This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue," or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in Part II Item 1A in this Form 10-Q, in Part I Item 1A of our Form 10-K for the fiscal year ended December 31, 2008 and in our other Securities and Exchange Commission filings. The information contained in this Form 10-Q represents our best judgment at the date of this report based on information currently available. In providing forward-looking statements, KapStone does not intend, and does not undertake any duty or obligations, to update its statements as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes thereto included elsewhere in this report.

Overview

We were formed on April 15, 2005 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the paper, packaging, forest products and related industries.

On January 2, 2007, the Company purchased substantially all of the assets and assumed certain liabilities of the Kraft Papers Business (" KPB"), a division of IP, consisting of an unbleached kraft paper manufacturing facility in Roanoke Rapids, North Carolina and Ride RiteŽ Converting, an inflatable dunnage bag manufacturer located in Fordyce, Arkansas, for a cash purchase price of $155 million in cash, less certain post-closing adjustments of $7.8 million, plus two contingent earn-out payments of up to $55 million (in aggregate and adjusted for the 2009 sale of Ride RiteŽ Converting), based on KPB's annual earnings before interest, income taxes, depreciation and amortization, or EBITDA, during the five years immediately following the acquisition.

On July 1, 2008, the Company purchased substantially all of the assets and assumed certain liabilities of the Charleston Kraft Division ("CKD"), a division of MeadWestvaco Corporation ("MWV"), consisting of an unbleached kraft paper manufacturing facility in North Charleston, South Carolina, including a cogeneration facility, chip mills located in Elgin, Hampton, Andrews and Kinards, South Carolina and a lumber mill located in Summerville, South Carolina, for a cash purchase price of $485 million less certain adjustments of $14.0 million.

The results reported below do not reflect any actual or pro forma adjustments related to the acquisition prior to the consummation of the acquisition on July 1, 2008. The results reported below include the results of CKD since the date of acquisition, July 1, 2008.

On March 31, 2009, the Company consummated the sale of its dunnage bag business for $36.0 million less certain working capital adjustments to Illinois Tool Works Inc. ("ITW"). The results of operations for the dunnage bag business are included in the all other segment until the date of the sale. In conjunction with the sale, the Company signed a long-term supply agreement with ITW.

Comparison of Results of Operations for the Three Months Ended June 30, 2009 and the Three Months Ended June 30, 2008

                                       Three Months Ended June 30,        Increase/     % Increase/
(in thousands of U.S. dollars):          2009               2008         (Decrease)     (Decrease)
Net sales                           $       156,493    $       68,162    $    88,331          129.6 %
Cost of sales, excluding
depreciation and amortization                88,354            40,800         47,554          116.6 %
Freight and distribution
expenses                                     13,165             6,924          6,241           90.1 %
Selling, general and
administrative expenses                       7,630             4,564          3,066           67.2 %
Depreciation and amortization                13,488             2,835         10,653          375.8 %
Gain/(loss) on sale of business                (704 )               -           (704 )          N/A
Other operating income                          216               187             29           15.5 %
Operating income                             33,368            13,226         20,142          152.3 %
Foreign exchange gain/(loss)                    171                 -            171            N/A
Interest income                                   -               293           (293 )          N/A
Interest expense                              5,011               460          4,551          989.3 %
Income before provision for
income taxes                                 28,528            13,059         15,469          118.5 %
Provision for income taxes                   10,416             4,808          5,608          116.6 %
Net income                          $        18,112    $        8,251    $     9,861          119.5 %

Net sales for the quarter ended June 30, 2009, were $156.5 million compared to $68.2 million for the second quarter of 2008, an increase of $88.3 million or 129.6%. The increase in net sales was driven by the CKD acquisition on July 1, 2008, which accounted for $102.4 million of the increase. Excluding the CKD acquisition, net sales were lower in the second quarter of 2009 compared to the second quarter of 2008 by $14.1 million, of which $8.9 million is a result of the sale of the dunnage bag business on March 31, 2009. Net sales also decreased by $7.5 million due to lower average revenue per ton and by $2.0 million as a result of unfavorable product mix due to a higher percentage of linerboard sales, which has a lower average selling price than other products, partially offset by a $3.1 million increase in sales volume.

