**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




x **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**





For
      the
      fiscal year ended June 30, 2006





or





 ̈ **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**





**For
      the Transition Period From ____ to ____**





Commission
      file number: 33-60032





**Buckeye
      Technologies Inc.**


(Exact
      name of registrant as specified in its charter)




Delaware
            
            62-1518973(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.) 
 1001
                  Tillman Street, Memphis, Tennessee
              
              38112(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 Registrant’s
        telephone number, including area code (901) 320-8100
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 Title
                  of Each Class
              
              Name
                  of Each Exchange on which RegisteredCommon
                  Stock, par value $0.1 per share
              
              New
                  York Stock Exchange
  Securities
      registered pursuant to Section 12(g) of the Act: None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act


Yes  ̈ No x


Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes  ̈ No x


Note
      -
      Checking the box above will not relieve any registrant required to file report
      pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
      under
      those Sections.





Indicate
      by check mark whether registrant (1) has filed all reports required to be filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer” or “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one).


Large
                accelerated filer ̈
            Accelerated
                filerx
            Non-accelerated
                filer ̈




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. x





Indicate
      by a check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ No x





As
      of
      December 31, 2005, the aggregate market value of the registrant’s voting common
      equity held by non-affiliates, computed by reference to the price at which
      the
      common equity was last sold, was approximately $277.2 million.





As
      of
      August 25, 2006, there were outstanding 37,901,334 Common Shares of the
      Registrant.





DOCUMENTS
      INCORPORATED BY REFERENCE


Portions
      of Buckeye Technologies Inc.’s 2006 Annual Proxy Statement to be filed with the
      commission in connection with the 2006 Annual Meeting of Stockholders are
      incorporated by reference into Part III and IV.













**INDEX**




**BUCKEYE
      TECHNOLOGIES INC.**








**ITEM**
            
            **PAGE****PART
                I**1.
            Business
            31a.
            Risk
                Factors
            81b.
            Unresolved
                Staff Comments
            102.
            Properties
            113.
            Legal
                Proceedings
            114.
            Submission
                of Matters to a Vote of Security Holders
            11**PART
                II**5.
            Market
                for the Registrant’s Common Stock, Related Security Holder
                Matters
            136.
            Selected
                Financial Data
            137.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            157a.
            Qualitative
                and Quantitative Disclosures About Market Risk
            298.
            Financial
                Statements and Supplementary Data
            309.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            309a.
            Controls
                and Procedures
            309b.
            Other
            31**PART
                III**10.
            Directors
                and Executive Officers of the Registrant
            3211.
            Executive
                Compensation
            3312.
            Security
                Ownership of Certain Beneficial Owners and Management
            3313.
            Certain
                Relationships and Related Transactions
            3314.
            Principal
                Accountant Fees and Services
            33**PART
                IV**15.
            Exhibits
                and Financial Statement Schedules
            34Signatures
            35**OTHER**Index
                to Consolidated Financial Statements and Schedules
            F-1








2




**PART
      I**


**Item
      1. Business**




**General**




Buckeye
      Technologies Inc. is a leading producer of value-added cellulose-based specialty
      products, headquartered in Memphis, Tennessee. We believe that we have leading
      positions in many of the high-end niche markets in which we compete. We utilize
      our expertise in polymer chemistry, leading research and development and
      advanced manufacturing facilities to develop and produce innovative and
      proprietary products for our customers. We sell our products to a wide array
      of
      technically demanding niche markets in which we believe our proprietary
      products, manufacturing processes and commitment to customer technical service
      give us a competitive advantage. We are the only manufacturer in the world
      offering cellulose-based specialty products made from both wood and cotton
      and
      utilizing wetlaid and airlaid technologies. As a result, we believe we produce
      and market a broader range of cellulose-based specialty products than any of
      our
      competitors. We produce precisely tailored products designed to meet individual
      customer requirements. Our focus on specialty niche markets allows us to
      establish long-term supply positions with key customers. We operate
      manufacturing facilities in the United States, Canada, Germany and Brazil.





Cellulose
      is a natural fiber derived from trees and other plants that is used in the
      manufacture of a wide array of products. The total cellulose market generally
      can be divided into two categories: commodity and specialty. Manufacturers
      use
      commodity cellulose to produce bulk paper and packaging materials, the markets
      for which are very large but highly cyclical. Specialty cellulose is used to
      impart unique chemical or physical characteristics to a diverse range of highly
      engineered products. Specialty cellulose generally commands higher prices,
      and
      demand for specialty cellulose is less cyclical than commodity cellulose. We
      believe the more demanding performance requirements for products requiring
      specialty cellulose limit the number of participants in our niche markets. Our
      focus on niche specialty cellulose markets has enabled us to maintain positive
      cash flows even during cyclical downturns in the commodity cellulose
      markets.




**Company
      History**




We
      and
      our predecessors have participated in the specialty cellulose market for over
      80
      years and have developed new uses for many cellulose-based products. We began
      operations as an independent company on March 16, 1993, when we acquired the
      cellulose manufacturing operations of Procter & Gamble located in Memphis,
      Tennessee and Perry, Florida (the Foley Plant), with Procter & Gamble
      retaining a 50% limited partnership interest in the Foley Plant. We became
      a
      public company in November of 1995 and simultaneously acquired and redeemed
      Procter & Gamble’s remaining interest in the Foley Plant.




In
      May
      1996, we acquired the specialty cellulose business of Peter Temming AG located
      in Glueckstadt, Germany. In September 1996, we acquired Alpha Cellulose
      Holdings, Inc., a specialty cellulose producing facility located in Lumberton,
      North Carolina. In May 1997, we acquired Merfin International Inc., a leading
      manufacturer of airlaid nonwovens with facilities located in Canada, Ireland
      and
      the United States. In October 1999, we acquired essentially all of the assets
      of
      Walkisoft, UPM-Kymmene’s airlaid nonwovens business. The acquisition of
      Walkisoft added manufacturing facilities in Steinfurt, Germany and Gaston
      County, North Carolina. In March 2000, we acquired the intellectual property
      rights to the Stac-PacTM folding technology. In August 2000, we acquired the
      cotton cellulose business of Fibra, S.A. located in Americana, Brazil. In
      calendar 2001, we commenced operating the world’s largest airlaid nonwovens
      machine at our Gaston, North Carolina facility and started up a cosmetic cotton
      fiber line at our Lumberton, North Carolina facility.





Due
      to a
      decline in demand for cotton content paper, in August 2003, we closed the
      specialty cotton papers portion of our Lumberton, North Carolina facility.
      Due
      to excess airlaid production capacity around the globe we closed our single-line
      airlaid nonwovens facility in Cork, Ireland during July 2004. In December 2005,
      we ceased production at our cotton linter pulp facility in Glueckstadt, Germany.
      In conjunction with this closure, we upgraded the capability of our Americana,
      Brazil manufacturing facility. This expansion was completed during fiscal year
      2006. See Note 4, Impairment of Long-Lived Assets and Assets Held for Sale,
      to
      the Consolidated Financial Statements for further discussion of the Lumberton,
      North Carolina; Cork, Ireland; and Glueckstadt, Germany closures.





We
      are
      incorporated in Delaware and our executive offices are located at 1001 Tillman
      Street, Memphis, Tennessee. Our telephone number is (901) 320-8100.





3


**Products**




Our
      product lines can be broadly grouped into four categories: chemical cellulose,
      customized fibers, fluff pulp and nonwoven materials. We manage these products
      within two reporting segments: specialty fibers and nonwoven materials. The
      chemical cellulose and customized fibers are derived from wood and cotton
      cellulose materials using wetlaid technologies. Fluff pulps are derived from
      wood using wetlaid technology. Wetlaid technologies encompass cellulose
      manufacturing processes in which fibers are deposited using water. Airlaid
      nonwoven materials are derived from wood pulps, synthetic fibers and other
      materials using airlaid technology. Airlaid technology utilizes air as a
      depositing medium for fibers, one benefit of which is an increased ability
      as
      compared to wetlaid processes to mix additional feature-enhancing substances
      into the material being produced. A breakdown of our major product categories,
      percentage of sales, product attributes and applications is provided below.





**Product
                Groups**
            **%
                of Fiscal 2006 Sales**
            **Value
                Added Attributes**
            **Market
                for End Use Applications*****Specialty
                Fibers***
              **Chemical
                Cellulose**
              
              Food
                casings
              
              Rayon
                industrial
              cord
              
              High
                purity cotton
              ethers
              
              
              Film
                for liquid
              crystal
                displays****
            32%
            Purity
                and strength
              
              Strength
                and heat stability
              
              
              High
                viscosity, purity and safety
              
              
              
              Transparency/clarity,
                strength and
              purity
            Hot
                dog and sausage casings
              
              High
                performance tires and hose reinforcement
              
              Personal
                care products, low fat dairy products, pharmaceuticals and construction
                materials
              
              Laptop
                and desktop computers and
              television
                screens**Customized
                Fibers**
              
              Filters
              
              Specialty
                cotton
              papers
              
              Cosmetic
                Cotton
              
              Buckeye
                UltraFiber 500â
            17%
            High
                porosity and product life
              
              Color
                permanence and tear resistance
              
              
              Absorbency,
                strength and softness
              
              Finishing
                and crack reduction
            Automotive,
                laboratory and industrial filters
              
              Personal
                stationery, premium letterhead and currency
              
              Cotton
                balls and cotton swabs
              
              Concrete
                (residential slab on grade)**Fluff
                Pulp**
              
              Fluff
                pulp
            18%
            Absorbency
                and fluid transport
            Disposable
                diapers, feminine hygiene products and adult incontinence
                products***Nonwoven
                Materials*****
              
              Airlaid
                nonwovens
            33%
            Absorbency,
                fluid management and wet strength
            Feminine
                hygiene products, specialty wipes and mops, tablecloths, napkins,
                placemats, incontinence products and food pads





See
      Note
      17, Segment Information, to the Consolidated Financial Statements for additional
      information on products.





4


**Raw
      Materials**





Slash
      pine timber and cotton fibers are the principal raw materials used in the
      manufacture of our specialty fibers products. These materials represent the
      largest components of our variable costs of production. The region surrounding
      the Foley Plant has a high concentration of slash pine timber, which enables
      us
      to purchase adequate supplies of a species well suited to our products at an
      attractive cost. In order to be better assured of a secure source of wood at
      reasonable prices, we have entered into timber purchase agreements which allow
      us to purchase a portion of our wood at market prices that are fixed annually
      or
      current market prices as stated in the agreements. Additional information is
      included in Note 19, Commitments, to the Consolidated Financial
      Statements.





We
      purchase cotton fiber either directly from cottonseed oil mills or indirectly
      through agents or brokers. We purchase the majority of our requirements of
      cotton fiber for the Memphis and Lumberton plants domestically. The majority
      of
      the cotton fiber processed in the Americana plant comes from within Brazil.





Fluff
      pulp is the principal raw material used in the manufacture of our nonwoven
      materials products. Approximately 60% of our fluff pulp usage is supplied
      internally and the remainder is purchased from several other suppliers. In
      addition to fluff pulp, these products are comprised of synthetic fibers, latex
      polymers, absorbent powders and carrier tissue depending on grade
      specifications. These materials are also purchased from multiple sources.





The
      cost
      and availability of slash pine timber, cotton fiber, and fluff pulp are subject
      to market fluctuations caused by supply and demand factors. We do not foresee
      material constraints from pricing or availability for any of our key raw
      materials.





Our
      manufacturing processes especially for specialty fibers, requires significant
      amounts of fuel oil and natural gas. These manufacturing inputs are subject
      to
      significant changes in prices and availability, which could adversely impact
      our
      future operating results.




**Sales
      and Customers**





Our
      products are marketed and sold through a highly trained and technically skilled
      in-house sales force. We maintain sales offices in the United States and Europe.
      Our worldwide sales are diversified by geographic region as well as end-product
      application. Our sales are distributed to customers in approximately 60
      countries around the world. Our fiscal 2006 sales reflect this geographic
      diversity, with 42% of sales in North America, 38% of sales in Europe, 10%
      of
      sales in Asia, 4% of sales in South America and 6% in other regions.
      Approximately 83% of our worldwide sales, for fiscal 2006, were denominated
      in
      U.S. dollars. Our products are shipped by rail, truck and ocean carrier.
      Geographic segment data and product sales data are included in Note 17, Segment
      Information, to the Consolidated Financial Statements.




Sales
      by
      geographical destination for the three years ended June 30, 2006 were as
      follows:





*(in
      millions)*


Sales
                by Destination2006
            
            2005
            
            2004United
                States
            
            $
            230
            
            
            32
            %
            $
            235
            
            
            33
            %
            $
            194
            
            
            30
            %Italy
            
            
            66
            
            
            9
            
            
            56
            
            
            8
            
            
            47
            
            
            7Germany
            
            
            59
            
            
            8
            
            
            63
            
            
            9
            
            
            59
            
            
            9Canada
            
            
            47
            
            
            6
            
            
            48
            
            
            7
            
            
            40
            
            
            6Japan
            
            
            38
            
            
            5
            
            
            38
            
            
            5
            
            
            39
            
            
            6Spain
            
            
            25
            
            
            3
            
            
            23
            
            
            3
            
            
            22
            
            
            3Mexico
            
            
            25
            
            
            3
            
            
            16
            
            
            2
            
            
            21
            
            
            3France
            
            
            22
            
            
            3
            
            
            19
            
            
            3
            
            
            21
            
            
            3Brazil
            
            
            21
            
            
            3
            
            
            26
            
            
            4
            
            
            22
            
            
            3All
                other
            
            
            194
            
            
            27
            
            
            189
            
            
            26
            
            
            191
            
            
            28Total
            
            $
            728
            
            
            100
            %
            $
            713
            
            
            100
            %
            $
            657
            
            
            100
            %





The
      high-end, technically demanding specialty niche markets that we serve require
      a
      higher level of sales and technical service support than do commodity product
      sales. Our sales, product development and customer service professionals work
      with customers in their plants to design products tailored precisely to their
      product needs and manufacturing processes. In addition to an in-house sales
      force, we also utilize outside sales agents in some parts of the world.




5


Procter
      & Gamble is our largest customer, accounting for 13% of our fiscal 2006 net
      sales. Nonwoven materials account for approximately 60% of the total sales
      to
      Procter & Gamble. No other customer accounted for greater than 6% of our
      fiscal 2006 net sales.





**Research
      and Development**





Our
      research and development activities focus on developing new products, improving
      existing products, and enhancing process technologies to further reduce costs
      and respond to environmental needs. We have research and development pilot
      plant
      facilities in Memphis, and we employ engineers, scientists and technicians
      who
      are focused on advanced products and new applications to drive future growth.
      Our pilot plant facilities allow us to produce, test and deliver breakthrough
      products to the market place on a more cost-effective basis while minimizing
      interruptions to the normal production cycles of our operating
      plants.





Research
      and development costs of $9.2, $8.8 million and $9.5 million were charged to
      expense as incurred for the years ended June 30, 2006, 2005 and 2004,
      respectively.




**Competition**




There
      are
      relatively few specialty fibers producers when compared with the much larger
      commodity paper pulp markets. The technical demands and unique requirements
      of
      the high-purity chemical cellulose or customized fiber pulp user tend to
      differentiate suppliers on the basis of their ability to meet the customer’s
      particular set of needs, rather than focusing only on pricing. The high-purity
      chemical cellulose and customized fiber markets are less subject to price
      variation than commodity paper pulp markets. Major competitors include
      Archer-Daniels-Midland, Borregaard, Rayonier, Tembec and Weyerhaeuser. A major
      competitor closed its high-purity wood cellulose mill in July 2003, which we
      estimate represented 18% of the high-purity wood cellulose market. This closure
      provided us with an opportunity to increase our volume in these
      markets.





We
      believe that the number of producers is unlikely to grow significantly given
      the
      substantial investment to enter the mature specialty fibers market and
      sufficient existing capacity.





Although
      demand for fluff pulp is generally stable, fluff pulp prices tend to vary
      together with commodity paper pulp prices because fluff pulp is often produced
      in mills that also produce commodity paper pulp. Our strategy is to reduce
      our
      exposure to fluff pulp by increasing our sales of more specialized wood
      cellulose into new and existing markets. We also use about 43,000 metric tons
      of
      fluff pulp from our Foley plant annually as a key raw material in our airlaid
      nonwovens operations. We currently produce less than 10% of the world’s supply
      of fluff pulp. Major competitors include Bowater, International Paper, Koch
      Industries, Rayonier and Weyerhaeuser,





Demand
      for airlaid nonwovens grew significantly in the 1990’s. Since then, significant
      capacity expansion in 2001, primarily in North America, resulted in the market
      being oversupplied. Buckeye is the leading supplier of airlaid nonwoven
      materials worldwide. The markets we compete in also utilize nonwovens materials
      produced with technologies other than airlaid such as spunlace. Major nonwovens
      competitors include Ahlstrom, BBA Nonwovens, Concert Industries, Duni, Koch
      Industries, Kimberly Clark and PGI.





The
      closure of our Cork, Ireland plant in July 2004 improved airlaid industry
      capacity utilization in Europe and improved our competitive position there.
      We
      successfully transitioned more than half of Cork's business to other airlaid
      production sites. There is limited availability of airlaid nonwoven capacity
      in
      Europe, while the North American industry is operating in an environment of
      excess supply.





**Intellectual
      Property**




At
      June
      30, 2006 and 2005, we had intellectual property assets recorded totaling $25.2
      and $27.6 million, respectively. These amounts include patents (including
      application and defense costs), licenses, trademarks, and tradenames the
      majority of which were obtained in the acquisition of airlaid nonwovens
      businesses and Stac-Pac â technology. We intend to protect our patents and file applications for any
      future inventions that are deemed to be important to our business operations.
      The Stac-Pac â packaging technology, a proprietary system for packaging low-density nonwoven
      materials in compressed cube-shaped bales, is an example of technology we
      acquired to further differentiate us from our airlaid nonwovens competitors.
      Stac-Pac â bales
      facilitate our customers’ high-speed production lines with a continuous flow of
      material. Stac-Pac â units
      also reduce freight costs by compressing more material in a bale than can be
      shipped in a traditional roll form, which enables us to ship the bales more
      effectively in trucks and containers. Additional information is included in
      Note
      1, Accounting Policies, to our Consolidated Financial Statements.




**Inflation**




We
      believe that inflation has not had a material effect on our results of
      operations or on our financial condition during recent periods.




6


**Seasonality**





Our
      business has generally not been seasonal to a substantial extent. However,
      somewhat lower specialty fiber volume is shipped in the July - September
      quarter.





**Employees**





As
      of
      August 25, 2006, we employed approximately 1,600 employees, of whom
      approximately 1,130 are employed at our facilities in the United States.
      Approximately 55% of the U.S. employees are represented by unions at two plants
      in Perry, Florida; and Memphis, Tennessee. On October 21, 2003, the union at
      our
      Foley Plant ratified a new labor agreement effective through March 31, 2008.
      The
      agreement for the Memphis Plant is in effect through March 18, 2009. The union
      at our Canadian facility ratified a new labor agreement effective through June
      30, 2009. A national union provides employee representation for non-management
      workers at our specialty fibers plant in Americana, Brazil.





During
      fiscal 2003, the Lumberton Plant’s hourly employees elected to be represented by
      a union. A two-year labor agreement was ratified on May 1, 2004. The employees
      at the Lumberton plant petitioned the National Labor Relations Board and
      effective May 3, 2006, revoked union certification. The Lumberton Plant hourly
      employees are no longer represented by a union.





A
      works
      council provides employee representation for non-management workers at our
      nonwoven materials plant in Steinfurt, Germany.





Our
      plants in Gaston and King, North Carolina are not unionized.





None
      of
      our facilities has had labor disputes or work stoppages in recent history.
      The
      Foley and Memphis Plants have not experienced any work stoppages due to labor
      disputes in over 30 years and 50 years, respectively. We consider our
      relationships with our employees and their representative organizations to
      be
      good. An extended interruption of operations at any of our facilities could
      have
      a material adverse effect on our business.




**Environmental
      Regulations and Liabilities**




Our
      operations are subject to extensive general and industry-specific federal,
      state, local and foreign environmental laws and regulations. We devote
      significant resources to maintaining compliance with these laws and regulations.
      We expect that, due to the nature of our operations, we will be subject to
      increasingly stringent environmental requirements (including standards
      applicable to wastewater discharges and air emissions) and will continue to
      incur substantial costs to comply with such requirements. Because it is
      difficult to predict the scope of future requirements, we can offer no assurance
      that we will not incur material environmental compliance costs or liabilities
      in
      the future. Our failure to comply with environmental laws or regulations could
      subject us to penalties or other sanctions which could materially affect our
      business, results of operations or financial condition. Additional information
      is included in Note 20, Contingencies, to the Consolidated Financial
      Statements.




**Other
      Information**





Our
      website is *www.bkitech.com* .
      We make
      available, free of charge, through our website under the heading “Investor
      Relations,” annual reports on Form 10-K, quarterly reports on Form 10-Q and
      current reports on Form 8-K, and any amendments to those filed or furnished,
      pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
      1934. The information on our website is not part of or incorporated by reference
      in this Annual Report on Form 10-K.





These
      reports are also available as soon as reasonably practicable after we
      electronically file such materials with, or furnish such materials to, the
      Securities and Exchange Commission, or the SEC. The public may also read and
      copy any materials we file with the SEC at the SEC’s Public Reference Room at
      Station Place, 100 F Street NE, Washington, D.C. 20549. In addition, the SEC
      maintains an internet site that contains reports, proxy and information
      statements and other information filed electronically by us, which are available
      at http://www.sec.gov.





**Safe
      Harbor Provisions**




This
      document contains both historical and forward-looking statements. All statements
      other than statements of historical fact are, or may be deemed to be,
      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. These forward-looking statements are not
      based
      on historical facts, but rather reflect management’s current expectations
      concerning future results and events.




7


These
      forward-looking statements generally can be identified by the use of statements
      that include phrases such as "believe," "expect," "anticipate," "intend,"
      "plan," "foresee," "likely," "will" or other similar words or phrases.
      Similarly, statements that describe management’s objectives, plans or goals are
      or may be forward-looking statements. These forward-looking statements involve
      known and unknown risks, uncertainties and other factors that are difficult
      to
      predict and which may cause the actual results, performance or achievements
      to
      be different from any future results, performance and achievements expressed
      or
      implied by these statements.




The
      following important factors, among others, could affect future results, causing
      these results to differ materially from those expressed in our forward-looking
      statements: pricing fluctuations and worldwide economic conditions; dependence
      on a single customer; fluctuation in the costs of raw materials; competition;
      inability to predict the scope of future environmental compliance costs or
      liabilities; and the ability to obtain additional capital, maintain adequate
      cash flow to service debt as well as meet operating needs.





The
      forward-looking statements included in this document are only made as of the
      date of this document and we do not have any obligation to publicly update
      any
      forward-looking statements to reflect subsequent events or
      circumstances.




**Item
      1a. Risk Factors**




In
      addition to the risks and uncertainties discussed elsewhere in this Annual
      Report on Form 10-K (particularly in Item 7. Management’s Discussion and
      Analysis of Financial Condition and Results of Operations), the following are
      some important factors that could materially impact our results of operations
      and financial condition.





**Risks
      related to our business**





*Our
      substantial indebtedness could adversely affect our financial
      health.*





As
      of
      June 30, 2006, our total debt was approximately $522 million and our total
      debt,
      as a percentage of total capitalization, was 64%. Our level of debt could have
      a
      significant adverse future effect on our business. For example:





-
            we
                may have limited ability to borrow additional amounts for working
                capital,
                capital expenditures, acquisitions, debt service requirements, execution
                of our growth strategy, research and development costs or other
                purposes;





-
            a
                substantial portion of our cash flow may be used to pay principal
                and
                interest on our debt, which will reduce the funds available for working
                capital, capital expenditures, acquisitions and other
                purposes;





-
            our
                senior secured credit facility covenants require us to meet certain
                financial objectives and impose other restrictions on business operations.
                These covenants and the covenants contained in the indentures governing
                our senior subordinated notes will limit our ability to borrow additional
                funds or dispose of assets and limit our flexibility in planning
                for and
                reacting to changes in our
                business;





-
            we
                may be more vulnerable to adverse changes in general economic, industry
                and competitive conditions and adverse changes in government
                regulation;





-
            our
                high debt level and the various covenants contained in the indentures
                related to our senior notes, senior subordinated notes and the documents
                governing our other existing indebtedness may place us at a relative
                competitive disadvantage as compared to certain of our competitors;





-
            our
                borrowings under our senior secured credit facility are at floating
                rates
                of interest, which could result in higher interest expense in the
                event of
                an increase in interest rates.





Our
      ability to pay principal of and interest on our senior notes and senior
      subordinated notes, to service our other debt and to refinance indebtedness
      when
      necessary depends on our financial and operating performance, each of which
      is
      subject to prevailing economic conditions and to financial, business and other
      factors beyond our control.





We
      cannot
      assure you that we will generate sufficient cash flow from operations or that
      we
      will be able to obtain sufficient funding to satisfy all of our obligations.
      If
      we are unable to pay our debts, we will be required to pursue one or more
      alternative strategies, such as selling assets, refinancing or restructuring
      our
      indebtedness or selling additional equity capital. However, we cannot assure
      you
      that any alternative strategies will be feasible at the time or prove adequate.
      Also, certain alternative strategies will require the consent of our senior
      secured lenders before we engage in any such strategy.





8


*If
      our significant customer changes its purchasing habits, our business could
      be
      adversely impacted.*





Procter
      & Gamble is our largest single customer. We supply Procter & Gamble with
      fluff pulp and airlaid nonwovens. While Procter & Gamble has previously
      accounted for a higher percentage of our total revenues, sales to Procter &
Gamble accounted for approximately 13% of our sales in fiscal year 2006. In
      the
      event that Procter & Gamble fails to continue to purchase these products
      from us in substantial volume, our results of operations and financial condition
      could be materially and adversely affected.





*Compliance
      with extensive general and industry specific environmental laws and regulations
      requires significant resources, and the significant associated costs may
      adversely impact our business.*





Our
      operations are subject to extensive general and industry specific federal,
      state, local and foreign environmental laws and regulations. We devote
      significant resources to maintaining compliance with these laws and regulations.
      We expect that, due to the nature of our operations, we will be subject to
      increasingly stringent environmental requirements (including standards
      applicable to wastewater discharges and air emissions) and will continue to
      incur substantial costs to comply with these requirements. Because it is
      difficult to predict the scope of future requirements, there can be no assurance
      that we will not in the future incur material environmental compliance costs
      or
      liabilities.





The
      Foley
      Plant, located in Perry, Florida, discharges treated wastewater into the
      Fenholloway River. Under the terms of an agreement with the Florida Department
      of Environmental Protection (“FDEP”), approved by the U. S. Environmental
      Protection Agency (the “EPA”) in 1995, we agreed to a comprehensive plan to
      attain Class III (“fishable/swimmable”) status for the Fenholloway River under
      applicable Florida law (the “Fenholloway Agreement”). The Fenholloway Agreement
      requires us, among other things, to (i) make process changes within the Foley
      Plant to reduce the coloration of its wastewater discharge, (ii) restore certain
      wetlands areas, (iii) relocate the wastewater discharge point into the
      Fenholloway River to a point closer to the mouth of the river, and (iv) provide
      oxygen enrichment to the treated wastewater prior to discharge at the new
      location. We have completed the process changes within the Foley Plant as
      required by the Fenholloway Agreement. In making these in-plant process changes,
      we incurred significant expenditures, and, as discussed in the following
      paragraph, we expect to incur significant additional capital expenditures to
      comply with the remaining obligations under the Fenholloway
      Agreement.




Based
      on
      the requirements, we expect to incur additional capital expenditures of
      approximately $60 million over 8 to 10 years, possibly beginning as early as
      fiscal year 2007. The amount and timing of these capital expenditures may vary
      depending on a number of factors. For additional information on environmental
      matters, see Note 20 to the Consolidated Financial Statements. These possible
      expenditures could have a material adverse effect on our business, results
      of
      operations or financial condition.





*Because
      approximately 68% of our sales are to customers outside the United States,
      we
      are subject to the economic and political conditions of foreign
      nations.*





We
      have
      manufacturing facilities in four countries and sell products in approximately
      60
      countries. For the fiscal year ended June 30, 2006, sales of our products
      outside the United States represented approximately 68% of our sales. The global
      economy and relative strength or weakness of the U. S. dollar can have a
      significant impact on our sales. In addition, although approximately 83% of
      our
      sales are denominated in U.S. dollars, it is possible that as we expand
      globally, we will face increased risks associated with operating in foreign
      countries, including:





-
            the
                risk that foreign currencies will be devalued or that currency exchange
                rates will fluctuate;





-
            the
                risk that limitations will be imposed on our ability to convert foreign
                currencies into U.S. dollars or on our foreign subsidiaries' ability
                to
                remit dividends and other payments to the United
                States;





-
            the
                risk that our foreign subsidiaries will be required to pay withholding
                or
                other taxes on remittances and other payments to the United States
                or that
                the amount of any such taxes will be
                increased;





-
            the
                risk that certain foreign countries may experience hyperinflation;





and





-
            the
                risk that foreign governments may impose or increase investment or
                other
                restrictions affecting our
                business.





