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 Fremont, Ohio; Lydney, Gloucestershire, the United Kingdom; Gernsbach, Germany; Scaër, France and the Philippines. Our products are marketed throughout the United States and in over 80 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.

     Reclassifications Certain reclassifications have been made to the prior year’s balance sheet, specifically between accounts payable and other current liabilities, to conform to those classifications used in the current year. Such reclassifications had no impact on reported earnings, financial position, or cash flows for either period.

3. RECENT PRONOUNCEMENTS

     Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). The Interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized,

a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The cumulative effect adjustment of $3.0 million was recognized as an adjustment to retained earnings.

     The following table provides a breakdown of the incremental effect of applying FIN 48 on individual line items in the consolidated balance sheet as of January 1, 2007:

										After
		Before				Effect of				adoption of
In thousands		FIN 48				FIN 48				FIN 48
Prepaid expenses and other current assets		$	32,517			$	193			$	32,710
Other current liabilities			90,482				(7,214	)			83,268
Other long-term liabilities			86,031				21,690				107,721
Deferred income taxes			182,659				(11,309	)			171,350
Retained earnings			519,489				(2,974	)			516,515

     In September 2006, SFAS No. 157, Fair Value Measurements was issued. SFAS No. 157, which defines fair value, establishes a framework for measurement and requires expanded disclosures about the fair value measurements, is effective for us beginning January 1, 2008. We do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial position or results of operations.

4. ACQUISITIONS

     Lydney On March 8, 2006, we entered into a definitive agreement to acquire, through Glatfelter-UK Limited (“GLT-UK”), a wholly-owned subsidiary, certain assets and liabilities of J R Crompton Limited (“Crompton”), a global supplier of wet laid non-woven products based in Manchester, United Kingdom. On February 7, 2006, Crompton was placed into Administration, the U.K. equivalent of bankruptcy.

     Effective March 13, 2006, we completed our purchase of Crompton’s Lydney mill and related inventory, located in Gloucestershire, UK for £37.5 million (US $65.0 million) in cash in addition to $4.2 million of transaction costs. The Lydney facility employed about 240 people and, produced a broad portfolio of wet laid non-woven products, including tea and coffee filter papers, clean room wipes, lens tissue, dye filter paper, double-sided adhesive tape substrates and

battery grid pasting tissue, and had 2005 revenues of approximately £43 million (US $75 million). The purchase price was financed with existing cash balances and borrowings under our credit facility.

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

In thousands
Assets acquired:
Inventory		$	8,389
Property and equipment			56,885
Intangibles and other assets			9,325
			74,599
Less acquisition related liabilities			(5,374	)
Total		$	69,225

     Although we do not expect future adjustments to occur, any such adjustments required to be made to the purchase price allocation will be reflected in our results of operations in the applicable period in which such adjustment occurs. The amounts set forth above ascribed to intangible and other assets primarily consist of technology and trademarks.

     Chillicothe On April 3, 2006, we completed our acquisition of Chillicothe, the carbonless business operations of NewPage Corporation, for $83.3 million in cash, in addition to approximately $5.9 million of transaction and other related costs. The Chillicothe assets consist of a paper making facility in Chillicothe, Ohio with annual production capacity approximating 400,000 tons-per-year and coating operations based in Fremont, Ohio with annual revenue of approximately $440 million. The Chillicothe acquisition was financed with borrowings under our credit facility.

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

In thousands
Assets acquired:
Accounts receivable		$	43,618
Inventory			91,580
Property and equipment			1,959
Prepaid pension and other assets			11,416
Intangibles — customer relationships			6,074
			154,647
Less acquisition related liabilities including accounts payable and accrued expenses			(65,430	)
Total		$	89,217

     Although we do not expect future adjustments to occur, any such adjustments required to be made to the purchase price allocation will be reflected in our results of operations in the applicable period in which such adjustment occurs.

     Pro-Forma Financial Information The information necessary to provide certain pro forma financial data for the Chillicothe acquisition relative to net income and earnings per share is not readily available due to the nature of the accounting and reporting structure of the acquired operation prior to the acquisition date. Pro forma consolidated net sales for the nine months ended September 30, 2006 was $823.7 million assuming the acquisition occurred at the beginning of the respective period. This unaudited pro forma financial information is not necessarily indicative of what the operating results would have been had the acquisition been completed at the beginning of the respective period nor is it indicative of future results.

5. NEENAH FACILITY SHUTDOWN

     In connection with our agreement to acquire the Chillicothe operations, we committed to a plan to permanently close our Neenah, WI facility. Production at this facility ceased effective June 30, 2006 and certain products previously manufactured at the Neenah facility were transferred to Chillicothe.

     During the first nine months of 2007, we increased our reserve for costs associated with the shutdown by $0.3 million and made payments totaling $1.6 million; thus, the remaining reserve balance was $1.5 million at September 30, 2007.

     The results of operations in the first nine months of 2006 include the following pre-tax charges related to the Neenah shutdown:

										Less non-
										cash-
										charges				Balance
		Beg.				Amount				and cash				Sept. 30,
In thousands		balance				Accrued				payments				2006
Non-cash charges
Accelerated depreciation		$	—			$	22,457			$	(22,457	)		$	—
Inventory write-down			—				3,196				(3,196	)			—
Pension curtailments and other retirement benefit charges			—				7,675				(7,675	)			—
Total non cash charges			—				33,328				(33,328	)			—
Cash charges
Severance and benefit continuation			—				7,219				(3,432	)			3,787
Contract termination costs			—				11,367				(11,367	)			—
Other			—				1,795				(645	)			1,150
Total cash charges			—				20,381				(15,444	)			4,937
Total		$	—			$	53,709			$	(48,772	)		$	4,937

     The Neenah shutdown resulted in the elimination of approximately 200 positions that had been supporting our Specialty Papers business unit. Approximately $25.7 million of the Neenah shutdown related charges are recorded as part of costs of products sold in the accompanying statements of income. The amounts accrued for severance and benefit continuation are recorded as other current liabilities in the accompanying consolidated balance sheets.

