**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





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





For
      the
      fiscal year ended June 30, 2007





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
      S


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
      S


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 S 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
                filer S
            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.  S





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





As
      of
      December 31, 2006, 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 $424.4 million.





As
      of
      September 1, 2007, there were outstanding 39,046,082 Common Shares of the
      Registrant.





DOCUMENTS
      INCORPORATED BY REFERENCE


Portions
      of Buckeye Technologies Inc.’s 2007 Annual Proxy Statement to be filed with the
      commission in connection with the 2007 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
            112.
            Properties
            113.
            Legal
                Proceedings
            124.
            Submission
                of Matters to a Vote of Security Holders
            12**PART
                II**5.
            Market
                for the Registrant’s Common Stock, Related Security Holder
                Matters
            126.
            Selected
                Financial Data
            147.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            157a.
            Qualitative
                and Quantitative Disclosures About Market Risk
            258.
            Financial
                Statements and Supplementary Data
            279.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            279a.
            Controls
                and Procedures
            279b.
            Other
            27**PART
                III**10.
            Directors
                and Executive Officers of the Registrant
            2811.
            Executive
                Compensation
            3012.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            3013.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            3014.
            Principal
                Accountant Fees and Services
            30**PART
                IV**15.
            Exhibits
                and Financial Statement Schedules
            31Signatures
            32**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
      85
      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 3, 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 2007 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****
            33%
            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
            16%
            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**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
      14, 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 16, 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 65% 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 slash pine timber
      and fluff pulp.  We have potential raw material availability issues
      for our cotton fibers in both North America and Brazil.  We have
      increased our imported cotton linters purchases for Memphis specialty cotton
      fiber production in order to minimize the impact of current constraints on
      North
      American cotton fiber availability.  For the near term, this raw
      material availability will limit growth and put pressure on our
      margins.





Our
      manufacturing processes especially for specialty fibers, require 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
      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 2007 sales
      reflect this geographic diversity, with 43% of sales in North America, 38%
      of
      sales in Europe, 9% of sales in Asia, 4% of sales in South America and 6% in
      other regions.  Approximately 82% of our worldwide sales, for fiscal
      2007, 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 14, Segment Information, to the Consolidated Financial
      Statements.




Sales
      by geographical destination for
      the three years ended June 30, 2007 were as follows:





*(in
      millions)*


Sales
                by Destination2007
            
            2006
            
            2005United
                States
            
            $
            254
            
            
            33
            %
            $
            230
            
            
            32
            %
            $
            235
            
            
            33
            %Italy
            
            
            72
            
            
            9
            
            
            66
            
            
            9
            
            
            56
            
            
            8Germany
            
            
            66
            
            
            9
            
            
            59
            
            
            8
            
            
            63
            
            
            9Canada
            
            
            45
            
            
            6
            
            
            47
            
            
            6
            
            
            48
            
            
            7Japan
            
            
            38
            
            
            5
            
            
            38
            
            
            5
            
            
            38
            
            
            5Mexico
            
            
            33
            
            
            4
            
            
            25
            
            
            3
            
            
            16
            
            
            2Spain
            
            
            26
            
            
            3
            
            
            25
            
            
            3
            
            
            23
            
            
            3France
            
            
            25
            
            
            3
            
            
            22
            
            
            3
            
            
            19
            
            
            3Brazil
            
            
            25
            
            
            3
            
            
            21
            
            
            3
            
            
            26
            
            
            4All
                other
            
            
            185
            
            
            25
            
            
            195
            
            
            28
            
            
            189
            
            
            26Total
            
            $
            769
            
            
            100
            %
            $
            728
            
            
            100
            %
            $
            713
            
            
            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 a direct sales force, we also utilize outside sales agents in some
      parts of the world.




5


Procter
      & Gamble is our largest customer, accounting for 12% of our fiscal 2007 net
      sales.  Nonwoven materials account for approximately 62% of the total
      sales to Procter & Gamble.  No other customer accounted for
      greater than 6% of our fiscal 2007 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 $8.3 million, $9.2 million and $8.8 million were
      charged to expense as incurred for the years ended June 30, 2007, 2006 and
      2005,
      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 and Tembec .





We
      believe that the number of producers is unlikely to grow significantly due
      to
      the substantial investment required to enter the mature specialty fibers market
      and to sufficient existing capacity.  However, Sateri has announced
      that it is adding 250,000 tons of specialty pulp capacity in Brazil in the
      October-December quarter of 2007, and a former Weyerhaeuser mill in Cosmopolis,
      Washington with an annual capacity of 155,000 metric tons may restart
      production.  We do not expect that this planned increase in industry
      capacity will adversely impact Buckeye’s specialty fibers business in the
      current fiscal year.  However, it is possible that it could have an
      impact in the following fiscal year.





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 used
      approximately 47,000 metric tons of fluff pulp from our Foley plant during
      this
      fiscal year as a key raw material in our airlaid nonwovens operations. We
      currently produce less than 7% of the world’s supply of fluff pulp. Major
      competitors include Bowater, International Paper, GP Cellulose, Rayonier and
      Weyerhaeuser.  We understand International Paper is converting one of
      its mills to begin producing fluff pulp in September 2007 and GP Cellulose
      announced it is adding capacity at its Brunswick mill, both of which will create
      additional fluff pulp capacity.  The potential added capacity from
      these two mills is approximately 10% of current industry capacity.