*Exposure
      to commodity products creates volatility in pricing and
      profits.*





If
      our
      research and development efforts do not result in the commercialization of
      new,
      proprietary products, we will continue to have significant exposure to fluff
      pulp, which could result in volatility in sales prices and profits.





9


*Our
      failure to maintain satisfactory labor relations could have a material adverse
      effect on our business.*





If
      our
      negotiations with the representatives of the unions, to which many of our
      employees belong, are not successful, our operations could be subject to
      interruptions at many of our facilities. As
      of
      August 25, 2006, we employed approximately 1,600 employees, of whom
      approximately 1,130 are employed at our facilities in the United States.
      Approximately 55% of the U.S. employees are represented by unions at two plants
      in Perry, Florida; and Memphis, Tennessee. On October 21, 2003, the union at
      our
      Foley Plant ratified a new labor agreement effective through March 31, 2008.
      The
      agreement for the Memphis Plant is in effect through March 18, 2009. The union
      at our Canadian facility ratified a new labor agreement effective through June
      30, 2009.





Works
      councils provide employee representation for non-management workers at our
      specialty fibers plant in Americana, Brazil, and our nonwoven materials plant
      in
      Steinfurt, Germany. Our plants in Gaston, Lumberton and King, North Carolina
      are
      not unionized.





None
      of
      our facilities has had labor disputes or work stoppages in recent history.
      The
      Foley and Memphis Plants have not experienced any work stoppages due to labor
      disputes in over 30 years and 50 years, respectively. We consider our
      relationships with our employees and their representative organizations to
      be
      good. An extended interruption of operations at any of our facilities could
      have
      a material adverse effect on our business.





***Risks
      related to our industry***





*We
      are subject to the cyclicality of our industry.*





The
      demand and pricing of our products, particularly fluff pulp, are influenced
      by
      the much larger market for papermaking pulps which is highly cyclical. The
      markets for most cellulose and absorbent products are sensitive to both changes
      in general global economic conditions and to changes in industry capacity.
      Both
      of these factors are beyond our control. The price of these products can
      fluctuate significantly when supply and demand become imbalanced for any reason.
      Our financial performance can be heavily influenced by these pricing
      fluctuations and the general cyclicality of the industries in which we compete.
      We cannot assure you that current prices will be maintained, that any price
      increases will be achieved, or that industry capacity utilization will reach
      favorable levels. The demand, cost and prices for our products may thus
      fluctuate substantially in the future and downturns in market conditions could
      have a material adverse effect on our business, results of operations and
      financial condition.





*Competition
      and surplus capacity could adversely affect our operating results and financial
      condition.*





The
      markets for our products are all competitive. Actions by competitors can affect
      our ability to sell our products and can affect the volatility of the prices
      at
      which our products are sold. Other actions by competitors, such as reducing
      costs or adding low-cost capacity, may adversely affect our competitive position
      in the products we manufacture and, consequently, our sales, operating income
      and cash flows.





*Market
      fluctuations in the availability and cost of energy and raw materials are beyond
      our control and may adversely impact our business.*





Energy,
      chemicals, and raw material costs, including fuel oil, natural gas, electricity,
      cotton linters, wood, and caustic and other chemicals are a significant
      operating expense. The prices and availability of raw materials and energy
      can
      be volatile and are susceptible to rapid and substantial changes due to factors
      beyond our control such as changing economic conditions, currency fluctuations,
      weather conditions, political unrest and instability in energy-producing
      nations, and supply and demand considerations. For example, energy and chemical
      costs have increased substantially which has resulted in increased production
      costs for our products. Increases in production costs could have a material
      adverse effect on our business, financial condition and results of operations.
      In addition to increased costs, it is possible that a disruption in supply
      of
      natural gas or other fossil fuels could limit our ability to operate our
      facilities.





*Market
      fluctuations in the availability and cost of transportation are beyond our
      control and may adversely impact our business.*





****** Our
      business depends on the transportation of a large number of products, both
      domestically and internationally. In the United States, an increase in
      transportation rates or fuel surcharges and/or a reduction in transport
      availability in truck and rail could negatively impact our ability to provide
      products to our customers in a timely manner. While we have had adequate
      transportation availability, there is no assurance that such availability can
      continue to be effectively managed in the future.





**Item
      1b. Unresolved Staff Comments**




None.








10





**Item
      2. Properties**





*Corporate
      Headquarters.* Our
      corporate headquarters, research and development laboratories, and pilot plants
      are located in Memphis, Tennessee.




***Specialty
      Fiber Plants***




*Memphis
      Plant* .
      The
      Memphis Plant is located on approximately 75 acres adjacent to the headquarters
      complex and has a capacity of approximately 100,000 annual metric tons of cotton
      cellulose. The facility currently operates at approximately 80% of
      capacity.




*Foley
      Plant* .
      The
      Foley Plant is located at Perry, Florida, on a 2,900 acre site and has a
      capacity of approximately 465,000 annual metric tons of wood cellulose. In
      connection with the acquisition of the Foley Plant, we also own 13,000 acres
      of
      real property near the plant site. As of June 30, 2006, the Foley Plant operated
      at 100% capacity.




*Lumberton
      Plant* .
      The
      Lumberton Plant is located in Lumberton, North Carolina on a 65-acre site and
      has a capacity of approximately 8,000 annual metric tons of cosmetic cotton
      fiber. As of June 30, 2006, the Lumberton Plant is operated at 90% of
      capacity.




*Americana
      Plant.* The
      Americana Plant is located in the city of Americana in the state of Sao Paulo,
      Brazil on 27 acres and is part of a multi-business industrial site. As of June
      30, 2006, it was operating at approximately 50% of capacity as we ramp up
      production to its full capacity of approximately 40,000 annual metric tons
      of
      cotton cellulose.





***Nonwovens
      Plants***





The
      stated capacity of airlaid nonwovens machines is based upon an assumed mix
      of
      products. The flexible nature of the airlaid technology allows for a wide range
      of materials to be produced. Machine production capability has typically been
      lower than the stated capacity, often by factors of 10-20%, when adjusted to
      reflect the actual product mix. Based on current product mix, utilization of
      our
      airlaid machines worldwide, as of June 30, 2006, was operating at approximately
      75% of capacity.





All
      of
      our airlaid nonwovens sites have proprietary Stac-PacTM folding technology, which
      allows us to efficiently produce compressed bales that facilitate customers’
high-speed production lines with a continuous flow of materials and facilitate
      more efficient shipping.





*Delta
      Plant* .
      The
      Delta Plant is located in Delta, British Columbia on a 12-acre industrial park
      site and has a total capacity of approximately 30,000 annual metric tons of
      airlaid nonwovens (26,000 based on current production mix) from two production
      lines.





*Steinfurt
      Plant* .
      The
      Steinfurt Plant is located in Steinfurt, Germany on an 18-acre site and has
      a
      total capacity of approximately 30,000 annual metric tons of airlaid nonwovens
      from two production lines.





*Gaston
      Plant* .
      The
      Gaston Plant is located in Gaston County near Mt. Holly, North Carolina on
      an
      80-acre site and has a total capacity of approximately 60,000 annual metric
      tons
      of airlaid nonwovens (48,000 annual metric tons based on current production
      mix)
      from two production lines.





*King
      Plant* .
      The
      King Plant is located in King, North Carolina and converts airlaid materials
      and
      wetlaid papers into wipes, towels and tissues for industrial and commercial
      uses.





We
      own
      our corporate headquarters, the Memphis Plant, the Foley Plant, the Lumberton
      Plant, the Gaston Plant, the Delta, Canada Plant, the Steinfurt, Germany Plant
      and the Americana, Brazil Plant. We lease buildings that house the King, North
      Carolina Plant, the sales offices in Europe and distribution facilities in
      Savannah, Georgia. All of the facilities located in the United States are
      pledged as collateral for certain debt agreements.





We
      believe that our specialty fibers and nonwoven materials manufacturing
      facilities and administrative buildings are adequate to meet current operating
      demands.





11


**Item
      3. Legal Proceedings**




We
      are
      involved in certain legal actions and claims arising in the ordinary course
      of
      business. We believe that such litigation and claims will be resolved without
      material adverse effect on our financial position or results of
      operation.





**Item
      4. Submission of Matters to a Vote of Security Holders**




None


12


**PART
      II**


**Item
      5. Market for the Registrant’s Common Stock and Related Security Holder
      Matters**




Buckeye
      Technologies Inc.’s common stock is traded on the New York Stock Exchange under
      the symbol BKI. There were approximately 4,400 shareholders on August 25, 2006,
      based on the number of record holders of our common stock and an estimate of
      the
      number of individual participants represented by security position listings.
      The
      table below sets forth the high and low sales prices for our common
      stock.


**Year
                Ended June 30****2006**
            
            **2005**High
            
            Low
            
            High
            
            LowFirst
                quarter (ended September 30)
            
            $
            10.08
            
            $
            7.75
            
            $
            11.93
            
            $
            9.40Second
                quarter (ended December 31)
            
            
            8.33
            
            
            7.18
            
            
            13.30
            
            
            9.66Third
                quarter (ended March 31)
            
            
            10.27
            
            
            7.89
            
            
            13.30
            
            
            10.22Fourth
                quarter (ended June 30)
            
            
            9.10
            
            
            6.97
            
            
            10.97
            
            
            7.38





We
      did
      not make any dividend payments during the fiscal years ended June 30, 2006
      or
      2005, and have no plans to pay dividends in the foreseeable future. We
      repurchased no shares of our common stock during the fiscal years ended June
      30,
      2006 or 2005. Due to certain debt agreements we are limited in our ability
      to
      make dividend distributions and share repurchases in the future. The amount
      available will depend on our financial results and ability to comply with
      certain conditions under our most restrictive debt agreements at the time of
      distribution or repurchase.





**Item
      6. Selected Financial Data**




**Selected
      Financial Data**


In
                thousands, except per share data
            
            **Year
                Ended June 30****2006(a)**
            
            **2005(b)**
            
            **2004
                (c)**
            
            **2003
                (d)**
            
            **2002
                (e)**Operating
                Data:Net
                sales
            
            $
            728,485
            
            $
            $712,782
            
            $
            656,913
            
            $
            641,082
            
            $
            635,218Operating
                income (loss)
            
            
            44,420
            
            
            57,601
            
            
            (19,079
            )
            
            4,496
            
            
            26,429Cumulative
                effect of changes in accounting, net of tax
            
            
            -
            
            
            -
            
            
            5,720
            
            
            -
            
            
            (11,500
            )Net
                income (loss)
            
            
            1,980
            
            
            20,204
            
            
            (38,190
            )
            
            (24,894
            )
            
            (26,004
            )Basic
                earnings (loss) per share
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.03
            )
            $
            (0.67
            )
            $
            (0.74
            )Diluted
                earnings (loss) per share
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.03
            )
            $
            (0.67
            )
            $
            (0.74
            )Pro
                forma amounts (f)Net
                income (loss)
            
            $
            1,980
            
            $
            20,204
            
            $
            (43,910
            )
            $
            (23,513
            )
            $
            (13,899
            )Earnings
                (loss) per shareBasic
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.18
            )
            $
            (0.64
            )
            $
            (0.40
            )Diluted
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.18
            )
            $
            (0.64
            )
            $
            (0.40
            )Balance
                sheet data:Total
                assets
            
            $
            949,553
            
            $
            949,737
            
            $
            970,823
            
            $
            1,097,855
            
            $
            1,134,737Total
                long-term debt (including current portion)
            
            $
            522,090
            
            $
            538,982
            
            $
            606,748
            
            $
            664,475
            
            $
            701,218Ratio
                of earnings to fixed charges (g)
            
            $
            (497
            )
            
            1.4x
            
            $
            (69,522
            )
            $
            (41,439
            )
            $
            (24,167
            )





(a)  Includes
      a pretax charge of $5,616 ($3,497 after tax) for restructuring and impairment
      costs. (See Notes 4, Impairment of Long-lived Assets and Assets Held for Sale,
      and Note 5, Restructuring Costs, to the Consolidated Financial Statements.).
      Includes a pretax charge of $151 ($95 after tax) for loss on early
      extinguishment of debt.





(
      b)  Includes
      a pretax charge of $16,905 ($9,392 after tax) for restructuring and impairment
      costs. (See Notes 4, Impairment of Long-lived Assets and Assets Held for Sale,
      and Note 5, Restructuring Costs, to the Consolidated Financial Statements.).
      Includes a pretax charge of $242 ($153 after tax) for loss on early
      extinguishment of debt. Includes a pretax gain of $7,203 ($4,682 after tax)
      for
      gain on sale of assets held for sale. During fiscal 2005, the IRS completed
      an
      audit of our tax return for fiscal year 2002. With the conclusion of this audit,
      we released the reserve on a tax deduction we claimed relating to our investment
      in our former facility in Cork, Ireland and recorded a non-cash tax benefit
      of
      $5,481 to our provision for income taxes.





13


(c)  Includes
      a pretax charge of $51,853 ($33,522 after tax) for restructuring and impairment
      costs. (See Note 4, Impairment of Long-lived Assets and Assets Held for Sale,
      and Note 5, Restructuring Costs, to the Consolidated Financial Statements.)
      Includes $4,940 ($3,112 after tax) for loss on early extinguishment of debt.
      Includes $5,720 ($0.15 per share), net of tax, cumulative effect of change in
      accounting relating to a change in the way we account for planned maintenance
      activities at our Perry, Florida facility. (See Note 3, Change in Accounting,
      to
      the Consolidated Financial Statements.)





(d)  Includes
      a pretax charge of $38,139 ($24,678 after tax) for restructuring and impairment
      costs.





(e)  Includes
      a pretax charge of $11,589 ($7,596 after tax) for restructuring and impairment
      costs. Includes $11,500 ($0.33 per share) cumulative effect of a change in
      accounting relating to a goodwill impairment charge for our converting plant
      at
      King, North Carolina under the transition rules of Statement of Financial
      Accounting Standard, No. 142, *Goodwill
      and Other Intangible Assets* .





(f)  Pro
      forma
      amounts reflect net income (loss) and earnings (loss) per share as if the
      changes in accounting


methods
      were applied retroactively.





(g)  Earnings
      were inadequate to cover fixed charges during fiscal years 2006, 2004, 2003
      and
      2002. Amounts reflect the deficit of earnings to fixed charges. See Exhibit
      12.1
      for computation.


14


**Item
      7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





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, 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 significantly reduce our debt.





We
      earned
      net income of $2.0 million for fiscal year 2006. These operating results
      included restructuring and impairment charges related to the closure of our
      Glueckstadt, Germany specialty fiber facility, impairment expenses related
      to
      our closed facility in Lumberton, North Carolina, and early extinguishment
      of
      debt totaling of $5.8 million ($3.6 million after tax). Net sales for fiscal
      year 2006 were $728.5 million, a 2.2% increase over the $712.8 million achieved
      in fiscal year 2005.





During
      fiscal year 2006, higher energy, chemical and transportation costs compressed
      our margins. Although some energy-related costs have retreated recently, energy,
      chemical and transportation costs were more than $32 million higher during
      fiscal year 2006 than they were during the same period in 2005, offsetting
      higher sales due to strong demand for specialty products. The hurricanes that
      devastated the U.S. Gulf Coast had a large impact on our costs. While none
      of
      our operations suffered serious physical damage, the disruptions caused by
      the
      storms and the impact of already high energy, chemical and transportation costs
      caused earnings to fall significantly below those earned during fiscal year
      2005. M anufacturing
      difficulties at our large specialty wood pulp facility in Perry, Florida and
      transportation issues also negatively impacted our business during
      fiscal year 2006 .





As
      a
      result of these extraordinarily high costs, we implemented product price
      surcharges of up to 5% on our products. This surcharge was effective for most
      of
      our products manufactured in the United States (excluding fluff pulp) from
      October 1, 2005 through March 31, 2006. In addition to the surcharge, we
      implemented further price increases in January of 2006 averaging
      8% on specialty wood cellulose products.





We
      removed the product price surcharge effective April 1, 2006 due to the
      return of natural gas pricing to more normal levels. Price increases for
      specialty fibers and nonwoven materials were implemented effective April 1,
      2006. These price increases and the reduced energy costs offset the reduction
      in
      revenue from the elimination of the product price surcharge.





Although
      the price increases discussed above were sufficient to maintain our margins
      in
      the high end segments of our markets, pricing on fluff pulp for fiscal year
      2006
      was slightly below the level we achieved during fiscal year 2005. This
      combination of low prices and higher costs during fiscal year 2006 resulted
      in
      our operating profit on fluff pulp being about $13 million below the levels
      achieved in fiscal year 2005. This decline in operating profit for fluff pulp
      more than offset the profitability improvements in our high end specialty wood
      products and nonwoven materials.





During
      fiscal year 2006, we completed the upgrade of our cotton cellulose manufacturing
      facility in Americana, Brazil and are now producing product for market sales.
      Prior to the transition of the facility to market production, we were
      manufacturing product for an on-site customer under an arrangement in which
      the
      customer provided raw materials and paid us a manufacturing fee. We ceased
      this
      toll manufacturing arrangement in November 2005. The combination of start-up
      costs incurred this fiscal year and the loss of the profitability from the
      tolling operations we received during the same periods in fiscal 2005 resulted
      in a negative impact of approximately $11 million before tax during fiscal
      year
      2006. Although we expect improvement, we believe that operating performance
      for
      the Americana facility during fiscal year 2007 will still compare negatively
      to
      the operating performance of our toll manufacturing configuration during the
      same period in 2005.







15


In
      spite
      of the higher costs, we are encouraged by progress on several
      fronts:





o
            We
                continued to generate strong cash flows during the year with $58.7
                million
                cash generated from operations, enabling us to complete the upgrade
                of the
                Americana facility and reduce debt and capital leases by $16.9 million
                during fiscal year 2006.





o
            In
                January 2006, we established two new organizations within
                Buckeye.





§
            Marketing
                - The mission of the organization is to bring new products to the
                market
                on an accelerated schedule. The new organization is focused on improving
                our marketing capability and increasing the speed at which we
                commercialize new products.





§
            Lean
                Enterprise - The mission is to lead our efforts in lowering costs,
                reducing working capital and eliminating waste. This new organization
                is
                responsible for the implementation of the “Lean Enterprise” methodology
                throughout our operations. The new organization is focused on improving
                work processes to ensure that all activities bring value to our customers.
                Our near-term objective is to improve gross margins by one percentage
                point through lean improvements.





o
            We
                continue to establish our global sales and distribution network for
                UltraFiber 500TM,
                a
                revolutionary concrete-reinforcing fiber. UltraFiber 500TMis
                a niche product for the building industry and a great example of
                the new
                product initiatives we are undertaking to reduce our dependency on
                fluff
                pulp. Sales reached approximately $3 million in fiscal 2006 and our
                goal
                is to exceed $15 million in fiscal
                2007.





o
            Our
                plan to transition the specialty fibers production previously supplied
                by
                Glueckstadt, Germany to our lower-cost manufacturing facilities in
                Memphis, Tennessee and Americana, Brazil is proceeding. We believe
                we are
                well-positioned to supply cotton-based specialty fiber products from
                our
                facilities in Memphis and Americana, with a significantly more favorable
                cost structure once we reach full production at the Americana
                facility.





The
      combination of new product initiatives, strong demand in important markets,
      and
      an improved, lower cost manufacturing configuration gives us optimism that
      we
      can generate future growth in sales and profitability. Like other manufacturing
      firms, we are still being negatively impacted by high costs for energy,
      chemicals, transportation and other materials. These issues will slow progress
      in the short-term, but our longer-term outlook remains
      favorable.


16


**Results
      of Operations**





*Consolidated
      results*




The
      following table compares the components of consolidated operating income (loss)
      for the three fiscal years ended June 30, 2006.




*(millions)*
            
            Year
                Ended June 30
            
            $
                Change
            
            Percent
                Change2006
            
            2005
            
            2004
            
            2006/
              2005
            
            2005/
              2004
            
            2006/
              2005
            
            2005/
              2004Net
                sales
            
            $
            728.5
            
            $
            712.8
            
            $
            656.9
            
            $
            15.7
            
            $
            55.9
            
            
            2
            %
            
            9
            %Cost
                of goods sold
            
            
            628.7
            
            
            592.7
            
            
            579.5
            
            
            36.0
            
            
            13.2
            
            
            6
            
            
            2Gross
                margin
            
            
            99.8
            
            
            120.1
            
            
            77.4
            
            
            (20.3
            )
            
            42.7
            
            
            (17
            )
            
            55Selling,
                research and administrative expenses
            
            
            47.8
            
            
            43.3
            
            
            42.4
            
            
            4.5
            
            
            0.9
            
            
            10
            
            
            2Amortization
                of intangibles and other
            
            
            2.0
            
            
            2.3
            
            
            2.2
            
            
            (0.3
            )
            
            0.1
            
            
            (13
            )
            
            5Impairment
                and restructuring costs
            
            
            5.6
            
            
            16.9
            
            
            51.9
            
            
            (11.3
            )
            
            (35.0
            )
            
            67
            
            
            67Operating
                income (loss)
            
            $
            44.4
            
            $
            57.6
            
            $
            (19.1
            )
            $
            (13.2
            )
            $
            76.7
            
            
            (23
            )%
            
            *
            %


*Percent
      change is not meaningful.





Net
      sales
      increased during fiscal year 2006 primarily due to improved pricing and mix
      on
      our products. Demand for high-end specialty fibers helped drive prices higher
      throughout the year. Higher shipment volumes and increased pricing drove sales
      of nonwoven materials higher during fiscal year 2006. Additionally, the
      implementation of the product price surcharge effective October 1, 2005 through
      March 31, 2006 had a positive impact on revenues. The
      product price surcharge improved revenues by $4.7 million for fiscal year 2006. Net
      sales
      improved overall during fiscal 2005 due primarily to increased pricing and
      improved mix in both specialty fibers and nonwoven materials.





As
      mentioned in the executive summary, cost of goods sold and gross margins were
      negatively impacted by high costs related to increases in the pricing of energy,
      chemicals and transportation. During fiscal year 2006, these costs were higher
      by approximately 28% versus fiscal year 2005.





During
      fiscal 2005, cost of goods sold increased by 2% on an overall volume increase
      of
      approximately 2%. This consistency was the result of two offsetting factors.
      Increased chemical and energy-related costs began impacting our facilities
      during the year. These increases were offset by the absence of several
      additional specialty fibers charges related to unusual events and special
      circumstances, including an extended maintenance shutdown at our Perry, Florida
      specialty fibers facility that occurred during fiscal 2004.





Increases
      in selling, research and administrative expenses during fiscal 2006 also had
      a
      negative impact on our operating margins. Expenses related to the establishment
      of an UltraFiber 500 TM sales
      force and distribution network, the expensing of share-based payments and the
      expensing of previously capitalized patent costs contributed to increased
      costs.





During
      fiscal 2005, selling, research and administrative expenses increased primarily
      due to increased accounting and consulting fees related to the implementation
      of
      Sarbanes-Oxley. External costs related to the implementation of Sarbanes-Oxley
      exceeded $2.0 million for fiscal 2005. This increase was partially offset by
      the
      absence of $3.3 million of bad debt expense incurred during fiscal 2004 as
      a
      result of the bankruptcy filing of a large specialty fibers customer.





As
      part
      of the announced closure of the Glueckstadt, Germany specialty fibers facility,
      we continued to incur restructuring expenses during fiscal year 2006. We
      incurred $3.5 million of expenses during fiscal year 2006. We expect to incur
      only minimal additional costs related to this restructuring. During fiscal
      year
      2006, we reclassified the land, buildings and equipment at the Glueckstadt
      facility to assets held for sale. Additionally, we reevaluated the fair value
      less cost to sell and recognized an impairment charge of $1.6 million. During
      June 2006, we sold the land, the buildings and a majority of the
      equipment.





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 found in Note 4, Impairment
      of
      Long-lived Assets and Assets Held for Sale, and Note 5, Restructuring Costs,
      to
      the Consolidated Financial Statements of the accompanying consolidated financial
      statements.





17


*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 is an aggregation of 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 and certain financing and investing costs.




*Specialty
      fibers*




The
      following table compares specialty fibers net sales and operating income for
      the
      three years ended June 30, 2006.




*(millions)*
            
            Year
                Ended June 30
            
            $
                Change
            
            Percent
                Change2006
            
            2005
            
            2004
            
            2006/
              2005
            
            2005/
              2004
            
            2006/
              2005
            
            2005/
              2004Net
                sales
            
            $
            515.9
            
            $
            513.6
            
            $
            461.4
            
            $
            2.3
            
            $
            $52.2
            
            
            0
            %
            
            11
            %Operating
                income
            
            
            35.8
            
            
            64.1
            
            
            28.2
            
            
            (28.3
            )
            
            35.9
            
            
            (44
            )
            
            127





Although
      demand for our high-end specialty fibers products and the implementation of
      a
      product price surcharge pushed pricing higher during fiscal year 2006, the
      favorable earnings impact of higher prices was offset by lower volumes due
      to
      the closure of our Glueckstadt, Germany cotton specialty fibers facility, the
      start-up of market operations of our Americana, Brazil facility and production
      and transportation issues at our Perry, Florida facility. Net
      sales
      increased during fiscal 2005 primarily due to an increase in specialty wood
      shipment volume and higher selling prices for both wood and cotton based
      products.





Average
      fluff pulp pricing declined by less than 1% during fiscal year 2006 versus
      fiscal year 2005. Although we experienced pricing softness for fluff pulp during
      the year, in the most recently completed quarter fluff pulp prices trended
      upward. For fiscal year 2006, fluff pulp sales accounted for 18% of our
      consolidated sales.





Strong
      demand in our high-end markets allowed us to raise prices during the year to
      partially offset higher costs for energy, chemicals and transportation. However,
      due to the rapid and continued increase in costs along with the slightly lower
      prices for fluff pulp, we were unable to maintain our margins at the same level
      as those realized during fiscal year 2005.





Our
      specialty fibers manufacturing costs for chemicals, energy and transportation
      increased by approximately $30.5 million during fiscal year 2006 as compared
      to
      fiscal year 2005. While we made some progress to recover a portion of these
      costs through reductions in raw material usage, increased pricing for our
      products and the implementation of a product price surcharge from October 1,
      2005 through March 31, 2006, these abnormally high energy, chemical and
      transportation prices will continue to put pressure on our margins during fiscal
      2007. Although the natural gas component of our energy costs is returning to
      normal pricing levels, our other energy related costs (including chemicals
      and
      transportation) still remain higher than normal.





In
      addition to recovering margins through increased pricing, we are also working
      on
      ways to reduce manufacturing costs. When natural gas prices were abnormally
      high, we transitioned our energy supply from natural gas to fuel oil where
      possible. Although natural gas is a very efficient energy source, market price
      volatility may make it more economical to purchase fuel oil at certain times.
      We
      will continue to look for alternatives to reduce costs and recover margins.
      Our
      new lean enterprise initiative, discussed in the executive summary, is focused
      on reducing costs by focusing on efficient processes that add value for our
      customers.





We
      were
      also negatively impacted by high manufacturing costs associated with maintenance
      outages at our specialty fibers facility in Perry, Florida. We incurred an
      unplanned lime kiln outage, requiring an increase in purchased materials.
      Additionally, we installed new chemical recycling equipment to improve our
      efficiency and further minimize our environmental impact. During these outages,
      we lost production at the facility. In addition to the fixed costs of the
      facility being spread over fewer tons of production, we also lost production
      of
      our high end specialty wood products, which impacted our sales volumes, both
      of
      which adversely affected our gross margins. The total impact of these outages
      was approximately $3.0 million for the year.





18


We
      are
      continuing to make progress with developing our capability to supply a wider
      range of products based on cotton cellulose to customers worldwide by upgrading
      the capability of our Americana, Brazil manufacturing facility. Because Brazil
      benefits from low manufacturing costs and a regional raw material supply, we
      anticipate that, when we reach full capacity, this facility will be a
      significant contributor to our profitability. We completed the upgrade and
      began
      the process of qualifying our facility with our customers during January of
      2006. With the cessation of tolling production in late November to facilitate
      the upgrade, we continued incurring pre-production expenses without offsetting
      revenue. During fiscal year 2006, the net impact of the Americana startup
      decreased before tax earnings by approximately $11 million versus fiscal year
      2005. We expect to continue to incur start-up and transition costs during the
      remainder of the calendar year as we qualify the plant and ramp up volume.
      Based
      on current progress, we believe the plant in Americana will be operating
      profitably by the third quarter of fiscal year 2007.