     As part of the Neenah shutdown, we terminated our long-term steam supply contract, as provided for within the contract, resulting in termination fee of approximately $11.4 million as of the end of the second quarter 2006.

6.

GAIN ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS

     During the first nine months of 2007 and 2006, gains on dispositions of plant, equipment and timberlands totaled $11.2 million and $2.0 million, respectively. Such gains are primarily from the completion of sales of timberlands which are summarized by the following table:

Dollars in thousands		Acres				Proceeds				Gain
2007			4,674			$	11,649			$	11,223
2006			465				1,573				1,503

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

7. EARNINGS PER SHARE

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

		Three Months Ended
		September 30
In thousands, except per share		2007				2006
Net (loss) income		$	7,812			$	5,368
Weighted average common shares outstanding used in basic EPS			45,084				44,749
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards			280				498
Weighted average common shares outstanding and common share equivalents used in diluted EPS			45,364				45,247
Potential common shares excluded due to anti-dilutive nature			461				399
Earnings (loss) per share Basic and diluted		$	0.17			$	0.12

		Nine Months Ended
		September 30
In thousands, except per share		2007				2006
Net (loss) income		$	13,063			$	(27,217	)
Weighted average common shares outstanding used in basic EPS			45,004				44,512
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards			361				—
Weighted average common shares outstanding and common share equivalents used in diluted EPS			45,365				44,512
Potential common shares excluded due to anti-dilutive nature			458				900
Earnings (loss) per share Basic and diluted		$	0.29			$	(0.61	)

8. INCOME TAXES

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

     Income taxes for the third quarter and first nine months of 2007 include $5.3 million of tax benefit adjustments related to the revaluation of deferred tax assets and liabilities due to tax legislation enacted in July 2007 by Germany that reduced the corporate income tax rate.

     Effective January 1, 2007, we adopted FIN 48. Subsequent to the adoption of this standard, we had $21.5 million of gross unrecognized tax benefits. If recognized, approximately $17.8 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate. There have been no significant changes to these amounts during 2007 although we have resolved certain tax matters and closed certain open years.

     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				Examination not yet
Jurisdiction		progress				initiated
United States
Federal			N/A				2004 — 2006
State			2004				2002 — 2006
Germany (1)			N/A				2003 — 2006
France			2003 — 2005				2006
United Kingdom			N/A				2006
Philippines			2004 — 2006				N/A

(1)		— includes provincial or similar local jurisdictions, as applicable.

     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. While it is possible that the

amounts of unrecognized benefit with respect to uncertain tax positions could change significantly within the next twelve months, such adjustments, if any, are not expected to have a material effect on our consolidated financial position.

     We recognize interest and penalties related to uncertain tax positions as income tax expense. Interest and penalty expense, net, totaled $0.5 million and $0.2 million for the first nine months of 2007 and the third quarter of 2007, respectively. Accrued interest and penalties were $0.7 million and $1.2 million as of January 1, 2007 and September 30, 2007, respectively.

9. STOCK-BASED COMPENSATION

     During the first nine months of 2007, we issued, net of forfeitures, 217,100 Stock Only Stock Appreciation Rights (“SOSAR”) to members of executive management with a grant date strike price of $15.94 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 $5.00 per right, and an aggregate value of $1.1 million. In addition, 122,623 Restricted Stock Units (“RSU”) were issued in 2007 with a weighted-average grant date fair value of $15.26 per unit and an aggregate value of $1.9 million. The RSUs vest over a period ranging from three years to five years.

     During the first nine months of 2007 and 2006, we recognized stock-based compensation expense totaling $3.0 million and $1.7 million, respectively.

10.

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
		September 30
In thousands		2007				2006
Pension Benefits
Service cost		$	2,392			$	1,762
Interest cost			5,452				5,698
Expected return on plan assets			(11,872	)			(12,717	)
Amortization of prior service cost			600				465
Recognized actuarial (gain)/loss			203				114
Net periodic benefit income		$	(3,225	)		$	(4,678	)
Other Benefits
Service cost		$	506			$	449
Interest cost			759				780
Expected return on plan assets			(223	)			—
Amortization of prior service cost			(259	)			(167	)
Amortization of unrecognized loss			262				329
Net periodic benefit cost		$	1,045			$	1,391

		Nine Months Ended
		September 30
In thousands		2007				2006
Pension Benefits
Service cost		$	7,176			$	4,441
Interest cost			16,370				15,345
Expected return on plan assets			(35,600	)			(34,483	)
Amortization of prior service cost			1,799				1,381
Recognized actuarial (gain) loss			609				672
			(9,646	)			(12,644	)
Curtailment charge			—				4,403
Net periodic benefit income		$	(9,646	)		$	(8,241	)
Other Benefits
Service cost		$	1,520			$	1,203
Interest cost			2,275				2,214
Expected return on assets			(669	)			—
Amortization of prior service cost			(776	)			(542	)
Amortization of unrecognized loss			786				977
			3,136				3,852
Special termination charge			—				3,273
Net periodic benefit cost		$	3,136			$	7,125

     As discussed in Note 5, in the first quarter of 2006, we recorded special termination charges in connection with the curtailment of pension benefits and termination of certain post retirement benefits related to the Neenah facility shutdown.