To balance production with demand, the Company ran four of its five paper machines alternating downtime among the three machines at the Charleston mill. By mid-June 2009, both paper mills were running at normal capacity.

Cost of sales for the quarter ended June 30, 2009, was $88.4 million compared to $40.8 million for the second quarter of 2008, an increase of $47.6 million, or 116.6%. The increase in cost of sales was mainly due to the CKD acquisition, which accounted for $66.7 million of the increase and was partially offset by $16.4 million for the alternative fuel mixture tax credit. Cost of sales also decreased by $6.6 million as a result of the sale of the dunnage bag business on March 31, 2009. Excluding the impact of the CKD acquisition, the sale of the dunnage bag business and the alternative fuel mixture tax credit, cost of sales increased by $3.9 million mainly due to $1.5 million of inflation, $1.0 million in sales volume and $0.5 million of higher property taxes.

The total amount of the alternative fuel mixture tax credit recorded as a reduction in cost of sales for the quarter ended June 30, 2009 was $48.6 million of which $32.2 million is included in CKD results.

Freight and distribution expenses for the quarter ended June 30, 2009 totaled $13.2 million compared to $6.9 million for the quarter ended June 30, 2008. The increase of $6.3 million was due to the CKD acquisition, which accounted for $7.6 million of the increase. Excluding the CKD acquisition, freight and distribution expenses were lower by $1.3 million in the second quarter of 2009 due to $0.9 million of lower fuel oil surcharges, realization of favorable contract negotiations and the sale of the dunnage bag business.

Selling, general and administrative expenses for the quarter ended June 30, 2009 totaled $7.6 million compared to $4.6 million for the quarter ended June 30, 2008. The increase of $3.0 million reflects $2.3 million of CKD's direct selling and administrative expenses, $1.4 million of transitional services provided by MWV, $0.5 million of professional fees related to the CKD acquisition partially offset by $0.8 million of lower compensation and benefit expenses as the Company temporarily suspended certain benefits as a result of economic conditions.

Depreciation and amortization for the quarter ended June 30, 2009 totaled $13.5 million compared to $2.8 million for the quarter ended June 30, 2008. The increase of $10.7 million is primarily due to the CKD acquisition, which added an additional $7.1 million of depreciation and $3.4 million of amortization of

intangibles, including $2.4 million of amortization for the intangible asset related to an acquired coal contract with below market prices at July 1, 2008. The acquired coal contract expires December 31, 2009.

A working capital adjustment of $0.9 million in connection with the sale of the dunnage bag business was recorded in the second quarter. The dunnage bag business was sold in March 2009.

Interest income for the quarter ended June 30, 2009 decreased by $0.3 million compared with the same period in 2008, reflecting lower average cash balances being invested and lower interest rates in 2009.

Interest expense for the quarters ended June 30, 2009 and 2008 was $5.0 million and $0.5 million, respectively. Interest expense reflects interest on the Company's long-term debt and amortization of debt issuance costs. Interest expense was $4.5 million higher in the quarter ended June 30, 2009 primarily due to higher debt levels relating to the CKD acquisition. Amortization of debt issuance costs for the quarters ended June 30, 2009 and 2008 was $0.9 million and $0.1 million, respectively, and reflects higher costs for the new Senior Credit Facility.

Provision for income taxes for the quarters ended June 30, 2009 and 2008 was $10.4 million and $4.8 million, respectively, reflecting an effective tax rate of 36.5% compared to 36.8% for the similar period in 2008.

Segment Results



The following table presents a reconciliation of consolidated net sales and
operating income to amounts reported by operating segment:



                                              Three Months Ended June 30,
         Operating Segment ($000s):             2009               2008
         Consolidated net sales:
         Unbleached kraft                  $       150,398    $       60,545
         All other                                   6,095             8,905
         Intersegment sales                              -            (1,288 )

         Total net sales                   $       156,493    $       68,162

         Operating income/(loss):
         Unbleached kraft                  $        40,934    $       15,930
         All other                                  (1,538 )           1,269
         Gain/(loss) on sale of business              (704 )               -
         Corporate                                  (5,324 )          (3,973 )

         Total operating income            $        33,368    $       13,226

The following represents analysis and commentary for results of operations for the Company's two operating segments: unbleached kraft and all other.