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, Fiberweb,
      Concert Industries, Duni, Koch Industries, Kimberly Clark and PGI.





There
      is limited availability of airlaid nonwoven capacity in Europe, while the North
      American industry is operating in an environment of excess supply.  We
      understand that Fiberweb is in the process of starting up a new airlaid
      nonwovens plant in Italy with an annual capacity of approximately 10,000 metric
      tons per year.





**Intellectual
      Property**




At
      June
      30, 2007 and 2006, we had intellectual property assets recorded totaling $18.0
      million and $25.2 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-Pacâ
      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-Pacâ
      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-Pacâ
      bales facilitate our customers’ high-speed production lines with a continuous
      flow of material. Stac-Pacâ
      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.




6


**Inflation**




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





**Seasonality**





Our
      business generally is not seasonal to a substantial extent, although we ship
      somewhat lower specialty fiber volume in the July – September quarter and
      somewhat lower nonwovens volume is shipped in the October – December
      quarter.





**Employees**




As
      of September 1, 2007, we employed
      approximately 1,550 employees, of whom approximately 1,100 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.  Our Foley Plant’s labor agreement expires on March 31,
      2008 and we will be entering negotiations for a new agreement in the next few
      months.  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.





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





Our
      plants in Gaston, King and Lumberton, 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.  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 17,
      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.  The public may obtain information about the
      operation of the Public Reference Room by calling the SEC at
      1-800-SEC-0330.  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.




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.




7


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





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**





*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, and sales to Procter & Gamble accounted for approximately
      12% of our sales in fiscal year 2007.  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, particularly if we are unable to attract new
      customers.





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





As
      of June 30, 2007, our total debt was
      approximately $446 million and our total debt, as a percentage of total
      capitalization, was 56%.  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 those contained in the
                indentures governing our senior and senior subordinated notes 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
                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;
                and





-
            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


*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 September 1, 2007, we
      employed approximately 1,550 employees, of whom approximately 1,100 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.  Our Foley Plant’s labor agreement expires on 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.





Employee
      representation is provided by
      a national union 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.





Problems
      regarding the negotiation of
      any labor contracts could also affect our business.  The failure to
      renegotiate labor agreements in a timely manner could lead to a curtailment
      or
      stoppage of work at our factories.  If we negotiated a labor agreement
      on unfavorable terms, our production costs will increase.  A reduction
      in production or increasing the costs of production would lower our profits
      and
      harm our business.





*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 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, we expect to incur significant
      additional capital expenditures to comply with the remaining obligations under
      the Fenholloway Agreement.




Based
      on
      the requirements of the proposed permit, we expect to incur capital expenditures
      of approximately $10 million over the next four years (beginning fiscal year
      2008) on in-plant process changes, and additional capital expenditures of
      approximately $50 million over at least five years, possibly beginning as early
      as fiscal year 2012.  The amount and timing of these capital
      expenditures may vary depending on a number of factors.  For
      additional information on environmental matters, see Note 17 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 67% 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, 2007, sales of our
      products outside the United States represented approximately 67% 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 82% 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;




9




-
            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.





Any
      of
      these risks could have a material adverse effect on our business, results of
      operations or financial condition.





*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.





***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.  Furthermore, a general economic downturn in a particular
      country or on an international scale, could reduce the overall sales within
      our
      industry, thereby likely reducing our sales.  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 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.  New competitors and the expansion of existing competitors
      could create a surplus capacity of the goods that we sell, which might cause
      us
      to either lose sales or lower the prices of our goods.  As examples of
      existing competitors expanding their production, Sateri has announced that
      it
      will add 250,000 tons of specialty pulp capacity in Brazil and Weyerhauser
      could
      reopen a mill with an annual capacity of 155,000 metric tons.  Actions
      by our competitors and any surplus capacity could cause our profits to decline,
      affecting our operating results and financial condition.







10




*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.  We
      have raw material availability issues in our specialty cotton fibers business
      in
      both North America and Brazil.  We have increased our imported cotton
      linters purchases for our Memphis specialty cotton fiber production in order
      to
      minimize the impact of current constraints on North American cotton fiber
      availability.  We have limited production at our Americana, Brazil
      specialty fibers facility because of raw material constraints in
      Brazil.  For the near term, this raw material availability will limit
      growth and increase our production costs.  Additionally, energy and
      chemical costs have increased substantially in recent years, 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.  An increase in transportation rates
      or fuel surcharges and/or a reduction in transport availability in truck, rail
      and international shipping could negatively impact our ability to provide
      products to our customers in a timely manner.  An increase in
      international shipping rates or fuel surcharges or a reduction in the
      availability of vessels could negatively impact our costs and our ability to
      provide products to our international 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.





**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.  As of June 30, 2007, the
      Memphis Plant operated at approximately 80% of its 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,
      2007,
      the Foley Plant operated at 100% of its 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, 2007, the
      Lumberton Plant operated at approximately 90% of its 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 with a capacity of approximately 40,000 annual metric tons
      of
      cotton cellulose.  As of June 30, 2007, the Americana Plant operated
      at approximately 60% of its capacity.





