The following Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") summarizes the significant factors affecting our results of operations, liquidity, capital resources and contractual obligations, as well as discussing our critical accounting policies. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to the Consolidated Financial Statements, and other sections of this Annual Report on Form 10-K. Our MD&A is composed of four major sections; Executive Summary, Results of Operations, Financial Condition and Critical Accounting Policies.

Executive Summary

Buckeye manufactures and distributes value-added cellulose-based specialty products used in numerous applications, including disposable diapers, personal hygiene products, engine, air and oil filters, concrete reinforcing fibers, food casings, cigarette filters, rayon filaments, acetate plastics, thickeners and papers. Our products are produced in the United States, Canada, Germany and Brazil, and we sell these products in approximately 60 countries worldwide. We generate revenues, operating income and cash flows from two reporting segments:
specialty fibers and nonwoven materials. Specialty fibers are derived from wood and cotton cellulose materials using wetlaid technologies. Our nonwoven materials are derived from wood pulps, synthetic fibers and other materials using an airlaid process.

Our strategy is to continue to strengthen our position as a leading supplier of cellulose-based specialty products. We believe that we can continue to expand market share, improve profitability and decrease our exposure to cyclical downturns by pursuing the following strategic objectives: focus on technically demanding niche markets, develop and commercialize innovative proprietary products, strengthen long-term alliances with customers, provide our products at an attractive value and evaluate growth opportunities that match our specialty market focus.

Buckeye had an excellent year, with record revenue and the highest earnings in eightyears. Highlights for fiscal year 2008 compared to fiscal year 2007 include:

· Net sales increased 7.3% to a company record of $825.5 million

· Gross margin improved from 17.1% to 18.1%

· Operating income was $100.3 million versus $81.2 million

· Earnings per share were $1.20, up 52% compared to the prior year

· Long-term debt decreased by $51.2 million to $393.9 million at year-end

· Net income increased 56% to $47.1 million

Total year earnings benefited from higher selling prices across all of our businesses. We continue to see particularly strong demand and a strong pricing environment for our products in the Specialty Fibers segment of our business. As a result of higher selling prices, improved product mix and improved chemical usage, our gross margin for fiscal 2008 improved to 18.1% versus 17.1% in fiscal 2007. However, our gross margin percentage trended down sharply during the second half of the fiscal year primarily as increased selling prices were not sufficient to offset the negative impacts of higher input costs, reduced production volume at our Perry, Florida wood cellulose mill and reduced capacity utilization at our Canadian airlaid nonwovens plant.

Transitioning our Americana plant to a profitable operation continues to be a challenge as our sales out of that facility are constrained due to limited raw material supply. While our operating loss is down significantly year over year, over the past four quarters our operating loss at Americana has stayed fairly constant in the range of $0.8 million to $1.0 million per quarter, and we have been operating close to cash breakeven during that time. Over the past year, we have raised our selling prices aggressively to cover rapidly escalating cotton fiber prices. Selling prices for fiscal year 2008 were up 21% and cotton linter costs were up 30%. We have also made some progress in improving our raw material supply, as total production tons for fiscal year 2008 were up about 10% to approximately 27,000 tons. Our ability to prevent our operating results at this facility from deteriorating remains dependent on our ability to purchase cotton linters at an affordable cost. Further strengthening of the Brazilian real versus the U.S. dollar would also impair the profitability of this operation by about $1.3 million annually for every ten basis point move in the currency.

We are moving forward on our Foley Energy Project initiative. The savings potential of this initiative continues to grow with the trend toward mandates on renewable energy sources and with higher oil prices. Our Board of Directors has approved total capital expenditures of $45 million over a three year period for this project, which was based on a design goal of an equivalent reduction of over 200,000 barrels of #6 fuel oil annually. We have spent $6.3 million of this amount through June 30, 2008 and have secured the appropriate construction permit in August. Additionally, upon the successful implementation of this initiative, we should be capable of producing excess energy and electricity using only biomass.

UltraFiber 500® held its own in the face of a collapsing housing market as we continue to leverage the value of our UltraFiber 500® dispensing system. Additionally, we are working to expand the use of Ultrafiber 500® in commercial construction, specifically in the concrete used on steel decks. We recently confirmed that Ultrafiber 500® enhances the fire resistance of normal weight concrete, which could provide significant cost savings in the construction of multi-level buildings. Finally, we are targeting growth in China, where a significant amount of concrete is being used to develop China's basic infrastructure needs.

