interest bearing note receivable from the timberland buyer. In January 2008, we pledged this note as collateral under a $36.7 million term loan (the “2008 Term Loan”) with SunTrust Financial. The 2008 Term Loan matures in five years, and bears interest at a six-month reserve adjusted LIBOR plus a margin rate of 1.20% per annum.

     On March 21, 2003, we sold timberlands and received as consideration a $37.9 million 10-year interest bearing note receivable from the timberland buyer. We pledged this note as collateral under a $34.0 million promissory note payable to SunTrust Financial (the “Note Payable”). The Note Payable was scheduled to mature in March 2008. In February 2008, we amended the Note Payable to extend its maturity until March 26, 2013. Beginning on March 26, 2008, the Note Payable bears a fixed rate of interest of 3.10%.

     The notes receivable, discussed in the preceding paragraphs, aggregating $81.1 million, are recorded in the accompanying consolidated balance sheets under the caption “Other assets.”

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

     As of June 30, 2008 and December 31, 2007, we had $7.1 million and $14.1 million of letters of credit issued to us by certain financial institutions. Such letters of credit, which reduce amounts available under our revolving credit facility, provide i) financial assurances for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program, and ii) assurance related to the purchase of certain utilities for our manufacturing facilities. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. No amounts are outstanding under the letters of credit.

13. ASSET RETIREMENT OBLIGATION

     During the second quarter of 2008, we recorded $7.2 million of asset retirement obligations related to the legal requirement to close 19 lagoons at the Spring Grove, PA facility. The lagoons are currently being used to dispose of residual waste material. Closure of the lagoons, which is expected to occur over the next several years, not to exceed ten years, will be accomplished by disposing in the lagoons certain non-hazardous sludge, ash and other residual material currently produced by the mill. This will be followed by the placement of a cover comprised primarily of purchased clay and top soil to construct the required cap over the lagoons. The ultimate time period over which the lagoons are closed is dependent upon the plan to be agreed and approved by the Pennsylvania Department of Environmental Protection. The amounts referred to above were accrued with a corresponding increase in the carrying value of the property, equipment and timberlands caption on the consolidated balance sheet. The amount capitalized will be amortized as a charge to operations on a systematic basis in relation to the expected closure period.

14. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

     Fox River — Neenah, Wisconsin

     Background We have significant uncertainties associated with 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 Wisconsin (“Site”). As part of the 1979 acquisition of the Bergstrom Paper Company we acquired a facility

located at the Site (the “Neenah Facility”). In part, the Neenah Facility used wastepaper as a source of fiber. At no time did the Neenah Facility utilize PCBs in the pulp and paper making process, but discharges to the lower Fox River from the Neenah Facility which may have contained PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that our Neenah Facility discharged into the lower Fox River resulted from the presence of PCBs in NCR^®-brand carbonless copy paper in the wastepaper that was recycled at the Neenah Facility. We closed the Neenah Facility in June 2006.

     The United States, the State of Wisconsin and various state and federal governmental agencies (collectively, the “Governments”), as well as private parties, have found PCBs in sediments on the bed of the Fox River, apparently from a number of sources at municipal and industrial facilities along the upstream and downstream portions of the Site. The Governments have identified manufacturing and recycling of NCR^®-brand carbonless copy paper as the principal source of that contamination.

     The United States Environmental Protection Agency (“EPA”) has divided the lower Fox River and the Bay of Green Bay site into five “operable units” numbered from the most upstream (“OU1”) to the most downstream (“OU5”). OU1 is the reach from primarily Lake Winnebago to the dam at Appleton, and is comprised of Little Lake Butte des Morts. Our Neenah Facility discharged its wastewater into OU1. OU2 extends from the dam at Appleton to the dam at Little Rapids, OU3 from the dam at Little Rapids to the dam at De Pere, OU4 from the dam at De Pere to the mouth of the river, and OU5 from the mouth into the lower portion of Green Bay. The river extends 39 miles from the upstream end of OU1 to the downstream end of OU4.

     Our liabilities, if any, for this contamination primarily arise under the federal Comprehensive Environmental, Response, Compensation and Liability Act (“CERCLA” or “Superfund”). The Governments have sought to recover “response actions” or “response costs,” which are the costs of studying and cleaning up contamination, from various “responsible parties.” In addition, various natural resource trustee agencies of the United States, the States of Wisconsin and Michigan, and several Indian Tribes have sought to recover natural resource damages (“NRDs”), including natural resource damage assessment costs. Parties that have incurred response costs or NRDs either voluntarily or in response to the governments’ and trustees’ demands may have an opportunity to seek contribution or other recovery of some or all of those costs from other parties who are jointly and severally responsible under Superfund for those costs. Therefore, as we incur costs, we also acquire a claim against other parties who may not have paid their equitable share of those costs. As others incur costs, they

acquire a claim against us to the extent that they claim that we have not paid our equitable share of the total. Any party that resolves its liability to the United States or a state in a judicially or administratively approved settlement agreement obtains protection from contribution claims for matters addressed in the settlement.