***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, 2007, was
      operating at approximately 80% of capacity.





*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 (43,000 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





**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 4,000 shareholders on
      September 1, 2007, 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****2007**
            
            **2006**High
            
            Low
            
            High
            
            LowFirst
                  quarter (ended September 30)
            
            $
            9.00
            
            $
            6.84
            
            $
            10.08
            
            $
            7.75Second
                  quarter (ended December 31)
            
            
            12.72
            
            
            8.33
            
            
            8.33
            
            
            7.18Third
                  quarter (ended March 31)
            
            
            14.00
            
            
            11.16
            
            
            10.27
            
            
            7.89Fourth
                  quarter (ended June 30)
            
            
            16.25
            
            
            11.75
            
            
            9.10
            
            
            6.97





We
      did
      not make any dividend payments during the fiscal years ended June 30, 2007
      or
      2006, 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, 2007 or 2006. 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.





12


***Performance
      Graph***





The
      line
      graph below compare the cumulative total stockholder return on our common stock
      with the cumulative total return of the Standard & Poor’s 500 Index and the
      New York Stock Exchange (NYSE) Paper & Allied Products peer group for the
      five fiscal years ended June 30, 2007.  The graph and table assume
      that $100 was invested on June 30, 2002 in each of our common stock, the
      Standard & Poor’s index and the NYSE Paper & Allied Products peer group,
      and that all dividends were reinvested.











**2002**
            **2003**
            **2004**
            **2005**
            **2006**
            **2007****Buckeye
                Technologies Inc.**
            
            **100.00**
            **69.39**
            **117.35**
            **81.33**
            **77.96**
            **157.86****S&P
                500**
            
            **100.00**
            **100.25**
            **119.41**
            **126.96**
            **137.92**
            **166.32****NYSE
                Paper & Allied Products - SIC Codes 2600-2699 (U.S. & Foreign
                Cos.)**
            **100.00**
            **84.62**
            **108.78**
            **96.09**
            **101.45**
            **124.14**





13


**Item
      6. Selected Financial Data**




**Selected
      Financial Data**


In
                thousands, except per share data
            
            **Year
                Ended June 30****2007(a)**
            
            **2006(b)**
            
            **2005(c)**
            
            **2004
                (d)**
            
            **2003
                (e)**Operating
                Data:Net
                  sales
            
            $
            769,321
            
            $
            728,485
            
            $
            $712,782
            
            $
            656,913
            
            $
            641,082Operating
                  income (loss)
            
            
            81,211
            
            
            44,420
            
            
            57,601
            
            
            (19,079
            )
            
            4,496Cumulative
                  effect of changes in accounting, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            5,720
            
            
            -Net
                  income (loss)
            
            
            30,118
            
            
            1,980
            
            
            20,204
            
            
            (38,190
            )
            
            (24,894
            )Basic
                  earnings (loss) per share
            
            $
            0.80
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.03
            )
            $
            (0.67
            )Diluted
                  earnings (loss) per share
            
            $
            0.79
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.03
            )
            $
            (0.67
            )Pro
                  forma amounts (f)Net
                  income (loss)
            
            $
            30,118
            
            $
            1,980
            
            $
            20,204
            
            $
            (43,910
            )
            $
            (23,513
            )Earnings
                  (loss) per shareBasic
            
            $
            0.80
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.18
            )
            $
            (0.64
            )Diluted
            
            $
            0.79
            
            $
            0.05
            
            $
            0.54
            
            $
            (1.18
            )
            $
            (0.64
            )Balance
                  sheet data:Total
                  assets
            
            $
            951,822
            
            $
            948,213
            
            $
            949,737
            
            $
            970,823
            
            $
            1,097,855Total
                  long-term debt (including current portion)
            
            $
            445,893
            
            $
            522,090
            
            $
            538,982
            
            $
            606,748
            
            $
            664,475Ratio
                  of earnings to fixed charges (g)
            
            
            2.1x
            
            $
            (497
            )
            
            1.4x
            
            $
            (69,522
            )
            $
            (41,439
            )





(a)         Includes
      a pretax benefit of $2,000 ($1,274 after tax) from a water conservation
      partnership payment.  Includes $1,867 ($1,171 after tax) from reversal
      of accrued interest related to


cancellation
      of
      a contingent note.  Includes a $2,481 tax benefit from adjustments
      related to state valuation allowances and credits.  Includes a pretax
      charge of $1,249 ($812 after


tax)
      for restructuring costs and $832 ($521 after tax) for early extinguishment
      of
      debt.





(b)         Includes
      a pretax charge of $5,616 ($3,497 after tax) for restructuring and impairment
      costs.  (See Note 3, Impairment of Long-lived Assets and Assets Held
      for Sale.)





(c)        Includes
      a pretax charge of
      $16,905 ($9,392 after tax) for restructuring and impairment
      costs.  (See Note 3, Impairment of Long-lived Assets and Assets Held
      for Sale). 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.





(d)        Includes
      a pretax charge of $51,853 ($33,522 after tax) for restructuring and impairment
      costs.  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.





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





(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,
      and 2003.  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, cigarette filters, rayon
      filaments, acetate plastics, thickeners and papers.  Our products are
      produced in the United States, Canada, Germany and Brazil, and we sell these
      products in approximately 60 countries worldwide.  We generate
      revenues, operating income and cash flows from two reporting segments: specialty
      fibers and nonwoven materials.  Specialty fibers are derived from wood
      and cotton cellulose materials using wetlaid technologies.  Our
      nonwoven materials are derived from wood pulps, synthetic fibers and other
      materials using an airlaid process.