     During the fourth quarter of 2006, we transferred $12.2 million from our qualified pension plan assets to a post-retirement sub-account pursuant to Section 420 of the Internal Revenue Code. Such amounts are to be used to satisfy certain post-retirement health care benefits.

11.

COMPREHENSIVE INCOME

     The following table sets forth comprehensive income and its components:

		Three Months Ended
		September 30
In thousands		2007				2006
Net income (loss)		$	7,812			$	5,368
Foreign currency translation adjustment			11,207				856
Additional pension liability amortization, net of tax			528				—
Comprehensive income (loss)		$	19,547			$	6,224

		Nine Months Ended
		September 30
In thousands		2007				2006
Net income (loss)		$	13,063			$	(27,217	)
Foreign currency translation adjustment			17,623				4,150
Additional pension liability amortization, net of tax			1,517				—
Comprehensive income (loss)		$	32,203			$	(23,067	)

12.

INVENTORIES

     Inventories, net of reserves, were as follows:

		September 30,				December 31,
In thousands		2007				2006
Raw materials		$	39,359			$	38,539
In-process and finished			97,075				107,811
Supplies			49,074				45,931
Total		$	185,508			$	192,281

13.

LONG-TERM DEBT

     Long-term debt is summarized as follows:

		September 30,				December 31,
In thousands		2007				2006
Revolving credit facility, due April 2011		$	45,097			$	64,795
Term loan, due April 2011			73,000				96,000
71/8% Notes, due May 2016			200,000				200,000
Note payable — SunTrust, due March 2008			34,000				34,000
Total long-term debt			352,097				394,795
Less current portion (1)			(49,532	)			(19,500	)
Long-term debt, excluding current portion		$	302,565			$	375,295

     Our revolving credit facility provides for up to $200 million of aggregate borrowings on an unsecured basis. Our term loan requires quarterly repayments of principal 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 or the incurrence of additional indebtedness, as defined in the debt agreement, in excess of $10.0 million in the

aggregate, 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 depending on our corporate credit rating determined by S&P and Moody’s.

     In June 2007, we negotiated an amendment to our credit agreement (the “Amended Credit Agreement”) which, among other items increased the maximum leverage ratio for each fiscal quarter beginning June 30, 2007 and through and including March 31, 2008. The Amended Credit Agreement 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, each as defined in the Amended Credit Agreement, including a consolidated minimum net worth test and a maximum debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio. A breach of these requirements, of which there were none at September 30, 2007, would give rise to certain remedies under the Amended Credit Agreement, 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 Note.

     Our outstanding debt obligations include a $34 million Note Payable to SunTrust Financial (the “Note Payable”), all of which is presented in the accompanying condensed consolidated balance sheets as currently payable as of September 30, 2007. The Note Payable bears interest at a fixed rate of 3.82% for five years through March 2008, at which time we can elect to renew the obligation. The Note Payable relates to the March 2003 sale of approximately 25,500 acres of timberlands for which we received as consideration a $37.9 million 10-year interest bearing note receivable from the timberland buyer. The note receivable is recorded as “Other assets” in the accompanying consolidated balance sheet. We pledged this note as collateral under the Note Payable. The debt agreement underlying this obligation

provides for an extension of the maturity of the Note Payable for up to five years assuming certain conditions are satisfied, all of which we believe to be, or will be, complied with. We intend to utilize the debt maturity extension clauses provided for in the original note agreement to extend the maturity of the Note Payable to March 2013.

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

     As of September 30, 2007 and December 31, 2006, we had $14.1 million and $8.1 million in letters of credit issued to us by financial institutions. The letters of credit are for the benefit of government agencies in the Fox River environmental matter and certain state workers compensation insurance agencies in conjunction with our self-insurance program. No amounts were outstanding under the letters of credit. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. Outstanding letters of credit reduce amounts available under our revolving credit facility.

14.

SALE OF TIMBERLANDS

     On August 8, 2007, we entered into a definitive agreement to sell approximately 26,000 acres of timberlands to Glawson Investments Corp. (“Glawson”), a Georgia corporation, and GIC Investments LLC, a Delaware limited liability company owned by Glawson (the “Buyer”) for approximately $43.1 million, subject to certain adjustments. As consideration for the timberlands, at closing we are to receive a LIBOR-based interest bearing, 20-year installment note payable at maturity. The note will be fully secured by an irrevocable letter of credit. The transaction is expected to close in the fourth quarter of 2007. Upon closing, we expect to record a pre-tax gain approximating $38 million.

     In connection with the Agreement, at closing there under, the Buyers and us will enter into a 10-year Stumpage Agreement, pursuant to which we will agree to purchase and Glawson commits to sell an annual amount of standing timber approximating 73,860 tons per annum for the first 5 years and 55,755 tons per annum for the next five years thereafter. The price paid will be based on market rates for comparable timber and will be reset every six months.

15.

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. As part of the 1979 acquisition of the Bergstrom Paper Company we acquired a facility located at this site (the “Neenah Facility”). In part, this 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 Fox River from the facility which may have contained PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that the Neenah Facility discharged into the Fox River resulted from the presence of PCBs in NCR^®-brand carbonless copy paper in the wastepaper that was received from others and recycled. We closed the Neenah Facility in June 2006.