Strong cash flow generation enabled us to reduce long-term debt by $51.2 million during fiscal year 2008. Our interest expense decreased $5.6 million as compared to fiscal year 2007. This was a result of the lower debt and lower average interest rates which reduced interest expense by $7.5 million partially offset by the $1.9 million reversal of interest related to the cancellation of the Stac-Pac Technologies Inc. contingent note.

Results of Operations

Consolidated results

The following table compares the components of consolidated operating income for the three fiscal years ended June 30, 2008.

 (millions)                     Year Ended June 30           $ Change          Percent Change
                                                          2008/    2007/      2008/      2007/
                            2008      2007       2006      2007     2006      2007       2006
Net sales                  $ 825.5   $ 769.3   $ 728.5    $ 56.2   $ 40.8        7.3  %     5.6  %
Cost of goods sold           676.0     637.5     628.7      38.5      8.8        6.0        1.4
Gross margin                 149.5     131.8      99.8      17.7     32.0       13.4       32.1
Selling, research and
administrative expenses       47.3      47.0      47.8       0.3     (0.8 )      0.6       (1.7 )
Amortization of
intangibles and other          1.8       2.3       2.0      (0.5 )    0.3      (21.7 )     15.0
Impairment and
restructuring costs            0.1       1.3       5.6      (1.2 )   (4.3 )    (92.3 )    (76.8 )
Operating income           $ 100.3   $  81.2   $  44.4    $ 19.1   $ 36.8       23.5  %    82.9 %

Net sales increased 7.3% for the year ended June 30, 2008, primarily due to selling prices which were higher by approximately 10% on average compared to the year ended June 30, 2007, accounting for $69.4 million in incremental sales. Partially offsetting the impact of favorable price increases, fiscal year 2008 sales volumes declined versus fiscal year 2007, accounting for a reduction in sales of $27.4 million. Nonwovens accounted for the largest part of this sales volume impact ($18.7 million) as a result of the loss of business with a large customer in January. Lower sales volume at our two specialty cotton fiber mills due to raw material availability issues also negatively impacted sales by $7.1 million compared to the prior year.

Our gross margin improved by $17.7 million in fiscal 2008 versus fiscal 2007. Our selling price increases of $69.4 million more than offset the impact of higher costs for raw materials and the lower shipment and production volumes. Raw material costs were higher year over year ($29.8 million) mainly for cotton linter fibers ($18.6 million) and in our nonwoven materials ($8.2 million) business. Increased chemical costs ($5.2 million) overall were partially offset by lower usage at our specialty wood fibers facility. Higher energy costs had a negative impact of $5.8 million and higher transportation costs reduced our gross margin by $4.8 million compared to the prior year.

Net sales were higher during the year ended June 30, 2007, primarily driven by higher selling prices across all segments of our business. The shift from tolling operations to market sales at our Americana specialty fibers facility contributed a positive mix impact. A positive currency impact, due to the strong euro, added to the improvement. Shipment volume was down for the year ended June 30, 2007, mainly due to the closure of our specialty fibers facility in Glueckstadt, Germany.

The gross margin improvement from fiscal year 2006 to fiscal year 2007 was mainly a result of the higher selling prices discussed previously. We also had improved operational results at our Americana plant, lower energy costs, and improved capacity utilization at our North American nonwovens sites. These improvements more than offset increased raw material costs in our cotton fibers and nonwovens business, increased transportation cost and higher plant direct costs.

Selling, research and administrative expenses increased slightly in the year ended June 30, 2008. Selling, research and administrative expenses decreased slightly in the year ended June 30, 2007. As a percentage of net sales these costs decreased to 5.7% in fiscal year 2008 versus 6.1% in fiscal 2007 and 6.6% in fiscal 2006.

During the second half of the year ended June 30, 2007, we entered into a restructuring program that complemented our operations' consolidations and involved consolidation in our European sales offices, product and market development and corporate overhead. The total cost of this program wasapproximately $1.4 million and was completed during the first quarter of the 2008 fiscal year. As a result of this restructuring, 22 positions were eliminated.

Further discussion of revenue, operating trends, impairment and restructuring costs can be found later in this MD&A. Additional information on the impairment and restructuring programs and charges may also be foundin Note 3, Impairment of Long-Lived Assets and Assets Held for Sale, and Note 4, Restructuring Costs, to the Consolidated Financial Statements.