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





Buckeye
      had an excellent year, with
      record revenue and the highest earnings in six years.  Net sales for
      fiscal year 2007 were $769.3 million, a 5.6% increase over the $728.5 million
      achieved in fiscal year 2006.  We earned net income of $30.1 million
      for fiscal year 2007.   These results included the following
      after-tax items:  a $1.3 million benefit from a water conservation
      partnership payment, a $1.2 million benefit from reversal of accrued interest
      related to cancellation of a contingent note owed to Stac-Pac Technologies
      Inc.,
      a $2.5 million tax benefit from adjustments related to state valuation
      allowances and credits, a $(0.8) million restructuring charge and a $(0.5)
      million charge related to early debt retirement.





Our
      markets continue to be robust.  Reliability of our operations is
      generally good, and we will continue to focus on operations stability and high
      up-time.  Earnings benefited from higher selling prices across all of
      our businesses.  The fluff pulp market remains strong and prices for
      fluff pulp continued to increase throughout the year.  Price increases
      in high-end specialty fibers and nonwoven materials accounted for two-thirds
      of
      the overall selling price increase.  We were able to make up for some
      of the margin erosion experienced over the past several years due to higher
      energy, chemicals and transportation costs through annual increases in the
      mid-single digit range for high-end specialty fibers and in the low single
      digit
      range for nonwoven materials.  Our costs were lower in fiscal 2007
      than in the prior year due to lower energy costs, improved capacity utilization
      at our North American airlaid plants and improvements in our Americana
      operation, which were partially offset by higher raw material costs in our
      cotton cellulose and nonwovens materials businesses, increased transportation
      costs and higher direct costs.  As a result of higher selling prices,
      improved mix and lower costs, our gross margin for the year improved to 17.1%
      compared to 13.7% for the prior year.  Our margins in the just
      completed quarter were above 20%.




We
      continue to make progress at our Americana cotton fiber facility in
      Brazil.  Our focus on reliability and efficiency is starting to pay
      off as our Americana team gains experience operating the new
      process.  We have and expect to continue to reduce costs and increase
      prices to offset the rising strength of the Brazilian real against the US
      dollar, and we are making good progress toward being cash neutral.  We
      expect our performance to continue to improve but we cannot predict when the
      site will be profitable due to constraints on raw material availability and
      price.




We
      continue to establish our global sales and distribution network for UltraFiber
      500TM, our concrete-reinforcing fiber.  UltraFiber 500 TM is a niche
      product for the building industry and is an example of the new product
      initiatives we are undertaking to reduce our dependency on fluff
      pulp.  For the year ended June 30, 2007, our sales increased by 62% to
      $5.5 million from $3.4 million for the same period in 2006.  Our
      customer base has almost doubled and installations of our dispensers, that
      provide ready mix operators with significant savings through automation,
      increased from 100 to 230 units, positioning us for a year of strong sales
      growth in fiscal 2008.  Our goal is to double UltraFiber 500TM fiscal
      year 2007 sales in 2008.




Strong
      cash flow generation enabled us to reduce debt by $75.6 million, including
      the
      cancellation of the $5.0 million Stac-Pac Note, during the year ended June
      30,
      2007.  As a result, our net interest expense for the year was down
      $4.4 million (including $1.9 million reversal of accrued interest related to
      a
      contingent note) compared to the previous year.  Cash generated from
      operations in the year just completed was $111.4 million compared to $58.7
      million in fiscal 2006.  We have reduced our long-term debt by
      approximately $255 million over the past five years.




The
      entire organization is involved in Lean Enterprise learning and
      implementation.  We are pleased with the progress we made this year
      with a significant reduction in working capital and progress in eliminating
      non-value added activities.  We know this is a journey and we have
      just begun to create a culture that will improve the speed of our business
      processes, improve product and service quality and reduce cost.  Our
      Lean Enterprise initiative is important and we must improve to stay competitive
      and avoid complacency.  We trained over 60% of our organization,
      including all officers and site managers, in the basic elements of Lean Thinking
      during fiscal 2007.




15


**Results
      of Operations**





*Consolidated
      results*




The
      following table compares the components of consolidated operating income for
      the
      three fiscal years ended June 30, 2007.





*(millions)*
            
            Year
                Ended June 30
            
            $
                Change
            
            Percent
                Change2007
            
            2006
            
            2005
            
            2007/
              2006
            
            2006/
              2005
            
            2007/
              2006
            
            2006/
              2005Net
                  sales
            
            $
            769.3
            
            $
            728.5
            
            $
            712.8
            
            $
            40.8
            
            $
            15.7
            
            
            6
            %
            
            2
            %Cost
                  of goods sold
            
            
            637.5
            
            
            628.7
            
            
            592.7
            
            
            8.8
            
            
            36.0
            
            
            1
            
            
            6Gross
                  margin
            
            
            131.8
            
            
            99.8
            
            
            120.1
            
            
            32.0
            
            
            (20.3
            )
            
            32
            
            
            (17
            )Selling,
                  research and administrative expenses
            
            
            47.0
            
            
            47.8
            
            
            43.3
            
            
            (0.8
            )
            
            4.5
            
            
            (1
            )
            
            10Amortization
                  of intangibles and other
            
            
            2.3
            
            
            2.0
            
            
            2.3
            
            
            0.3
            
            
            (0.3
            )
            
            15
            
            
            (13
            )Impairment
                  and restructuring costs
            
            
            1.3
            
            
            5.6
            
            
            16.9
            
            
            (4.3
            )
            
            (11.3
            )
            
            (77
            )
            
            67Operating
                  income
            
            $
            81.2
            
            $
            44.4
            
            $
            57.6
            
            $
            36.8
            
            $
            (13.2
            )
            
            83
            %
            
            (23
            )%





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




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.