During
      fiscal year 2005, rising energy and chemical prices pushed manufacturing costs
      higher. The allocation of sales, research and administrative costs related
      to
      the implementation of Sarbanes-Oxley regulations also offset the improvement
      in
      pricing, mix, and volume during fiscal 2005. In spite of the increase in costs,
      operating income substantially improved during fiscal 2005 based on the strong
      improvement in sales and the absence of several additional charges related
      to
      unusual events and special situations that occurred during fiscal 2004. These
      unusual events and special situations included: the planned maintenance shutdown
      of our Perry, Florida facility ($9.6 million), the bankruptcy of a large
      customer ($3.3 million), the ratification of a new labor agreement that included
      a one-time retroactive payment ($0.8 million), and higher costs associated
      with
      reduced production at our Perry, Florida and Memphis, Tennessee specialty fibers
      facilities.




*Nonwoven
      materials*




The
      following table compares nonwoven materials net sales and operating income
      for
      the three years ended June 30, 2006.




*(millions)*
            
            Year
                Ended June 30
            
            $
                Change
            
            Percent
                Change2006
            
            2005
            
            2004
            
            2006/
              2005
            
            2005/
              2004
            
            2006/
              2005
            
            2005/
              2004Net
                sales
            
            $
            240.9
            
            $
            226.5
            
            $
            217.6
            
            $
            14.4
            
            $
            $8.9
            
            
            6
            %
            
            4
            %Operating
                income
            
            
            15.9
            
            
            13.0
            
            
            7.6
            
            
            2.9
            
            
            5.4
            
            
            22
            
            
            71





Improvements
      in the mix, selling prices and volumes for our nonwoven materials resulted
      in an
      increase in net sales during fiscal year 2006 versus fiscal year 2005. In an
      effort to offset rising prices for raw materials and other manufacturing costs,
      we implemented sales price increases during the year. Effective October 1,
      2005,
      we implemented a product pricing surcharge for most of our products manufactured
      in the United States to offset higher energy related costs. Increased demand
      for
      high-end napkins and other tabletop products in our European markets contributed
      to an improved mix. Due to a decline in the cost for natural gas, we removed
      the
      surcharge effective April 1, 2006. Decreased energy costs and the implementation
      of permanent price increases effective April 1, 2006 allowed us to maintain
      our
      margins in spite of the removal of the surcharge. These improvements in net
      sales were partially offset by the strengthening of the US dollar versus the
      euro during fiscal year 2006 compared to fiscal year 2005. The majority of
      products sold at our Steinfurt facility are denominated in euros and translated
      to US dollars for consolidation.





The
      increase in net sales during fiscal 2005 was due to improved pricing and mix,
      and the relative strength of the euro versus the U.S. dollar. Although we ceased
      production at our Cork, Ireland facility in July, 2004 we continued shipping
      inventory from Cork through November and completed the transition of a majority
      of Cork’s sales to our other nonwoven materials facilities.





Improved
      pricing, mix and increased volumes overcame higher raw materials and other
      manufacturing costs to improve operating margins during the year. Higher
      revenues offset increased costs for energy, chemical and transportation, which
      drove costs approximately $2.2 million higher for fiscal year 2006 than they
      were during fiscal year 2005. Additionally, the stronger Canadian dollar created
      further pressure on operating costs at our nonwoven materials facility in Delta,
      British Columbia.





Operating
      income improved significantly for fiscal 2005 versus fiscal year 2004. The
      improvement was primarily due to higher selling prices and the closure of our
      high cost Cork, Ireland facility. Overall, our nonwoven materials business
      supported similar shipment and production volume with one less manufacturing
      facility for the majority of the year. Our Gaston, North Carolina facility
      continued to show improvement in its operating performance compared to the
      prior
      year due to significant increases in shipment volume and the resulting
      improvement in capacity utilization. These improvements were partially offset
      by
      price increases on raw materials and other manufacturing costs. The cost of
      fluff pulp, bi-component fibers, and binder materials increased during fiscal
      2005.







19


*Restructuring
      and impairment activities*




During
      the three years ended June 30, 2006, 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 will 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, 2006.
      Following the table is an explanation of the programs and the resulting
      impairment charges. For further explanation of these charges, see Note 4,
      Impairment of Long-lived Assets and Assets Held for Sale, and Note 5,
      Restructuring Costs, to the Consolidated Financial Statements.





Year
                Ended June 30
            
            Total*(millions)*
            
            2006
            
            2005
            
            2004
            
            ChargesImpairment
                charges
            
            $
            2.1
            
            $
            12.3
            
            $
            45.9Restructuring
                costs2005
                Restructuring program
            
            $
            3.5
            
            $
            3.0
            
            $
            -
            
            $
            6.52004
                Restructuring program
            
            
            -
            
            
            1.2
            
            
            1.8
            
            
            3.02003
                Restructuring program - phase 2
            
            
            -
            
            
            0.3
            
            
            3.2
            
            
            3.52003
                Restructuring program - phase 1
            
            
            -
            
            
            0.1
            
            
            1.0
            
            
            1.1Total
                restructuring costs
            
            $
            3.5
            
            $
            4.6
            
            $
            6.0
            
            $
            14.1





*2005
      Restructuring program and impairments*





In
      January 2005, we announced our decision to discontinue producing cotton linter
      pulp at our Glueckstadt, Germany facility. Our decision was due to a combination
      of factors that had increased the plant’s costs to a level at which it was
      uneconomical to continue operations. The most significant factor impacting
      cost
      at the site was the substantial strengthening of the euro over calendar 2003
      and
      2004. Specialty fibers are normally priced and sold in U.S. dollars around
      the
      world. As a majority of Glueckstadt’s costs were denominated in euros, this
      substantial strengthening had a negative impact on Glueckstadt’s cost position.
      Additionally, Glueckstadt’s process water, waste treatment and energy costs were
      more than twice the cost of these utilities at our Memphis, Tennessee
      cotton-based specialty fibers facility.





Faced
      with these difficulties, we reduced the number of employees at the facility
      from
      approximately 150 to approximately 100 and operated at 55% of capacity during
      calendar year 2004. After careful consideration, we decided to close and cease
      production at Glueckstadt in December 2005. We believe that the closure of
      our
      Glueckstadt facility and transfer of the majority of its cotton-based specialty
      fiber production to our Memphis, Tennessee and Americana, Brazil facilities
      will
      yield a more competitive cost structure.





Based
      on
      our inability to recover the remaining value of the long-lived assets at the
      Glueckstadt, Germany facility, we determined that these long-lived assets,
      with
      a carrying amount of $15.3 million, were impaired and wrote them down to their
      estimated fair value of $3.0 million, resulting in an impairment charge of
      $12.3
      million ($6.5 million after tax), during fiscal year 2005.





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. Current markets and third party interest for the land and
      buildings indicated we would not be able to recover the carrying value through
      the sales process. 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.





As
      of
      June 30, 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.
      Although we believe the current carrying value less cost to sell represents
      the
      fair value of the equipment, it is possible the actual results of a sale could
      materially differ from amounts estimated.





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. We expect this consolidation to enable us to
      improve our overall specialty fibers operating results by approximately $9
      million annually.





20


In
      anticipation of the closure of the facility, customers increased their
      inventories to ensure a smooth transition as they qualified material supplied
      from our Memphis, Tennessee facility. Due to the increased demand, we were
      able
      to increase pricing and make incremental sales from inventory. Additionally,
      as
      a result of the impairment of the Glueckstadt plant and equipment, there was
      a
      decrease in depreciation expense during fiscal year 2006.





*2004
      Restructuring program and impairments*




During
      March 2004, our Board of Directors approved the discontinuation of production
      of
      nonwoven materials at our Cork, Ireland facility. While the demand for nonwoven
      products grew at a rate in the low to mid-single digits on an annualized basis,
      the growth in demand was not sufficient to utilize the existing capacity fully.
      As such, industry participants rationalized production by idling plants and
      closing facilities.





Due
      to
      excess production capacity around the globe, we operated Cork below its
      productive capacity from its inception in 1998. Because of its location and
      small size, our cost to produce at Cork was higher than at our other locations.
      Due to these issues, we decided to close the Cork facility and consolidate
      production at our three other nonwoven manufacturing facilities. Production
      at
      Cork ceased in July 2004. Closing our Cork facility reduced our nonwovens
      capacity by about 10%.





We
      continued to meet customer needs for nonwoven materials by producing these
      products at our facilities in Delta, British Columbia, Canada; Steinfurt,
      Germany; and Gaston County, North Carolina. This consolidation reduced working
      capital needs, and we began to realize fully the on-going cost benefit from
      operating one less facility during the third quarter of fiscal 2005. The closure
      of the Cork facility and related reorganization of the nonwoven materials
      segment resulted in the termination of 89 employees and resulted in
      restructuring expenses totaling $3.0 million. We do not expect additional
      expenses related to this program.





Our
      commitment to discontinue production represented an indicator of impairment,
      and
      subsequently we evaluated the value of the property, plant, and equipment
      associated with the Cork facility. We determined that these long-lived assets,
      with a carrying amount of $48.4 million were impaired and wrote them down to
      their estimated fair value of $5.4 million, resulting in an impairment charge
      of
      $43.0 million. During fiscal 2004, we also impaired certain equipment and other
      capitalized costs at other facilities of $2.9 million. In late December 2004,
      we
      completed the sale of the Cork facility building for $13.4 million (see
      G *ain
      on sale of assets held for sale* for
      further discussion).





*2003
      Restructuring programs (phase 1 and phase 2) and impairments*





In
      April
      2003, we announced the discontinuation of production of cotton linter pulp
      at
      our specialty fibers Lumberton, North Carolina facility due to the decline
      in
      demand for cotton content paper. We completed this partial closure in August
      2003 but continue to produce cosmetic cotton products at the Lumberton site.
      This decision reflects a steady decline in demand in the cotton fiber paper
      industry, which has contracted by more than one-third since the late 1990’s.
      While cotton linter pulp is one of our core businesses, current demand did
      not
      economically justify operating a facility that could only produce products
      for
      paper applications.





To
      meet
      our customers’ needs, we consolidated our cotton linter pulp production at our
      larger Memphis, Tennessee and Glueckstadt, Germany facilities. In conjunction
      with the consolidation, we initiated the first phase of a restructuring program
      designed to deliver cost reductions through reduced expenses across the company,
      the main component of which was the partial closure of our Lumberton, North
      Carolina facility. This phase of restructuring resulted in the elimination
      of
      approximately 100 positions within the specialty fibers segment. The resulting
      increase in facility utilization enabled us to improve our operating results
      by
      approximately $6 million annually. This more efficient operating configuration
      began to reduce our cost of goods sold beginning in January 2004. This closure
      reduced our working capital needs by approximately $10 million.





During
      the first quarter of fiscal 2004, we entered into a second phase of this
      restructuring program. This phase of the program enabled us to improve our
      operating results by approximately $6 million annually through reduced salaries,
      benefits, other employee-related expenses and operating expenses. As a result
      of
      this restructuring, 78 positions were eliminated. These positions include
      manufacturing, sales, product development and administrative functions
      throughout the organization.





During
      fiscal year 2006, we began to actively market idled cotton linter pulping
      equipment 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.





21


*Interest
      expense and amortization of debt costs*





Interest
      expense and amortization of debt costs decreased $1.2 million for fiscal year
      2006 versus fiscal year 2005. Our decrease in average outstanding debt had
      a
      positive impact on interest expense during the period. Also contributing to
      the
      improvement was the impact of capitalizing interest for the Americana facility
      capital improvements. The total amount of interest capitalized during fiscal
      year 2006, related to the Americana project, was $1.3 million. These
      improvements ** were
      partially offset by higher variable interest rates. The weighted average
      effective interest rate on our variable rate debt increased from 5.3% at June
      30, 2005 to 7.2% at June 30, 2006. See
      Note
      9, Debt, in the Consolidated Financial Statements for further discussion of
      variable interest rates.





We
      incurred interest expense and amortization of debt costs of $45.1 million in
      fiscal 2005, down $2.2 million from fiscal 2004. This improvement was primarily
      the result of lower average debt levels during fiscal 2005 and the absence
      of
      interest costs from holding $150 million of senior subordinated notes due 2005
      and $200 million of senior notes due 2013 concurrently for 30 days during the
      first half of the fiscal 2004. These improvements were partially offset by
      higher average variable interest rates during fiscal 2005.





*Loss
      on early extinguishment of debt costs*





*Fiscal
      year 2006 -* On
      September 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.





*Fiscal
      year 2005* - On
      March 23, 2005 we used cash on hand to redeem $20 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 2005.





*Fiscal
      year 2004* - On
      November 5, 2003, we established a $220 million senior secured credit facility.
      This facility amended and restated our then existing $215 million revolving
      credit facility. We used the proceeds of the new credit facility to pay the
      outstanding balance on the former revolving credit facility plus transaction
      fees and expenses. During fiscal 2004, $1.6 million was expensed related to
      the
      early extinguishment of the previous credit facility.





On
      September 22, 2003, we placed privately $200 million in aggregate principal
      amount of 8.5% senior notes due in 2013. The notes are unsecured obligations
      and
      rank senior to any of our subordinated debt. The notes are guaranteed by our
      direct and indirect domestic subsidiaries that are also guarantors on our senior
      secured indebtedness. We used the net proceeds from the private placement to
      redeem our $150 million senior subordinated notes due 2005. As a result of
      the
      extinguishment, $3.3 million was expensed during fiscal 2004. These expenses
      included a $2.1 million call premium and $1.2 million related to the write-off
      of deferred financing costs.





See
      Note
      9, 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
      July
      2004, we ceased production of nonwoven materials at our Cork, Ireland facility.
      Subsequent to the July 2004 closure of the facility, we began to actively market
      the building and equipment with carrying values of $4.5 million and $1.5
      million, respectively. In late December of 2004, we completed the sale of the
      Cork facility building to the Port of Cork Company for $13.4 million. Although
      the carrying values of these assets were based on appraisals and available
      market information at the time of the impairment in March of 2004, the purchase
      of this building for strategic purposes by the Port of Cork Company was not
      contemplated in those appraisals. As a result of the sale and disposition of
      the
      building and equipment for net proceeds after decommissioning and other expenses
      of $13.1 million, we recognized a net gain of $7.2 million ($4.7 million net
      of
      tax) during fiscal year 2005.




*Foreign
      exchange and other*





Foreign
      exchange and other in fiscal 2006, 2005 and 2004 were $(0.4) million, $(0.6)
      million and $0.3 million, respectively. The expense in fiscal 2006 was primarily
      due to foreign currency losses as a result of the strengthening of the Canadian
      dollar during the fiscal year. The expense in fiscal 2005 was primarily due
      to
      $0.5 million of expenses related to amending our senior secured credit facility
      and other financing related costs.







22


*Income
      tax expense*




Our
      effective tax rate for 2006 was approximately (189%) versus (2%) in fiscal
      2005
      and 37% in fiscal 2004.





Effective
      June 22, 2006, many of the tax measures introduced in the 2006 Canadian Federal
      budget were passed into law. Included in the budget was a reduction in the
      general corporate tax rate to 20.5% for 2008, 20% for 2009, and 19% for 2010
      and
      later years. As a result, the company remeasured its Canadian deferred tax
      balances based on the reversal pattern of the company’s temporary differences,
      resulting in a $0.8 million net tax benefit.





Our
      Brazilian valuation allowance increased in 2006 due to larger losses associated
      with the slower than expected start-up of the Americana, Brazil
      operations.





Effective
      for transactions occurring after September 30, 2000 the Internal Revenue Service
      enacted the Extraterritorial Income Exclusion.  The income exclusion
      provides for a reduction of gross income by a percentage of qualifying foreign
      trade income. In October 2004, the American Jobs Creation Act of 2004 (the
      Act)
      was signed into law. In order to comply with international trade rules, the
      Act
      repealed the current tax treatment for extraterritorial income. Effective for
      transactions entered into after December 31, 2004, the extraterritorial income
      exclusion is subject to a phase-out which will be completed on December 31,
      2006.  For transactions during calendar years 2005 and 2006, the income
      exclusion will be 80% and 60% of the exclusion otherwise allowed, respectively.
      Our extraterritorial income exclusion benefit was reduced in fiscal 2006 due
      to
      this phase-out and will continue to decrease through the final phase-out during
      fiscal 2007.





The
      Act
      provides a tax deduction for domestic manufacturers.  The deduction will be
      phased in during fiscal years 2006 through 2010. Due to the company’s U.S. net
      operating loss position, this deduction had no impact to fiscal year 2006.
      See
      Note 13, Income Taxes, in the Consolidated Financial Statements for further
      discussion of income taxes.





During
      the fourth quarter of fiscal 2005, the IRS completed an audit of our tax return
      for fiscal year 2002. With the conclusion of this audit, we released the reserve
      on a tax deduction we claimed relating to our investment in our former facility
      in Cork, Ireland and recorded a non-cash tax benefit of $5.5 million to our
      provision for income taxes.





*Cumulative
      effect of change in accounting*





Historically,
      we accrued in advance expenses related to planned extended maintenance shutdowns
      at our Perry, Florida facility. However, as of July 1, 2003, we changed our
      method of accounting from the accrue in advance method to the direct expense
      method. The effect of applying the new method for the year ended June 30, 2004
      was a decrease in net loss composed of a profit increase of $9.1 million pre-tax
      ($5.7 million net-of-tax reported as a cumulative effect of accounting change),
      offset by $8.5 million ($5.4 million net-of-tax) in additional cost of goods
      sold compared to what would have been expensed in fiscal 2004 under the accrue
      in advance methodology.





The
      total
      cost of the related planned maintenance activity performed in 2004 was $9.6
      million. Historically, we perform planned extended maintenance shutdowns at
      our
      Perry, Florida facility in two to five year intervals. Due to variability in
      the
      timing and activities associated with our planned extended maintenance
      shutdowns, it is difficult to predict the future costs of these activities.
      See
      Note 3, Change in Accounting, in the Consolidated Financial Statements for
      further discussion of this change in accounting.





23


**Financial
      Condition**





Our
      financial condition continued to improve during fiscal year 2006. We
      are
      committed to reducing our debt, strengthening our operations and continuing
      to
      improve our profitability and cash flow.





**Liquidity
      and capitalization**




We
      have
      the following major sources of financing: senior secured credit facility, senior
      notes and senior subordinated notes. Our senior secured credit facility, senior
      notes and senior subordinated notes contain various covenants. We were in
      compliance with these covenants as of June 30, 2006 and believe we will continue
      to remain in compliance for the foreseeable future. These sources of financing
      are described in detail in Note 9, Debt, to the Consolidated Financial
      Statements.




Our
      total
      debt and capital leases decreased $16.9 million to $522.1 million at June 30,
      2006 from $539.0 million at June 30, 2005. From June 30, 2004 to June 30, 2005,
      total debt decreased by $67.7 million. Our total debt as a percentage of our
      total capitalization was 64.3% at June 30, 2006 as compared to 66.7% at June
      30,
      2005 and 72.6% at June 30, 2004 **.**




On
      June
      30, 2006, we had $8.7 million of cash and cash equivalents and $62.6 million
      borrowing capacity on our revolving credit facility. The portion of this
      capacity that we could borrow will depend on our financial results and ability
      to comply with certain borrowing conditions under the revolving credit facility.
      As of June 30, 2006, our liquidity, including available borrowings and cash
      and
      cash equivalents was approximately $71.3 million. Management believes this
      is
      sufficient liquidity to meet the needs of the business. We believe we will
      continue to have positive cash flow and these borrowing conditions are not
      expected to impact our operating or investing activities, or our ability to
      service our debt obligations.




*Treasury
      stock*




Our
      Board
      of Directors has authorized the repurchase of up to 6.0 million shares of our
      common stock. Under this authorization, we will hold the repurchased shares
      as
      treasury stock and such shares will be available for general corporate purposes,
      including the funding of employee benefit and stock-related plans. In fiscal
      2006, we repurchased no shares of our common stock. Through June 30, 2006,
      we
      had repurchased a total of 5,009,300 shares under the current board authority.





***Cash
      Flow***





While
      we
      can offer no assurances, we believe that our cash flow from operations, together
      with current cash and cash equivalents, will be sufficient to fund necessary
      capital expenditures, meet operating expenses and service our debt obligations
      for the foreseeable future. Cash and cash equivalents totaled $8.7 million
      at
      June 30, 2006, compared to $9.9 million at June 30, 2005 and $27.2 million
      at
      June 30, 2004. The following table provides a summary of cash flows for the
      three years ended June 30, 2006.





*(millions)*
            
            2006
            
            2005
            
            2004Operating
                activities:Net
                income (loss)
            
            $
            2.0
            
            $
            20.2
            
            $
            (38.2
            )Noncash
                charges and credits, net
            
            
            49.3
            
            
            58.3
            
            
            72.6Changes
                in operating assets and liabilities, net
            
            
            7.4
            
            
            0.1
            
            
            31.3Net
                cash provided by operating activities
            
            
            58.7
            
            
            78.6
            
            
            65.7Investing
                activities:Purchases
                of property, plant and equipment
            
            
            (45.6
            )
            
            (45.3
            )
            
            (31.9
            )Proceeds
                from sales of assets
            
            
            1.2
            
            
            13.6
            
            
            0.3Other
                investing activities
            
            
            (0.5
            )
            
            (0.5
            )
            
            (0.6
            )Net
                cash used in investing activities
            
            
            (44.9
            )
            
            (32.2
            )
            
            (32.2
            )Financing
                activities:Net
                borrowings (payments) under lines of credit
            
            
            0.4
            
            
            0.4
            
            
            (224.0
            )Proceeds
                from debt issuances
            
            
            -
            
            
            -
            
            
            350.0Payments
                on long-term debt and other
            
            
            (16.8
            )
            
            (67.7
            )
            
            (178.3
            )Other
                financing activities, net
            
            
            0.5
            
            
            2.4
            
            
            (4.6
            )Net
                cash used in financing activities
            
            
            (15.9
            )
            
            (64.9
            )
            
            (56.9
            )Effect
                of foreign currency rate fluctuations on cash
            
            
            0.9
            
            
            1.2
            
            
            0.7Net
                decrease in cash and cash equivalents
            
            $
            (1.2
            )
            $
            (17.3
            )
            $
            (22.7
            )





24


*Cash
      provided by operating activities*





The
      $19.9
      million decrease in cash flows from operating activities in 2006 was primarily
      the result of the decrease in net income in fiscal year 2006. This decrease
      was
      partially offset by general improvements in working capital during fiscal 2006.
      Although the closure of our Glueckstadt, Germany cotton cellulose facility
      improved working capital in fiscal 2006, this improvement was partially offset
      by increased working capital requirements at our Americana, Brazil specialty
      fibers facility as we moved away from the previous tolling arrangement toward
      new market production. We believe there are still opportunities to reduce
      working capital requirements and improve cash flow during fiscal year
      2007.




The
      $12.9
      million improvement in cash flows from operating activities in 2005 was
      primarily the result of improvements in net income in fiscal 2005. Due to an
      overall reduction in working capital during fiscal 2004, there was limited
      cash
      generation ability from changes in operating assets and liabilities during
      fiscal 2005.





*Net
      cash used in investing activities*





Purchases
      of property, plant and equipment were consistent during fiscal 2006 and 2005,
      but were higher than fiscal year 2004, primarily due to expenditures related
      to
      the project to add full market capability to our Americana, Brazil cotton
      cellulose facility. The total cost of this facility improvement excluding
      capitalized interest was approximately $31 million, of which approximately
      $20
      million was spent during fiscal 2006 and $11 million was spent during fiscal
      2005. We expect further spending related to the Americana facility upgrade
      will
      be minimal. Although the Americana project is completed, we expect efficiency
      improvement and energy savings projects, maintenance capital, and environmental
      spending will result in total capital expenditures of approximately $45 million
      for fiscal 2007.





We
      expect
      to incur significant capital expenditures in the future to comply with remaining
      environmental obligations at our Perry, Florida specialty fibers facility.
      Based
      on current estimates we expect expenditures of approximately $60 million over
      8
      - 10 years, possibly beginning as early as fiscal 2007. See Note 20,
      Contingencies, to the Consolidated Financial Statements.




During
      fiscal 2005, we sold the Cork, Ireland building and equipment for net proceeds
      of $13.1 million. These proceeds offset the increase in capital expenditures
      during the year.




During
      fiscal 2004, in addition to our basic capital maintenance expenditures of
      approximately $25 million, we made expenditures at our Foley plant for a planned
      maintenance shutdown and capital expenditures at our Memphis, Tennessee facility
      to provide the capability to manufacture cotton cellulose products previously
      manufactured at our Lumberton, North Carolina facility. The low level of capital
      spending achieved during 2004 was due to an overall effort to reduce capital
      expenditures and the lack of any major construction projects during those
      years.




*Net
      cash used in financing activities*





During
      fiscal year 2006 we used cash from operations to finance the capital investments
      we made at our Americana, Brazil facility, and to redeem, at par, $15 million
      principal amount of our high interest rate, 9.25%, senior subordinated notes
      due
      in 2008. We intend to continue to redeem portions of the remaining $65 million
      of these notes ahead of their maturity in the fall of 2008. These partial
      redemptions will be limited by available cash and our capacity to make
      restricted cash payments under our other debt instruments. We are focused on
      debt reduction with an intermediate term objective of a 50/50 debt to equity
      balance in our capital structure.





During
      fiscal year 2005, we used cash from operating activities to reduce the principal
      balances on our debt and capital leases by $67.7 million. We called, at par,
      $20
      million of our high interest rate, 9.25%, senior subordinated notes due in
      2008.
      (See Note 9, Debt, to the Consolidated Financial Statements for further
      information.)





25


***Contractual
      Obligations***




The
      following table summarizes our significant contractual cash obligations as
      of
      June 30, 2006. Certain of these contractual obligations are reflected in our
      balance sheet, while others are disclosed as future obligations under accounting
      principles generally accepted in the United States.




*(millions)*
            
            Payments
                Due by Period(6)Contractual
                Obligations
            
            Total
            
            Less
                than
              1
                year
            
            1-3
                years
            
            3-5
                years
            
            Greater
                than
              5
                yearsLong-term
                obligations(1)
            
            $
            726.8
            
            $
            43.3
            
            $
            158.4
            
            $
            299.6
            
            $
            225.5Capital
                lease obligations(2)
            
            
            1.5
            
            
            0.7
            
            
            0.8
            
            
            -
            
            
            -Operating
                lease obligations(2)
            
            
            2.2
            
            
            1.4
            
            
            0.7
            
            
            0.1
            
            
            -Timber
                commitments(3)
            
            
            58.6
            
            
            13.1
            
            
            25.3
            
            
            20.2
            
            
            -Linter
                commitments(4)
            
            
            9.3
            
            
            9.3
            
            
            -
            
            
            -
            
            
            -Other
                purchase commitments(5)
            
            
            12.7
            
            
            11.0
            
            
            1.7
            
            
            -
            
            
            -Total
                contractual cash obligations
            
            $
            811.1
            
            $
            78.8
            
            $
            186.9
            
            $
            319.9
            
            $
            225.5





(1) Amounts
      include related interest payments. Interest payments for variable debt of $98.7
      million are based on the effective rate as of June 30, 2006 of 7.2%. See Note
      9,
      Debt, to the Consolidated Financial Statements for further information on
      interest rates.





(2) Capital
      lease obligations represent principal and interest payments. See Note 10,
      Leases, to the Consolidated Financial Statements for further
      information.




(3) See Note
      19, Commitments, to the Consolidated Financial Statements for further
      information.





(4) Linter
      commitments are take-or-pay contracts made in the ordinary course of business
      that usually are less than one year in length.





(5) The
      majority of other purchase commitments are take-or-pay contracts made in the
      ordinary course of business related to utilities and raw material purchases.





(6) Less
      than one year references fiscal 2007; 1-3 years references fiscal 2008 and
      2009;
      3-5 years references fiscal 2010 and 2011.





Note:
            Additionally,
                the cash flow to fund postretirement benefit obligations has an expected
                net present value of $22.5 million. The actuarially estimated annual
                benefit payments net of retiree contributions are as follows: 2007
                - $1.5
                million; 2008-2009 - $3.3 million; 2010 - 2011 - $3.4 million; and
                2012
                through 2016 - $9.2 million. These obligations are not included in
                the
                table above as the total obligation is based on the present value
                of the
                payments and would not be consistent with the contractual cash obligations
                disclosures included in the table above. See Note 15, Employee Benefit
                Plans, to the Consolidated Financial Statements for further
                information.





26


**Critical
      Accounting Policies and Estimates**





This
      discussion and analysis is based upon our consolidated financial statements.
      Our
      critical and significant accounting policies are more fully described in Note
      1,
      Accounting Policies, to our Consolidated Financial Statements. Some of our
      accounting policies require us to make significant estimates and assumptions
      about future events that affect the amounts reported in our financial statements
      and the accompanying notes. Future events and their effects cannot be determined
      with certainty. Therefore, the determination of estimates underlying our
      financial statements requires the exercise of management’s judgment. Actual
      results could differ from those estimates, and any such differences may be
      material to our financial statements. Our management exercises critical judgment
      in the application of our accounting policies in the following areas, which
      significantly affect our financial condition and results of operation.
      Management has discussed the development and selection of these critical
      accounting policies and estimates with the Audit Committee of our Board of
      Directors and with our independent auditors.