     As described below, various state and federal governmental agencies have formally notified nine potentially responsible parties (“PRPs”), including us, that they are potentially responsible for response costs and “natural resource damages” (“NRDs”) arising from PCB contamination at this site under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and other statutes. The other identified PRPs are NCR Corporation, Appleton Paper Inc., Georgia Pacific Corp. (formerly Fort Howard Corp. and Fort James Operating Company), WTM I Company (“WTM I”, a subsidiary of Chesapeake Corp.), Riverside Paper Corporation, U.S. Paper Mills Corp. (a subsidiary of Sonoco Products Company), Sonoco Products Company, Menasha Corporation, and the U.S. Army Corps of Engineers.

     The United States, on behalf of certain governmental authorities, is pursuing responsible parties to remediate the contaminated areas of the Fox River, to satisfy Natural Resource Damage claims, and to reimburse the governmental authorities for past costs. The areas of the lower Fox River and in the Bay of Green Bay in which PCB contamination exists are commonly referred to as Operable Unit 1 (“OU1”), which consists of Little Lake Butte des Morts, the portion of the river that is closest to the Neenah Facility, Operable Unit 2 (“OU2”), which is the portion of the river between dams at Appleton and Little Rapids, and Operable Units 3 through 5 (“OU3-5”), an area approximately 20 miles downstream from the Neenah Facility.

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

     The following table summarizes the potential range of costs to satisfy total claims associated with the Fox River matter based on the best available estimates. Such amounts are not necessarily indicative of our share of responsibility:

In millions		Low					High
OU1		$	93				$	137
OU2			—					—
OU3 — OU5			270					499
Natural Resource Damages (NRD)			76					333

     OU1 is currently the only area of the Fox River in which we are conducting remediation activities. The high end of the range for OU1 set forth above assumes dredging of contamination as opposed to the use of alternative remedies. Based on discussions to date, we believe dredging the entire OU1 is remote. As discussed in detail below, our revised final plan assumes the use of alternative remedies. To date, approximately $57 million of escrowed funds have been spent on OU1 remediation. The range of costs for OU3-5 is based on the cost of $390 million set forth in the amended ROD issued in June 2007 plus or minus a 30% contingency factor. The range of NRD is based on recently obtained information that indicated $76 million represents the best estimate of NRDs.

Reserves for Fox River Environmental Liabilities

     We have reserves for existing environmental liabilities and for those environmental matters for which it is probable that a claim will be made and for which the amount of the obligation is reasonably estimable. The following table summarizes information with respect to such reserves.

		September 30,					December 31,
In millions		2007					2006
Recorded as:
Environmental liabilities		$	8.7				$	5.5
Other long-term liabilities			20.0					2.2
Total		$	28.7				$	7.7

     With respect to the amounts set forth above, the caption “environmental liabilities” on the consolidated balance sheet represents the current portion of our reserves. Such classification is based on our best estimate

as to when the liability is expected to require the use of funds to settle the underlying obligation. As discussed later in this disclosure, during the first nine months of 2007, we recorded additional charges of $26.0 million associated with the Fox River matter in our results of operations.

     The following summarizes the status of our potential exposure:

     Response Actions and Recent Activities

     OU1 and OU2 On January 7, 2003, the Wisconsin Department of Natural Resources (the “Wisconsin DNR”) and the Environmental Protection Agency (“EPA”) issued a Record of Decision (“ROD”) for the cleanup of OU1 and OU2. Subject to extenuating circumstances and alternative solutions provided for in the ROD, the ROD requires the removal of approximately 784,000 cubic yards of sediment from OU1 and no active remediation of OU2. The ROD also requires the long term monitoring of the two operable units. On July 1, 2003, WTM I Company entered into an Administrative Order on Consent (“AOC”) with EPA and the Wisconsin DNR regarding the implementation of the Remedial Design for OU1.

     In the first quarter of 2004, the United States District Court for the Eastern District of Wisconsin approved a consent decree regarding OU1 (“the OU1 Consent Decree”). Under terms of the OU1 Consent Decree, we and WTM I each agreed to pay approximately $27 million, of which $25.0 million from each was placed in escrow to fund response work at OU-1 (“OU-1 Escrow Account”). The remaining amount that the parties agreed to pay under the Consent Decree includes payments for NRD and NRD assessment and other past costs incurred by the governments. In addition, the EPA agreed to contribute $10 million from another settlement to the OU1 Escrow Account for the OU1 cleanup. As a result of these contributions, the total amount of funds initially available for remediation totaled $60 million.

     The terms of the OU1 Consent Decree restrict the use of the escrowed funds to qualifying remediation activities or restoration activities at the lower Fox River site. The response work is being performed by us and WTM I, with governmental oversight, and funded by the funds placed in the OU1 Escrow Account. Beginning in mid 2004, we and WTM I have performed activities to remediate OU1, including, among others, construction of de-watering and water-treatment facilities, dredging of portions of OU1, dewatering of the dredged materials, and hauling of the dewatered sediment to an authorized disposal facility.

     The terms of the OU1 Consent Decree include provisions to be followed should the OU1 Escrow

Account be depleted prior to completion of the response work. In this event, each settling company would be notified and be provided an opportunity to contribute additional funds to the OU1 Escrow Account. Should the OU1 Consent Decree be terminated due to insufficient funds, each settling company would lose the protections contained in the OU1 Consent Decree, and the governments may order one or both parties to complete the required remedial activities for OU-1. The governments may issue a similar order to a third party or perform the work themselves and seek response costs from any or all PRPs for the site, including us. If the OU1 Consent Decree is terminated due to the insufficiency of the escrow funds, we and WTM I would each remain potentially responsible for the costs necessary to complete the remedial action.