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




In
      fiscal
      year 2006 versus fiscal year 2005 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 2005.




Selling,
      research and administrative expenses decreased slightly in the year ended June
      30, 2007.  As a percentage of net sales these costs were down from
      6.6% in fiscal 2006 to 6.1% in fiscal 2007.  The expense reduction was
      mainly a result of reduced headcount and lower spending on sales
      commissions.




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




During
      the second half of the year ended June 30, 2007, we entered into a restructuring
      program that complements our operations’ consolidations and involves
      consolidation in our European sales offices, product and market development
      and
      corporate overhead.  We expect the total cost of this program will be
      approximately $1.3 million and that it will be completed during the first
      quarter of the 2008 fiscal year.  As a result of this restructuring,
      21 positions will be eliminated which we expect to provide annual savings of
      over $2.0 million.




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





16




*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, 2007.




*(millions)*
            
            Year
                Ended June 30
            
            $
                Change
            
            Percent
                Change2007
            
            2006
            
            2005
            
            2007/
              2006
            
            2006/
              2005
            
            2007/
              2006
            
            2006/
              2005Net
                  sales
            
            $
            543.8
            
            $
            515.9
            
            $
            513.6
            
            $
            27.9
            
            $
            2.3
            
            
            5
            %
            
            0
            %Operating
                  income
            
            
            63.7
            
            
            35.8
            
            
            64.1
            
            
            27.9
            
            
            (28.3
            )
            
            78
            
            
            (44
            )





Specialty
      fibers net sales improved during the year ended June 30, 2007 versus the prior
      year, primarily driven by higher selling prices and improved product mix, offset
      partially by the closure of the Glueckstadt plant, which had a negative impact
      on sales volume.




Strong
      demand in our high-end specialty and fluff markets allowed us to raise prices
      during the year.  Fluff pulp pricing increased by approximately $55
      per ton on the average during the year ended June 30, 2007 versus the previous
      year.  Average selling prices on our high-end specialty products
      increased in the mid-single digit range for the year.




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




We
      have
      made good progress at our Americana cotton fiber facility in
      Brazil.  Reduced costs and higher volumes contributed to improved
      earnings.  The focus on reliability and efficiency has been successful
      and the facility has demonstrated  the ability to run at design rate
      and high reliability.  The operation averaged 96 tons per day during
      the just completed quarter with many days at or above the design rate of 110
      tons per day.  We are confident that the facility has the capability
      of 40,000 tons annually.  The process is delivering quality products
      with little offgrade.





The
      cotton crop in Brazil this year is up 40% from the prior year, but the amount
      of
      seed delinted and crushed for oil will not increase as much as we had
      hoped.  We are strengthening relationships with existing raw material
      suppliers to increase delinting capacity and assisting with their expansion
      plans.  This looks positive, but will take time to
      implement.  In the near term, we will continue to operate the facility
      at its current rate of approximately 2,000 tons per month.





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.





Average
      fluff pulp pricing declined by less that 1% during fiscal year 2006 versus
      fiscal year 2005.  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 fiscal year 2006 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.


*Nonwoven
      materials*




The
      following table compares nonwoven materials net sales and operating income
      for
      the three years ended June 30, 2007.




*(millions)*
            
            Year
                Ended June 30
            
            $
                Change
            
            Percent
                Change2007
            
            2006
            
            2005
            
            2007/
              2006
            
            2006/
              2005
            
            2007/
              2006
            
            2006/
              2005Net
                  sales
            
            $
            258.8
            
            $
            240.9
            
            $
            226.5
            
            $
            17.9
            
            $
            $14.4
            
            
            7
            %
            
            6
            %Operating
                  income
            
            
            21.2
            
            
            15.9
            
            
            13.0
            
            
            5.3
            
            
            2.9
            
            
            33
            
            
            22





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




17


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




Operating
      income improved during the twelve months ended June 30, 2006 versus the same
      period in 2005.  Higher revenue from volume and increased pricing
      overcame higher raw materials, energy, transportation, and other manufacturing
      costs to improve operating margins during the period.




*Restructuring
      and impairment activities*




During
      the three years ended June 30, 2007, 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, 2007.
      Following the table is an explanation of the programs and the resulting
      impairment charges. For further explanation of these charges, see Note 3,
      Impairment of Long-lived Assets and Assets Held for Sale, and Note 4,
      Restructuring Costs, to the Consolidated Financial Statements.