*Allowance
      for doubtful accounts*





We
      provide an allowance for receivables we believe we may not collect in full.
      Management evaluates the collectibility of accounts based on a combination
      of
      factors. In circumstances in which we are aware of a specific customer’s
      inability to meet its financial obligations (i.e., bankruptcy filings or
      substantial downgrading of credit ratings), we record a specific reserve. For
      all other customers, we recognize reserves for bad debts based on our historical
      collection experience. If circumstances change (i.e., higher than expected
      defaults or an unexpected material adverse change in a major customer’s ability
      to meet its financial obligations), our estimates of the recoverability of
      amounts due could be reduced by a material amount.





Bad
      debt
      expense for fiscal years 2006, 2005 and 2004 was $0.1 million, $1.4 million
      and
      $4.0 million, respectively. During fiscal 2004, a significant customer filed
      for
      bankruptcy protection. As a result, we recorded an increase in our estimate
      for
      bad debts of $3.3 million during fiscal 2004.





*Deferred
      income taxes and other liabilities*





Deferred
      income tax assets and liabilities are recognized based on the difference between
      the financial statement and the tax law treatment of certain items. Realization
      of certain components of deferred tax assets is dependent upon the occurrence
      of
      future events. We record a valuation allowance to reduce our net deferred tax
      assets to the amount we believe is more likely than not to be realized. These
      valuation allowances can be impacted by changes in tax laws, changes to
      statutory tax rates, and future taxable income levels and are based on our
      judgment, estimates and assumptions regarding those future events.





In
      fiscal
      2006, we increased the valuation allowances recorded against certain foreign
      and
      state net operating losses by approximately $3.8 million, since we believe
      it
      more likely than not that these assets will not result in a future tax
      benefit.





In
      the
      event we were to determine that we would not be able to realize all or a portion
      of the net deferred tax assets in the future, we would increase the valuation
      allowance through a charge to income in the period that such determination
      is
      made. Conversely, if we were to determine that we would be able to realize
      our
      deferred tax assets in the future, in excess of the net carrying amounts, we
      would decrease the recorded valuation allowance through an increase to income
      in
      the period that such determination is made.





We
      record
      our world-wide tax provision based on the tax rules and regulations in the
      various jurisdictions in which we operate. Significant managerial judgment
      is
      required in determining our effective tax rate and evaluating our tax
      positions.  Where we believe that the deduction of an item is supportable
      for income tax purposes, the item is deducted in our income tax returns. 
However, where treatment of an item is uncertain, tax contingency reserves
      are
      recorded based upon the expected most probable outcome taking into consideration
      the specific tax regulations and facts of each matter.  These reserves are
      recorded in the consolidated balance sheet in other liabilities.  We adjust
      these reserves when an identifiable event occurs that changes the most probable
      outcome.





*Depreciation*





We
      provide for depreciation on our production machinery and equipment at our cotton
      cellulose and airlaid nonwovens plants using the units-of-production
      depreciation method. Under this method, we calculate depreciation based on
      the
      expected total productive hours of the assets and, in any case, subject to
      a
      minimum level of depreciation. We review our estimate of total productive hours
      at least annually. If the estimated productive hours of these assets change
      based on changes in utilization and useful life assumptions, we adjust
      depreciation expense per unit of production accordingly. We use the
      straight-line method for determining depreciation on our other capital assets.
      During fiscal 2004, based on changes in utilization estimates, we increased
      depreciation expense by $0.2 million. We had no changes in estimates or
      assumptions during fiscal 2006 or 2005.





27


*Long-lived
      assets*





Long-lived
      assets are reviewed for impairment when circumstances indicate the carrying
      value of an asset may not be recoverable. For assets that are held and used,
      recoverability is evaluated based on the undiscounted cash flows expected to
      be
      generated by the asset. If the carrying value of the assets are determined
      not
      be recoverable, then an impairment is recognized. If impairment exists, an
      adjustment is made to write the asset down to its fair value. Estimated fair
      values are determined based on quoted market values, discounted cash flows
      or
      internal and external appraisals, as applicable. Assets to be disposed of are
      carried at the lower of carrying value or estimated net realizable value.





Based
      on
      the estimated fair values of long-lived assets, we have recorded impairment
      charges of $2.1 million, $12.3 million, and $45.9 million for years ended June
      30, 2006, 2005, and 2004, respectively. If circumstances change, our estimated
      fair values may be impacted and have a material effect on our reported financial
      position and results of operations. See Note 4, Impairment of Long-lived Assets
      and Assets Held for Sale, of our Consolidated Financial Statements for further
      information concerning impairment charges.





We
      have
      made acquisitions in the past that included a significant amount of goodwill
      and
      other intangible assets. We adopted Statement of Financial Accounting Standards
      No. 142, *Goodwill
      and Other Intangible Assets* (SFAS
      142), and, as a consequence, discontinued the amortization of goodwill. Under
      the guidelines of SFAS 142, goodwill is subject to an annual impairment test
      based on its estimated fair value. Unless circumstances otherwise dictate,
      we
      perform our annual impairment testing in the fourth quarter. We will continue
      to
      amortize other intangible assets that meet certain criteria over their useful
      lives. We utilize the present value of expected net cash flows to determine
      the
      estimated fair value of our reporting units. This present value model requires
      management to estimate future net cash flows, the timing of these cash flows
      and
      an appropriate discount rate (or weighted average cost of capital) representing
      the time value of money and the inherent risk and uncertainty of future cash
      flows. The discount rate, adjusted for inflation, is based on independently
      calculated beta risks for a composite group of companies, our target capital
      mix
      and an estimated market risk premium. The assumptions used in estimating future
      cash flows were consistent with the reporting unit’s internal planning. If the
      estimated fair value of the reporting unit exceeds its carrying amount, goodwill
      of the reporting unit is not impaired. The determination of an impairment loss
      is complex and requires that we make many assumptions and estimates. If our
      estimates of future cash flows or the underlying assumptions and estimates
      change, we may need to record impairment losses in the future. See Note 1,
      “Accounting Policies,” to the Consolidated Financial Statements for further
      information on long-lived assets.


28


**Item
      7a. Qualitative and Quantitative Disclosures About Market
      Risk**





We
      are
      exposed to market risk from changes in foreign exchange rates, interest rates,
      raw material costs and the price of certain commodities used in our production
      processes. To reduce such risks, we selectively use financial instruments.
      All
      hedging transactions are authorized and executed pursuant to clearly defined
      policies and procedures. Further, we do not enter into financial instruments
      for
      trading purposes.





The
      following risk management discussion and the estimated amounts generated from
      the sensitivity analyses are forward-looking statements of market risk, assuming
      that certain adverse market conditions occur. Actual results in the future
      may
      differ materially from those projected results due to actual developments in
      the
      global financial markets. The analysis methods used to assess and mitigate
      risks
      discussed below should not be considered projections of future events or
      losses.





A
      discussion of our accounting policies for risk management is included in Note
      1,
      Accounting Policies, in the Notes to the Consolidated Financial Statements.





***Interest
      Rates***





The
      fair
      value of our long-term public debt is based on an average of the bid and offer
      prices at year-end. The fair value of the credit facility approximates its
      carrying value due to its variable interest rate. The carrying value of other
      long-term debt approximates fair value based on our current incremental
      borrowing rates for similar types of borrowing instruments. The carrying value
      and fair value of long-term debt at June 30, 2006 were $522.1 million and $497.3
      million and at June 30, 2005 were $539.0 million and $535.6 million,
      respectively. Market risk is estimated as the potential change in fair value
      resulting from a hypothetical 100 basis point decrease in interest rates and
      would amount to $9.5 million increase in the fair value of long-term debt.





We
      had
      $98.7 million of variable rate long-term debt outstanding at June 30, 2006.
      At
      this borrowing level, a hypothetical 100 basis point increase in interest rates
      would have a $1.0 million unfavorable impact on our pre-tax earnings and cash
      flows. The primary interest rate exposures on floating rate debt are with
      respect to European interbank rates and U.S. prime rates.





***Foreign
      Currency Exchange Rates***





Foreign
      currency exposures arising from transactions include firm commitments and
      anticipated transactions denominated in a currency other than an entity’s
      functional currency. Buckeye and our subsidiaries generally enter into
      transactions denominated in their respective functional currencies. Our primary
      foreign currency exposure arises from foreign-denominated revenues and costs
      and
      their translation into U.S. dollars. The primary currencies to which we are
      exposed include the euro, Canadian dollar and the Brazilian real.





We
      generally view as long-term our investments in foreign subsidiaries with a
      functional currency other than the U.S. dollar. As a result, we do not generally
      hedge these net investments. However, we use capital structuring techniques
      to
      manage our net investment in foreign currencies as considered necessary. The
      net
      investment in foreign subsidiaries translated into dollars using the year-end
      exchange rates is $196.9 million and $185.1 million at June 30, 2006 and 2005,
      respectively. The potential foreign currency translation loss from investment
      in
      foreign subsidiaries resulting from a hypothetical 10% adverse change in quoted
      foreign currency exchange rates amounts to approximately $17.9 million at June
      30, 2006. This change would be reflected in the equity section of our
      consolidated balance sheet in accumulated other comprehensive loss. The primary
      foreign currency exposures on our long-term investments are with the euro,
      Canadian dollar and the Brazilian real.





***Cost
      of Raw Materials***





Amounts
      paid by us for wood, cotton fiber and fluff pulp represent the largest component
      of our variable costs of production. The availability and cost of these
      materials are subject to market fluctuations caused by factors beyond our
      control, including weather conditions. Significant decreases in availability
      or
      increases in the cost of wood or cotton fiber to the extent not reflected in
      prices for our products, could materially and adversely affect our business,
      results of operations and financial condition.





***Commodities***




We
      are
      dependent on commodities in our production process. Natural gas, electricity,
      fuel oil, caustic and other chemicals are just some of the commodities that
      our
      processes rely upon. Exposure to these commodities can have a significant impact
      on our operating performance.





In
      order
      to minimize market exposure, we may use forward contracts to reduce price
      fluctuations in a desired percentage of forecasted purchases of fossil fuels
      over a period of generally less than one year. There were no fossil fuel
      contracts outstanding at June 30, 2006 or 2005 requiring fair value treatment.


29





Exposure
      to commodity products also creates volatility in pricing. If our research and
      development efforts do not result in the commercialization of new, proprietary
      products, we will continue to have significant exposure to fluff pulp and other
      commodity products, which could result in volatility in sales prices and
      profits.





***Industry
      Cyclicality***





The
      demand and pricing of our products, particularly fluff pulp, are influenced
      by
      the much larger market for papermaking pulps which is highly cyclical. The
      markets for most cellulose-based products are sensitive to both changes in
      general global economic conditions and to changes in industry capacity. Both
      of
      these factors are beyond our control. The price of these products can fluctuate
      significantly when supply and demand become imbalanced for any reason. Financial
      performance can be heavily influenced by these pricing fluctuations and the
      general cyclicality of the industries in which we compete. It is not certain
      that current prices will be maintained, that any price increases will be
      achieved, or that industry capacity utilization will reach favorable levels.
      The
      demand, cost and prices for our products may thus fluctuate substantially in
      the
      future and downturns in market conditions could have a material adverse effect
      on our business, results of operations and financial condition.





***Contingencies***





Our
      operations are subject to extensive general and industry-specific federal,
      state, local and foreign environmental laws and regulations. We devote
      significant resources to maintaining compliance with such requirements. We
      expect that, due to the nature of our operations, we will be subject to
      increasingly stringent environmental requirements (including standards
      applicable to wastewater discharges and air emissions) and will continue to
      incur substantial costs to comply with such requirements. Given the
      uncertainties associated with predicting the scope of future requirements,
      there
      can be no assurance that we will not in the future incur material environmental
      compliance costs or liabilities. For additional information on environmental
      matters, see Note 20 to the Consolidated Financial Statements.





**Forward-Looking
      Statements**





Except
      for the historical information contained herein, the matters discussed in this
      Annual Report are forward-looking statements that involve risks and
      uncertainties, including, but not limited to, economic, competitive,
      governmental and technological factors affecting our operations, markets,
      products, services and prices and other factors. The forward-looking statements
      included in this document are only made as of date of this document and we
      undertake no obligation to publicly release the result of any revisions to
      these
      forward-looking statements to reflect events or circumstances after the date
      hereof or to reflect the occurrence of unanticipated events.





**Item
      8. Financial Statements and Supplementary Data**





See
      Index
      to Financial Statements on page F-1.




**Item
      9. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**




We
      had no
      changes in or disagreements with Ernst & Young LLP, our independent
      auditors.




**Item
      9a. Controls and Procedures**





***Management’s
      Evaluation of Disclosure Controls and Procedures***




Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we evaluated the
      effectiveness of our disclosure controls and procedures in ensuring that the
      information required to be disclosed in our filings under the Securities
      Exchange Act of 1934 is recorded, processed, summarized and reported within
      the
      time periods specified in the Securities and Exchange Commission’s
      rules and forms, including ensuring that such information is accumulated
      and communicated to Buckeye management as appropriate to allow timely decisions
      regarding required disclosure. Based on such evaluation, our principal executive
      and financial officers have concluded that such disclosure controls and
      procedures were effective, as of June 30, 2006 (the end of the period covered
      by
      this Annual Report on Form 10-K).





***Assessment
      of Internal Control Over Financial Reporting***




Management’s
      report on our internal control over financial reporting is presented on
      page F-3 of this Annual Report on Form 10-K. The report of Ernst &
Young LLP with respect to management’s assessment of internal control over
      financial reporting is presented on page F-4 of this Annual Report on
      Form 10-K.




30


***Changes
      in Internal Control Over Financial Reporting***




During
      our fiscal quarter ended June 30, 2006, no change occurred in our internal
      control over financial reporting that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting.




**Item
      9b. Other Information**




None.







31


**PART
      III**




**Item
      10. Directors and Executive Officers of the Registrant**





*Directors
      and Executive Officers*





Information
      regarding members of the Board of Directors will be presented in our 2006 Annual
      Proxy Statement for the 2006 annual meeting of stockholders and is incorporated
      herein by reference.





**Executive
      Officers of the Registrant**




The
      names, ages and positions held by our executive officers on August 25, 2006
      are:




Name
            Age
            Position
            Elected
                to Present PositionJohn
                B. Crowe
            59
            Chairman
                of the Board, Chief Executive Officer and Director
            July
                2006Kristopher
                J. Matula
            43
            President,
                Chief Operating Officer
            July
                2006Charles
                S. Aiken
            56
            Sr.
                Vice President, Manufacturing
            October
                2003Jeffery
                T. Cook
            44
            Sr.
                Vice President, Marketing
            February
                2006Sheila
                Jordan Cunningham
            54
            Sr.
                Vice President, General Counsel and Secretary
            April
                2000Steven
                G. Dean
            50
            Vice
                President and Chief Financial Officer
            July
                2006Douglas
                L. Dowdell
            48
            Sr.
                Vice President, Specialty Fibers
            February
                2006William
                M. Handel
            60
            Sr.
                Vice President, Lean Enterprise
            February
                2006Paul
                N. Horne
            51
            Sr.
                Vice President, Product and Market Development
            February
                2006





**John
      B. Crowe**


*Chairman
      of the Board, Chief Executive Officer and Director*


Mr.
      Crowe
      has served as Chairman of the Board and Chief Executive Officer since July
      1,
      2006. He served as President and Chief Operating Officer from April 2003 to
      July
      2006. Mr. Crowe was elected as a director of Buckeye in August 2004. He served
      as Senior Vice President, Wood Cellulose from January 2001 to April 2003. He
      served as Vice President, Wood Cellulose Manufacturing from January 1998 to
      January 2001. Prior to joining the Company, he was Executive Vice
      President/General Manager of Alabama River Pulp and Alabama Pine Pulp
      Operations, a division of Parsons and Whittemore, Inc. and was Vice President
      and Site Manager of Flint River Operations, a subsidiary of Weyerhauser Company.
      From 1979 to 1992, he was an employee of Procter & Gamble.





**Kristopher
      J. Matula**


*President,
      Chief Operating Officer*


Mr.
      Matula has served as President and Chief Operating Officer since July 1, 2006.
      He served as Executive Vice President and Chief Financial Officer from October
      2003 to July 2006. Mr. Matula served as Senior Vice President, Nonwovens and
      Corporate Strategy from April 2003 to October 2003. He served as Senior Vice
      President, Nonwovens from January 2001 to April 2003. He served as Senior Vice
      President, Commercial - Absorbent Products from July 1997 to January 2001 and
      as
      Vice President, Corporate Strategy from April 1996 to July 1997. Prior to
      joining Buckeye in 1994, he held various positions with Procter & Gamble and
      General Electric.





**Charles
      S. Aiken**


*Senior
      Vice President, Manufacturing*


Mr.
      Aiken
      has served as Senior Vice President, Manufacturing since October 1, 2003. He
      served as Senior Vice President, Nonwovens Manufacturing from April 2000 to
      October 2003. He served as Vice President, Business Systems from April 1998
      to
      April 2000 and as Vice President, Foley Plant from June 1995 to April 1998.
      He
      was an employee of Procter & Gamble from 1977 to March 1993.





**Jeffery
      T. Cook**


*Senior
      Vice President, Marketing*


Mr.
      Cook
      has served as Senior Vice President, Marketing since February 1, 2006. 
 He served as Senior Vice President, Product and Market Development
      from February 2005 to February 2006. Mr. Cook served as Vice President, Product
      and Market Development from July 2003 to February 2005. He served as Vice
      President of Research and Development, Wood Cellulose from August 1999 to July
      2003. He was an employee of Procter and Gamble from 1988 to 1998.





**Sheila
      Jordan Cunningham**


*Senior
      Vice President, General Counsel and Secretary*


Ms.
      Cunningham has served as Senior Vice President, General Counsel and Secretary
      since April 2000. She served as Vice President, General Counsel and Secretary
      from April 1998 to April 2000. She served as Assistant General Counsel from
      March 1997 and as Secretary from July 1997 to April 1998. Prior to joining
      the
      Company, she was a partner in the law firm of Baker, Donelson, Bearman &
Caldwell from 1988 to March 1997.


32


**Steven
      G. Dean**


*Vice
      President, Chief Financial Officer*


Mr.
      Dean
      has served as Vice President and Chief Financial Officer since July 1, 2006.
      He
      served as Vice President and Controller from February 2006 to July 2006. Mr.
      Dean
      served as Company Controller from December 2005 to February 2006. Previously,
      he
      served as Controller for Buckeye's Specialty Fibers Division from December
      2004
      to November 2005 and Controller for Buckeye's Nonwovens Division from August
      2001 to November 2004. Prior to joining Buckeye in 1999, he held various
      financial management positions with Thomas & Betts and
      Hewlett-Packard.





**Douglas
      L. Dowdell**


*Senior
      Vice President, Specialty Fibers*


Mr.
      Dowdell has served as Senior Vice President, Specialty Fibers since February
      1,
      2006.  He served as Senior Vice President, Nonwovens from February 2005 to
      February 2006. Mr. Dowdell served as Vice President, Nonwovens from October
      2003
      to February 2005. He served as Vice President, Absorbent Wood Fiber Sales from
      February 2002 to October 2003. He served as Vice President, Nonwovens Business
      Development from February 2001 to February 2002. He served as Vice President,
      Absorbent Products Business Development from August 2000 to February 2001.
      Prior
      to August 2000 he held several positions in the Company including: Manager,
      Absorbent Fiber Sales; Manager, Business Development; and Manager, Wood
      Procurement. He was an employee of Procter & Gamble from 1988 to March
      1993.





**William
      M. Handel**


*Senior
      Vice President, Lean Enterprise*


Mr.
      Handel has served as Senior Vice President, Lean Enterprise since February
      1,
      2006.  He served as Senior Vice President, Human Resources from April 2000
      to February 2006. Mr. Handel served as Vice President, Human Resources from
      November 1995 to April 2000 and as Human Resources Manager from March 1993
      to
      November 1995. He was an employee of Procter & Gamble from 1974 to March
      1993.





**Paul
      N. Horne**


*Senior
      Vice President, Product and Market Development*


Mr.
      Horne
      has served as Senior Vice President, Product and Market Development since
      February 1, 2006.  He served as Senior Vice President, Cotton Cellulose
      from January 2001 to February 2006. Mr. Horne served as Senior Vice President,
      Commercial - Specialty Cellulose from July 1997 to January 2001 and as Vice
      President, North and South American Sales from October 1995 to July 1997. He
      was
      an employee of Procter & Gamble from 1982 to March 1993.





*Code
      of Business Conduct & Ethics*





We
      have a
      Code of Business Conduct & Ethics, which applies to all of our
      directors, officers and employees, including our principal executive officer
      and
      senior financial officers. Our Code of Business Conduct & Ethics is
      available in the corporate governance section of the investor relations
      page of our website, *www.bkitech.com* .
      In
      addition, we intend to post in the corporate governance section of the investor
      relations page of our website information regarding any amendment to, or
      waiver from, the provisions of our Code of Business Conduct & Ethics to
      the extent such disclosure is required. The information on our website, however,
      does not form part of this Report.




**Item
      11. Executive Compensation**





Information
      relating to this item will be included in our 2006 Annual Proxy Statement and
      is
      incorporated herein by reference.





**Item
      12. Security Ownership of Certain Beneficial Owners and
      Management**





Information
      relating to this item will be included under the captions “Buckeye Stock
      Ownership”, “Executive Compensation” and “Equity Compensation Plan Information”
in our 2006 Annual Proxy Statement and is incorporated herein by
      reference.





**Item
      13. Certain Relationships and Related Transactions**





Information
      relating to this item will be included in our 2006 Annual Proxy Statement and
      is
      incorporated herein by reference.


**Item
      14. Principal Accountant Fees and Services**




Information
      regarding principal accountant fees and services will be included in our 2006
      Annual Proxy Statement and is incorporated by reference herein.










33


**PART
      IV**




**Item
      15. Exhibits and Financial Statement Schedules**




(a)
            (1)
            Financial
                Statements-
                See Index to Consolidated Financial Statements and Schedule on page
                F-1.(2)
            Financial
                Statement Schedules-
                See Index to Consolidated Financial Statements and Schedule on page
                F-1.
                All other financial statement schedules are omitted as the information
                is
                not required or because the required information is presented in
                the
                financial statements or the notes thereto.(3)
            Listing
                of Exhibits. See exhibits listed under Item 15
                (b).





Exhibit
      15 (b). Exhibits required by Item 601 of Regulation S-K





Exhibit
            
            Incorporation
                by Reference orNumbers
            Description
            Filed
                Herewith3.1
            Second
                Amended and Restated Certificate of Incorporation
            Exhibit
                3.1 to Form 10-Q for quarter ended December 31, 19973.1(a)
            Articles
                of Amendment to the Second Amended and Restated Certificate of
                Incorporation
            Exhibit
                3.1(a) to Form S-4 file no. 333-59267, filed on July 16,
                19983.2
            Amended
                and Restated By-laws
            Exhibit
                3.2 to Form 10-Q dated March 31, 20064.1
            First
                Amendment to the Rights Agreement
            Form
                8-A to Form 10-K dated June 30, 19974.2
            Indenture
                for 9 1⁄4% Senior Subordinated Notes due 2008, dated July 12,
                1996
            Exhibit
                4.2 to Form S-3 file no. 333-05139 filed on June 4,
                19964.3
            Indenture
                for 8% Senior Subordinated Notes due 2010, dated June 11,
                1998
            Exhibit
                4.3 to Form S-4 file no. 333-59267, filed on July 16,
                19984.4
            Indenture
                for 8 1⁄2%Senior Notes due 2013, dated September 22, 2003
            Exhibit
                4.4 to Form S-4, file no. 333-110091, filed on October 30,
                200310.1
            Amended
                and Restated 1995 Management Stock Option Plan
            Exhibit
                10.1 to Form 10-K dated June 30, 199810.2
            Second
                Amended and Restated 1995 Incentive and Nonqualified Stock Option
                Plan for
                Management Employees
            Exhibit
                10.2 to Form S-4 file no. 333-59267, filed on July 16,
                199810.3
            Form
                of Management Stock Option Subscription Agreement
            Exhibit
                10.3 to Form 10-K dated June 30, 199810.4
            Form
                of Stock Option Subscription Agreement
            Exhibit
                10.4 to Form 10-K dated June 30, 199810.5
            Amended
                and Restated Formula Plan for Non-Employee Directors
            Exhibit
                10.1 to Form 10-Q dated December 31, 200010.6
            Amendment
                No. 1 to Timberlands Agreement dated January 1, 1999 by and Between
                Buckeye Florida, Limited Partnership and Foley Timber and Land Company.
                Certain portions of the Agreement have been omitted pursuant to an
                Application for Confidential Treatment dated October 30,
                1995
            Exhibit
                10.1 to Form 10-Q/A dated March 31, 199910.7
            Amended
                and Restated Credit Agreement dated November 5, 2003 among the Registrant;
                Fleet National Bank; Fleet Securities Inc.; Citigroup Global Markets
                Inc.;
                UBS Security LLC; Citibank N.A.; UBS, AG Stanford Branch; and the
                other
                lenders party thereto
            Exhibit
                10.1 to Form 10-Q dated September 30, 200310.8
            Amended
                and Restated Credit Agreement Amendment No. 1, dated March 15,
                2005
            Exhibit
                10.1 to Form 10-Q dated March 31, 200510.9
            Form
                of Change in Control Agreement, dated August 8, 2006
            Exhibit
                10.1 to Form 8-K dated August 11, 200612.1
            Computation
                of Ratio of Earnings to Fixed Charges
            Filed
                herewith21.1
            Subsidiaries
            Filed
                herewith23.1
            Consent
                of Ernst & Young LLP
            Filed
                herewith31.1
            Section
                302 Certification of Chief Executive Officer
            Filed
                herewith31.2
            Section
                302 Certification of Chief Financial Officer
            Filed
                herewith32.1
            Section
                1350 Certification of Chief Executive Officer
            Filed
                herewith32.2
            Section
                1350 Certification of Chief Financial Officer
            Filed
                herewith





34


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant


has
      duly
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.





Buckeye
      Technologies Inc.




By:
            /s/
                John B. CroweJohn
                B. Crowe, Director, Chairman of the Board and Chief Executive
                OfficerDate:
            August
                31, 2006





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





By:
            /s/
                  John B. CroweJohn
                B. Crowe, Director, Chairman of the Board and Chief Executive
                OfficerDate:
            August
                31, 2006





By:
            /s/
                David B. FerraroDavid
                B. Ferraro, DirectorDate:
            August
                31, 2006





By:
            /s/
                Katherine Buckman GibsonKatherine
                Buckman Gibson, DirectorDate:
            August
                31, 2006




By:
            /s/
                Henry F. FrigonHenry
                F. Frigon, DirectorDate:
            August
                31, 2006





By:
            /s/
                  Red CavaneyRed
                Cavaney, DirectorDate:
            August
                31, 2006





By:
            /s/
                Lewis E. HollandLewis
                E. Holland, DirectorDate:
            August
                31, 2006




By:
            /s/
                Steven G. DeanSteven
                G. Dean, Vice President and Chief Financial OfficerDate:
            August
                31, 2006





By:
            /s/
                Elizabeth J. WelterElizabeth
                J. Welter, Vice President and Chief Accounting OfficerDate:
            August
                31, 2006







35





**BUCKEYE
      TECHNOLOGIES INC.**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE**





**PAGE**Report
                of Management
            F-2Management’s
                Report on Internal Control Over Financial Reporting
            F-3Reports
                of Independent Registered Public Accounting Firm
            F-4Financial
                Statements as of June 30, 2006, June 30, 2005 and for the Three Years
                Ended June 30, 2006:Consolidated
                Statements of Operations
            F-6Consolidated
                Balance Sheets
            F-7Consolidated
                Statements of Stockholders’ Equity
            F-8Consolidated
                Statements of Cash Flows
            F-9Notes
                to Consolidated Financial Statements
            F-10Schedule:Report
                of Independent Registered Public Accounting Firm, on Financial Statement
                Schedule
            F-37Schedule
                II - Valuation and Qualifying Accounts
            F-38








F-1




**Report
      of Management**





The
      management of Buckeye Technologies Inc. is committed to providing financial
      reports that are complete, accurate and easily understood.





The
      consolidated financial statements and financial information included in this
      report have been prepared in accordance with accounting principles generally
      accepted in the United States and in the opinion of management fairly and
      completely present the Company’s financial results. Our independent auditor,
      Ernst & Young LLP, has examined our financial statements and expressed an
      unqualified opinion.





Ensuring
      the accuracy of financial statements starts at the top of the Company. Our
      Board
      of Directors provides oversight as the representative of the stockholders.
      Our
      Audit Committee, consisting entirely of independent Directors, meets regularly
      with management, internal audit and the independent auditors to review our
      financial reports.