     For these reasons, all of the parties who are potentially responsible (“PRPs”) under CERCLA for response costs or NRDs have exposure to liability for: (a) the cost of past response actions taken by anyone else, (b) the cost of past NRD payments or restoration projects incurred by anyone else, (c) the cost of response actions to be taken in the future, and (d) NRDs. All of this exposure is subject to substantial defenses, including, for example, that the PRP is not liable or not jointly and severally liable for any particular cost or damage, that the cost or damage is not recoverable under CERCLA or any other law, or that the recovery is barred by the passage of time. In addition, a party that has incurred or committed to incur costs or has paid NRDs may be able to claim credit for that cost or payment in any equitable allocation of response costs or NRDs in any action for reallocation of costs.

     Cleanup Decisions. Our liability exposure depends importantly on the decisions made by EPA and the Wisconsin Department of Natural Resources (“WDNR”) as to how the Site will be cleaned up, and consequently the costs and timing of those response actions. The nature of the response actions has been highly controversial. EPA issued a record of decision (“ROD”) selecting response actions for OU1 and OU2 in December 2002. EPA issued a separate ROD selecting response actions for OU3, OU4, and OU5 in March 2004.

     As the result of continuing discussions with parties other than us, as well as our experience in OU1 (discussed below), EPA amended the ROD for OU2-5 in June 2007 to rely less on dredging and more on capping and covering of sediments containing PCBs. The governments project that these methods will allow certain costs to be lower for this portion of the cleanup. In June 2008, EPA amended the ROD for OU1.

     NRD Assessment. The natural resources trustees have engaged in work to assess NRDs at and arising from the Site. However, they have not completed a required NRD Assessment under the pertinent regulations. The trustees’ estimate of NRDs ranges from $176 million to $333 million, some of which has already been satisfied. With specific respect to NRD claims, we contended that the trustees’ claims are barred by the applicable 3 year statute of limitations.

     Work Under Agreements, Orders, and Decrees. As we mention above, our exposure to liability depends

on the amount of work done, costs incurred, and damages paid both by us and by others. The procedural context of the work done, costs incurred, and damages paid also matters.

     Since 1991, the Governments and various groups of potentially responsible parties, including us, have entered into a series of agreements, orders, and decrees under which we and others have performed work, incurred costs, or paid damages in connection with the Site. As a result, some parties have contributed or performed substantial work at the Site and at least one party, Fort Howard Corporation (whose successor is either the Fort James Operating Company or Georgia Pacific Corporation) has resolved its NRD liability at the Site.

     Notably, in April 2004, the United States District Court for the Eastern District of Wisconsin entered a consent decree (“OU1 Consent Decree”) in United States v. P.H. Glatfelter Co., No. 2:03-cv-949, under which we and WTM I Corp. have been implementing the remedy in OU1, dividing costs evenly in addition to a $7 million contribution from Menasha Corp. and a $10 million contribution that the United States contributed from a separate settlement in United States v. Appleton Papers Inc., No. 2:01-cv-816, obligating NCR and Appleton Papers to contribute to certain NRD projects. In June 2008, the parties entered into an amendment to the OU1 Consent Decree. The amendment allows for implementation of the amended remedy for OU1. It also commits us and WTM I to implement that remedy without a cost limitation on that commitment. The amended OU1 Consent Decree has been lodged with the court, but has not yet been entered by the court. The amended OU1 Consent Decree, by its terms, binds the parties unless the United States withdraws its consent or the court denies a motion to enter the consent decree.

     Further, in November 2007, EPA issued an administrative order for remedial action (“UAO”) to Appleton Papers Inc., CBC Coating, Inc. (formerly known as Riverside Paper Corporation), Georgia-Pacific Consumer Products, L.P. (formerly known as Fort James Operating Company), Menasha Corporation, NCR Corporation, us, U.S. Paper Mills Corp., and WTM I Company directing those respondents to implement the amended remedy in OU2-5. We have no obligation to assist in that effort until August 2008. We understand that others have commenced designing that remedy and procuring certain equipment and real estate necessary to its implementation.

     Cost estimates. Estimates of the Site remediation change over time as we, or others, gain additional experience. In addition, disagreement exists over the likely costs for some of this work. The Governments estimate that the total cost of implementing the amended

remedy in OU1 will be approximately $102 million. Because we have completed a significant amount of work in this portion of the river, we believe the costs of completing the remedial actions specified in the amended ROD can be completed for this amount. However, it is reasonably possible costs could exceed this amount by up to $10 million. The cost of implementing the remedy set forth in the amended ROD for OU2-5 (the downstream portions of the Site) is estimated by the Governments to total between $270 million and $499 million, reflecting a contingency factor of plus or minus 30%. However, based on independent estimates commissioned by various potentially responsible parties, we believe the actual costs to be incurred to implement the remedy of OU2 — 5 will exceed the Government’s estimate by a significant amount.