Unbleached Kraft



                                              Three Months Ended June 30,
                                                2009               2008
         Net sales                         $       150,398    $       60,545
         Operating income                  $        40,934    $       15,930
         Operating income % of net sales              27.2 %            26.3 %

         Average revenue per ton           $           529    $          581
         Tons of paper sold                        284,514           104,131

For the three months ended June 30, 2009, unbleached kraft segment net sales increased by $89.9 million, or 148.4%, to $150.4 million compared to $60.5 million for the three months ended June 30, 2008. The increase in net sales is due to the CKD acquisition, which increased sales by $96.3 million and 175,202 tons of paper sold. Average revenue per ton in the second quarter of 2009 was $529/ton, or $52/ton lower than average revenue per ton in the second quarter of 2008, reflecting the impact of market driven price reductions and product mix. Excluding the CKD acquisition, net sales were lower by $6.4 million in the second quarter of 2009 compared to the second quarter of 2008, mainly due to $7.5 million of lower average revenue per ton and $2.0 million of unfavorable product mix due to a higher percentage of linerboard sales, partially offset by a $3.1 million volume increase.

To balance production with demand, the Company ran four of its five paper machines alternating downtime among the three machines at the Charleston mill. By mid-June 2009, both paper mills were running at normal capacity.

Unbleached kraft segment operating income increased by $25.0 million, or 157.2%, to $40.9 million for the three months ended June 30, 2009 compared to $15.9 million for the three months ended June 30, 2008. Operating income increased by $16.8 million due to the CKD acquisition and $16.4 million due to the alternate fuel mixture tax credit partially offset by $7.5 million of lower average revenue per ton and $1.7 million of unfavorable product mix. Included in operating income is $2.4 million of amortization of an intangible asset recorded for an acquired coal contract with favorable prices. The coal contract will terminate on December 31, 2009.

The total amount of the alternative fuel mixture tax credit recorded in operating income for the three months ended June 30, 2009 was $48.6 million of which $32.2 million is related to the CKD business.

For the quarter ended June 30, 2009, operating income as a percentage of net sales increased to 27.2% from 26.3% for the second quarter of 2008 due to the alternative fuel mixture tax credit partially offset by lower margins on sales.

All Other



                                                 Three Months Ended June 30,
                                                    2009              2008
      Net sales                                $         6,095    $       8,905
      Operating (loss) income                  $        (1,538 )  $       1,269
      Operating (loss) income % of net sales             -25.2 %           14.3 %

For the three months ended June 30, 2009, net sales for the all other segment decreased by $2.8 million, or 31.5%, to $6.1 million compared to $8.9 million for the three months ended June 30, 2008. The decrease is due to the sale of the dunnage bag business, which accounted for $8.9 million of net sales in 2008, offset by the acquisition of the CKD lumber business, which increased net sales by $6.1 million.

Operating loss for the three months ended June 30, 2009 was $1.5 million reflecting lower sales volume and selling prices in the lumber business, mainly due to a continued slowdown in the number of new housing starts and lower consumer spending. Operating income in the three months ended June 30, 2008 reflects the results of the dunnage bag business.

Corporate

Corporate expenses for the three months ended June 30, 2009 totaled $5.3 million compared to $4.0 million for the three months ended June 30, 2008. The increase of $1.3 million is primarily due to $1.4 million of MWV transitional services and $0.5 million of professional fees related to the CKD acquisition partially offset by $0.8 million of lower compensation and benefit expenses as the Company temporarily suspended certain benefits as a result of economic conditions.