The
      Company’s senior management, our corporate leadership team, is actively involved
      in all aspects of the business. This group understands key strategies and
      monitors financial results. We maintain a system of internal control which
      provides reasonable assurance that transactions are accurately recorded and
      assets are safeguarded. All of the Company’s officers and financial executives
      adhere to the Company’s Code of Business Conduct and Ethics and provide written
      confirmation of their compliance annually.





Our
      Company was built on a foundation of integrity and honesty. We take
      responsibility for the quality and accuracy of our financial
      reporting.





/s/
                John B. Crowe
            /s/
                Kristopher J. Matula
            /s/
                Steven G. DeanJohn
                B. Crowe
            Kristopher
                J. Matula
            Steven
                G. DeanChairman
                of the Board and
            President
                and
            Vice
                President andChief
                Executive Officer
            Chief
                Operating Officer
            Chief
                Financial Officer








F-2








**Management’s
      Report on Internal Control Over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
      under the Securities Exchange Act of 1934, as amended). Our internal control
      over financial reporting includes, among other things: defined policies and
      procedures for conducting and governing our business, a written Code of Business
      Conduct and Ethics adopted by our Board of Directors and applicable to all
      directors and all officers and employees of Buckeye and our subsidiaries,
      sophisticated information systems for processing transactions and a properly
      staffed and professional internal audit department. Mechanisms are in place
      to
      monitor the effectiveness of our internal control over financial reporting
      and
      actions are taken to correct identified deficiencies. Our procedures for
      financial reporting include the active involvement of senior management, our
      Audit Committee and a staff of highly qualified financial and legal
      professionals.





Management,
      with the participation of our principal executive and financial officers,
      assessed our internal control over financial reporting as of June 30, 2006,
      the
      end of our fiscal year. Management based its assessment on criteria established
      in Internal Control—Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (the COSO criteria).





Based
      on
      this assessment, management has concluded that our internal control over
      financial reporting was effective as of June 30, 2006.





Our
      independent registered public accounting firm, Ernst & Young LLP,
      audited management’s assessment and the effectiveness of our internal control
      over financial reporting. Ernst & Young has issued their report
      concurring with management’s assessment, which is included in this Annual Report
      on Form 10 - K.





/s/
                John B. Crowe
            /s/
                Steven G. DeanJohn
                B. Crowe
            Steven
                G. DeanChair
                of the Board and
            Vice
                President andChief
                Executive Officer
            Chief
                Financial Officer







F-3




**Report
      of Independent Registered Public Accounting Firm**





The
      Board
      of Directors and Stockholders of Buckeye Technologies Inc.





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control over Financial Reporting, that Buckeye Technologies
      Inc. maintained effective internal control over financial reporting as of June
      30, 2006, based on criteria established in Internal Control—Integrated Framework
      issued by the Committee of Sponsoring Organizations of the Treadway Commission
      (the COSO criteria). Buckeye Technologies Inc.’s **** management
      is responsible for maintaining effective internal control over financial
      reporting and for its assessment of the effectiveness of internal control over
      financial reporting. Our responsibility is to express an opinion on management’s
      assessment and an opinion on the effectiveness of the company’s internal control
      over financial reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that Buckeye Technologies Inc. maintained
      effective internal control over financial reporting as of June 30, 2006, is
      fairly stated, in all material respects, based on the COSO criteria. Also,
      in
      our opinion, Buckeye Technologies Inc. maintained, in all material respects,
      effective internal control over financial reporting as of June 30, 2006, based
      on the COSO criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Buckeye
      Technologies Inc. as of June 30, 2006 and 2005, and the related consolidated
      statements of operations, stockholders’ equity, and cash flows for each of the
      three years in the period ended June 30, 2006 of Buckeye Technologies Inc.
      and
      our report dated August 31, 2006 expressed an unqualified opinion
      thereon.










Memphis,
      Tennessee        /s/
      Ernst
& Young LLP


August
      31, 2006








F-4




**Report
      of Independent Registered Public Accounting Firm**





The
      Board
      of Directors and Stockholders of Buckeye Technologies Inc.





We
      have
      audited the accompanying consolidated balance sheets of Buckeye Technologies
      Inc. as of June 30, 2006 and 2005 and the related consolidated statements of
      operations, stockholders' equity, and cash flows for each of the three years
      in
      the period ended June 30, 2006. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Buckeye Technologies
      Inc. as of June 30, 2006 and 2005, and the consolidated results of its
      operations and its cash flows for each of the three years in the period ended
      June 30, 2006, in conformity with U. S. generally accepted accounting
      principles.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Buckeye Technologies
      Inc.’s internal control over financial reporting as of June 30, 2006, based on
      criteria established in Internal Control-Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission and our report
      dated August 31, 2006 expressed an unqualified opinion thereon.





As
      discussed in Note 3 to the consolidated financial statements, the Company
      changed its method of accounting for planned maintenance activities in
      2004.










Memphis,
      Tennessee        /s/
      Ernst
& Young LLP


August
      31, 2006





F-5




**Consolidated
        Statements of Operations**
 (In
        thousands, except per share data)
 **Year
                  Ended June 30****2006**
              
              **2005**
              
              **2004****Net
                  sales**
              
              $
              728,485
              
              $
              712,782
              
              $
              656,913Cost
                  of goods sold
              
              
              628,687
              
              
              592,726
              
              
              579,472Gross
                  margin
              
              
              99,798
              
              
              120,056
              
              
              77,441Selling,
                  research and administrative expenses
              
              
              47,762
              
              
              43,270
              
              
              42,423Amortization
                  of intangibles and other
              
              
              2,000
              
              
              2,280
              
              
              2,244Impairment
                  of long-lived assets
              
              
              2,090
              
              
              12,326
              
              
              45,908Restructuring
                  costs
              
              
              3,526
              
              
              4,579
              
              
              5,945**Operating
                  income (loss)**
              
              
              44,420
              
              
              57,601
              
              
              (19,079
              )Other
                  income (expense):Interest
                  income
              
              
              635
              
              
              943
              
              
              923Interest
                  expense and amortization of debt costs
              
              
              (43,868
              )
              
              (45,142
              )
              
              (47,284
              )Loss
                  on early extinguishment of debt
              
              
              (151
              )
              
              (242
              )
              
              (4,940
              )Gain
                  on sale of assets held for sale
              
              
              -
              
              
              7,203
              
              
              -Foreign
                  exchange and other
              
              
              (352
              )
              
              (649
              )
              
              273Income
                  (loss) before income taxes and cumulative effect of change in
                accounting
              
              
              684
              
              
              19,714
              
              
              (70,107
              )Income
                  tax benefit
              
              
              (1,296
              )
              
              (490
              )
              
              (26,197
              )Income
                  (loss) before cumulative effect of change in accounting
              
              
              1,980
              
              
              20,204
              
              
              (43,910
              )Cumulative
                  effect of change in accounting (net of tax of $3,359)
              
              
              -
              
              
              -
              
              
              5,720**Net
                  income (loss)**
              
              $
              1,980
              
              $
              20,204
              
              $
              (38,190
              )**Earnings
                  (loss) per share before cumulative effect of change
                  in**
                **accounting**Basic
              
              $
              0.05
              
              $
              0.54
              
              $
              (1.18
              )Diluted
              
              $
              0.05
              
              $
              0.54
              
              $
              (1.18
              )**Cumulative
                  effect of change in accounting per share**Basic
              
              $
              -
              
              $
              -
              
              $
              0.15Diluted
              
              $
              -
              
              $
              -
              
              $
              0.15**Earnings
                  (loss) per share**Basic
              
              $
              0.05
              
              $
              0.54
              
              $
              (1.03
              )Diluted
              
              $
              0.05
              
              $
              0.54
              
              $
              (1.03
              )**Weighted
                  average shares for earnings per share**Basic
              
              
              
              37,622
              
              
              37,447
              
              37,075Diluted
              
              
              37,658
              
              
              37,598
              
              37,075




See
      accompanying notes.


F-6


**Consolidated
      Balance Sheets**




(In
      thousands, except share data)


**June
                30****2006**
            
            **2005****Assets****Current
                assets:**Cash
                and cash equivalents
            
            $
            8,734
            
            $
            $
                9,926Accounts
                receivable - trade, net of allowance for doubtful accounts of $1,904
                in
                2006 and $5,602 in 2005
            
            
            110,218
            
            
            116,006Accounts
                receivable - other
            
            
            3,880
            
            
            2,209Inventories
            
            
            98,567
            
            
            107,895Deferred
                income taxes
            
            
            4,176
            
            
            3,584Prepaid
                expenses and other
            
            
            4,297
            
            
            6,884**Total
                current assets**
            
            
            229,872
            
            
            246,504Property,
                plant and equipment, net
            
            
            531,898
            
            
            525,931Goodwill
            
            
            149,106
            
            
            139,430Intellectual
                property and other, net
            
            
            38,677
            
            
            37,872**Total
                assets**
            
            $
            949,553
            
            $
            $949,737**Liabilities
                and stockholders’ equity****Current
                liabilities:**Trade
                accounts payable
            
            $
            32,973
            
            $
            37,226Accrued
                expenses
            
            
            48,416
            
            
            48,401Current
                portion of capital lease obligation
            
            
            627
            
            
            685Current
                portion of long-term debt
            
            
            1,294
            
            
            1,376**Total
                current liabilities**
            
            
            83,310
            
            
            87,688Long-term
                debt
            
            
            519,414
            
            
            535,539Accrued
                postretirement benefits
            
            
            19,367
            
            
            19,206Deferred
                income taxes
            
            
            35,686
            
            
            34,660Capital
                lease obligation
            
            
            755
            
            
            1,382Other
                liabilities
            
            
            1,304
            
            
            1,673Commitments
                and contingencies (Notes 10, 19, and 20)**Stockholders’
                equity:**Preferred
                stock, $.01 par value; 10,000,000 shares authorized; none issued
                or
                outstanding
            
            
            -
            
            
            -Common
                stock, $.01 par value; 100,000,000 shares authorized; 43,142,770
                shares
                issued; 37,901,334 and 37,586,409 shares outstanding at June 30,
                2006 and
                2005, respectively
            
            
            431
            
            
            431Additional
                paid-in capital
            
            
            49,274
            
            
            52,446Accumulated
                other comprehensive income
            
            
            33,819
            
            
            16,791Retained
                earnings
            
            
            277,733
            
            
            275,753Treasury
                shares, 5,241,436 and 5,556,361 shares at June 30, 2006 and 2005,
                respectively
            
            
            (71,540
            )
            
            (75,832
            )**Total
                stockholders’ equity**
            
            
            289,717
            
            
            269,589**Total
                liabilities and stockholders’ equity**
            
            $
            949,553
            
            $
            949,737




See
      accompanying notes.





F-7


**Consolidated
      Statements of Stockholders' Equity**


(In
      thousands, except share data)


Common
              stock
            
            Additional
              paid-in
              capital
            
            Accumulated
              other
              comprehensive
              income
                (loss)
            
            Retained
              Earnings
            
            Treasury
              shares
            
            Total**Balance
                at June 30, 2003**
            
            $
            431
            
            $
            55,235
            
            $
            (3,410
            )
            $
            293,739
            
            $
            (84,111
            )
            $
            261,884Comprehensive
                income (loss):Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (38,190
            )
            
            -
            
            
            (38,190
            )Other
                comprehensive income:Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            2,841
            
            
            -
            
            
            -
            
            
            2,841Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (35,349
            )Issuance
                of 326,219 shares of common stock
            
            
            -
            
            
            (1,782
            )
            
            -
            
            
            -
            
            
            4,416
            
            
            2,634Tax
                benefit from stock-based awards
            
            
            -
            
            
            105
            
            
            -
            
            
            -
            
            
            -
            
            
            105Termination
                of restricted stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5
            )
            
            (5
            )Amortization
                of deferred stock compensation
            
            
            -
            
            
            36
            
            
            -
            
            
            -
            
            
            -
            
            
            36Directors
                stock compensation (4,469 shares)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            40
            
            
            40**Balance
                at June 30, 2004**
            
            $
            431
            
            $
            53,594
            
            $
            (569
            )
            $
            255,549
            
            $
            (79,660
            )
            $
            229,345Comprehensive
                income (loss):Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            20,204
            
            
            -
            
            
            20,204Other
                comprehensive income:Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            17,360
            
            
            -
            
            
            -
            
            
            17,360Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37,564Issuance
                of 279,698 shares of common stock
            
            
            -
            
            
            (1,470
            )
            
            -
            
            
            -
            
            
            3,791
            
            
            2,321Tax
                benefit from stock-based awards
            
            
            -
            
            
            245
            
            
            -
            
            
            -
            
            
            -
            
            
            245Termination
                of restricted stock
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            (3
            )
            
            (3
            )Amortization
                of deferred stock compensation
            
            
            -
            
            
            77
            
            
            -
            
            
            -
            
            
            -
            
            
            77Directors
                stock compensation (3,439 shares)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            40
            
            
            40**Balance
                at June 30, 2005**
            
            $
            431
            
            $
            52,446
            
            $
            16,791
            
            $
            275,753
            
            $
            (75,832
            )
            $
            269,589Comprehensive
                income (loss):Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            1,980
            
            
            -
            
            
            1,980Other
                comprehensive income:Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            17,028
            
            
            -
            
            
            -
            
            
            17,028Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            19,008Issuance
                of 313,670 shares of common stock
            
            
            -
            
            
            (3,733
            )
            
            -
            
            
            -
            
            
            4,282
            
            
            549Stock-based
                compensation expense
            
            
            -
            
            
            561
            
            
            -
            
            
            -
            
            
            -
            
            
            561Directors
                stock compensation (1,255 shares)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10
            
            
            10**Balance
                at June 30, 2006**
            
            $
            431
            
            $
            49,274
            
            $
            33,819
            
            $
            277,733
            
            $
            (71,540
            )
            $
            289,717See
                accompanying notes.











F-8





**Consolidated
      Statements of Cash Flows**


(In
      thousands)


**Year
                Ended June 30****2006**
            
            **2005**
            
            **2004****Operating
                activities**Net
                income (loss)
            
            $
            1,980
            
            $
            $20,204
            
            $
            (38,190
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Cumulative
                effect of change in accounting
            
            
            -
            
            
            -
            
            
            (5,720
            )Impairment
                of long-lived assets
            
            
            2,090
            
            
            12,326
            
            
            45,908Depreciation
                and depletion
            
            
            46,903
            
            
            45,964
            
            
            45,675Amortization
            
            
            3,336
            
            
            3,477
            
            
            4,227Loss
                on early extinguishment of debt
            
            
            151
            
            
            242
            
            
            4,940Deferred
                income taxes
            
            
            (5,464
            )
            
            4,510
            
            
            (27,340
            )Non-cash
                tax benefit
            
            
            -
            
            
            (5,481
            )
            
            -Gain
                on sale of assets held for sale
            
            
            -
            
            
            (7,203
            )
            
            -Provision
                for bad debts
            
            
            123
            
            
            1,372
            
            
            4,010Other
            
            
            2,192
            
            
            3,150
            
            
            867Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            8,535
            
            
            (5,971
            )
            
            11,716Inventories
            
            
            10,900
            
            
            (1,504
            )
            
            29,838Other
                assets
            
            
            (5,954
            )
            
            463
            
            
            (2,301
            )Accounts
                payable and other current liabilities
            
            
            (6,071
            )
            
            7,072
            
            
            (7,974
            )**Net
                cash provided by operating activities**
            
            
            58,721
            
            
            78,621
            
            
            65,656**Investing
                activities**Purchases
                of property, plant and equipment
            
            
            (45,591
            )
            
            (45,329
            )
            
            (31,871
            )Proceeds
                from sales of assets
            
            
            1,163
            
            
            13,648
            
            
            309Other
            
            
            (467
            )
            
            (567
            )
            
            (683
            )**Net
                cash used in investing activities**
            
            
            (44,895
            )
            
            (32,248
            )
            
            (32,245
            )**Financing
                activities**Net
                borrowings (payments) under revolving line of credit
            
            
            350
            
            
            400
            
            
            (224,026
            )Issuance
                of long-term debt
            
            
            -
            
            
            -
            
            
            350,000Payments
                on long-term debt and capital lease obligations
            
            
            (16,813
            )
            
            (67,758
            )
            
            (178,333
            )Payments
                for debt issuance costs
            
            
            -
            
            
            (5
            )
            
            (9,070
            )Payments
                related to early extinguishment of debt
            
            
            -
            
            
            -
            
            
            (2,115
            )Proceeds
                from termination of swap
            
            
            -
            
            
            -
            
            
            4,000Net
                proceeds from sale of equity interests
            
            
            549
            
            
            2,468
            
            
            2,667**Net
                cash used in financing activities**
            
            
            (15,914
            )
            
            (64,895
            )
            
            (56,877
            )**Effect
                of foreign currency rate fluctuations on cash**
            
            
            896
            
            
            1,213
            
            
            724**Decrease
                in cash and cash equivalents**
            
            
            (1,192
            )
            
            (17,309
            )
            
            (22,742
            )**Cash
                and cash equivalents at beginning of year**
            
            
            9,926
            
            
            27,235
            
            
            49,977**Cash
                and cash equivalents at end of year**
            
            $
            8,734
            
            $
            9,926
            
            $
            27,235


See
      accompanying notes.








F-9





**Notes
      to Consolidated Financial Statements**


**(** In
      thousands, except share data)





**NOTE
      1: ACCOUNTING POLICIES**





***Business
      Description and Basis of Presentation***




** Our
      financial statements are consolidated financial statements of Buckeye
      Technologies Inc. We manufacture and distribute value-added cellulose-based
      specialty products used in numerous applications including disposable diapers,
      personal hygiene products, engine air and oil filters, food casings, rayon
      filament, acetate plastics, thickeners and papers.





*Fiscal
      Year*




Except
      as
      otherwise specified, references to years indicate our fiscal year ended June
      30,
      2006 or ended June 30 of the year referenced.





*Reclassifications*




Certain
      prior year amounts have been reclassified to conform to current year
      classifications.





*Principles
      of Consolidation*




** The
      consolidated financial statements include the accounts of Buckeye Technologies
      Inc. and our subsidiaries, all of which are wholly owned. All significant
      intercompany accounts and transactions have been eliminated.





***Summary
      of Significant Accounting Policies***





*Cash
      and Cash Equivalents*




We
      consider cash equivalents to be temporary cash investments with a maturity
      of
      three months or less when purchased.





*Inventories*




Inventories
      are valued at the lower of cost or market. The costs of manufactured
      cotton-based specialty fibers and costs for nonwoven raw materials are generally
      determined on the first-in, first-out (FIFO) basis. Other manufactured products
      and raw materials are generally valued on an average cost basis. Manufactured
      inventory costs include material, labor and manufacturing overhead. Slash pine
      timber, cotton fibers and chemicals are the principal raw materials used in
      the
      manufacture of our specialty fiber products. Fluff pulp is the principal raw
      material used in our nonwoven materials products. We take physical counts of
      inventories at least annually, and we review periodically the provision for
      potential losses from obsolete, excess or slow-moving inventories.





*Allowance
      for Doubtful Accounts*




We
      provide an allowance for receivables we believe we may not collect in full.
      Management evaluates the collectibility of accounts based on a combination
      of
      factors. In circumstances where we are aware of a specific customer’s inability
      to meet its financial obligations (i.e., bankruptcy filings or substantial
      downgrading of credit ratings), we record a specific reserve. For all other
      customers, we recognize reserves for bad debts based on our historical
      collection experience. If circumstances change (i.e., higher than expected
      defaults or an unexpected material adverse change in a major customer’s ability
      to meet its financial obligations), our estimates of the recoverability of
      amounts due could differ by a material amount.





*Property,
      Plant and Equipment*




Property,
      plant and equipment are recorded at cost. Cost includes the interest cost
      associated with significant capital additions. Interest capitalized for the
      years ended June 30, 2006, 2005 and 2004 was $1,866, $418 and $67, respectively.
      Depreciation on production machinery and equipment at the cotton cellulose
      and
      airlaid nonwovens plants is determined by the units-of-production method which
      is based on the expected productive hours of the assets, subject to a minimum
      level of depreciation. The straight line method is used for determining
      depreciation on other capital assets. Depreciation under the straight-line
      method is computed over the following estimated useful lives: buildings—30 to 40
      years; machinery and equipment—3 to 20 years. Depreciation and amortization
      expense includes the amortization of assets under capital
      lease.


F-10


*Long-Lived
      Assets*




Long-lived
      assets are reviewed for impairment when circumstances indicate the carrying
      value of an asset may not be recoverable. For assets that are to be held and
      used, impairment is recognized when the estimated fair value is less than their
      carrying value. If impairment exists, an adjustment is made to write the asset
      down to its fair value, and a loss is recorded as the difference between the
      carrying value and fair value. Fair values are determined based on quoted market
      values, discounted cash flows or internal and external appraisals, as
      applicable. Assets to be disposed of are carried at the lower of carrying value
      or fair value. See Note 4 for information concerning impairment charges.








Goodwill
      is recognized for the excess of the purchase price over the fair value of
      tangible and identifiable intangible net assets of businesses acquired. Goodwill
      of businesses acquired is specifically identified to the reporting units to
      which the businesses belong. We have determined that our reporting units for
      Goodwill are the same as our operating segments before aggregation. See Note
      17,
“Segment Reporting,” for further discussion of our operating segments. Goodwill
      is reviewed at least annually for impairment. Unless circumstances otherwise
      dictate, we perform our annual impairment testing in the fourth quarter. No
      impairment was recorded during the years ending June 30, 2006, 2005 and 2004.
      The change in goodwill resulted from changes in foreign currency exchange rates.





*Intellectual
      Property and Other*




At
      June
      30, 2006 and 2005, we had intellectual property totaling $25,173 and $27,576,
      respectively, which includes patents (including application and defense costs),
      licenses, trademarks, and tradenames, the majority of which were obtained in
      the
      acquisition of airlaid nonwovens businesses and Stac-PacTM technology.
      Intellectual property is amortized by the straight-line method over 5 to 20
      years and is net of accumulated amortization of $14,519 and $12,288 at June
      30,
      2006 and 2005, respectively. Intellectual property amortization expense of
      $2,000, $2,280 and $2,244 was recorded during the years June 30, 2006, 2005
      and
      2004, respectively. Estimated amortization expense for the five succeeding
      fiscal years follows: $1,924 in 2007, $1,929 in 2008, $1,929 in 2009, $1,929
      in
      2010 and $1,929 in 2011.




Deferred
      debt costs of $7,534 and $9,148 at June 30, 2006 and 2005, respectively are
      amortized by the effective interest method over the life of the related debt
      and
      are net of accumulated amortization of $6,901 and $5,810 at June 30, 2006 and
      2005, respectively. We recorded amortization of deferred debt costs of $1,487,
      $1,556 and $1,960 during the years ending June 30, 2006, 2005 and 2004,
      respectively.





*Income
      Taxes*




We
      provide for income taxes under the liability method. Accordingly, deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. No provision is made for U.S. income
      taxes applicable to undistributed earnings of foreign subsidiaries that are
      indefinitely reinvested in foreign operations. It is not practicable to compute
      the potential deferred tax liability associated with these undistributed foreign
      earnings.





*Risk
      Management*




We
      are
      exposed to certain market risks as a part of our ongoing business operations
      and
      use derivative financial instruments, where appropriate, to manage these risks.
      Derivatives are financial instruments whose value is derived from one or more
      underlying financial instruments. Examples of underlying instruments are
      currencies, commodities and interest rates. With the adoption of SFAS 133,
      " *Accounting
      for Derivative Instruments and Hedging Activities* ,"
      in
      2001, we record the fair value of all outstanding derivatives in other assets
      or
      other liabilities. Gains and losses related to non-designated instruments or
      the
      ineffective portion of any hedge are recorded in various costs and expenses,
      depending on the nature of the derivative.




We
      periodically use derivatives and other financial instruments to hedge exposures
      to fossil fuels, interest rates and currency risks. For hedges which meet the
      Statement of Financial Accounting Standards No. (“SFAS”) 133, *Accounting
      for Derivative Instruments and Hedging Activities,* criteria, we formally designate and document the instrument as a hedge of a
      specific underlying exposure, as well as the risk management objective and
      strategy for undertaking each hedge transaction. Because of the high degree
      of
      effectiveness between the hedging instrument and the underlying exposure being
      hedged, fluctuations in the value of the derivative instruments are generally
      offset by changes in the value or cash flows of the underlying exposures being
      hedged.





From
      time
      to time, we utilize forward foreign exchange contracts for the sale or purchase
      of foreign currencies. These contracts are not designated as hedging instruments
      and do not qualify for hedge accounting treatment under the provisions of
      SFAS No. 133 and SFAS No. 138. Mark-to-market gains and
      losses for forward foreign exchange contracts are recorded in foreign exchange
      and other.





F-11


Derivatives
      are recorded in the consolidated balance sheet at fair value. At June 30, 2006
      and 2005, we had no derivatives outstanding.





*Credit
      Risk*




We
      have
      established credit limits for each customer. We generally require the customer
      to provide a letter of credit for export sales in high-risk countries. Credit
      limits are monitored routinely.




*Environmental
      Costs*




Liabilities
      are recorded when environmental assessments are probable and the cost can be
      reasonably estimated. Generally, the timing of these accruals coincides with
      the
      earlier of completion of a feasibility study or our commitment to a plan of
      action based on the then known facts.





*Revenue
      Recognition*




We
      recognize revenue when the following criteria are met: persuasive evidence
      of an
      agreement exists, delivery has occurred, our price to the buyer is fixed and
      determinable, and collectibility is reasonably assured. Delivery is not
      considered to have occurred until the customer takes title and assumes the
      risks
      and rewards of ownership. The timing of revenue recognition is largely dependent
      on shipping terms. Discounts and allowances reduce net sales and are comprised
      of trade allowances, cash discounts and sales returns.





*Shipping
      and Handling Costs*




Amounts
      related to shipping and handling which are billed to a customer in a sale
      transaction have been classified as revenue. Costs incurred for shipping and
      handling have been classified as costs of goods sold.





*Foreign
      Currency Translation*




Management
      has determined that the local currency of our German, Canadian, and Brazilian
      subsidiaries is the functional currency, and accordingly European euro, Canadian
      dollar, and Brazilian real denominated balance sheet accounts are translated
      into United States dollars at the rate of exchange in effect at fiscal year
      end.
      Income and expense activity for the period is translated at the weighted average
      exchange rate during the period. Translation adjustments are included as a
      separate component of stockholders' equity, and are the only component of other
      comprehensive income.




Transaction
      gains and losses that arise from exchange rate fluctuations on transactions
      denominated in a currency other than the local functional currency are included
      in “Other income (expense)” in the results of operations. Transaction gains and
      (losses) of $(551), $(226), and $224 were recorded during the years ended June
      30, 2006, 2005 and 2004, respectively.





*Use
      of Estimates*




The
      preparation of the consolidated financial statements in conformity with
      accounting principles generally accepted in the United States requires
      management to make estimates and assumptions that affect the amounts reported
      in
      the consolidated financial statements and accompanying notes. Actual results
      could differ from the estimates and assumptions used.




Changes
      in estimates are recognized in accordance with the accounting rules for the
      estimate, which is typically in the period when new information becomes
      available to management. Areas where the nature of the estimate makes it
      reasonably possible that actual results could materially differ from amounts
      estimated include: impairment assessments on long-lived assets (including
      goodwill), allowance for doubtful accounts, inventory reserves, income tax
      liabilities, and contingent liabilities.





*Earnings
      Per Share*




Basic
      earnings per share has been computed based on the average number of common
      shares outstanding excluding restricted stock. Diluted earnings per share
      reflects the increase in average common shares outstanding that would result
      from the assumed exercise of outstanding stock options and restricted stock
      awards calculated using the treasury stock method. Diluted loss per share
      amounts for 2004 were calculated using the same denominator as used in the
      basic
      loss per share calculation as the inclusion of dilutive securities in the
      denominator would have been anti-dilutive.





*Stock-Based
      Compensation*




On
      December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) 123 (revised 2004), *Share-Based
      Payments* (“SFAS
      123(R)”), which is a revision of SFAS 123, *Accounting
      for Stock Based Compensation* (“SFAS
      123”). SFAS 123(R) supersedes Accounting Principles Bulletin 25 (“APB 25”), *Accounting
      for Stock Issued to Employees* ,
      and
      amends SFAS 95, *Statement
      of Cash Flows* .
      Generally, the approach in SFAS 123(R) is similar to the approach described
      in




F-12


SFAS
      123.
 However, SFAS 123(R) requires all share-based payments to employees,
      including grants of employee stock options and restricted stock awards, to
      be
      recognized in the income statement based on their fair values. 
SFAS 123(R) eliminates the alternative to use the intrinsic value method of
      accounting that was provided in SFAS 123, which generally resulted in no
      compensation expense recorded in the financial statements related to the
      issuance of share-based awards to employees. SFAS 123(R) requires that the
      cost resulting from all share-based payment transactions be recognized in the
      financial statements. SFAS 123(R) establishes fair value as the measurement
      objective in accounting for share-based payment arrangements and requires all
      companies to apply a fair-value-based measurement method in accounting for
      generally all share-based payment transactions with employees.