Segment results

Although nonwoven materials, processes, customers, distribution methods and regulatory environment are very similar to specialty fibers, we believe it is appropriate for nonwoven materials to be disclosed as a separate reporting segment from specialty fibers. The specialty fibers segment consistsof our chemical cellulose, customized fibers and fluff pulp product lines which are cellulosic fibers based on both wood and cotton. We make separate financial decisions and allocate resources based on the sales and operating income of each segment. We allocate selling, research, and administration expense to each segment, and we use the resulting operating income to measure the performance of the two segments. We exclude items that are not included in measuring business performance, such as restructuring costs, asset impairment, amortization of intangibles,certain financing and investing costs and unallocated at-risk and stock-based compensation. We have reclassified the at-risk compensation and stock-based compensation from the specialty fibers and nonwovens segments for fiscal years 2007 and 2006 for comparability.

Specialty fibers

The following table compares specialty fibers net sales and operating income for the three years ended June 30, 2008.

(millions)              Year Ended June 30             $ Change         Percent Change
                                                   2008/     2007/      2008/     2007/
                    2008       2007       2006      2007     2006       2007       2006
Net sales          $ 595.8    $ 543.8   $ 515.9    $ 52.0    $ 27.9         9.6 %    5.4 %
Operating income      90.6       65.8      36.7      24.8      29.1        37.7     79.3

Net sales increased 9.6% in fiscal 2008 versus fiscal 2007, primarily due to higher prices. Selling prices were up approximately 8% on our wood specialty products and 15% on our cotton specialty fibers products. In fiscal 2008, fluff pulp prices increased approximately $107 per ton compared to fiscal 2007. Shipment volume was down approximately 2%, partially offsetting the favorable price increases.

Operating income improved as a percentage of sales from 12.1% in fiscal 2007 to 15.2% in fiscal 2008. The favorable impact of higher selling prices ($66.9 million) was partially offset by higher raw material costs ($21.7 million), mainly due to the increase in cotton fibers for which costs were up 36% year over year. In addition, higher chemical, energy and transportation costs reduced the favorable impact of the higher selling prices.

Our operating loss at Americana was reduced significantly in fiscal 2008 versus fiscal 2007 (approximately 50%). Increased pricing (21%), higher production volume and reductions in fixed costs helped offset the higher cotton linter prices and the strengthening Brazilian currency (1.77 versus 2.11 BRL/USD).

Specialty fibers net sales improved during the year ended June 30, 2007 versus the prior year, primarily driven by higher selling prices and improved product mix, offset partially by the closure of the Glueckstadt plant, which had a negative impact on sales volume. Strong demand in our high-end specialty and fluff markets allowed us to raise prices during the year. Fluff pulp pricing increased by approximately $55 per ton on the average during the year ended June 30, 2007 versus the previous year. Average selling prices on our high-end specialty products increased in the mid-single digit range for the year.

Sales pricing and improved product mix were the primary drivers of our operating income improvement in fiscal 2007. Costs as a percentage of sales increased compared to the prior year as the impact of lower energy costs was not enough to offset increases in transportation costs, raw material costs and factory direct costs.

Our Memphis and Americana plants are working to solve the fundamental raw material supply constraints in North America and Brazil, reduce operating costs and improve gross margins on an on-going basis. Raw material availability continues to limit productionat these two sites. According to the USDA, in the U.S., cotton production decreased 11% in the 2007/08 crop year and is expected to decrease another 28% in the 2008/09 crop year (harvested in the fall of 2008). According to the USDA, in Brazil cotton production in the 2006/07 crop year increased 49% from the prior year and is expected to increase by about 2% in the 2007/08 crop year (harvest began in June 2008). In both cases, the amount of cottonseed that is delinted and crushed for oil determines our raw material supply, and this has not been increasing fast enough to meet our needs. We expect that the amount of seed crushed for our fiscal year 2009 could increase approximately 10% in Brazil and is likely to decrease approximately 5% in the United States. We are strengthening relationships with our raw material suppliers to increase delinting capacity and assisting with their expansion plans. Improving our lint supply is a top priority, but will take time to implement. As more lint becomes available, we intend to ramp up production levels at our cotton fiber facilities. During our fiscal year 2009, we expect to continue to operate the Americana, Brazil facility at its current rate of approximately 2,200 tons per month due to constraints on raw material availability, assuming we are able to purchase sufficient cotton linters at a reasonable price. The Memphis, Tennessee facility is expected to run at approximately 75% to 80% of capacity during fiscal year 2009, up slightly compared to 2008, due to the constraints of the North American cotton crop.

Nonwoven materials

The following table compares nonwoven materials net sales and operating income for the three years ended June 30, 2008.