Comparison of Results of Operations for the Six Months Ended June 30, 2009 and the Six Months Ended June 30, 2008

                                           Six Months Ended June 30,         Increase/     % Increase/
(in thousands of U.S. dollars):              2009              2008         (Decrease)     (Decrease)
Net sales                               $      297,077    $      135,291    $   161,786          119.6 %
Cost of sales, excluding
depreciation and amortization                  184,838            82,358        102,480          124.4 %
Freight and distribution expenses               26,493            13,511         12,982           96.1 %
Selling, general and administrative
expenses                                        16,187             9,494          6,693           70.5 %
Depreciation and amortization                   27,097             5,428         21,669          399.2 %
Gain on sale of business                        16,695                 -         16,695            N/A
Other operating income                             448               371             77           20.8 %
Operating income                                59,605            24,871         34,734          139.7 %
Foreign exchange gain/(loss)                      (127 )               -           (127 )          N/A
Interest income                                      1               840           (839 )        -99.9 %
Interest expense                                10,744             1,213          9,531          785.7 %
Income before provision for income
taxes                                           48,735            24,498         24,237           98.9 %
Provision for income taxes                      19,511             9,017         10,494          116.4 %
Net income                              $       29,224    $       15,481    $    13,743           88.8 %

Net sales for the six months ended June 30, 2009, were $297.1 million compared to $135.3 million for the first six months of 2008, an increase of $161.8 million or 119.6%. The increase in net sales was driven by the CKD acquisition on July 1, 2008, which accounted for $188.2 million of the increase. Excluding the CKD acquisition, net sales were lower in the first six months of 2009, compared to the same period in 2008 by $26.4 million of which $9.9 million is a result of the sale of the dunnage bag business on March 31, 2009. In addition net sales decreased by $8.6 million due to lower volume, $7.0 million due to lower average revenue per ton and $2.4 million due to unfavorable product mix, as the Company had a higher percentage of linerboard sales, which has a lower average selling price than other products.

To balance production with demand, the Company ran four of its five paper machines alternating downtime among the three machines at the Charleston mill. By mid-June 2009, both paper mills were running at normal capacity.

Cost of sales for the six months ended June 30, 2009, was $184.8 million compared to $82.4 million for the first six months of 2008, an increase of $102.4 million, or 124.4%. The increase in cost of sales was due to the CKD acquisition, which accounted for $130.7 million of the increase. Excluding the CKD acquisition, cost of sales decreased by $19.8 million due to the alternative fuel mixture tax credit, $6.6 million due to the sale of the dunnage bag business in the first quarter of 2009 and $4.9 million due to lower sales volume. Inflation increased costs by $1.7 million mainly for energy and raw materials.

The total amount of the alternative fuel mixture tax credit recorded as a reduction in cost of sales for the first six months of 2009 was $54.0 million of which $34.2 million is included in CKD results.

Freight and distribution expenses for the six months ended June 30, 2009, totaled $26.5 million compared to $13.5 million for the six months ended June 30, 2008. The increase of $13.0 million was due to the CKD acquisition, which accounted for $15.9 million of the increase. Excluding the CKD acquisition and the sale of the dunnage bag business, freight and distribution expenses were lower by $2.9 million due to a $1.6 million reduction in sales volume, mainly due to lower demand reflecting economic conditions, $1.3 million of lower fuel oil surcharges and realization of favorable contract negotiations.

Selling, general and administrative expenses for the six months ended June 30, 2009 totaled $16.2 million compared to $9.5 million for the similar period in 2008. The increase of $6.7 million reflects $4.2 million of CKD's direct selling and administrative expenses, $3.0 million of transitional services provided by MWV and $1.4 million of professional fees related to the CKD acquisition partially offset by $1.6 million of lower compensation and benefit expenses as the Company temporarily suspended certain benefits as a result of economic conditions.

Depreciation and amortization for the six months ended June 30, 2009, totaled $27.1 million compared to $5.4 million for the six month period ended June 30, 2008. The increase of $21.7 million was due to the CKD acquisition, which added an additional $14.3 million of depreciation and $6.7 million of amortization of intangibles, including $4.9 million of amortization for the intangible asset related to an acquired coal contract with below market prices at July 1, 2008. The acquired coal contract expires December 31, 2009.

The $16.7 million gain on sale of business is the result of the sale of the dunnage bag business to Illinois Tool Works, Inc. on March 31, 2009.