     Since the start of these activities in the third quarter of 2004, approximately 320,000 cubic yards of contaminated sediment has been dredged.

     Recent activity In late 2006, Glatfelter and WTM I jointly submitted a proposed Final Plan for the completion of the remediation of OU1 (the “Final Plan”) to Wisconsin DNR and EPA. The Final Plan proposed the implementation of permitted alternative remedies that require acceptance by the agencies. The cost estimates for the Final Plan were within the available funds.

     Throughout 2007, we and WTM I have been actively engaged in discussions with the government agencies concerning the Final Plan. The Final Plan includes the use of engineered capping of certain areas in the river as opposed to dredging sediment. In the first quarter of 2007, after reviewing the refined cost estimates for the OU1 remediation and our projected estimates of the funds that would be available in the OU1 Escrow Account to implement the Final Plan, the governments notified us and WTM 1 that EPA was considering making a formal determination that the balance remaining in the OU1 Escrow Account was likely to be insufficient to fund the completion of the OU1 Remediation. We refined our cost estimates and as a result, the estimate of total costs to implement the Final Plan (including work already performed) increased. As a result of the revised cost estimate to complete the remedy of OU1, we increased our reserve by $6.0 million. We and WTM I agreed to address that potential shortfall in the OU1 Escrow Account by executing a supplement to the OU1 Consent Decree which provided that we each would commit to an additional $6.0 million into the OU1 Escrow Account.

     Subsequently, and as discussed below in June 2007 the agencies issued an amended Second ROD for OU3-5 which included the use of alternative remedies similar to, but more extensive than, those in the proposed Final Plan. In

addition, during the third quarter of 2007 the agencies informed us that they would require capping or dredging in large portions of OU1 that we and WTM1 had proposed in the Final Plan would not be remediated due to the relatively low levels of contamination. As a result, we and WTM 1 have submitted a proposed revised Final Plan to the agencies that is consistent with the agencies’ new requirements. As a result of applying the specifications of the agencies’ requirements, the estimated costs to complete the OU1 remedies increased.

     In October 2007, we and WTM I reached an agreement with another PRP under which this PRP will deposit $7 million to the OU1 Escrow Account to secure performance of the remediation work in OU1 that is currently planned for 2008 (the “PRP’s Funds”), assuming that that work can be performed at the expected cost. The PRP will provide the funds on an interim basis, and there is no agreement that the amounts provided either equal or exceed the PRP’s fair share of costs to be incurred in OU1.

     In the third quarter 2007, we conducted a pilot project to validate certain aspects of the Final Plan, including evaluating the engineered capping of contaminated areas. The impact of the revised cost estimates discussed above, the agreement with the PRP for additional funding and the estimated impact of other developments discussed above regarding the site, are all reflected in the additional $20 million charge taken in the third quarter of 2007.

     Based on information currently available to us, subject to i) government approval of the revised Final Plan proposed by us and WTM I; ii) the successful negotiation of acceptable and cost-effective contracts to complete the proposed remediation activities; and iii) effective implementation of the chosen technologies by the remediation contractor, and together with anticipated earnings on the funds currently on deposit in the escrow account and other assets available, we believe the required OU1 remedial actions can be completed for amounts reserved as of September 30, 2007.

     OUs 3 — 5 On July 28, 2003, the EPA and the Wisconsin DNR issued a ROD (the “OU3-5 ROD”) for the cleanup of OU3-5. The OU3-5 ROD calls for the removal of 6.5 million cubic yards of sediment and certain monitoring at an estimated cost of $324.4 million but could, according to the OU3-5 ROD, cost within a range from approximately $227.0 million to $486.6 million. The most significant component of the estimated costs is attributable to large-scale sediment removal by dredging.

     During the first quarter of 2004, NCR Corp. and Georgia Pacific Corp. entered into an AOC with the

United States EPA under which they agreed to perform the Remedial Design for OU3-5. After gathering samples to perform the Remedial Design for OU3-5, elevated concentrations of PCBs were identified in sediments along the west bank of OU4, just downstream of the DePere Dam. Subsequently, during the second quarter of 2006, the United States filed a proposed Consent Decree with the U.S. District Court for the Eastern District of Wisconsin, under which NCR Corp. and Sonoco-U.S. Mills agreed to perform certain response actions regarding these sediments, on an expedited basis. In the spring of 2007, NCR Corp and Sonoco-U.S. Mills commenced this work.

     Recent Activity In February 2007, we, along with the other PRPs involved in the OU2 and OU3-5 matters, received a General Notice Letter from the EPA requesting that each PRP advise the EPA of their willingness to discuss their liability for the costs to remediate OU2-5 and to provide a good faith offer to settle by April 1, 2007. Since the receipt of this letter, the recipients have had discussions to explore a potential settlement of the asserted claims. In an attempt to resolve their disputes concerning allocation of liability, we, together with several PRPs, have agreed to participate in non-binding mediation. The mediation, so far, has not resulted in any agreement as to allocation but is continuing. We do not know at this time whether an agreement will be reached between the governments and any PRPs to complete the remediation of OU2-5.

     In June 2007, the EPA and the Wisconsin DNR issued an amendment to the OU3-5 ROD (the “Amended OU3-5 ROD”) that primarily, among other matters, expanded the Remedial Design provided for under the original ROD to include the use of engineered caps as an alternative to dredging. The Amended OU3-5 ROD estimates the total projected costs to be approximately $385 million.