On
      July
      1, 2005 (the first day of our 2006 fiscal year), we adopted SFAS 123(R). We
      adopted SFAS 123(R) using a modified prospective application, as permitted
      under SFAS 123(R). Accordingly, prior period amounts have not been
      restated. Under this application, we are required to record compensation expense
      for all share-based awards granted after the date of adoption and for the
      unvested portion of previously granted share-based awards that remain
      outstanding at the date of adoption.





On
      June
      7, 2005, prior to our adoption of FSAS 123(R), the Compensation Committee of
      our
      Board of Directors approved the acceleration of vesting of out-of-the-money
      options with an exercise price greater than $8.32 to purchase shares of our
      common stock that remained unvested at June 30, 2005. The acceleration of
      vesting of these out-of-the-money options was undertaken primarily to eliminate
      any future compensation expense we would otherwise recognize in our income
      statement with respect to these options with the implementation of SFAS 123(R).
      We estimate the compensation expense, before tax, which was avoided as a result
      of the acceleration, would have totaled approximately $4,900 (approximately
      $2,100 in 2006, $1,400 in 2007, $800 in 2008 and $600 in 2009) based on fair
      value calculations using the Black-Scholes methodology.


The
      following table illustrates the effect on net income (loss) and earnings (loss)
      per share had compensation expense for the employee stock-based awards been
      recorded during fiscal year 2005 and fiscal year 2004 based on the fair value
      method under SFAS 123(R).





Year
                Ended June 302005
            
            2004Net
                income (loss) as reported
            
            
            $
            $20,204
            
            $
            (38,190
            )Deduct:
                Total stock-based compensation expense determined under fair value
                based
                method, net of related tax effect
            
            
            
            (4,856
            )
            
            (1,511
            )Pro
                forma net income (loss)
            
            
            $
            $15,348
            
            $
            (39,701
            )Earnings
                (loss) per share:Basic
                - as reported
            
            
            $
            $
                0.54
            
            $
            (1.03
            )Basic
                - pro forma
            
            
            $
            $
                0.41
            
            $
            (1.07
            )Diluted
                - as reported
            
            
            $
            $
                0.54
            
            $
            (1.03
            )Diluted
                - pro forma
            
            
            $
            $
                0.41
            
            $
            (1.07
            )




Stock-based
      compensation expense for fiscal year 2006 was $561 ($365 after tax and $0.01
      per
      share). See
      Note
      11 for a discussion of the assumptions underlying the pro forma calculations
      above.





**NOTE
      2: RECENT ACCOUNTING PRONOUNCEMENTS**





The
      FASB
      issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income
      Taxes,” on July 13, 2006. The new rules will be effective for us in fiscal 2008.
      The interpretation provides a consistent framework for accounting for tax
      positions in accordance with SFAS 109 “ *Accounting
      for Income Taxes.* ”
At
      this
      time, we have not completed our review and assessment of the impact of adoption
      of FIN 48.





**NOTE
      3: CHANGE IN ACCOUNTING**




*Planned
      Maintenance Activities*




Through
      June 30, 2003, we accounted for major planned maintenance activities at our
      specialty fiber plant in Perry, Florida by accruing the cost of the maintenance
      activities over the period between each planned maintenance activity (the accrue
      in advance method), which ranged from two to five year intervals. All other
      facilities expensed maintenance costs as incurred.





During
      fiscal 2004, we re-evaluated this critical accounting policy and, effective
      July
      1, 2003, changed our method of accounting from the accrue in advance method
      to
      the direct expense method. Under the new accounting method, maintenance costs
      are expensed as incurred. We believe the new method is preferable in this
      circumstance because the maintenance liability is not recorded until there
      is an
      obligating event (when the maintenance event is actually being performed).
      The
      direct expense method eliminates significant estimates and judgments inherent
      under the accrual method, and it is the predominant method used in the
      industry.




F-13


The
      effect of applying the new method for the year ended June 30, 2004 was a
      decrease in net loss of $349 or $0.01 per share. This decrease in net loss
      is
      composed of a profit increase of $9,079 pre-tax ($5,720 net-of-tax reported
      as a
      cumulative effect of accounting change), offset by $8,525 ($5,371 net-of-tax)
      in
      additional cost of goods sold compared to what would have been expensed in
      fiscal 2004 under the accrue in advance methodology. The total cost of the
      related planned maintenance activity performed in 2004 was $9,582.




Reported
      basic and diluted loss per share for fiscal 2004 was $(1.03). Excluding the
      cumulative effect of the accounting change, the basic and diluted loss per
      share
      was $(1.18).





**NOTE
      4: IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR
      SALE**




*Lumberton,
      North Carolina Facility*




During
      fiscal year 2006, we began to actively market idled cotton linter pulping
      equipment at our Lumberton, North Carolina facility which had a carrying value
      of $1,451. Management determined that the classification as held for sale
      criteria in SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-lived Assets* (“SFAS
      144”), had been met. Accordingly, management evaluated its estimate of fair
      value less the cost to sell the assets and determined an impairment should
      be
      recognized for the equipment. Current markets and third party interest for
      the
      equipment indicated we would not be able to recover the carrying value through
      the sales process. Therefore, we wrote down the carrying value of the equipment
      to its fair value less costs to sell of $963 and recorded an impairment charge
      of $488 during fiscal year 2006. Subsequent to this impairment, we sold the
      equipment for net proceeds of $963.





*Glueckstadt,
      Germany Facility*





In
      January 2005, we announced our decision to discontinue producing cotton linter
      pulp at our Glueckstadt, Germany facility. Our decision was due to a combination
      of factors that had increased the plant’s costs to a level at which it is
      uneconomical to continue operations. The most significant factor impacting
      cost
      at the site was the substantial strengthening of the euro over calendar 2003
      and
      2004. Specialty fibers are normally priced and sold in U.S. dollars around
      the
      world. As a majority of Glueckstadt’s costs were denominated in euros, this
      substantial strengthening had a negative impact on Glueckstadt’s cost position.
      Additionally, Glueckstadt’s process water, waste treatment and energy costs were
      more than twice the cost of these utilities at our Memphis, Tennessee
      cotton-based specialty fibers facility. Faced with these difficulties, we
      reduced the number of employees at the facility from approximately 150 to
      approximately 100 and operated at 55% of capacity during calendar year 2004.
      Based on these factors, we ceased production at Glueckstadt in December of
      2005.
      We believe that the closure of our Glueckstadt facility and transfer of the
      majority of its cotton-based specialty fiber production to our Memphis,
      Tennessee and Americana, Brazil facilities will yield a more competitive cost
      structure.




During
      fiscal 2005 we evaluated the recoverability of the long-lived assets at the
      Glueckstadt facility in accordance with SFAS 144. Based on this evaluation,
      we
      determined that these long-lived assets, with a carrying amount of $15,280
      (net
      of $2,977 of foreign currency translation adjustment), were impaired and wrote
      them down to their estimated fair value of $2,954, resulting in an impairment
      charge of $12,326. This fair value was based on the remaining service potential
      of the facility through its expected closure in the second quarter of fiscal
      2006, plus the estimated salvage value, as we did not believe the facility
      could
      be economically utilized for its intended purpose by us or a third party. The
      fair value analysis used a discount rate incorporating time value of money,
      expectations about timing and amount of future cash flows, and an appropriate
      risk premium.





During
      fiscal year 2006, we began to actively market the land and buildings, and the
      equipment which had carrying values of $1,600 and $496, respectively. Management
      determined that the classification as held for sale criteria in SFAS 144 had
      been met. Accordingly, management reevaluated its estimate of fair value less
      the cost to sell the assets and determined an additional impairment should
      be
      recognized for the land and buildings. Current markets and third party interest
      for the land and buildings indicated we would not be able to recover the
      carrying value through the sales process. Therefore, we wrote down the carrying
      value of the land and buildings to their fair value less costs to sell of $121
      and recorded an impairment charge of $1,469 during fiscal year 2006. Subsequent
      to this impairment, we sold the land and building for $127. As of June 30,
      2006,
      management re-evaluated its estimate of fair value less the cost to sell the
      remaining assets and determined an additional impairment should be recognized
      for equipment with a carrying value of $297. Therefore, we wrote down the
      carrying value of the remaining equipment to its fair value less costs to sell
      of $165 and recorded an impairment charge of $132.





The
      carrying value of the equipment was classified in property, plant and equipment
      as of June 30, 2005 and has been reclassified to current assets held for sale
      and is presented under the “Prepaid expenses and other” caption in the balance
      sheet as of June 30, 2006.





F-14


*Cork,
      Ireland Facility*




During
      fiscal 2004, we initiated the discontinuation of production of nonwoven
      materials at our Cork, Ireland facility. Due to excess production capacity
      around the globe, we had operated Cork below its productive capacity since
      the
      plant started up in 1998. Because of its location and small size, our cost
      to
      produce at Cork was higher than it was at our other locations. Therefore,
      management made the decision to close the Cork facility and consolidate
      production at our three other nonwoven materials manufacturing facilities.
      Production at Cork ceased during July of 2004. Closing our Cork facility reduced
      our nonwovens capacity by about 10%.




In
      accordance with SFAS 144 we evaluated the value of the property, plant, and
      equipment associated with the Cork facility. Under this guidance, we determined
      that those long-lived assets, with a carrying amount of $48,359 (net of $6,914
      of foreign currency translation adjustment), were impaired and wrote them down
      to their estimated fair value of $5,409, resulting in an impairment charge
      of
      $42,950 during fiscal 2004. Fair value was based on the estimated salvage value
      of the Cork facility as we did not believe the facility could be utilized for
      its intended purpose. The salvage value incorporated assumptions that
      marketplace participants would likely use in estimating the fair value of the
      Cork facility




Subsequent
      to the July 2004 closure of the facility, we began to actively market the
      building and equipment with carrying values of $4,494 and $1,505, respectively,
      and reclassified them as assets held for sale. In late December of 2004, we
      completed the sale of the building to the Port of Cork Company for $13,408.
      Although the carrying values of these assets were based on appraisals and
      available market information at the time of the impairment in March of 2004,
      the
      purchase of this building for strategic purposes by the Port of Cork Company
      was
      not contemplated in those appraisals. As a result of the sale and disposition
      of
      the building and equipment for net proceeds of $13,134 (net of $1,897 of
      decommissioning and selling costs), we recognized a net gain of $7,203 ($4,682
      net of tax and $0.12 per share net of tax) during fiscal 2005. The gain is
      presented under the “Gain on sale of assets held for sale” caption in the
      statement of operations.





*Other
      Facilities*




During
      fiscal 2004, we also impaired certain equipment and other capitalized costs
      at
      specialty fibers facilities in the United States. These assets consisted of
      equipment that was replaced with more cost effective technology, engineering
      costs and capitalized interest for a long delayed project, and assets related
      to
      idled equipment. In evaluating these assets with a total carrying amount of
      $3,209, it was determined that the carrying value was not recoverable and the
      estimated fair value was $251. We recognized an impairment charge of
      $2,958.




**NOTE
      5: RESTRUCTURING COSTS**




During
      fiscal 2003 we initiated the first phase of a restructuring program designed
      to
      deliver cost reductions through reduced expenses across our company. During
      the
      first quarter of fiscal 2004, we entered into a second phase of our
      restructuring program. This program was a continuation of the program initiated
      in the fourth quarter of fiscal 2003 and enabled us to improve our operating
      results through reduced salaries, benefits, other employee-related expenses
      and
      operating expenses. As a result of this restructuring, 78 positions were
      eliminated. These positions included manufacturing, sales, product development
      and administrative functions throughout the organization. We do not expect
      any
      additional payments related to this phase of the restructuring
      program.




During
      fiscal 2005, we entered into another restructuring program. As part of this
      program, we discontinued production of cotton-based specialty fibers at our
      Glueckstadt, Germany facility during December 2005. The closure of the
      Glueckstadt facility resulted in the termination of 103 employees.





F-15


Restructuring
      expenses are included in “Restructuring costs” in our consolidated statements of
      operations. The additional charges below reflect severance and employee benefits
      accrued over the retention period, and other miscellaneous expenses which are
      expensed as incurred. Accrual balances are included in “Accrued expenses” in the
      consolidated balance sheet. The following table summarizes the expenses and
      accrual balances by reporting segments for the year ended June 30,
      2006.





Year
                Ended June 30, 2006Accrual
              Balance
              as
                of
              June
                30,
              2005
            
            
            Additional
              Charges
            
            
            Adjustments
            
            
            Impact
              of
              Foreign
              Currency
            
            
            Payments
            
            
            Accrual
              Balance
              as
                of
              June
                30,
              2006
            
            
            Total
              Program
              Charges
              to
                Date**2003
                Restructuring Program-Phase 2**Severance
                and employee benefitsSpecialty
                fibers
            
            $
            13
            
            $
            10
            
            
            -
            
            $
            (1
            )
            $
            (22
            )
            $
            -
            
            $
            1,894Nonwovens
                materials
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            39Corporate
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,514**Total
                2003 Program-Phase 2**
            
            
            13
            
            
            10
            
            
            -
            
            
            (1
            )
            
            (22
            )
            
            -
            
            
            3,447**2005
                Restructuring Program**Specialty
                fibersSeverance
                and employee benefits
            
            
            2,311
            
            
            2,624
            
            
            -
            
            
            20
            
            
            (4,946
            )
            
            9
            
            
            5,096Other
                miscellaneous expenses
            
            
            147
            
            
            1,018
            
            
            (126
            )
            
            5
            
            
            (1,033
            )
            
            11
            
            
            1,497**Total
                2005 Program**
            
            
            2,458
            
            
            3,642
            
            
            (126
            )
            
            25
            
            
            (5,979
            )
            
            20
            
            
            6,593**Total
                All Programs**
            
            $
            2,471
            
            $
            3,652
            
            $
            (126
            )
            $
            24
            
            $
            (6,001
            )
            $
            20
            
            $
            10,040




**NOTE
      6: INVENTORIES**




Components
                of inventoriesJune
                302006
            
            2005Raw
                materials
            
            $
            30,028
            
            $
            33,433Finished
                goods
            
            
            45,759
            
            
            53,353Storeroom
                and other supplies
            
            
            22,780
            
            
            21,109$
            98,567
            
            $
            107,895





**NOTE
      7: PROPERTY, PLANT AND EQUIPMENT**




Components
                of property, plant and equipmentJune
                302006
            
            2005Land
                and land improvements
            
            $
            16,209
            
            $
            16,521Buildings
            
            
            131,521
            
            
            125,917Machinery
                and equipment
            
            
            794,522
            
            
            717,014Construction
                in progress
            
            
            15,425
            
            
            43,518957,677
            
            
            902,970Accumulated
                depreciation
            
            
            (425,779
            )
            
            (377,039
            )$
            531,898
            
            $
            525,931





F-16


**NOTE
      8: ACCRUED EXPENSES**




Components
                of accrued expensesJune
                302006
            
            2005Income
                taxes
            
            $
            4,357
            
            $
            1,981Interest
            
            
            11,323
            
            
            11,136Retirement
                plans
            
            
            6,258
            
            
            5,924Salaries
                and incentive pay
            
            
            4,430
            
            
            6,855Customer
                incentive programs
            
            
            4,895
            
            
            4,017Vacation
                pay
            
            
            5,033
            
            
            4,786Other
            
            
            12,120
            
            
            13,702$
            48,416
            
            $
            48,401





**NOTE
      9: DEBT**




Components
                of long-term debtJune
                302006
            
            2005Senior
                Notes due:2013
            
            $
            200,000
            
            $
            $200,000Senior
                Subordinated Notes due:2008
            
            
            64,902
            
            
            79,8322010
            
            
            152,059
            
            
            152,558Credit
                Facilities
            
            
            98,747
            
            
            99,525Other
            
            
            5,000
            
            
            5,000520,708
            
            
            536,915Less
                current portion
            
            
            1,294
            
            
            1,376$
            519,414
            
            $
            $535,539




*Senior
      Notes*




During
      September 2003 ,
      we
      placed privately $200,000 in aggregate principal amount of 8.5% senior notes
      due
      October 1, 2013 (the “2013 Notes”). In
      fiscal
      year 2004, we exchanged these outstanding notes for public notes with the same
      terms. The notes are unsecured obligations and are senior to any of our
      subordinated debt. The notes are guaranteed by our direct and indirect domestic
      subsidiaries that are also guarantors on our senior secured
      indebtedness. The
      senior notes are redeemable at our option, in whole or part, at any time on
      or
      after October 1, 2008, at redemption prices varying from 104.25% of principal
      amount to 100% of principal amount on or after October 1, 2011, together with
      accrued and unpaid interest to the date of redemption. We used the net proceeds
      from the private placement to redeem our $150,000 senior subordinated notes
      due
      2005, make a permanent reduction of $40,000 to our revolving credit facility
      and
      pay the related transaction costs. Total costs for the issuance of these notes
      were $5,274 and will be amortized over the life of the senior notes using the
      effective interest method.





On
      September 22, 2003, we called the senior subordinated notes due in 2005. These
      notes were redeemed on October 22, 2003. During fiscal 2004, $3,300 was expensed
      related to the early extinguishment of the $150,000 senior subordinated notes
      due 2005. These expenses included a $2,115 call premium and $1,185 related
      to
      the write-off of deferred financing costs.





*Senior
      Subordinated Notes*




During
      July 1996, we completed a public offering of $100,000 principal amount of 9.25%
      unsecured Senior Subordinated Notes due September 15, 2008 (the “2008 Notes”).
      These notes have been redeemable at our option, in whole or in part, at any
      time
      since September 15, 2004, at a redemption price of 100% of principal amount
      together with accrued and unpaid interest to the date of
      redemption.




During
      fiscal year 2005, we redeemed $20,000 of the 2008 Notes. During fiscal year
      2006, we called and redeemed an additional $15,000 of the 2008 Notes. As a
      result of these redemptions, we wrote off a portion of the deferred financing
      costs and unamortized discount related to the redeemed bonds. During fiscal
      year
      2006 and 2005, we recorded non-cash expenses of $151 and $242, respectively
      related to the early extinguishment of debt.





On
      October 16, 2003, we successfully completed a solicitation of consents from
      holders of our 2008 Notes to amend this indenture to conform certain provisions
      of the 2008 Notes to the provisions in our notes due in 2010 and to current
      market practice. This amendment allowed us to refinance our revolving credit
      facility in the fall of calendar 2003 (discussed later in this
      note).




F-17


During
      June 1998, we completed a private placement of $150,000 principal amount of
      8%
      unsecured Senior Subordinated Notes due October 15, 2010. In fiscal 1999, we
      exchanged these outstanding notes for public notes with the same terms. These
      notes are redeemable at our option, in whole or in part, at any time on or
      after
      October 15, 2003, at redemption prices varying from 104% of principal amount
      to
      100% of principal amount on or after October 15, 2006, together with accrued
      and
      unpaid interest to the date of redemption.




Under
      the
      indentures governing our senior subordinated notes, as well as the indenture
      that governs our senior notes, our ability to incur additional debt is limited.
      Under these indentures, additional debt must be incurred as so-called “ratio
      debt” or, alternatively, must be permitted in form and amount as “Permitted
      Indebtedness.” In order to incur ratio debt, a specified consolidated fixed
      charge coverage ratio (as defined in the indentures) must equal or exceed 2:1
      (measured on a rolling four-quarter basis). Falling below the 2:1 ratio does
      not
      breach any covenant or constitute an event of default under any of our debt
      agreements. Currently, we exceed the required 2:1 ratio and as a result, are
      not
      limited to the “ratio debt” restrictions under the indentures governing the
      senior notes and the senior subordinated notes.




*Interest
      Rate Swap*




In
      May
      2001, we entered into an interest rate swap on $100,000 of 8% fixed rate notes
      maturing in October 2010. The swap converted interest payments from a fixed
      rate
      to a floating rate of LIBOR plus 1.97%. This arrangement qualified as a fair
      value hedge under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* .
      As
      such, the net effect from the interest rate swap was recorded as part of
      interest expense. On October 15, 2003, the swap counter party exercised its
      right to change the termination date of the swap from October 15, 2010 to
      October 15, 2003. By exercising this right, the swap counter party paid us
      $4,000 as an early termination fee, which is being amortized as a reduction
      to
      interest expense through October 15, 2010. At June 30, 2006 and 2005 the
      unamortized portion of the termination fee was recorded as an increase in debt
      of $2,452 and $3,024, respectively. During the years ended June 30, 2006, 2005
      and 2004, the swap reduced our interest expense by $572, $571 and $1,848,
      respectively and will continue to reduce interest expense through the
      amortization period of the termination fee.





*Revolving
      Credit Facility*




On
      November 5, 2003, we established a $220,000 senior secured credit facility
      (the
“credit facility”), comprised of a $70,000 revolving credit facility (the
“revolver”) maturing on September 15, 2008 and a $150,000 term loan (the “term
      loan”) with serial maturities of $249 with final payment at maturity. The term
      loan maturity date is March 15, 2008, unless we retire or refinance the 2008
      Notes, with a due date after October 15, 2010, in which case the maturity date
      would be April 15, 2010.




The
      term
      loan also requires an annual excess cash flow payment (as defined under the
      credit agreement). Based on fiscal 2006 results, we are required to make an
      excess cash flow payment during fiscal 2007 of $296. During fiscal 2006, we
      made
      an excess cash flow payment of $378 based on fiscal 2005 performance and
      additional voluntary payments of $2,002. Total payments on the term loan,
      including required principal payments, during fiscal 2006 were
      $3,378.




We
      had
      $98,747 outstanding on this facility ($95,747 on the term loan and $3,000 on
      the
      revolving credit facility) at an average variable interest rate of 7.2% as
      of
      June 30, 2006. The interest rate applicable to borrowings under the revolver
      is
      the agent’s prime rate plus 1.50% to 1.75%, or a LIBOR-based rate ranging from
      LIBOR plus 2.50% to LIBOR plus 3.25%. Effective March 15, 2005, the interest
      rate applicable to the term loan is the agent’s prime rate plus 1.00% or a
      LIBOR-based rate plus 2.00%. The credit facility is secured by substantially
      all
      of our assets located in the United States.




The
      credit facility contains covenants customary for financing of this type. The
      financial covenants include: maximum ratio of consolidated net senior secured
      debt to consolidated earnings before interest, taxes, depreciation and
      amortization (“EBITDA”), minimum ratio of consolidated EBITDA to consolidated
      interest expense and minimum ratio of consolidated EBITDA minus capital
      expenditures and taxes to consolidated fixed charges; as well as limitations
      on
      capital expenditures, share repurchases and dividend payments. During fiscal
      year 2006, we were in compliance with these financial covenants.




As
      of
      June 30, 2006, we had $62,625 of borrowing capacity on our revolving credit
      facility. The portion of this capacity that we could borrow on a particular
      date
      will depend on our financial results and ability to comply with certain
      borrowing conditions under the revolving credit facility. The commitment fee,
      on
      the unused portion of the revolving credit facility, ranges from 0.40% to 0.50%
      per annum. Total costs for the issuance of the new facility were approximately
      $3,300 and are being amortized to interest expense using the effective interest
      method over the life of the facility. The unamortized issuance costs are
      presented under the “Intellectual property and other, net” caption on the
      balance sheet. During fiscal 2004, $1,640 was expensed related to the early
      extinguishment of the previous credit facility.





F-18


*Other
      Debt*





On
      March
      1, 2000, we purchased certain technology from Stac-Pac Technologies Inc. In
      connection with the purchase, we entered into an unsecured promissory note
      with
      Stac-Pac Technologies Inc. The principal amount of the note is $5,000 and bears
      interest at a rate of 7%. In accordance with the purchase agreement, we are
      entitled to withhold or retain the final installment of the purchase price
      until
      and unless there is final resolution of patent rights and to cancel the final
      installment of the purchase price if the patent rights in certain jurisdictions
      are not resolved according to the terms of the purchase agreement. As of June
      30, 2006, these patent rights were not resolved. Therefore, the principal amount
      of the note remains unpaid and has been classified as long-term debt. As of
      June
      30, 2006, we have accrued interest on the note of $1,867.




Aggregate
      maturities of long-term debt for the next five fiscal years and beyond are
      as
      follows: 2007-$1,294, 2008-$5,998, 2009-$68,998, 2010-$92,457, 2011-$150,000
      and
      thereafter $200,000. The 2007 maturities consist of the term loan serial
      maturities of $998 and an excess cash flow payment of $296. Terms of long-term
      debt agreements require compliance with certain covenants including interest
      coverage ratios, and limitations on restricted payments and levels of
      indebtedness. At June 30, 2006, the amount available for the payment of
      dividends and/or the acquisition of treasury stock was limited. Under our most
      restrictive debt agreements the amount available for the payment of dividends
      and/or the acquisition of treasury stock will depend on our financial results
      and ability to comply with certain conditions.




Total
      cash interest payments for the years ended June 30, 2006, 2005 and 2004 was
      $44,303, $44,358 and $47,783, respectively.




We
      had no
      off-balance sheet financing except for operating leases as disclosed in Note
      10.





**NOTE
      10: LEASES**




*Capital
      Leases*




In
      October 2001, we entered into capital lease agreements for certain airlaid
      nonwovens plant equipment. The total cost of the assets covered by these
      agreements was $4,284. As of June 30, 2006, the accumulated depreciation on
      these assets was $692. At June 30, 2006, our future minimum lease payments,
      including interest totaling $152, for these assets were as follows: 2007—$717;
      2008—$449; 2009—$368; 2010—$0. Amortization of assets recorded under capital
      lease agreements is included in depreciation expense.




*Operating
      Leases*





We
      lease
      office and warehouse facilities and equipment under various operating leases.
      Operating lease expense was $2,940, 3,371 and $3,960 during the years ended
      June
      30, 2006, 2005 and 2004, respectively. The commitments under the operating
      leases at June 30, 2006 were as follows: 2007—$1,421; 2008—$538; 2009—$182;
      2010—$58; 2011—$47 and thereafter—$0.





**NOTE
      11: COMMON STOCKHOLDERS’ EQUITY**




*Stock
      Compensation Plans*





Our
      stock
      option plans provide for the granting of either incentive or nonqualified stock
      options to employees and non-employee directors. Options are subject to terms
      and conditions determined by the Compensation Committee of our Board of
      Directors, and generally are exercisable in increments of 20% per year beginning
      one year from date of grant and expire ten years from date of grant. During
      fiscal year 2006, our employee stock option plans and our director plan expired,
      and no further options can be granted under these plans.





On
      June
      7, 2005, the Compensation Committee of the Board of Directors of Buckeye
      Technologies Inc. approved the acceleration of vesting of out-of-the-money
      options with an exercise price greater than $8.32 to purchase shares of common
      stock of Buckeye Technologies Inc. that remained unvested at June 30, 2005.
      Options to purchase 898,150 shares of common stock were subject to this
      acceleration (see Note 1).





F-19


We
      use
      the Black-Scholes option-pricing model to calculate the fair value of options
      for determining our option related compensation expense. The key assumptions
      for
      this valuation method include the expected life of the option, stock price
      volatility, risk-free interest rate, dividend yield and forfeiture rate. Many
      of
      these assumptions are judgmental and highly sensitive in the determination
      of
      compensation expense. The table below indicates the key assumptions used in
      the
      option valuation calculations for options granted during fiscal years 2006,
      2005
      and 2004 and a discussion of our methodology for developing each of the
      assumptions used in the valuation model:




2006
            2005
            2004Expected
                lives
            6.3
                years
            5.9
                years
            7.8
                yearsExpected
                volatility
            55%
            49%
            49%Risk-free
                interest rate
            4.4%
            3.7%
            4.1%Forfeiture
                rate
            11%
            -
            -




*Expected
      Lives -* This is the period of time over which the options granted are expected to remain
      outstanding. Options granted have a maximum term of ten years. An increase
      in
      the expected life will increase compensation expense.





*Expected
      Volatility -* This is a measure of the amount by which a price has fluctuated or is expected
      to fluctuate. We use actual changes in the market value of our stock to
      calculate the volatility assumption. We calculate daily market value changes
      from the date of grant over a past period representative of the expected life
      of
      the options to determine volatility. An increase in the expected volatility
      will
      increase compensation expense.





*Risk-Free
      Interest Rate -* This is the U.S. Treasury rate for the week of the grant having a term
      approximating the expected life of the option. An increase in the risk-free
      interest rate will increase compensation expense.





*Dividend
      Yield -* We did not make any dividend payments during the last five fiscal years and
      we
      have no plans to pay dividends in the foreseeable future. An increase in the
      dividend yield will decrease compensation expense.





*Forfeiture
      Rate -* This
      is
      the estimated percentage of options granted that are expected to be forfeited
      or
      canceled before becoming fully vested. An increase in the forfeiture rate will
      decrease compensation expense. The forfeiture rate is based on our historic
      forfeiture experience. Prior to the implementation of SFAS 123(R), we accounted for forfeitures when
      they occurred.