     NRDs. The trustees claim that we are jointly and severally responsible for NRDs with a value between $176 million and $333 million. We deny (a) liability for most of these NRDs, (b) that if anyone is liable, that we are jointly and severally liable for the full amount, and (c) that the trustees can pursue this claim at this late date as the limitations period for NRD claims is three years from discovery.

     Allocation. Since 1991, various potentially responsible parties have, without success, attempted to agree on a binding, final, allocation of costs and damages among themselves. All costs that they have incurred to date have been incurred individually, or under interim, nonbinding allocations. However, the consent decree in United States v. P.H. Glatfelter Co. affords us and WTM I contribution protection for claims seeking to reallocate costs of implementing the OU1 remedy, and Fort James Operating Co. (now Georgia-Pacific) has certain rights under its consent decree. Otherwise, the parties have not litigated their internal allocation with us.

     NCR and Appleton Papers Inc. have commenced litigation in the United States District Court for the Eastern District of Wisconsin captioned Appleton Papers Inc. v. George A. Whiting Paper Co., No. 2:08-cv-16, seeking to reallocate costs and damages allegedly incurred or paid or to be incurred or paid by NCR or Appleton Papers. They have to date joined 22 defendants: us, George A. Whiting Paper Co., Menasha Corporation, Green Bay Packaging Inc., International Paper Company, Leicht Transfer & Storage Company, Neenah Foundry Company, Newpage Wisconsin System Inc., The Procter & Gamble Paper Products Company, Wisconsin Public Service Corp. the Cities of Appleton, De Pere, Green Bay, and Kaukauna, Brown County, Green Bay Metropolitan Sewerage District, Heart of the Valley Metropolitan Sewerage District, Neenah-Menasha Sewerage Commission, the Villages of Kimberly and Wrightstown, WTM I Company, and U.S. Paper Mills Corporation. That litigation may be expected to result in an allocation of responsibility, at least as between these parties.

     We contend that we are not jointly and severally liable for costs or damages arising from the presence of PCBs downstream of OU1. In addition, we contend that

NCR or other sources of NCR^® - brand carbonless copy paper that our Neenah Mill recycled bear most of the responsibility for costs and damages arising from the presence of PCBs in OU1. Other parties disagree.

     To date we have spent or have committed to spend approximately $50 million implementing the remedy in OU1, and under the various agreements, orders, and decrees under which we and others have performed work, incurred costs, or paid damages in connection with the Site.

     Reserves for the Fox River Site In 2007 we recorded additional charges of $6 million in the first quarter and $20 million in the third quarter, to satisfy both our obligations at OU1 and all pending, threatened or asserted and unasserted claims against us for the Fox River including our claimed liability for the remediation of OU3-5 as a result of the developments concerning the Fox River including our revised cost estimates for OU1. These additional charges represent our current assessment of the ultimate costs to be incurred by us associated with the revised final plan for OU1 and any settlement of liability for NRDs and for remediation of OU 2-5. As of June 30, 2008, our reserve for the Fox River environmental liability totaled $26.3 million. Of the total reserve, $6.8 million is recorded in the accompanying consolidated balance sheets under the caption “Environmental liabilities” and the remaining $19.5 million is recorded under the caption “Other long term liabilities.” Our reserve includes amounts originally established prior to 2002 and adjustments in the first and third quarter of 2007 increasing the liability by $26.0 million offset by expenditures related to remediation activities.

     We and WTM I have been funding the OU1 remedy by depositing funds in an OU1 Escrow Account and then paying for work out of that account. At June 30, 2008, the remaining OU1 Escrow Account balance totaled $13.7 million. During the first six months of 2008, Menasha contributed $7 million to the OU1 Escrow Account. In addition, WTM I and we committed to contribute an additional $9.5 million each, and contributions, or security for later contributions, have been posted according to the agreed schedule. Of the total commitment, we funded $3.5 million on July 15, 2008 and obtained a letter of credit guaranteeing payment of the balance.

     We believe that we have strong defenses to liability for remediation of OU2-5 including the existence of ample data that indicates that PCBs did not leave OU1 in concentrations that could have caused or contributed to the need for cleanup in OU2-5. Others, including the EPA and other PRPs, disagree with us and, as a result, the EPA has issued a UAO to us and to others to perform the OU2-5 work. NCR and Appleton Papers have recently commenced the Whiting Litigation and have joined us and others. Additional litigation associated with the remediation of the Site is likely. As illustrated by the Whiting Litigation, we also

note that there exist additional potentially responsible parties other than the PRPs who were named in the UAO or who have been joined in the Whiting Litigation, including the owners of public wastewater treatment facilities who discharged PCB-contaminated wastewater to the Fox River and entities providing PCB-containing wastepaper to each of the recycling mills.