Year
                Ended June 30
            
            Total*(millions)*
            
            2007
            
            2006
            
            2005
            
            ChargesImpairment
                charges
            
            $
            -
            
            $
            2.1
            
            $
            12.3Restructuring
                costs2007
                Restructuring program
            
            $
            1.3
            
            $
            -
            
            $
            -
            
            $
            1.32005
                Restructuring program
            
            
            -
            
            
            3.5
            
            
            3.0
            
            
            6.52004
                Restructuring program
            
            
            -
            
            
            -
            
            
            1.2
            
            
            3.02003
                Restructuring programs
            
            
            -
            
            
            -
            
            
            0.4
            
            
            6.2Total
                restructuring costs
            
            $
            1.3
            
            $
            3.5
            
            $
            4.6
            
            $
            17.0





*2007
      Restructuring program*





In
      January 2007, we entered into a restructuring program that complements our
      operations’ consolidations and involves consolidation in our European sales
      offices, product and market development and corporate overhead
      operations.  We anticipate the total cost of this program will be
      approximately $1.3 million and will be completed during the first quarter of
      the
      2008 fiscal year.  As a result of this restructuring, 21 positions
      will be eliminated which will provide annual savings of over $2.0
      million.





*2005
      Restructuring program and impairments*





In
      January 2005, we announced our decision to discontinue producing cotton linter
      pulp at our Glueckstadt facility. 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 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.  This resulted 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.





18


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.  In September 2006, the remaining
      assets were sold for $0.5 million.  Since we previously had written
      the value of these assets down to $0.2 million, we recorded a gain on sales
      of
      assets held for sale of $0.3 million.  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.





*2004
      Restructuring program and impairments*




During
      fiscal 2004, we initiated the discontinuation of production of nonwoven
      materials at our Cork, Ireland facility.  Subsequent to the closure of
      this facility, we completed the sale of our related building and
      equipment.  As a result of the sale and disposition of the building
      and equipment for net proceeds of $13.1 million (net of $1.9 million of
      decommissioning and selling costs), we recognized a net gain of $7.2 million
      ($4.7 million 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.





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.





*2003
      Restructuring programs 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, eliminating approximately 100 positions. We
      completed this partial closure in August 2003 but continue to produce cosmetic
      cotton products at the Lumberton site.  During the first quarter of
      fiscal 2004, we entered into a second phase of this restructuring
      program.  As a result of this restructuring, 78 positions were
      eliminated.  These positions include manufacturing, sales, product
      development and administrative functions throughout the
      organization.  The total cost of the 2003 programs was $6.2 million,
      of which $0.4 was expensed in fiscal 2005.





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.





*Interest
      expense and amortization of debt costs*





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




We
      incurred interest expense and amortization of debt costs of $43.9 million in
      fiscal 2006, down $1.3 million from fiscal 2005. This improvement was primarily
      the result of lower average debt levels during fiscal 2006 and the impact of
      the
      capitalized interest discussed previously.  These improvements were
      partially offset by higher average variable interest rates during fiscal
      2006.





*Loss
      on early extinguishment of debt costs*





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





*Fiscal
      year 2006 -* 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.





19


*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.





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





*Gain
      on sale of assets held for sale*





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





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 2007, 2006 and 2005 were $ 1.9 million, $(0.4)
      million and $(0.6)million, respectively.    The income in
      fiscal 2007 was primarily due to $2.0 million from a water conversation
      partnership payment received pursuant to our reduction in the daily water permit
      limit at the Foley plant.   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.





*Income
      tax expense*




Our
      effective tax rate for 2007 was
      approximately 31% versus (189%) in fiscal 2006 and (2%) in fiscal
      2005.





This
      tax
      rate includes a tax benefit from reduction in the Tennessee state net operating
      loss valuation allowance and recognition of Tennessee industrial machinery
      credits totaling $2.5 million during the fourth quarter of fiscal 2007 as a
      result of tax planning.





Our
      Brazilian valuation allowance increased $2.5 million in 2007 due to 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 was completed on December 31, 2006.  For
      transactions during calendar years 2005 and 2006, the income exclusion was
      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
      was phased-out completely during the second half of 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 our U.S. net operating loss position, this deduction had
      no impact to fiscal year 2007 other than a slight reduction to alternative
      minimum taxes.  See Note 11, Income Taxes, in the Consolidated
      Financial Statements for further discussion of income taxes.





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.





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.


20


**Financial
      Condition**





Our
      financial condition continued to improve during fiscal year 2007.  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: a 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,
      2007, and believe we will continue to remain in compliance for the foreseeable
      future.  These sources of financing are described in detail in Note 8,
      Debt, to the Consolidated Financial Statements.




Our
      total
      debt and capital leases decreased $76.2 million (including the cancellation
      of
      the $5.0 million  note owed to Stac-Pac Technologies Inc.) to $445.9
      million at June 30, 2007 from $522.1 million at June 30, 2006. From June 30,
      2005 to June 30, 2006, total debt decreased by $16.9 million.  Our
      total debt as a percentage of our total capitalization was 56.2% at June 30,
      2007 as compared to 64.3% at June 30, 2006 and 66.7% at June 30,
      2005**.**




On
      June
      30, 2007, we had $14.8 million of cash and cash equivalents and $65 million
      borrowing capacity on our old credit facility.