     Natural Resource Damages Neither the ROD nor the OU3-5 ROD place any value on claims for NRDs associated with this matter. As noted above, NRD claims are distinct from costs related to the primary remediation of a Superfund site. Calculating the value of NRD claims is difficult, especially in the absence of a completed remedy for the underlying contamination. The State of Wisconsin, the United States Fish and Wildlife Service

(“FWS”), the National Oceanic and Atmospheric Administration (“NOAA”), four Indian tribes and the Michigan Attorney General have asserted that they possess NRD claims related to the lower Fox River and the Bay of Green Bay.

     In September 1994, FWS notified the then-identified PRPs that it considered them potentially responsible for NRDs. The federal, tribal and Michigan agencies claiming to be NRD trustees have proceeded with the preparation of an NRD assessment. While the final assessment has yet to be completed, the federal trustees released a plan on October 25, 2000 that values NRDs for injured natural resources that allegedly fall under their trusteeship at between $176 million and $333 million. We believe that the federal NRD assessment is technically and procedurally flawed. We also believe that the NRD claims alleged by the various alleged trustees are legally and factually without merit.

     The OU1 Consent Decree required that Glatfelter and WTM I each pay the governments $1.5 million for NRDs for the Fox River site, and $150,000 for NRD assessment costs. Each of these payments was made in return for credit to be applied toward each settling company’s potential liability for NRDs associated with the Fox River site.

     Reserves for the Fox River Site As of September 30, 2007 the OU1 Escrow Account balance totaled $7.7 million, of which our portion totaled approximately $1.6 million. This amount is recorded in the accompanying Consolidated Balance Sheet under the caption “Prepaid expenses and other current assets.” In addition to the Escrow Account balance, as discussed above, another PRP has agreed to contribute $7 million to the Escrow Account and we and WTM I each have committed to provide an additional $6 million towards OU1 remediation. Our committed share is recorded in the accompanying Consolidated Balance Sheet under the caption “Environmental liabilities.”

     As a result of the recent developments concerning the Fox River including: (i) our revised cost estimates for the Final Plan; (ii) developments in the ongoing PRP mediation and discussions with other PRPs; and (iii) the stated intentions of Wisconsin DNR and EPA; we have recorded an additional charge of $20 million in the third quarter 2007 to satisfy our current obligations at OU1 and all pending, threatened or asserted and unasserted claims against us for the Fox River including OU3-5. This additional charge represents our current assessment of the ultimate costs to be incurred by us associated with the revised Final Plan and any settlement of NRDs and OU 3-5 exposures. As of September 30, 2007, our reserve for the Fox River environmental liability totaled $28.7 million. Our reserve includes amounts originally established in

2003 and adjustments in the first and third quarter of 2007 increasing the liability by $6 million and $20 million, respectively, offset by expenditures related to remediation activities.

     The EPA has stated its intention to issue one or more unilateral administrative orders (“UAO”) for performance of the work required by the Amended OU3-5 ROD. We do not yet know whether any UAOs will be issued, if so, when they will be issued, and, if issued, what they will require of us or of others.

     We contend that we do not have any liability for remediation of OU3-5 because we believe that we have strong defenses to liability including that there is ample credible data that indicates that PCBs did not leave OU1 in concentrations that could have caused or contributed to the need for cleanup more than 20 miles downstream in OU3-5. Others, including the EPA and other PRPs, disagree with us and, as a result, the EPA could issue some group of PRPs, including us, a UAO to perform the OU3-5 work or this matter could otherwise result in litigation. Even if we are not successful in establishing our non-liability for OU3-5, 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 OU3-5. The accompanying consolidated financial statements do not include reserves for any future litigation or defense costs for the Fox River, and should litigation be necessary, the costs to do so could be significant. If we are ordered to complete more than what we believe to be our fair share of any remediation efforts, the costs to do so could be significant.

     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 extent and timing of any technological advances for pollution abatement, the response actions that may be required, the availability of qualified remediation contractors, equipment, and landfill space, and the number and financial resources of any other PRPs.

     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 evidence. 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 distribution 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 have entered into interim cost-sharing agreements with four of the other PRPs, pursuant to which such PRPs have agreed to share both defense costs and costs for scientific studies relating to PCBs discharged into the lower Fox River. These interim cost-sharing agreements have no bearing on the final allocation of costs related to this matter. Based upon our evaluation of the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination, we believe our share of any liability among the identified PRPs is much less than our per capita share of the cost sharing agreement.

     We also believe that there exist additional potentially responsible parties other than the identified PRPs. For instance, certain of the identified PRPs discharged their wastewater through public wastewater treatment facilities, which we believe makes the owners of such facilities potentially responsible in this matter. We also believe that entities providing PCB-containing wastepaper to each of the recycling mills are also potentially responsible in this matter.

     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 may not completely resolve our exposure at the Fox River. We anticipate this matter may result in litigation but cannot predict the timing, nature, magnitude or outcome of such litigation.

     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 governments and other PRPs, as well as legal counsel and engineering consultants. Based on our analysis of currently available information and experience regarding the cleanup of hazardous substances, we believe that it is reasonably possible that our costs associated with the Fox River matter discussed herein may exceed the amount of charges taken by amounts that may prove to be insignificant or that could range, in the aggregate, up to approximately $120 million, over a period that is 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.

     In our estimate of the upper end of the range of reasonable possible outcomes for the entire river, we have considered: (i) the remedial actions agreed upon to date under the OU1 Consent Decree; (ii) our understanding of the Amended OU3-5 ROD; and (ii) no current requirement for any active remediation of OU2. We have also assumed successful implementation of the Amended OU3-5 ROD, although at a significantly higher cost than estimated in the Amended OU3-5 ROD. We have also assumed our share of the ultimate liability to be 18%, which is significantly higher than we believe is appropriate or than we will incur, and a level of NRD claims and claims for reimbursement of expenses from other parties that, although reasonably possible, is unlikely.