The
      following table summarizes information about our stock option plans for the
      years ended June 30:




2006
            
            2005
            
            2004Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Shares
            
            Weighted-
              Average
              Exercise
              PriceOutstanding
                at beginning of year
            
            
            4,765,150
            
            $
            13.57
            
            
            5,046,750
            
            $
            13.35
            
            
            4,833,950
            
            $
            13.60Granted
                at market
            
            
            358,000
            
            
            7.64
            
            
            100,000
            
            
            10.57
            
            
            845,000
            
            
            10.72Granted
                below market
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            36,000
            
            
            7.60Exercised
            
            
            (73,500
            )
            
            7.47
            
            
            (270,800
            )
            
            8.22
            
            
            (318,200
            )
            
            8.04Forfeited
            
            
            (4,000
            )
            
            7.62
            
            
            (67,600
            )
            
            11.98
            
            
            (163,200
            )
            
            12.08Expired
            
            
            (805,250
            )
            
            12.75
            
            
            (43,200
            )
            
            16.93
            
            
            (186,800
            )
            
            16.89Outstanding
                at end of year
            
            
            4,240,400
            
            $
            13.34
            
            
            4,765,150
            
            $
            13.57
            
            
            5,046,750
            
            $
            13.35Exercisable
                at end of year
            
            
            3,854,800
            
            $
            13.91
            
            
            4,716,350
            
            $
            13.64
            
            
            3,638,484
            
            $
            14.13





Using
      the
      Black-Scholes valuation method calculated under the assumptions indicated above,
      the weighted-average fair value of the grants at market was $4.37, $5.32 and
      $6.24 per option in 2006, 2005 and 2004, respectively. The weighted-average
      fair
      value of the grants below market was $7.19 in 2004. As of June 30, 2006, the
      total future compensation cost related to non-vested stock option grants was
      $1,210 over a weighted average period of 1.8 years. The aggregate intrinsic
      value of vested options outstanding at June 30, 2006 was $45.




F-20


Since
      our
      stock option plans expired during fiscal 2006, there are no options available
      for grant at June 30, 2006. There were 319,200 and 308,400 shares reserved
      for
      grants of options at June 30, 2005 and 2004, respectively. The following summary
      provides information about stock options outstanding and exercisable at June
      30,
      2006:




Outstanding
            
            ExercisableExercise
                Price
            
            Options
            
            Average
                Exercise Price
            
            Average
                Remaining Life (Years)
            
            Options
            
            Average
                Exercise Price$
                6.50-$12.00
            
            
            2,291,400
            
            $
            10.24
            
            
            7.1
            
            
            1,905,800
            
            $
            10.76$12.01-$18.00
            
            
            1,897,792
            
            
            16.83
            
            
            2.1
            
            
            1,897,792
            
            
            16.83$18.01-$24.00
            
            
            51,208
            
            
            23.04
            
            
            3.5
            
            
            51,208
            
            
            23.04Total
            
            
            4,240,400
            
            $
            13.34
            
            
            4.8
            
            
            3,854,800
            
            $
            13.91





Stock
      options and restricted stock awards that could potentially dilute basic earnings
      per share in the future, which were not included in the fully diluted
      computation because the grant prices were greater than the average market price
      of common shares for the period, were 4,411,466, 4,245,071 and 3,801,640 for
      the
      years ended June 30, 2006, 2005 and 2004, respectively. In addition, during
      2004
      even those shares that ordinarily would have been included in diluted shares
      were not, due to the net loss incurred during 2004, as the inclusion of dilutive
      securities in the denominator for losses would have been
      anti-dilutive.




*Restricted
      Stock Plan*




The
      following table summarizes information about our restricted stock plan for
      the
      years ended June 30:




2006
            
            2005
            
            2004Shares
            
            Weighted-
              Average
              Price
            
            Shares
            
            Weighted-
              Average
              Price
            
            Shares
            
            Weighted-
              Average
              PriceNonvested
                at beginning of year
            
            
            51,440
            
            $
            12.49
            
            
            42,998
            
            $
            12.64
            
            
            75,737
            
            $
            13.18Granted
                at market
            
            
            240,170
            
            
            7.31
            
            
            8,898
            
            
            11.79
            
            
            8,019
            
            
            9.80Vested
            
            
            -
            
            
            -
            
            
            (282
            )
            
            (10.94
            )
            
            (40,038
            )
            
            14.11Forfeited
            
            
            -
            
            
            -
            
            
            (174
            )
            
            (11.79
            )
            
            (720
            )
            
            8.54Nonvested
                at end of year
            
            
            291,610
            
            $
            8.23
            
            
            51,440
            
            $
            12.49
            
            
            42,998
            
            $
            12.64





In
      August
      1997, the Board of Directors authorized a restricted stock plan and set aside
      800,000 treasury shares to fund this plan. At June 30, 2006, 338,526 restricted
      shares had been awarded since inception of the plan. The weighted-average fair
      value of restricted stock awards is the closing price of the common stock on
      the
      New York Stock Exchange on the date of the grant. Although the restricted stock
      may be voted by the recipient, the restricted stock may not be sold, pledged
      or
      otherwise transferred before the recipient’s death or the recipient’s retirement
      from Buckeye. Therefore, the vesting period is from the date of grant to the
      date each employee reaches age 62 (the retirement age defined in the plan).
      Based on historic experience, the forfeiture rate used for employees whose
      vesting period is greater than 10 years is 15% and no forfeiture rate is applied
      for employees whose vesting period is less than 10 years. As of June 30, 2006,
      the total future compensation cost related to non-vested restricted stock awards
      was $1,640 over a weighted average period of 9.5 years.




*Treasury
      Shares*




** The
      Board
      of Directors has authorized the repurchase of 6,000,000 shares of common stock.
      Repurchased shares will be held as treasury stock and will be available for
      general corporate purposes, including the funding of employee benefit and
      stock-related plans. No shares were repurchased during 2006, 2005 and 2004.
      A
      total of 5,009,300 shares have been repurchased through June 30,
      2006.




F-21


**NOTE
      12: COMPUTATION OF EARNINGS PER SHARE**





The
      calculation of basic and diluted earnings per common share for the years June
      30:




2006
            
            2005
            
            2004Net
                income (loss)
            
            $
            1,980
            
            $
            20,204
            
            $
            (38,190
            )Weighted-average
                shares of common stock outstanding
            
            
            37,622
            
            
            37,447
            
            
            37,075Effect
                of diluted shares
            
            
            36
            
            
            151
            
            
            -Weighted-average
                common and common equivalent shares outstanding
            
            
            37,658
            
            
            37,598
            
            
            37,075Earnings
                (loss) per share before cumulative effect of change in
                accountingBasic
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.18
            )Diluted
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.18
            )Cumulative
                effect of change in accountingBasic
            
            $
            -
            
            $
            -
            
            $
            0.15Diluted
            
            $
            -
            
            $
            -
            
            $
            0.15Earnings
                (loss) per shareBasic
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.03
            )Diluted
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.03
            )





**NOTE
      13: INCOME TAXES**




The
      components of income (loss) before income taxes and cumulative effect of change
      in accounting were taxed under the following jurisdictions:




Year
                Ended June 302006
            
            2005
            
            2004Domestic
            
            $
            2,505
            
            $
            18,881
            
            $
            (76,210
            )Foreign
            
            
            (1,821
            )
            
            833
            
            
            6,103Income
                (loss) before income taxes and cumulative effect of change inaccounting
            
            $
            684
            
            $
            19,714
            
            $
            (70,107
            )





Income
      tax expense (benefit) before cumulative effect of change in
      accounting:





Year
                Ended June 302006
            
            2005
            
            2004Current
                tax expense (benefit):Federal
            
            $
            435
            
            $
            503
            
            $
            (2,676
            )Foreign
            
            
            4,458
            
            
            185
            
            
            4,695State
                and other
            
            
            (120
            )
            
            41
            
            
            (876
            )Current
                tax expense
            
            
            4,773
            
            
            729
            
            
            1,143Deferred
                tax expense (benefit):Federal
            
            
            (2,133
            )
            
            7,204
            
            
            (24,861
            )Foreign
            
            
            (2,048
            )
            
            (2,724
            )
            
            (1,057
            )State
                and other
            
            
            (1,381
            )
            
            515
            
            
            (1,422
            )Deferred
                tax expense
            
            
            (5,562
            )
            
            4,995
            
            
            (27,340
            )Noncurrent
            
            
            (507
            )
            
            (6,214
            )
            
            -Income
                tax benefit
            
            $
            (1,296
            )
            $
            (490
            )
            $
            (26,197
            )





Noncurrent
      tax relates primarily to matters not resolved with various taxing
      authorities.





F-22


The
      difference between reported income tax expense (benefit) and a tax determined
      by
      applying the applicable U.S. federal statutory income tax rate to income (loss)
      before income taxes and the cumulative effect of the change in accounting is
      reconciled as follows:




Year
                Ended June 302006
            
            2005
            
            2004Expected
                tax expense (benefit)
            
            $
            239
            
            
            35.0
            %
            $
            6,900
            
            
            35.0
            %
            $
            (24,537
            )
            
            35.0
            %Extraterritorial
                income exclusion
            
            
            (1,542
            )
            
            (225.4
            )
            
            (1,034
            )
            
            (5.2
            )
            
            (1,155
            )
            
            1.6Effect
                of foreign operations
            
            
            110
            
            
            16.0
            
            
            (1,851
            )
            
            (12.9
            )
            
            (713
            )
            
            1.0Change
                in tax reserves
            
            
            362
            
            
            52.9
            
            
            (6,214
            )
            
            (31.5
            )
            
            -
            
            
            -Change
                in valuation allowance
            
            
            3,842
            
            
            561.7
            
            
            1,145
            
            
            9.3
            
            
            1,746
            
            
            (2.5
            )Correction
                of prior year provision
            
            
            (1,711
            )
            
            (250.1
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Canadian
                tax rate change
            
            
            (791
            )
            
            (115.6
            )
            
            -
            
            
            -
            
            
            -
            
            
            -State
                taxes and other, net
            
            
            (1,805
            )
            
            (263.9
            )
            
            564
            
            
            2.8
            
            
            (1,538
            )
            
            2.3Income
                tax benefit
            
            $
            (1,296
            )
            
            (189.4
            )%
            $
            (490
            )
            
            (2.5
            )%
            $
            (26,197
            )
            
            37.4
            %





Effective
      June 22, 2006, many of the tax measures introduced in the 2006 Canadian Federal
      budget were passed into law. Included in the budget was a reduction in the
      general corporate tax rate to 20.5% for 2008, 20% for 2009, and 19% for 2010
      and
      later years. As a result, the company remeasured its Canadian deferred tax
      balances based on the reversal pattern of our temporary differences, resulting
      in a $0.8 million net tax benefit.





The
      increase for fiscal year 2006 in our valuation allowance is primarily due to
      the
      allowance for losses of the Americana, Brazil operations.





Effective
      for transactions occurring after September 30, 2000 the Internal Revenue Service
      enacted the Extraterritorial Income Exclusion.  The income exclusion
      provides for a reduction of gross income by a percentage of qualifying foreign
      trade income. In October 2004, the American Jobs Creation Act of 2004 (the
      Act)
      was signed into law. In order to comply with international trade rules, the
      Act
      repealed the current tax treatment for extraterritorial income. Effective for
      transactions entered into after December 31, 2004, the extraterritorial income
      exclusion is subject to a phase-out which will be completed on December 31,
      2006.  For transactions during calendar years 2005 and 2006, the income
      exclusion will be 80% and 60% of the exclusion otherwise allowed, respectively.
      Our extraterritorial income exclusion benefit was reduced in fiscal 2006 due
      to
      this phase-out and will continue to decrease through the final phase-out during
      fiscal 2007.





The
      Act
      provides a tax deduction for domestic manufacturers.  The deduction will be
      phased in during fiscal years 2006 through 2010. Due to the company’s U.S. net
      operating loss position, this deduction had no impact to fiscal year
      2006.




During
      the fourth quarter of fiscal 2005, the IRS completed an audit of our tax return
      for fiscal year 2002. With the conclusion of this audit, we released the reserve
      on a tax deduction we claimed relating to our investment in our former facility
      in Cork, Ireland and recorded a non-cash tax benefit of $5,481 to our provision
      for income taxes.





F-23


The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets (liabilities) are as follows:




June
                302006
            
            2005Deferred
                tax liabilities:Property,
                plant and equipment
            
            $
            (88,606
            )
            $
            (87,623
            )Inventory
            
            
            (884
            )
            
            (467
            )Other
            
            
            (17,108
            )
            
            (18,246
            )Total
                deferred tax liabilities
            
            
            (106,598
            )
            
            (106,336
            )Deferred
                tax assets:Postretirement
                benefits
            
            
            7,034
            
            
            7,036Inventory
                costs
            
            
            141
            
            
            943Net
                operating losses
            
            
            63,373
            
            
            50,933Nondeductible
                reserves
            
            
            1,960
            
            
            2,692Credit
                carryforwards
            
            
            9,810
            
            
            10,510Other
            
            
            2,835
            
            
            8,959Total
                deferred tax assets
            
            
            85,153
            
            
            81,073Valuation
                allowances
            
            
            (10,065
            )
            
            (5,813
            )Deferred
                tax assets, net of valuation allowances
            
            
            75,088
            
            
            75,260Net
                deferred tax liability
            
            $
            (31,510
            )
            $
            (31,076
            )





The
      valuation allowances at June 30, 2006 and 2005 relate specifically to net
      operating losses in certain state and foreign operations. Based on the future
      reversal of deferred tax liabilities and the actions management has taken and
      will continue to take to improve financial performance, management believes
      it
      is more likely than not that the net deferred tax assets recorded at June 30,
      2006 will be fully utilized after consideration of the valuation allowance
      recorded.




Taxes
      paid net of refunds received resulted in no cash tax expense for fiscal year
      2006. We paid cash income taxes of $3,075 and $3,828 during the years ended
      June
      30, 2005 and 2004, respectively.





At
      June
      30, 2006, the net operating loss asset is based on foreign net operating loss
      carryforwards of approximately $35,298, which have no expiration date and
      federal and state net operating loss carryforwards of approximately $127,872
      and
      $161,835, respectively which expire between 2017 and 2026. Additionally,
      included in the credit carryforward asset of $9,810 at June 30, 2006, we have
      a
      minimum tax carryforward of $6,717 which has an indefinite life and general
      business credits which will expire between 2020 and 2026.





**NOTE
      14: DERIVATIVES**




We
      periodically use derivative instruments to reduce financial risk in three areas:
      interest rates, foreign currency and commodities. The notional amounts of
      derivatives do not represent actual amounts exchanged by the parties and, thus,
      are not a measure of our exposure through our use of derivatives.





In
      May
      2001, we entered into an interest rate swap on $100,000 of 8% fixed rate notes
      maturing in October 2010. The swap converted interest payments from a fixed
      rate
      to a floating rate of LIBOR plus 1.97%. The arrangement was considered a hedge
      of a specific borrowing, and differences paid and received under the arrangement
      were recognized as adjustments to interest expense. This agreement, which was
      accounted for as a fair value hedge, decreased interest expense by $572, $571
      and $1,848 for the years ended June 30, 2006, 2005 and 2004, respectively.
      On
      October 15, 2003, the swap counter party exercised its right to change the
      termination date of the swap from October 15, 2010 to October 15, 2003. By
      exercising this right, the swap counter party paid us $4,000 as an early
      termination fee, which is being amortized as a reduction to interest expense
      through October 15, 2010. At June 30, 2006 and 2005, the unamortized portion
      of
      the termination fee was recorded as an increase in debt of $2,452 and $3,024,
      respectively.





From
      time
      to time, we utilize forward foreign exchange contracts for the sale or purchase
      of foreign currencies. These contracts are not designated as hedging instruments
      and do not qualify for hedge accounting treatment under the provisions of
      SFAS No. 133 and SFAS No. 138. Mark-to-market gains and
      losses for forward foreign exchange contracts are recorded in foreign exchange
      and other. We had no outstanding forward sale or purchase contracts as of
      June 30, 2006 and June 30, 2005. We had no mark-to-market adjustments for
      forward foreign exchange contracts during fiscal years 2006, 2005, and
      2004.




In
      order
      to minimize market exposure, at times we use forward contracts to reduce price
      fluctuations in a desired percentage of forecasted purchases of fossil fuel
      over
      a period of generally less than one year. There were no fossil fuel contracts
      outstanding at June 30, 2006, 2005 or 2004 requiring fair value
      treatment.




F-24


We
      may be
      exposed to losses in the event of nonperformance of counterparties but do not
      anticipate such nonperformance.





**NOTE
      15: EMPLOYEE BENEFIT PLANS**




*Defined
      Contribution Plans*




We
      have
      defined contribution retirement plans covering certain U.S. employees. We
      contribute 1% of the employee's gross compensation plus 1/2% for each year
      of
      service up to a maximum of 11% of the employee's gross compensation. During
      fiscal 2005 we implemented an additional retirement plan for U.S. employees.
      We
      match employees’ voluntary contributions to their retirement accounts up to the
      lesser of $2,000 per year or 2% of their eligible gross earnings. Contribution
      expense for the retirement plans for the years ended June 30, 2006, 2005 and
      2004 was $7,153, $6,743 and $5,744, respectively.




*Postretirement
      Healthcare Plans*




We
      also
      provide medical, dental, and life insurance postretirement plans covering
      certain U.S. employees who meet specified age and service requirements. Certain
      employees who met specified age and service requirements on March 15, 1993
      are
      covered by their previous employer and are not covered by these plans. Our
      current policy is to fund the cost of these benefits as payments to participants
      as required. We have established cost maximums to more effectively control
      future medical costs. Effective July 1, 2002, we amended our postretirement
      medical plan to among other things reduce the level of cost maximums per
      eligible employee. Effective January 1, 2006, Medicare eligible retirees age
      65
      or older will not continue coverage under the self-funded plan. Instead they
      are
      provided a subsidy towards the purchase of supplemental insurance. This
      amendment reduced the accumulated postretirement benefit obligation by $4,089.
      The benefit is being amortized over 7.75 years.





The
      components of net periodic benefit costs are as follows:




Year
                Ended June 302006
            
            2005
            
            2004Service
                cost for benefits earned
            
            $
            629
            
            $
            703
            
            $
            753Interest
                cost on benefit obligation
            
            
            1,258
            
            
            1,432
            
            
            1,252Amortization
                of unrecognized prior service credit
            
            
            (1,055
            )
            
            (1,125
            )
            
            (1,125
            )Actuarial
                loss
            
            
            597
            
            
            389
            
            
            335Total
                cost
            
            $
            1,429
            
            $
            1,399
            
            $
            1,215





The
      following table provides a reconciliation of the changes in the plans’ benefit
      obligations over the two-year period ending June 30, 2006, and a statement
      of
      the plans’ funded status as of June 30, 2006 and 2005:




June
                302006
            
            2005Change
                in benefit obligation:Obligation
                at beginning of year
            
            $
            22,567
            
            $
            22,541Service
                cost
            
            
            629
            
            
            703Interest
                cost
            
            
            1,258
            
            
            1,432Participant
                contributions
            
            
            328
            
            
            320Actuarial
                loss
            
            
            (703
            )
            
            2,927Benefits
                paid
            
            
            (1,620
            )
            
            (1,267
            )Amendment
            
            
            -
            
            
            (4,089
            )Underfunded
                status at end of year
            
            
            22,459
            
            
            22,567Unrecognized
                prior service credit
            
            
            5,550
            
            
            6,605Unrecognized
                loss
            
            
            (8,643
            )
            
            (9,943
            )Other
            
            
            1,536
            
            
            1,358Net
                amount recognized in the consolidated balance sheet
            
            $
            20,902
            
            $
            20,587




The
      amount recognized in the consolidated balance sheets as of June 30, 2006 and
      2005 includes $1,535 and $1,381, respectively which is classified in accrued
      expenses as the amount of benefits expected to be paid in fiscal year 2007
      and
      2006, respectively. Expected annual benefit payments net of retiree
      contributions are as follows: 2007 - $1,535; 2008 - $1,627; 2009 - $1,665;
      2010
      - $1,655 and 2011 - $1,701. The measurement date used to perform the benefit
      obligation analysis was May 1, 2006.




F-25


The
      weighted average annual assumed rate of increase in the per capita cost of
      covered benefits (i.e. health care cost trend rate) for the medical plans is
      9.0% for 2007 and is assumed to decrease gradually to 5.0% in 2011 and remain
      level thereafter. Due to the benefit cost limitations in the plan, the health
      care cost trend rate assumption does not have a significant effect on the
      amounts reported.




Weighted
      average actuarial discount rate assumptions for our U.S. postretirement
      healthcare plan, which comprise substantially all of our projected benefit
      obligation, are as follows:




2006
            
            2005
            
            2004Discount
                rate%
            
            
            6.25
            %
            
            5.75
            %
            
            6.50
            %




We
      use
      currently available high quality long-term corporate bond indices to determine
      the appropriate discount rate. Due to the long-term nature of these indexes,
      they have a similar maturity to expected benefit payments.




The
      Medicare Modernization Act will provide prescription drug benefits to Medicare
      eligible participants effective January 1, 2006. Since our plan only provides
      a
      subsidy toward supplemental Medicare insurance coverage, there is no impact
      on
      our plan as a result of the Medicare Modernization Act.





**NOTE
      16: SIGNIFICANT CUSTOMER**




Net
      sales
      to The Procter & Gamble Company and its affiliates for the years ended June
      30, 2006, 2005 and 2004 were 13%, 14% and 16%, respectively, of total net sales.
      Nonwoven materials accounted for 60%, 56% and 48% of these sales in fiscal
      years
      2006, 2005 and 2004, respectively. The remainder of these sales were derived
      from the specialty fiber segment.





**NOTE
      17: SEGMENT INFORMATION**




We
      report
      results for two segments, specialty fibers and nonwoven materials. The specialty
      fiber segment is an aggregation of cellulosic fibers based on both wood and
      cotton. Management makes financial decisions and allocates resources based
      on
      the sales and operating income of each segment. We allocate selling, research,
      and administration expenses to each segment and management uses the resulting
      operating income to measure the performance of the segments. The financial
      information attributed to these segments is included in the following
      table:




Specialty
              Fibers
            
            Nonwoven
                Materials
            
            Corporate
            
            Total**Net
                sales**
            
            
            **2006**
            
            $
            **515,855**
            
            **$**
            **240,873**
            
            **$**
            **(28,243**
            **)**
            **$**
            **728,485**2005
            
            
            513,588
            
            
            226,492
            
            
            (27,298
            )
            
            712,7822004
            
            
            461,360
            
            
            217,641
            
            
            (22,088
            )
            
            656,913**Operating
                income (loss)**
            
            
            **2006**
            
            
            **35,842**
            
            
            **15,919**
            
            
            **(7,341**
            **)**
            
            **44,420**2005
            
            
            64,148
            
            
            12,963
            
            
            (19,510
            )
            
            57,6012004
            
            
            28,198
            
            
            7,580
            
            
            (54,857
            )
            
            (19,079
            )**Depreciation
                and amortization**
            
            
            **2006**
            
            
            **29,945**
            
            
            **15,835**
            
            
            **3,398**
            
            
            **49,178****of
                intangibles**
            
            
            2005
            
            
            28,159
            
            
            16,904
            
            
            3,388
            
            
            48,4512004
            
            
            27,662
            
            
            17,150
            
            
            3,321
            
            
            48,133**Total
                assets**
            
            
            **2006**
            
            
            **473,899**
            
            
            **276,589**
            
            
            **199,065**
            
            
            **949,553**2005
            
            
            467,736
            
            
            285,338
            
            
            196,663
            
            
            949,7372004
            
            
            464,294
            
            
            297,864
            
            
            208,665
            
            
            970,823**Capital
                expenditures**
            
            
            **2006**
            
            
            **42,410**
            
            
            **1,939**
            
            
            **1,242**
            
            
            **45,591**2005
            
            
            39,356
            
            
            3,690
            
            
            2,283
            
            
            45,3292004
            
            
            28,909
            
            
            2,662
            
            
            300
            
            
            31,871





The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies. Management evaluates operating
      performance of the specialty fibers and nonwoven materials segments, excluding
      amortization of intangibles, the impact of impairment of long-lived assets
      and
      charges related to restructuring. Therefore, the corporate segment includes
      operating elements such as segment eliminations, amortization of intangibles,
      impairment of long-lived assets and charges related to restructuring. Corporate
      net sales represents the elimination of intersegment sales included in the
      specialty fibers reporting segment. We account for intersegment sales as if
      the
      sales were to third parties, that is, at current market prices. Certain
      partially impaired assets are included in the total assets for the reporting
      segments, but the associated asset impairment charges are included in the
      corporate category. These asset impairment charges and the segments they relate
      to are discussed further in Note 4. Corporate assets primarily include cash,
      goodwill and intellectual property.




F-26


Operating
      income in 2004 for specialty fibers includes $9,582 of expense related to an
      extended maintenance shutdown at our Perry, Florida facility. This shutdown
      was
      the first in five years. Historically, we accrued expenses related to extended
      maintenance shutdowns; however, as of July 1, 2003, we changed our method of
      accounting from the accrue in advance method to the direct expense method.
      See
      Note 3 of the Consolidated Financial Statements for further
      discussion.




Our
      identifiable product lines are chemical cellulose, customized fibers, fluff
      pulp
      and nonwoven materials. Chemical cellulose is used to impart purity, strength
      and viscosity in the manufacture of diverse products such as food casings,
      rayon
      filament, acetate fibers, thickeners for consumer products, cosmetics and
      pharmaceuticals. Customized fibers are used to provide porosity, color
      permanence, strength and tear resistance in filters, premium letterhead,
      currency paper and personal stationery as well as absorbency and softness in
      cotton balls and cotton swabs. Fluff pulp and nonwoven materials are used to
      increase absorbency and fluid transport in products such as disposable diapers,
      feminine hygiene products and adult incontinence products. Additionally,
      nonwoven materials are used to enhance fluid management and strength in wipes,
      tabletop items, food pads, household wipes and mops. The following provides
      relative net sales to unaffiliated customers by product line:





Year
                Ended June 302006
            
            2005
            
            2004Chemical
                cellulose
            
            
            32
            %
            
            32
            %
            
            32
            %Customized
                fibers
            
            
            17
            
            
            18
            
            
            17Fluff
                pulp
            
            
            18
            
            
            18
            
            
            18Nonwoven
                materials
            
            
            33
            
            
            32
            
            
            33100
            %
            
            100
            %
            
            100
            %




We
      are
      domiciled in the United States and have manufacturing operations in the United
      States, Canada, Germany and Brazil. The following provides a summary of net
      sales to unaffiliated customers, based on point of origin, long-lived assets
      by
      geographic areas and net sales by point of destination:


Year
                  Ended June 30Net
                  sales by point of origin:
              
              2006
              
              2005
              
              2004United
                  States
              
              $
              539,233
              
              
              74
              %
              $
              503,367
              
              
              71
              %
              
              436,722
              
              
              66
              %Germany
              
              
              120,970
              
              
              17
              
              
              133,088
              
              
              19
              
              
              129,426
              
              
              20Other
              
              
              68,282
              
              
              9
              
              
              76,327
              
              
              10
              
              
              90,765
              
              
              14Total
              
              $
              728,485
              
              
              100
              %
              $
              712,782
              
              
              100
              %
              $
              656,913
              
              
              100
              %





Year
                Ended June 30Net
                sales by point of destination:
            
            2006
            
            2005
            
            2004Europe
            
            $
            274,157
            
            
            38
            %
            $
            271,806
            
            
            38
            %
            
            261,137
            
            
            40
            %North
                America
            
            
            302,527
            
            
            42
            
            
            299,192
            
            
            42
            
            
            255,427
            
            
            39Asia
            
            
            76,851
            
            
            10
            
            
            70,390
            
            
            10
            
            
            75,882
            
            
            11South
                America
            
            
            25,865
            
            
            4
            
            
            29,091
            
            
            4
            
            
            27,018
            
            
            4Other
            
            
            49,085
            
            
            6
            
            
            42,303
            
            
            6
            
            
            37,449
            
            
            6Total
            
            $
            728,485
            
            
            100
            %
            $
            712,782
            
            
            100
            %
            $
            656,913
            
            
            100
            %





As
                of June 302006
            
            2005
            
            2004Long-lived
                assets by geographical area:United
                States
            
            $
            464,637
            
            $
            482,113
            
            $
            489,019Canada
            
            
            134,102
            
            
            125,099
            
            
            118,639Germany
            
            
            54,658
            
            
            59,294
            
            
            76,572Brazil
            
            
            66,195
            
            
            36,633
            
            
            19,133Other
            
            
            89
            
            
            94
            
            
            5,464Total
                long-lived assets
            
            $
            719,681
            
            $
            703,233
            
            $
            708,827





**NOTE
      18: RESEARCH AND DEVELOPMENT EXPENSES**




Research
      and development costs of $9,182, $8,785 and $9,457 were charged to expense
      as
      incurred for the years ended June 30, 2006, 2005 and 2004,
      respectively.