On
      July
      25, 2007, we established a new $200 million senior secured revolving credit
      facility with a maturity date of July 25, 2012.  This facility amends
      and restates our existing credit facility.  Initially, we used the
      proceeds from this new credit facility to pay the outstanding balance on the
      former credit facility plus fees and expenses.  The interest rate
      applicable to borrowings under the revolver is grid based pricing, related
      to
      our total leverage ratio, of the agent’s prime rate plus 0.25% to 1.00% or a
      LIBOR-based rate ranging from LIBOR plus 1.25% to LIBOR plus
      2.00%.  We plan to use the proceeds from this facility to redeem the
      remaining $60 million of our 2008 notes, to redeem $20 million of the 2010
      notes
      in mid-September 2007, and for general corporate purposes.  The credit
      facility is secured by substantially all of our assets located in the United
      States.





The
      new
      credit facility contains covenants customary for financing of this type. The
      financial covenants include: maximum total leverage ratio of consolidated total
      debt to consolidated earnings before interest, taxes, depreciation and
      amortization (“EBITDA”), and minimum ratio of consolidated EBITDA to
      consolidated interest expense.  During fiscal year 2007, we were in
      compliance with the financial covenants under our old credit
      facility.




The
      new credit facility (taking into account the $33.6 million outstanding on the
      old term loan) increased borrowing capacity to $161.4 million.  The
      new credit facility also contains a $50 million increase option.  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 new revolving credit facility.  The commitment fee, on the
      unused portion of the new revolving credit facility, ranges from 0.25% to 0.40%
      per annum based on a grid related to our leverage ratio.  Total costs
      for the issuance of the new facility were approximately $1.3 million and will
      be
      amortized to interest expense using the effective interest method over the
      life
      of the facility.





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.  We have not repurchased any shares of our common stock since
      fiscal year 2001.  Through June 30, 2007, we had repurchased a total
      of 5,009,300 shares under the current board authority.





21


***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 $14.8 million
      at
      June 30, 2007, compared to $8.7 million at June 30, 2006 and $9.9 million at
      June 30, 2005. The following table provides a summary of cash flows for the
      three years ended June 30, 2007.





*(millions)*
            
            2007
            
            2006
            
            2005Operating
                  activities:Net
                  income
            
            $
            30.1
            
            $
            2.0
            
            $
            20.2Noncash
                  charges and credits, net
            
            
            62.5
            
            
            49.3
            
            
            58.3Changes
                  in operating assets and liabilities, net
            
            
            18.8
            
            
            7.4
            
            
            0.1Net
                  cash provided by operating activities
            
            
            111.4
            
            
            58.7
            
            
            78.6Investing
                  activities:Purchases
                  of property, plant and equipment
            
            
            (45.2
            )
            
            (45.6
            )
            
            (45.3
            )Proceeds
                  from sales of assets
            
            
            0.5
            
            
            1.2
            
            
            13.6Other
                  investing activities
            
            
            (0.5
            )
            
            (0.5
            )
            
            (0.5
            )Net
                  cash used in investing activities
            
            
            (45.2
            )
            
            (44.9
            )
            
            (32.2
            )Financing
                  activities:Net
                  borrowings (payments) under lines of credit
            
            
            (3.0
            )
            
            0.4
            
            
            0.4Payments
                  on long-term debt and other
            
            
            (67.8
            )
            
            (16.8
            )
            
            (67.7
            )Other
                  financing activities, net
            
            
            9.9
            
            
            0.5
            
            
            2.4Net
                  cash used in financing activities
            
            
            (60.9
            )
            
            (15.9
            )
            
            (64.9
            )Effect
                  of foreign currency rate fluctuations on cash
            
            
            0.8
            
            
            0.9
            
            
            1.2Net
                  increase (decrease) in cash and cash equivalents
            
            $
            6.1
            
            $
            (1.2
            )
            $
            (17.3
            )





*Cash
      provided by operating activities*





The
      $52.7
      million increase in cash flows from operating activities in 2007 was primarily
      due to improved profits of $28.1 million, higher accounts payable and current
      liabilities and deferred taxes.  The higher current liabilities were
      the result of increases in taxes payable, incentive plans and general
      payables.  The change in deferred taxes was a result of our higher
      profits and the reversal of some federal and state valuation allowances being
      an
      offset to our net operating loss.




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
      plant 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 market production.





*Net
      cash used in investing activities*





Purchases
      of property, plant and equipment were consistent during the last three fiscal
      years.  We expect efficiency improvement and energy savings projects,
      maintenance capital, and environmental spending will result in total capital
      expenditures of approximately $48 million for fiscal 2008.





We
      expect
      to incur significant capital expenditures in the future to comply with
      environmental obligations at our Perry, Florida specialty fibers
      facility.  Based on the requirements of the proposed permit, we expect
      to incur capital expenditures of approximately $10 million over the next four
      years (beginning fiscal year 2008) on in-plant process changes, and additional
      capital expenditures of approximately $50 million over at least five years,
      possibly beginning as early as fiscal year 2012.  The amount and
      timing of these capital expenditures may vary depending on a number of
      factors.  For additional information on environmental matters, see
      Note 17 to the Consolidated Financial Statements.




*Net
      cash used in financing activities*





During
      fiscal year 2007, we used cash from operations and $9.9 million received from
      option exercises to reduce our debt and capital leases by $70.8
      million.  We are focused on debt reduction with an intermediate term
      objective of a 50/50 debt to equity balance in our capital
      structure.  (See Note 8, Debt, to the Consolidated Financial
      Statements for further information.)