     Based on currently available information, including actual remediation costs incurred to date, we believe that the remediation of OU1 as proposed in our revised Final Plan can be completed with available amounts in the OU1 Escrow Account, the amounts committed to be funded and the amounts currently reserved. Our assessment assumes that: 1) the revised Final Plan will be approved by the governments; 2) we and WTM I successfully negotiate acceptable contracts to complete remediation activities; and 3) the OU1 remediation contractor will successfully implement the revised Final Plan. However, if we are unsuccessful in managing our costs to implement the revised Final Plan additional charges may be necessary and such amounts could be material.

     The OU1 Consent Decree does not address response costs necessary to remediate the remainder of the Fox River site and only addresses NRDs and claims for reimbursement of government expenses to a limited extent. Because CERCLA imposes stricts joint and several liability, uncertainty persists regarding our exposure with respect to the remainder of the Fox River site.

     In estimating both our current reserves for environmental remediation and other environmental liabilities and the possible range of costs, we have assumed that we will not bear the entire cost of remediation and damages to the exclusion of other known PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, generally based on their financial condition and probable contribution. Our evaluation of the other PRPs’ financial condition included the review of publicly available financial information. Furthermore, we believe certain of these PRPs have corporate or contractual relationships with additional entities that may shift to those entities some or all of the monetary obligations arising from the Fox River site. The relative probable contribution is based upon our knowledge that at least two PRPs manufactured the paper, and arranged for the disposal of the wastepaper,

that included the PCBs and consequently, in our opinion, bear a higher level of responsibility.

     In addition, our assessment is based upon the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We 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.

     Summary Our current assessment is that we should 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 implementation of the OU1 Consent Decree and/or if we are ordered to implement the remedy proposed in the Amended OU3-5 ROD, 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.

Ecusta Division Matters

     At September 30, 2007, we had reserves for various matters associated with our former Ecusta Division. Summarized below is the activity in these reserves during the period indicated:

		Ecusta
		Environmental				Workers’
In thousands		Matters				Comp				Other				Total
Balance, Jan. 1, 2007		$	7,202			$	1,409				—			$	8,611
Payments			(817	)			(683	)							(1,500	)
Balance, Sept 30, 2007		$	6,385			$	726				—			$	7,111
Balance, Jan. 1, 2006		$	8,105			$	1,913			$	3,300			$	13,318
Payments			(673	)			(262	)			(3,262	)			(4,197	)
Other Adjustments			—				—				(38	)			(38	)
Balance, Sept 30, 2006		$	7,432			$	1,651			$	—			$	9,083

     With respect to the reserves set forth above as of September 30, 2007, $1.1 million is recorded under the caption “Other current liabilities” and $6.0 million is

recorded under the caption “Other long-term liabilities” in the accompanying condensed consolidated balance sheets.

     The following discussion provides more details on each of these matters.

     Background Information In August 2001, pursuant to an acquisition agreement (the “Acquisition Agreement”), we sold the assets of our Ecusta Division to four related entities, consisting of Purico (IOM) Limited, an Isle of Man limited liability company (“Purico”), RF&Son Inc. (“RF”), RFS US Inc. (“RFS US”) and RFS Ecusta Inc. (“RFS Ecusta”), each of which is a Delaware corporation (collectively, the “Buyers”).

     In August 2002, the Buyers shut down the manufacturing operation of the pulp and paper mill in Pisgah Forest, North Carolina, which was the most significant operation of the Ecusta Division. On October 23, 2002, RFS Ecusta and RFS US (the “Debtors”) separately filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy cases were later converted to Chapter 7 proceedings. Effective August 8, 2003, the assets of RFS Ecusta and RFS US, which substantially consist of the pulp and paper mill and related real property, were sold to several third parties unrelated to the Buyers (the “New Buyers”).

     Ecusta Environmental Matters Beginning in April 2003, government authorities, including the North Carolina Department of Environment and Natural Resources (“NCDENR”), initiated discussions with us and the New Buyers regarding, among other environmental issues, certain landfill closure liabilities associated with the Ecusta mill and its properties. The discussions focused on NCDENR’s desire to establish a plan and secure financial resources to close three landfills located at the Ecusta facility and to address other environmental matters at the facility. During the third quarter of 2003, the discussions ended with NCDENR’s conclusion to hold us responsible for the closure of three landfills. Accordingly, we established reserves approximating $7.6 million representing estimated closure costs. In March 2004 and September 2005, the NCDENR issued us separate orders requiring the closure of two of the three landfills at issue. We have completed the closure of these two landfills and are in the process of closing the third.

     In October 2004, one of the New Buyers entered into a Brownfields Agreement with the NCDENR relating to the Ecusta mill, pursuant to which the New Buyers were to be held responsible for certain specified environmental issues at the Ecusta Facility.

     In September 2005, NCDENR sought our participation, pursuant to a proposed consent order, in the

evaluation and potential remediation of environmentally hazardous conditions at the former Ecusta mill site. In January 2006, NCDENR modified its proposed consent order to include us and the company (the “Prior Owner”) from whom our predecessor, Ecusta Corporation, purchased the Ecusta mill. NCDENR and the United States Environmental Protection Agency (“USEPA”) have indicated that if neither party enters into a consent order USEPA intends to list the mill site on the National Priorities List and pursue assessment and remediation of the site under the Comprehensive Environmental Responsibility, Compensation and Liability Act (more commonly known as “Superfund”). In addition to calling for the assessment, closure, and post-closure monitoring and maintenance of the third landfill for which we since have been directed to close, the proposed consent order would impose an obligation to assess and remediate the following:

	i.		mercury and certain other contamination on and around the site;
	ii.		potentially hazardous conditions existing in the sediment and water column of the site’s water treatment and aeration and sedimentation basin (the “ASB”); and
	iii.		contamination associated with two additional landfills on the site that were not used by us.