F-27


**NOTE
      19: COMMITMENTS**




Under
      two
      separate agreements expiring at various dates through December 31, 2010, we
      are
      required to purchase certain timber from specified tracts of land that is
      available for harvest. The contract price under the terms of these agreements
      are fixed annually based on market prices. At June 30, 2006, estimated annual
      purchase obligations were as follows: 2007—$13,100; 2008—$12,300; 2009—$13,000;
      2010—$13,400; 2011—$6,800. Purchases under these agreements for the years ended
      June 30, 2006, 2005 and 2004 were $12,978; $13,672 and $9,166,
      respectively.





**NOTE
      20: CONTINGENCIES**




Our
      operations are subject to extensive general and industry-specific federal,
      state, local and foreign environmental laws and regulations. We devote
      significant resources to maintaining compliance with these laws and regulations.
      We expect that, due to the nature of our operations, we will be subject to
      increasingly stringent environmental requirements (including standards
      applicable to wastewater discharges and air emissions) and will continue to
      incur substantial costs to comply with these requirements. Because it is
      difficult to predict the scope of future requirements, there can be no assurance
      that we will not incur material environmental compliance costs or liabilities
      in
      the future.





The
      Foley
      Plant, located in Perry, Florida, discharges treated wastewater into the
      Fenholloway River. Under the terms of an agreement with the Florida Department
      of Environmental Protection (“FDEP”), approved by the U. S. Environmental
      Protection Agency (“the EPA”) in 1995, we agreed to a comprehensive plan to
      attain Class III (“fishable/swimmable”) status for the Fenholloway River under
      applicable Florida law (the “Fenholloway Agreement”). The Fenholloway Agreement
      requires us, among other things, to (i) make process changes within the Foley
      Plant to reduce the coloration of its wastewater discharge, (ii) restore certain
      wetlands areas, (iii) relocate the wastewater discharge point into the
      Fenholloway River to a point closer to the mouth of the river, and (iv) provide
      oxygen enrichment to the treated wastewater prior to discharge at the new
      location. We have completed the process changes within the Foley Plant as
      required by the Fenholloway Agreement. In making these in-plant process changes,
      we incurred significant expenditures, and, as discussed in the following
      paragraph, we expect to incur significant additional capital expenditures to
      comply with the remaining obligations under the Fenholloway
      Agreement.




The
      EPA
      objected to the draft National Pollutant Discharge Elimination System (NPDES)
      permit prepared in connection with the Fenholloway Agreement and requested
      additional environmental studies to identify possible alternatives to the
      relocation of the wastewater discharge point. The studies’ focus was to
      determine if more cost effective technologies are available to address both
      Class III water quality standards for the Fenholloway River and the anticipated
      EPA “cluster rules” applicable to wastewater discharges from dissolving kraft
      pulp mills, like the Foley Plant. While these studies were being conducted,
      implementation of the non in-plant process changes required by the Fenholloway
      Agreement was deferred. The studies have been completed, and the EPA provided
      comments to FDEP on the steps that would be required to overcome the EPA’s
      objections to the draft NPDES permit. In August 2005 FDEP redrafted the Buckeye
      NPDES permit to address the EPA’s comments, and has completed the required
      public review and comment process. The formal Notice of Intent to Issue Permit
      was issued in November 2005. The proposed permit was subsequently challenged
      by
      some members of the public and an administrative hearing to address the issues
      is expected to occur during the second or third quarter of fiscal 2007. The
      redrafted permit recognizes that the in-plant process changes already completed
      and the additional process changes planned as part of the draft NPDES permit
      will satisfy the EPA’s cluster rule requirements applicable to dissolving kraft
      pulp mills. Based on the requirements of the draft permit, we expect to incur
      additional capital expenditures of approximately $60 million over 8 - 10 years,
      possibly beginning as early as fiscal year 2007. The amount and timing of these
      capital expenditures may vary depending on a number of factors including when
      the permit is issued and whether the upcoming hearing results in changes to
      the
      proposed permit. A proposed permit condition requiring certain studies could
      result in additional treatment costs beyond these expected under the draft
      permit.




The
      EPA
      and FDEP have listed the Fenholloway River as impaired water (not meeting all
      applicable water quality standards) under the Clean Water Act for certain
      pollutants. The permitting proceedings discussed above are expected to address
      these water-quality issues.




The
      EPA
      has issued air emission standards applicable to the Foley Plant. In addition,
      the EPA has issued boiler air emission standards that are applicable to the
      Foley Plant. Compliance plans have been developed and are currently undergoing
      agency review. If the compliance plans are approved as proposed, these new
      standards will not have a material adverse effect on our financial statements
      as
      a whole.





We
      are
      involved in certain legal actions and claims arising in the ordinary course
      of
      business. It is the opinion of management that such litigation and claims will
      be resolved without a materially adverse effect on our financial statements
      as a
      whole.





F-28


**NOTE
      21: FAIR VALUES OF FINANCIAL INSTRUMENTS**




For
      certain of our financial instruments, including cash and cash equivalents,
      short-term investments, accounts receivable and accounts payable, the carrying
      amounts approximate fair value due to their short maturities. The fair value
      of
      our long-term public debt is based on an average of the bid and offer prices.
      The fair value of the credit facilities approximates its carrying value due
      to
      its variable interest rate. The carrying value of other long-term debt
      approximates fair value based on our current incremental borrowing rates for
      similar types of borrowing instruments. The carrying value and fair value of
      long-term debt and capital leases at June 30, 2006 were $522,090 and $497,256,
      respectively and at June 30, 2005 were $538,982 and $535,568,
      respectively. ****





**NOTE
      22: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**





First
                Quarter
            
            Second
                Quarter
            
            Third
                Quarter
            
            Fourth
                Quarter*Year
                ended June 30, 2006*Net
                sales
            
            $
            165,456
            
            $
            188,254
            
            $
            181,407
            
            $
            193,368Gross
                margin
            
            
            24,193
            
            
            25,708
            
            
            24,344
            
            
            25,553Operating
                income
            
            
            10,305
            
            
            12,736
            
            
            9,763
            
            
            11,616Net
                income (loss)
            
            
            (289
            )
            
            1,854
            
            
            (795
            )
            
            1,210Earnings
                (loss) per shareBasic
            
            $
            (0.01
            )
            $
            0.05
            
            $
            (0.02
            )
            $
            0.03Diluted
            
            $
            (0.01
            )
            $
            0.05
            
            $
            (0.02
            )
            $
            0.03*Year
                ended June 30, 2005*Net
                sales
            
            $
            167,323
            
            $
            180,622
            
            $
            180,910
            
            $
            183,927Gross
                margin
            
            
            29,629
            
            
            31,147
            
            
            30,210
            
            
            29,070Operating
                income
            
            
            18,104
            
            
            7,423
            
            
            17,905
            
            
            14,169Net
                income
            
            
            4,415
            
            
            2,913
            
            
            4,094
            
            
            8,782Earnings
                per shareBasic
            
            $
            0.12
            
            $
            0.08
            
            $
            0.11
            
            $
            0.23Diluted
            
            $
            0.12
            
            $
            0.08
            
            $
            0.11
            
            $
            0.23




(1)  During
      the second quarter of fiscal 2005, we incurred impairment charges of $12,010
      related to the announced closure of our Glueckstadt, Germany facility. Also
      during the quarter, we recorded a gain on sale of assets held for sale of
      $7,203. See Note 4 for further information on both of these items.





(2)  During
      the fourth quarter of fiscal 2005, the IRS completed an audit of our tax return
      for fiscal year 2002. With the conclusion of this audit, we released the reserve
      on a tax deduction we claimed relating to our investment in our former facility
      in Cork, Ireland and recorded a non-cash tax benefit of $5,481 to our provision
      for income taxes. We also recorded an additional tax benefit of $733 resulting
      from a net change in our contingency reserves.





**NOTE
      23: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS**




The
      guarantor subsidiaries presented below represent our subsidiaries that are
      subject to the terms and conditions outlined in the indenture governing the
      senior notes and that guarantee the notes, jointly and severally, on a senior
      unsecured basis. The non-guarantor subsidiaries presented below represent the
      foreign subsidiaries and the receivables subsidiary which do not guarantee
      the
      senior notes. Each subsidiary guarantor is 100% owned directly or indirectly
      by
      Buckeye Technologies Inc. and all guarantees are full and
      unconditional.




Supplemental
      financial information for Buckeye Technologies Inc. and our guarantor
      subsidiaries and non-guarantor subsidiaries for the senior notes is presented
      in
      the following tables.





F-29





**STATEMENTS
      OF OPERATIONS**


Year
      ending June 30, 2006


Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidating
              Adjustments
            
            ConsolidatedNet
                sales
            
            $
            109,164
            
            $
            461,613
            
            $
            190,984
            
            $
            (33,276
            )
            $
            728,485Cost
                of goods sold
            
            
            94,527
            
            
            395,369
            
            
            172,403
            
            
            (33,612
            )
            
            628,687Gross
                margin
            
            
            14,637
            
            
            66,244
            
            
            18,581
            
            
            336
            
            
            99,798Selling,
                research and administrative expenses, and other
            
            
            12,977
            
            
            29,021
            
            
            7,764
            
            
            -
            
            
            49,762Restructuring
                and impairment costs
            
            
            1
            
            
            498
            
            
            5,117
            
            
            -
            
            
            5,616**Operating
                income**
            
            
            1,659
            
            
            36,725
            
            
            5,700
            
            
            336
            
            
            44,420Other
                income (expense):Net
                interest expense and amortization of debt
            
            
            (45,187
            )
            
            311
            
            
            1,643
            
            
            -
            
            
            (43,233
            )Other
                income/(expense), including equity income in
              affiliates
            
            
            17,596
            
            
            69
            
            
            (632
            )
            
            (17,536
            )
            
            (503
            )Intercompany
                interest income/(expense)
            
            
            28,340
            
            
            (19,809
            )
            
            (8,531
            )
            
            -
            
            
            -Income/(loss)
                before income taxes
            
            
            2,408
            
            
            17,296
            
            
            (1,820
            )
            
            (17,200
            )
            
            684Income
                tax expense/(benefit)
            
            
            428
            
            
            1,889
            
            
            2,407
            
            
            (6,020
            )
            
            (1,296
            )**Net
                income (loss)**
            
            $
            1,980
            
            $
            15,407
            
            $
            (4,227
            )
            $
            (11,180
            )
            $
            1,980





**STATEMENTS
      OF OPERATIONS**


Year
      ending June 30, 2005


Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidating
              Adjustments
            
            ConsolidatedNet
                sales
            
            $
            105,112
            
            $
            426,330
            
            $
            210,634
            
            $
            (29,294
            )
            $
            712,782Cost
                of goods sold
            
            
            86,203
            
            
            350,516
            
            
            185,078
            
            
            (29,071
            )
            
            592,726Gross
                margin
            
            
            18,909
            
            
            75,814
            
            
            25,556
            
            
            (223
            )
            
            120,056Selling,
                research and administrative expenses, and other
            
            
            12,219
            
            
            24,629
            
            
            8,702
            
            
            -
            
            
            45,550Restructuring
                and impairment costs
            
            
            -
            
            
            166
            
            
            16,739
            
            
            -
            
            
            16,905**Operating
                income (loss)**
            
            
            6,690
            
            
            51,019
            
            
            115
            
            
            (223
            )
            
            57,601Other
                income (expense):Net
                interest expense and amortization of debt
            
            
            (44,997
            )
            
            118
            
            
            680
            
            
            -
            
            
            (44,199
            )Other
                income/(expense), including equity income in
              affiliates
            
            
            29,751
            
            
            20
            
            
            6,948
            
            
            (30,407
            )
            
            6,312Intercompany
                interest income/(expense)
            
            
            29,727
            
            
            (22,817
            )
            
            (6,910
            )
            
            -
            
            
            -Income/(loss)
                before income taxes
            
            
            21,171
            
            
            28,340
            
            
            833
            
            
            (30,630
            )
            
            19,714Income
                tax expense/(benefit)
            
            
            967
            
            
            10,514
            
            
            (332
            )
            
            (11,639
            )
            
            (490
            )**Net
                income (loss)**
            
            $
            20,204
            
            $
            17,826
            
            $
            1,165
            
            $
            (18,991
            )
            $
            20,204





F-30


**STATEMENTS
      OF OPERATIONS**


Year
      ending June 30, 2004


Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidating
              Adjustments
            
            ConsolidatedNet
                sales
            
            $
            88,914
            
            $
            370,399
            
            $
            224,150
            
            $
            (26,550
            )
            $
            656,913Cost
                of goods sold
            
            
            71,623
            
            
            330,153
            
            
            203,521
            
            
            (25,825
            )
            
            579,472Gross
                margin
            
            
            17,291
            
            
            40,246
            
            
            20,629
            
            
            (725
            )
            
            77,441Selling,
                research and administrative expenses, and other
            
            
            14,753
            
            
            22,022
            
            
            7,892
            
            
            -
            
            
            44,667Restructuring
                and impairment costs
            
            
            1,596
            
            
            4,533
            
            
            45,724
            
            
            -
            
            
            51,853**Operating
                income (loss)**
            
            
            942
            
            
            13,691
            
            
            (32,987
            )
            
            (725
            )
            
            (19,079
            )Other
                income (expense):Net
                interest expense and amortization of debt
            
            
            (45,554
            )
            
            (294
            )
            
            (513
            )
            
            -
            
            
            (46,361
            )Other
                income/(expense), including equity income in
              affiliates
            
            
            (49,884
            )
            
            279
            
            
            198
            
            
            44,740
            
            
            (4,667
            )Intercompany
                interest income/(expense)
            
            
            32,135
            
            
            (23,646
            )
            
            (8,489
            )
            
            -
            
            
            -Income/(loss)
                before income taxes and cumulative effect change in
              accounting
            
            
            (62,361
            )
            
            (9,970
            )
            
            (41,791
            )
            
            44,015
            
            
            (70,107
            )Income
                tax expense (benefit)
            
            
            (24,171
            )
            
            (4,179
            )
            
            (14,907
            )
            
            17,060
            
            
            (26,197
            )Income/(loss)
                before cumulative effect of change in
              accounting
            
            
            (38,190
            )
            
            (5,791
            )
            
            (26,884
            )
            
            26,955
            
            
            (43,910
            )Cumulative
                effect of change in accounting (net of tax)
            
            
            -
            
            
            5,720
            
            
            -
            
            
            -
            
            
            5,720**Net
                income (loss)**
            
            $
            (38,190
            )
            $
            (71
            )
            $
            (26,884
            )
            $
            26,955
            
            $
            (38,190
            )








F-31





**BALANCE
      SHEETS**


As
      of
      June 30, 2006





Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidating
              Adjustments
            
            Consolidated**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            1,535
            
            $
            162
            
            $
            7,037
            
            $
            -
            
            $
            8,734Accounts
                receivable, net
            
            
            17,395
            
            
            66,207
            
            
            30,496
            
            
            -
            
            
            114,098Inventories
            
            
            24,680
            
            
            53,756
            
            
            20,573
            
            
            (442
            )
            
            98,567Other
                current assets
            
            
            2,422
            
            
            4,845
            
            
            1,206
            
            
            -
            
            
            8,473Intercompany
                accounts receivable
            
            
            -
            
            
            57,105
            
            
            -
            
            
            (57,105
            )
            
            -**Total
                current assets**
            
            
            46,032
            
            
            182,075
            
            
            59,312
            
            
            (57,547
            )
            
            229,872Property,
                plant and equipment, net
            
            
            55,440
            
            
            329,020
            
            
            147,438
            
            
            -
            
            
            531,898Goodwill
                and intangibles, net
            
            
            20,913
            
            
            51,730
            
            
            101,636
            
            
            -
            
            
            174,279Intercompany
                notes receivable
            
            
            342,478
            
            
            -
            
            
            -
            
            
            (342,478
            )
            
            -Other
                assets, including investment in subsidiaries
            
            
            304,581
            
            
            337,654
            
            
            93,066
            
            
            (721,797
            )
            
            13,504**Total
                assets**
            
            $
            769,444
            
            $
            900,479
            
            $
            401,452
            
            $
            (1,121,822
            )
            $
            949,553**Liabilities
                and stockholders’ equity**Current
                liabilitiesTrade
                accounts payable
            
            $
            4,857
            
            $
            21,077
            
            $
            7,039
            
            $
            -
            
            $
            32,973Other
                current liabilities
            
            
            20,416
            
            
            17,390
            
            
            12,530
            
            
            1
            
            
            50,337Intercompany
                accounts payable
            
            
            52,297
            
            
            -
            
            
            4,808
            
            
            (57,105
            )
            
            -**Total
                current liabilities**
            
            
            77,570
            
            
            38,467
            
            
            24,377
            
            
            (57,104
            )
            
            83,310Long-term
                debt
            
            
            519,414
            
            
            -
            
            
            -
            
            
            -
            
            
            519,414Deferred
                income taxes
            
            
            (48,099
            )
            
            64,030
            
            
            19,755
            
            
            -
            
            
            35,686Other
                long-term liabilities
            
            
            6,414
            
            
            13,476
            
            
            1,536
            
            
            -
            
            
            21,426Intercompany
                notes payable
            
            
            -
            
            
            201,993
            
            
            140,485
            
            
            (342,478
            )
            
            -Stockholders’/invested
                equity
            
            
            214,145
            
            
            582,513
            
            
            215,299
            
            
            (722,240
            )
            
            289,717**Total
                liabilities and stockholders’ equity**
            
            $
            769,444
            
            $
            900,479
            
            $
            401,452
            
            $
            (1,121,822
            )
            $
            949,553











F-32





**BALANCE
      SHEETS**


As
      of
      June 30, 2005





Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidating
              Adjustments
            
            Consolidated**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            860
            
            $
            151
            
            $
            8,915
            
            $
            -
            
            $
            9,926Accounts
                receivable, net
            
            
            16,147
            
            
            70,636
            
            
            31,432
            
            
            -
            
            
            118,215Inventories
            
            
            21,745
            
            
            57,932
            
            
            28,997
            
            
            (779
            )
            
            107,895Other
                current assets
            
            
            4,521
            
            
            3,995
            
            
            1,952
            
            
            -
            
            
            10,468Intercompany
                accounts receivable
            
            
            -
            
            
            22,741
            
            
            -
            
            
            (22,741
            )
            
            -**Total
                current assets**
            
            
            43,273
            
            
            155,455
            
            
            71,296
            
            
            (23,520
            )
            
            246,504Property,
                plant and equipment, net
            
            
            55,720
            
            
            342,455
            
            
            127,756
            
            
            -
            
            
            525,931Goodwill
                and intangibles, net
            
            
            20,962
            
            
            53,827
            
            
            92,217
            
            
            -
            
            
            167,006Intercompany
                notes receivable
            
            
            333,295
            
            
            -
            
            
            -
            
            
            (333,295
            )
            
            -Other
                assets, including investment in subsidiaries
            
            
            301,239
            
            
            323,095
            
            
            113,840
            
            
            (727,878
            )
            
            10,296**Total
                assets**
            
            $
            754,489
            
            $
            874,832
            
            $
            405,109
            
            $
            (1,084,693
            )
            $
            949,737**Liabilities
                and stockholders’ equity**Current
                liabilitiesTrade
                accounts payable
            
            $
            7,213
            
            $
            20,841
            
            $
            9,172
            
            $
            -
            
            $
            37,226Other
                current liabilities
            
            
            20,450
            
            
            18,094
            
            
            11,918
            
            
            -
            
            
            50,462Intercompany
                accounts payable
            
            
            20,179
            
            
            -
            
            
            2,562
            
            
            (22,741
            )
            
            -**Total
                current liabilities**
            
            
            47,842
            
            
            38,935
            
            
            23,652
            
            
            (22,741
            )
            
            87,688Long-term
                debt
            
            
            535,539
            
            
            -
            
            
            -
            
            
            -
            
            
            535,539Deferred
                income taxes
            
            
            (43,918
            )
            
            62,764
            
            
            15,814
            
            
            -
            
            
            34,660Other
                long-term liabilities
            
            
            6,822
            
            
            14,081
            
            
            1,358
            
            
            -
            
            
            22,261Intercompany
                notes payable
            
            
            -
            
            
            212,620
            
            
            120,675
            
            
            (333,295
            )
            
            -Stockholders’/invested
                equity
            
            
            208,204
            
            
            546,432
            
            
            243,610
            
            
            (728,657
            )
            
            269,589**Total
                liabilities and stockholders’ equity**
            
            $
            754,489
            
            $
            874,832
            
            $
            405,109
            
            $
            (1,084,693
            )
            $
            949,737








F-33


**STATEMENTS
      OF CASH FLOWS**


Year
      ending June 30, 2006


Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidated**Net
                cash provided by (used in) operations**
            
            $
            29,990
            
            $
            29,445
            
            $
            (714
            )
            $
            58,721**Investing
                activities:**Purchases
                of property, plant and equipment
            
            
            (4,899
            )
            
            (18,627
            )
            
            (22,065
            )
            
            (45,591
            )Other
            
            
            -
            
            
            505
            
            
            191
            
            
            696**Net
                cash used in investing****activities**
            
            
            (4,899
            )
            
            (18,122
            )
            
            (21,874
            )
            
            (44,895
            )**Financing
                activities**Net
                borrowings under revolving line of credit
            
            
            350
            
            
            -
            
            
            -
            
            
            350Net
                borrowings (payments) on long-term debt and other
            
            
            (24,766
            )
            
            (11,312
            )
            
            19,810
            
            
            (16,268
            )**Net
                cash provided by (used in) financing activities**
            
            
            (24,416
            )
            
            (11,312
            )
            
            19,810
            
            
            (15,918
            )Effect
                of foreign currency rate fluctuations on cash
            
            
            -
            
            
            -
            
            
            900
            
            
            900**Increase
                (decrease) in cash and cash equivalents**
            
            
            675
            
            
            11
            
            
            (1,878
            )
            
            (1,192
            )**Cash
                and cash equivalents at beginning of period**
            
            
            860
            
            
            151
            
            
            8,915
            
            
            9,926**Cash
                and cash equivalents at end of period**
            
            $
            1,535
            
            $
            162
            
            $
            7,037
            
            $
            8,734





**STATEMENTS
      OF CASH FLOWS**


Year
      ending June 30, 2005


Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidated**Net
                cash provided by operations**
            
            $
            20,746
            
            $
            50,824
            
            $
            7,051
            
            $
            78,621**Investing
                activities:**Purchases
                of property, plant and equipment
            
            
            (6,354
            )
            
            (25,330
            )
            
            (13,645
            )
            
            (45,329
            )Other
            
            
            -
            
            
            (550
            )
            
            13,631
            
            
            13,081**Net
                cash used in investing****activities**
            
            
            (6,354
            )
            
            (25,880
            )
            
            (14
            )
            
            (32,248
            )**Financing
                activities**Net
                borrowings under revolving line of credit
            
            
            400
            
            
            -
            
            
            -
            
            
            400Net
                payments on long-term debt and other
            
            
            (28,678
            )
            
            (24,896
            )
            
            (11,721
            )
            
            (65,295
            )**Net
                cash used in financing activities**
            
            
            (28,278
            )
            
            (24,896
            )
            
            (11,721
            )
            
            (64,895
            )Effect
                of foreign currency rate fluctuations on cash
            
            
            -
            
            
            -
            
            
            1,213
            
            
            1,213**Increase
                (decrease) in cash and cash equivalents**
            
            
            (13,886
            )
            
            48
            
            
            (3,471
            )
            
            (17,309
            )**Cash
                and cash equivalents at beginning of period**
            
            
            14,746
            
            
            103
            
            
            12,386
            
            
            27,235**Cash
                and cash equivalents at end of period**
            
            $
            860
            
            $
            151
            
            $
            8,915
            
            $
            9,926







F-34




**STATEMENTS
      OF CASH FLOWS**


Year
      ending June 30, 2004


Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidated**Net
                cash provided by (used in) operations**
            
            $
            3,925
            
            $
            (5,806
            )
            $
            67,537
            
            $
            65,656**Investing
                activities:**Purchases
                of property, plant and equipment
            
            
            (6,524
            )
            
            (22,971
            )
            
            (2,376
            )
            
            (31,871
            )Other
            
            
            -
            
            
            (377
            )
            
            3
            
            
            (374
            )**Net
                cash used in investing****activities**
            
            
            (6,524
            )
            
            (23,348
            )
            
            (2,373
            )
            
            (32,245
            )**Financing
                activities**Net
                payments under revolving line of credit
            
            
            (209,124
            )
            
            -
            
            
            (14,902
            )
            
            (224,026
            )Payments
                for debt issuance and extinguishment
            
            
            (11,185
            )
            
            -
            
            
            -
            
            
            (11,185
            )Net
                issuance of (payments on) long-term debt and other
            
            
            211,579
            
            
            24,908
            
            
            (58,153
            )
            
            178,334**Net
                cash provided by (used in) financing activities**
            
            
            (8,730
            )
            
            24,908
            
            
            (73,055
            )
            
            (56,877
            )Effect
                of foreign currency rate fluctuations on cash
            
            
            -
            
            
            -
            
            
            724
            
            
            724**Decrease
                in cash and cash equivalents**
            
            
            (11,329
            )
            
            (4,246
            )
            
            (7,167
            )
            
            (22,742
            )**Cash
                and cash equivalents at beginning****of
                period**
            
            
            26,075
            
            
            4,349
            
            
            19,553
            
            
            49,977**Cash
                and cash equivalents at end of period**
            
            $
            14,746
            
            $
            103
            
            $
            12,386
            
            $
            27,235








F-35







**Report
      of Independent Registered Public Accounting Firm on Financial Statement
      Schedule**





The
      Board
      of Directors and Stockholders of Buckeye Technologies Inc.





We
      have
      audited the consolidated financial statements of Buckeye Technologies Inc.
      as of
      June 30, 2006 and 2005, and for each of the three years in the period ended
      June
      30, 2006, and have issued our report thereon dated August 31, 2006 (included
      elsewhere in this Annual Report on Form 10-K). Our audits also included the
      financial statement schedule listed in Item 15(a) in this Annual Report on
      Form
      10-K. This schedule is the responsibility of the Company’s management. Our
      responsibility is to express an opinion based on our audits.





In
      our
      opinion, the financial statement schedule referred to above, when considered
      in
      relation to the basic financial statements taken as a whole, presents fairly
      in
      all material respects the information set forth therein.













Memphis,
      Tennessee        /s/
      Ernst
& Young LLP


August
      31, 2006








F-36





**SCHEDULE
      II**


**VALUATION
      AND QUALIFYING ACCOUNTS**








Column
                B
            
            Column
                C
            
            Column
                D
            
            Column
                EDescription
            
            Balance
              at
              Beginning
              of
              Period
            
            Additions
              Charged
              to
              Expenses
            
            Deductions
            
            Balance
              at
              End
              of
              Period**Allowance
                for doubtful accounts**Year
                ended June 20, 2006
            
            $
            5,602
            
            $
            123
            
            $
            (3,821(a
            )
            $
            1,904Year
                ended June 20, 2005
            
            $
            4,240
            
            $
            1,372
            
            $
            (10)(a
            )
            $
            5,602Year
                ended June 30, 2004
            
            $
            721
            
            $
            4,010
            
            $
            (491)(a
            )
            $
            4,240**Allowance
                for maintenance shutdowns**Year
                ended June 20, 2006
            
            $
            -
            
            $
            -
            
            $
            -(d
            )
            $
            -Year
                ended June 20, 2005
            
            $
            -
            
            $
            -
            
            $
            -(d
            )
            $
            -Year
                ended June 30, 2004
            
            $
            9,881
            
            $
            -
            
            $
            9,881(d
            )
            $
            -**Accrual
                for restructuring**Year
                ended June 20, 2006
            
            $
            2,471
            
            $
            3,526
            
            $
            (6,103)(b
            )
            $
            20Year
                ended June 20, 2005
            
            $
            2,134
            
            $
            4,579
            
            $
            (4,242)(b
            )
            $
            2,471Year
                ended June 30, 2004
            
            $
            1,624
            
            $
            5,945
            
            $
            (5,435)(b
            )
            $
            2,134**Deferred
                tax assets valuation allowance**Year
                ended June 30, 2006
            
            $
            5,813
            
            $
            3,842
            
            $
            410(c
            )
            $
            10,065Year
                ended June 30, 2005
            
            $
            4,125
            
            $
            1,145
            
            $
            543(c
            )
            $
            5,813Year
                ended June 30, 2004
            
            $
            2,439
            
            $
            1,746
            
            $
            (60)(c
            )
            $
            4,125


(a) Uncollectible
      accounts written off, net of recoveries, translation adjustments and changes
      in
      quality claims. Quality claims are recorded as reduction in sales.


(b) Severance
      payments, lease cancellations, relocation expenses, and miscellaneous other
      expenses.


(c) Impact
      of
      change in exchange rate between Brazilian reals and US dollars.


(d) Payments
      made during plant shut downs were $9,881 in 2004. Effective July 1, 2003, we
      changed our method of accounting for planned maintenance activities from
      the


accrue in
      advance method to the direct expense method. For further discussion of this
      change, see Note 3 of the Consolidated Financial Statements.





F-37