(millions)              Year Ended June 30              $ Change          Percent Change
                                                    2008/      2007/     2008/      2007/
                    2008       2007       2006      2007       2006       2007       2006
Net sales          $ 263.6    $ 258.8   $ 240.9     $  4.8    $ 17.9         1.9  %    7.4  %
Operating income      15.3       22.2       16.3      (6.9 )      5.9      (31.1 )    36.2

Nonwoven materials sales increased in fiscal 2008 versus fiscal 2007. Strong sales volume in the first half of fiscal year 2008 was offset by weak volume in the second half of the fiscal year due to the loss of business with a long-time customer. Shipment volume year over year was down 8% from fiscal 2007 to fiscal 2008. We have recently replaced a sizeable portion of that lost business in North America. We started to see the impact of this in June and anticipate that sales in the first quarter of fiscal 2009 should increase by $3.0 to $4.0 million compared to the fourth quarter of fiscal year 2008. Improved pricing and improved product mix contributed $6.4 million and $4.8 million, respectively, to the sales increase. The strengthening of the euro provided $12.2 million of the increased revenues.

Operating income decreased 31% in fiscal 2008 versus fiscal 2007. The impact of higher sales prices was more than offset by lower volume, higher raw material costs for fluff pulp, bi-component fiber and latex binder, and higher energy and transportation costs.

A strong market for Nonwoven materials in North America contributed to the increase in net sales during fiscal year 2007 versus fiscal year 2006. Increased demand resulted in higher sales volumes at increased selling prices. We implemented similar sales price increases in Europe during the year, and our sales volume remained stable. Additionally, net sales in Europe saw improvement due to the strengthening of the euro during this time period. Most products sold at our Steinfurt, Germany facility are denominated in euros and translated to US dollars for consolidation purposes.

Operating income improvement during fiscal year 2007 versus fiscal year 2006 was driven by the increased volumes and selling prices. Increased volumes in North America and the associated improvements in capacity utilization helped to improve operating margins during the year. Higher revenues from increased selling prices largely offset increased raw material costs in North America and Europe.

Corporate

Our intercompany net sales elimination represents intercompany sales from our Florida and Memphis specialty fiber facilities to our airlaid nonwovens plants. The unallocated at-risk compensation and unallocated stock based compensation represent compensation for executive officers and certain other employees. We have reclassified the at-risk compensation and stock-based compensation from the specialty fibers and nonwovens segments for fiscal years 2007 and 2006 for comparability.

The following tables compare corporate net sales and operating loss for the three years ended June 30, 2008.

(millions)               Year Ended June 30             $ Change         Percent Change
                                                     2008/    2007/      2008/     2007/
                    2008        2007       2006       2007     2006      2007       2006
Net sales          $ (33.8 )   $ (33.4 )  $ (28.2 )   $ 0.4   $ 5.2          1.2 %   18.4 %
Operating income      (5.6 )      (6.8 )     (8.6 )     1.2      1.8        17.6     20.9

The operating loss for the three years ended June 30 consists of:

(millions)                               2008       2007      2006
Unallocated at-risk compensation        $  (2.6 )  $ (2.2 )  $ (0.8 )
Unallocated stock based compensation       (0.9 )    (0.8 )    (0.6 )
Intellectual property amortization         (1.9 )    (2.3 )    (2.0 )
Restructuring expenses                     (0.1 )    (1.2 )    (3.5 )
Impairment on long-lived assets               -         -      (2.1 )
Gross margin on intercompany sales         (0.1 )    (0.3 )     0.4
                                        $  (5.6 )  $ (6.8 )  $ (8.6 )

Restructuring and impairment activities

During the three years ended June 30, 2008, we entered into various restructuring programs, which resulted in restructuring and impairment charges. In order to continue to provide both specialty fibers and nonwoven materials at attractive values, we intend to continue to look for ways to reduce costs and optimize our operating structure. The following table summarizes restructuring expense by program and impairment charges for the three years ended June 30, 2008. Following the table is an explanation of the programs and the resulting impairment charges. For further explanation of these charges, see Note 3, Impairment of Long-lived Assets and Assets Held for Sale, and Note 4, Restructuring Costs, to the Consolidated Financial Statements.