     Even if we are not successful in establishing that we are not liable for the remediation of OU2-5, we do not believe that we would be allocated a significant percentage share of liability in any equitable allocation of the remediation costs and other potential damages associated with OU2-5. The accompanying consolidated financial statements do not include reserves for any future litigation or defense costs for the Fox River, and because litigation has commenced, the costs to do so could be significant.

     In setting our reserve for the Fox River, we have assessed our defenses to liability, including matters raised in the Whiting Litigation, and assumed that we will not bear the entire cost of remediation and damages to the exclusion of other known PRPs at the Site who are also potentially jointly and severally liable. The existence and ability of other PRPs to participate has also been taken into account in setting our reserve, and is generally based on our evaluation of recent publicly available financial information on each PRP, and any known insurance, indemnity or cost sharing agreements between PRPs and third parties. In addition, our assessment is based upon the magnitude, nature, location and circumstances associated with the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We will 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 Fox River site.

     Other than with respect to the OU1 Consent Decree, the amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, NRDs and property damage liabilities cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contamination, the response actions that may ultimately be required, the availability of remediation equipment, and landfill space, and the number and financial resources of any other PRPs.

     Other Information The Wisconsin DNR and FWS have each 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 the 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 (a) the studies themselves disclose that they are not accurate and (b) the volumetric estimates contained in the studies are based on assumptions that are unsupported by existing data on the Site. We believe that our volumetric contribution is significantly lower than the estimates set forth in these studies. Further, we do not believe that a volumetric allocation would constitute an equitable allocation of the potential liability for the contamination. Other factors, such as the location of contamination, the location of discharge, and a party’s role in causing discharge, must be considered in order for the allocation to be equitable.

     We previously entered into interim cost-sharing agreements with four of the other PRPs, which provided for those PRPs to share certain costs relating to scientific studies of PCBs discharged at the Site (“Interim Cost Sharing Agreements”). These interim cost-sharing agreements do not establish the final allocation of remediation costs incurred at the Site. Based upon our evaluation of the volume, nature and location of the various discharges of PCBs at the Site and the relationship of those discharges to identified contamination, we believe our allocable share of liability at the Site is less than our share of costs under the Interim Cost Sharing Agreements.

     While the OU1 Consent Decree, as amended, provides a negotiated framework for resolving both our and WTM I’s liability for the remediation of OU1, it does not resolve our exposure at the Site. The OU1 Consent Decree does not address response costs necessary to remediate the remainder of the Site and only addresses NRDs and claims for reimbursement of government expenses to a limited extent. Because CERCLA imposes strict joint and several liability, uncertainty persists regarding our exposure with respect to the remainder of the Fox River site. In addition, as mentioned previously, EPA has issued a UAO to us and others calling for further work in OU2-5, and Appleton Papers and NCR have commenced the Whiting Litigation that may become more complicated and involve additional parties. We cannot predict the outcome of the Whiting Litigation or any other litigation or regulatory actions related to this matter.

     Range of Reasonably Possible Outcomes Our analysis of the range of reasonably possible outcomes is derived from all available information, including but not limited to official documents such as RODs, discussions with the United States and other PRPs, as well as legal counsel and engineering consultants. Based on our analysis of the current RODs and cost estimates for work to be performed at the Site, we believe that it is

reasonably possible that our costs associated with the Fox River matter may exceed our reserve for the Fox River matter by amounts that are insignificant or that could range up to $195 million, over a period that is currently undeterminable but that could range beyond 15 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.

     Based on currently available information, we believe that the remaining work to complete the remediation of OU1 can be completed with the amounts in the OU1 Escrow Account, and the amounts committed to be contributed by us and WTM I. Our assessment assumes that: 1) the court ultimately enters the amended OU1 Consent Decree; 2) we and WTM I successfully negotiate acceptable contracts covering the work provided for in the amended OU1 ROD; and 3) the remedial measures provided in the amended OU1 ROD are successfully implemented. However, if we are unsuccessful in managing our costs to implement the amended OU1 ROD, additional charges may be necessary and such amounts could be material.

     Summary Our current assessment is that we will be able to manage these environmental matters without a long-term, material adverse impact on the Company. 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 Fox River site, if we are not successful in managing the completion of the remaining remedial work at OU1 and/or should the United States seek to enforce the UAO for OU2-5 against us which requires us to either perform directly or contribute significant amounts towards the performance of that work, such developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and may result in a default under our loan covenants.