     With respect to the concerns set forth above (collectively, the “NCDENR matters”), we contend that the Prior Owner is responsible for any mercury contamination at the Ecusta Facility and that the New Buyers, as owner and operator of the ASB, are responsible for addressing any issues associated with the ASB, including closure, and that the New Buyers, in a May 2004 agreement, expressly agreed to indemnify and hold us harmless from certain environmental liabilities, which include most, if not all, of the NCDENR matters. We continue to have discussions with NCDENR and USEPA concerning our potential responsibilities and appropriate remedial actions, if any, which may be necessary.

     The Prior Owners of the site have filed a declaratory judgment action in the US District Court that seeks a determination by the Court that, under the Purchase Agreement pursuant to which the Ecusta Facility was conveyed to Glatfelter, Glatfelter is obligated to indemnify the Prior Owners for any costs related to the remediation of mercury contamination at the Ecusta Facility. In response, Glatfelter has filed an answer denying that it is responsible for such costs and a counterclaim against the Prior Owners alleging, among others things, fraud and negligent misrepresentation by the Prior Owner regarding mercury contamination. We continue to evaluate potential legal claims we may have with respect to Prior Owners and other parties with

respect to any remediation of hazardous substance that may be ultimately required at the Ecusta Facility.

     As a result of NCDENR’s September 2005 communication with us and our assessment of the range of likely outcomes of the NCDENR Matters and the New Buyers Matters, our results of operations for 2005 included a $2.7 million charge to increase our reserve for estimated costs associated with the Ecusta environmental matters. The addition to the reserve includes estimated operating costs associated with the obligations of the New Buyer discussed above, estimated costs to perform an assessment of certain risks posed by the presence of mercury, further characterization of sediment in the ASB and treatment of other contamination. Since this initial accrual, no further changes have been made.

     The 2005 reserves relating to additional environmental assessment activities were premised, in part, on the belief that it might be mutually beneficial to us and NCDENR if we were to agree to perform the assessment activities, without accepting responsibility for any subsequently required remediation. While it now appears clear that NCDENR and USEPA will not accept such an arrangement, it is uncertain in the absence of a consent order i) what actions will be taken by the agencies; ii) against whom any such actions may be taken; and iii) when any additional remediation would be required to be performed.

     In addition, it is unclear how the liability for any required assessment or remediation will be apportioned among the Prior Owner, Glatfelter, the Buyers and the New Buyers. We are also in negotiations with potential buyers of the Ecusta Facility (the “Potential Buyers”) and the New Buyers concerning the division of assessment and remediation obligations for known and suspected contamination at the Ecusta Facility and certain off-site areas between us and the Potential Buyers. However, the outcome of these negotiations is uncertain. For the foregoing reasons, in part, our recorded reserve does not include costs associated with further remediation activities that we may be required to perform, the range of which we are currently unable to estimate; however, they could be significant.

     We are evaluating options presented to us by the Potential Buyers, including proposals for Glatfelter, the Prior Owner and the Potential Buyers to jointly contribute to the cost to remediate any on-site contamination. To date we believe we are adequately reserved to participate in such an arrangement at the level currently proposed; however, there are no assurances that we will reach agreement with the Potential Buyers and the Prior Owner on the terms of such an arrangement. We are uncertain as to what additional Ecusta-related claims, including, among others, environmental matters, government

oversight and government past costs, if any, may be asserted against us

     It is possible that the New Buyers may not have sufficient cash flow from their operations to satisfy certain ongoing obligations to NCDENR and us and, their ability to do so may be dependent on their ability to sell the Ecusta Facility. Specifically, the New Buyers are obligated (i) to treat leachate and stormwater runoff from the landfills, which we are currently required to manage, and (ii) to pump and treat contaminated groundwater in the vicinity of a former caustic building at the site. If the New Buyers should default on these obligations, it is possible that NCDENR will require us to make appropriate arrangements for these obligations and to be responsible for the remediation of certain contamination on and around the site (collectively, the “New Buyers Matters”). We continue to discuss with the New Buyers and the Potential Buyers the need for assurances that the New Buyers or the Potential Buyers, or both, will fulfill the New Buyers’ obligations for the New Buyers Matters.

     Notwithstanding a potential sale of the property, and with respect to alleged mercury contamination at the site, i) the extent of mercury contamination is unknown; ii) it is unclear who will be required to remediate this contamination; and iii) the ultimate costs to remedy such contamination are not reasonably estimable based on information currently available to us. Accordingly, no amounts to address such contamination have been included in our reserve discussed above. If we are required to perform additional remediation at the Ecusta Facility, additional charges would be required, and such amounts could be material.

     Workers’ Compensation Prior to 2003, we established reserves related to potential workers’

compensation claims associated with the former Ecusta Division, which at that time were estimated to total approximately $2.2 million. In the fourth quarter of 2005, the North Carolina courts issued a ruling that held us liable for workers’ compensation claims of certain employees injured during their employment at the Ecusta facility prior to our sale of the Division. Since this ruling, we have made payments as indicated in the reserve analysis presented earlier in this Note 15.

     In addition to the specific matters discussed above, we are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governments with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate the adverse effects, if any, 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.

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