                                Year Ended June 30         Total
(millions)                     2008      2007    2006     Charges
Impairment charges           $      -    $   -   $ 2.1

Restructuring costs
2007 Restructuring program   $    0.1    $ 1.3   $   -   $     1.4
2005 Restructuring program          -        -     3.5         6.5
Total restructuring costs    $    0.1    $ 1.3   $ 3.5   $     7.9

2007 Restructuring program

In January 2007, we entered into a restructuring program that complements our operations' consolidations and involves consolidation in our European sales offices, product and market development and corporate overhead operations. The total cost of this program wasapproximately $1.4 million and wascompleted during the first quarter of the 2008 fiscal year. As a result of this restructuring, 22 positions were eliminated which should provide annual savings of over $2.0 million.

2005 Restructuring program and impairments

In January 2005, we announced our decision to discontinue producing cotton linter pulp at our Glueckstadt facility. During fiscal 2006, management reevaluated its estimate of fair value less the cost to sell the remaining equipment and determined an additional impairment should be recognized for equipment with a carrying value of $0.3 million. Therefore, we wrote down the carrying value of the remaining equipment to its fair value less costs to sell of $0.2 million and recorded an impairment charge of $0.1 million. In September 2006, the remaining assets were sold for $0.5 million. Since we previously had written the value of these assets down to $0.2 million, we recorded a gain on sales of assets held for sale of $0.3 million.

During fiscal year 2006, we began to actively market the land and buildings, and the equipment which had carrying values of $1.6 million and $0.5 million, respectively. Therefore, we wrote down the carrying value of the land and buildings to their fair value less costs to sell of $0.1 million and recorded an additional impairment charge of $1.5 million during fiscal year 2006. Subsequent to this impairment, we sold the land and building for $0.1 million.

The closure of the Glueckstadt facility resulted in the termination of 103 employees, and restructuring expenses related to the closure of $6.5 million over fiscal year 2005 and 2006.

Impairments

During fiscal year 2006, we began to actively market idled cotton linter pulping equipment at our specialty fibers Lumberton, North Carolina facility which had a carrying value of $1.5 million. Management evaluated its estimate of fair value less the cost to sell the assets and determined an impairment should be recognized for the equipment. We wrote down the carrying value of the equipment to its fair value less costs to sell of $1.0 million and recorded an impairment charge of $0.5 million during fiscal year 2006. Subsequent to this impairment, we sold the equipment for net proceeds of $1.0 million.

Interest expense and amortization of debt costs

Interest expense and amortization of debt costs decreased $5.6 million for fiscal year 2008 versus fiscal year 2007. This improvement was primarily the result of lower average debt levels during fiscal 2008 and lower average interest rates. This favorable impact was partially offset by the decrease in interest expense in fiscal year 2007 due to the reversal of $1.9 million of interest related to the cancellation of a contingent note owed to Stac-Pac Technologies Inc.

Interest expense and amortization of debt costs decreased $4.7 million for fiscal year 2007 versus fiscal year 2006. This decrease includes the reversal of $1.9 million of accrued interest previously discussed. The remaining decrease was primarily due to lower debt levels. The decrease would have been larger, but capitalized interest related to the Americana project reduced last year's interest expense by $1.3 million that was not replicated in fiscal 2007. The weighted average effective interest rate on our variable rate debt increased from 7.2% at June 30, 2006 to 7.3% at June 30, 2007. See Note 8, Debt, in the Consolidated Financial Statements for further discussion of variable interest rates.

Loss on early extinguishment of debt costs

Fiscal year 2008- During fiscal year 2008, we used cash from operations and borrowings on our revolving credit facility to redeem the remaining $60 million of our 2008 notes and to redeem $35 million of the 2010 notes. As a result of these extinguishments, we wrote off a portion of deferred financing costs, resulting in non-cash expenses of $0.6 million during fiscal year 2008.

Fiscal year 2007 -During fiscal year 2007 we used cash from operations to redeem $5 million of our senior subordinated notes due in 2008 and to make voluntary prepayments on our term loan of $60.8 million. As a result of these partial extinguishments, we wrote-off a portion of deferred financing costs, resulting in non-cash expense of $0.8 million during fiscal year 2007.

Fiscal year 2006- OnSeptember 26, 2005 we used borrowings on our revolving credit facility to redeem $15 million of our senior subordinated notes due in 2008. As a result of this partial extinguishment, we wrote-off a portion of deferred financing costs, resulting in non-cash expense of $0.2 million during fiscal year 2006.

See Note 8, Debt, in the Consolidated Financial Statements for further discussion of the debt issuance and related extinguishment.

Gain on sale of assets held for sale

In September 2006, the remaining assets located at our Glueckstadt facility were sold for $0.5 million. Since we had previously written the value of these assets down to $0.2 million, we recorded a gain on sale of assets held for sale of $0.3 million during fiscal 2007.

. . .