Interest income for the six months ended June 30, 2009 decreased by $0.8 million compared with the same period in 2008, reflecting lower cash balances being invested as the Company used cash and cash equivalents to fund a portion of the CKD acquisition, and lower average interest rates.

Interest expense for the six months ended June 30, 2009 and 2008 was $10.7 million and $1.2 million, respectively. Interest expense reflects interest on the Company's long-term debt and amortization of debt issuance costs. Interest expense was $9.5 million higher in the six months ended June 30, 2009 primarily due to higher debt levels relating to the CKD acquisition. Amortization of debt issuance costs for the periods ended June 30, 2009 and 2008 was $1.7 million and $0.1 million, respectively, and reflects higher costs for the new Senior Credit Facility.

Provision for income taxes for the six months ended June 30, 2009 and 2008 was $19.5 million and $9.0 million, respectively, reflecting higher pre-tax income and an effective tax rate of 40.0% compared to 36.8% for the similar period in 2008. The primary reasons for the increase in the effective tax rate are due to differences between the book and tax basis of the dunnage bag assets and a lower expected benefit from the domestic manufacturing tax deduction.

Segment Results



The following table presents a reconciliation of consolidated net sales and
operating income to amounts reported by operating segment:



                                Six Months Ended June 30,
Operating Segment ($000s):        2009              2008
Consolidated net sales:
Unbleached kraft             $      279,858    $      120,905
All other                            18,118            16,797
Intersegment sales                     (899 )          (2,411 )

Total net sales              $      297,077    $      135,291

Operating income/(loss):
Unbleached kraft             $       56,416    $       30,480
All other                            (2,375 )           2,600
Gain on sale of business             16,695                 -
Corporate                           (11,131 )          (8,209 )

Total operating income       $       59,605    $       24,871

The following represents analysis and commentary for results of operations for the Company's two operating segments: unbleached kraft and all other.

Unbleached Kraft



                                     Six Months Ended June 30,
                                       2009              2008
Net sales                         $      279,858    $      120,905
Operating income                  $       56,416    $       30,480
Operating income % of net sales             20.2 %            25.2 %

Average revenue per ton           $          558    $          576
Tons of paper sold                       501,926           209,781

For the six months ended June 30, 2009, unbleached kraft segment net sales increased by $159.0 million, or 131.5%, to $279.9 million compared to $120.9 million for the six months ended June 30, 2008. The increase in net sales is due to the CKD acquisition, which increased net sales by $177.0 million and 307,705 tons of paper sold. Average revenue per ton in the first six months of 2009 was $558/ton, or $18/ton lower than average revenue per ton in the first six months of 2008. Excluding the CKD acquisition, net sales were lower by $18.0 million in the first six months of 2009 compared to the first six months of 2008, mainly due to $8.6 million of lower volume, reflecting economic conditions, $7.0 million due to lower average revenue per ton, and $2.4 million of unfavorable product mix, as the Company had a higher percentage of linerboard sales.

To balance production with demand, the Company ran four of its five paper machines alternating downtime among the three machines at the Charleston mill. By mid-June 2009, both paper mills were running at normal capacity.

Unbleached kraft segment operating income increased by $25.9 million, or 84.9%, to $56.4 million for the six months ended June 30, 2009 compared to $30.5 million for the six months ended June 30, 2008. Operating income increased by $19.4 million due to the CKD acquisition and $19.8 million due to the alternate fuel mixture tax credit partially offset by $7.0 million of lower average revenue per ton, $3.2 million of lower sales volume and $2.0 million of unfavorable product mix. Included in operating income is $4.9 million of amortization of an intangible asset recorded for an acquired coal contract with favorable prices. The coal contract will terminate on December 31, 2009.

The total amount of the alternative fuel mixture tax credit recorded in operating income for the first six months of 2009 was $54.0 million of which $34.2 million is related to the CKD business.

For the six months ended June 30, 2009, operating income as a percentage of net sales decreased to 20.2% from 25.2% for the first six months of 2008 mainly due to lower average revenue per ton and lower sales volume partially offset by the alternative fuel mixture tax credit.

All Other



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