22





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.





***Contractual
      Obligations***




The
      following table summarizes our significant contractual cash obligations as
      of
      June 30, 2007. 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)
            
            $
            597.4
            
            $
            37.0
            
            $
            125.7
            
            $
            192.6
            
            $
            242.1Capital
                  lease obligations (2)
            
            
            0.8
            
            
            0.5
            
            
            0.3
            
            
            -
            
            
            -Operating
                  lease obligations (2)
            
            
            1.4
            
            
            0.9
            
            
            0.5
            
            
            -
            
            
            -Timber
                  commitments (3)
            
            
            43.6
            
            
            11.7
            
            
            25.4
            
            
            6.5
            
            
            -Linter
                  commitments (4)
            
            
            17.3
            
            
            17.3
            
            
            -
            
            
            -
            
            
            -Other
                  purchase commitments (5)
            
            
            34.5
            
            
            19.6
            
            
            7.0
            
            
            4.5
            
            
            3.4Total
                  contractual cash obligations
            
            $
            695.0
            
            $
            87.0
            
            $
            158.9
            
            $
            203.6
            
            $
            245.5





(1)
      Amounts include
      related interest payments. Interest payments for variable debt of $33.6 million
      are based on the effective rate as of June 30, 2007 of 7.3%. See Note 8, Debt,
      to the Consolidated Financial Statements for further information on interest
      rates.





(2)
      Capital lease
      obligations represent principal and interest payments. See Note 9, Leases,
      to
      the Consolidated Financial Statements for further information.




(3)
      See Note 16,
      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 2008; 1-3 years references fiscal 2009 and 2010; 3-5
      years references fiscal 2011 and 2012.





Note:
            Additionally,
                the cash flow to fund postretirement benefit obligations has an expected
                net present value of $24.5 million.  The actuarially estimated
                annual benefit payments net of retiree contributions are as follows:
                2008
                - $1.7 million; 2009-2010 - $3.6 million; 2011 - 2012 - $3.6 million;
                and
                2013 through 2017 - $9.9 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 12, Employee Benefit Plans, to the Consolidated
                Financial Statements for further
                information.










23




**Recent
      Accounting Pronouncements**







**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 2007, 2006 and 2005 was $0.3 million, $0.1 million
      and
      $1.4 million, respectively.





*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
      2007, we increased the valuation allowance recorded against certain foreign
      net
      operating losses by approximately $2.5 million and decreased the valuation
      allowances recorded against certain state net operating losses and tax credits
      by approximately $2.4 million.





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 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.


24


*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 is determined to
      not
      be recoverable, we measure the potential impairment by comparing the carrying
      value of the assets to their fair value. 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 recorded no impairment
      charges in fiscal year 2007.  We recorded $2.1 million, and $12.3
      million for years ended June 30, 2006, and 2005, 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 3,
      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 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.





**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 and fair value of long-term debt at June 30,
      2007 were $445.9 million and $450.8 million and at June 30, 2006 were $522.1
      million and $497.3 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 a $6.7 million increase in the
      fair value of long-term debt as of June 30, 2007.





We
      had
      $33.6 million of variable rate long-term debt outstanding at June 30,
      2007.  At this borrowing level, a hypothetical 100 basis point
      increase in interest rates would have a $0.3 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 inter-bank rates and U.S.
      prime rates.





25


***Foreign
      Currency Exchange Rates***





Foreign
      currency exposures arise from transactions including 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.  Our euro exposure is
      internally hedged for the most part because a high percentage of both the sales
      and costs at our Steinfurt, Germany plant are denominated in euros.  We
      currently hedge about 50% of our balance sheet exposure to the Canadian dollar
      and we do not have any hedges in place to protect aganst fluctuations in the
      Brazilian real.  However, we are continuously evaluating our foreign
      currency exposure and our hedging policy is subject to change.





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 $201.3 million
      and
      $196.9 million at June 30, 2007 and 2006, 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 $18.3 million at June 30,
      2007.  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.





***Availability
      and 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.  We have
      potential raw material availability issues in our specialty cotton fibers
      business in both North America and Brazil.  We have increased our
      imported cotton linters purchases for our Memphis specialty cotton fiber
      production facility in order to minimize the impact of the current constraints
      on North American cotton fiber availability.  Currently our production
      is constrained by lint availability.




***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
      May
      2007, we entered into a seven year electrical power contract for power usage
      in
      Brazil.  This contract bypasses the local utility company thereby
      reducing our energy costs by approximately $0.5 million each year.





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, 2007 or 2006 requiring fair value
      treatment.





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.





26


***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 17, Contingencies, 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, 2007 (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 internal control over financial reporting is
      presented on page F-4 of this Annual Report on Form 10-K.




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




During
      our fiscal quarter ended June 30, 2007, 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.




27


**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 2007 Annual
      Proxy Statement for the 2007 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 September 1, 2007
      are:




Name
            Age
            Position
            Elected
                to Present PositionJohn
                B. Crowe
            60
            Chairman
                of the Board, Chief Executive Officer and Director
            July
                2006Kristopher
                J. Matula
            45
            President,
                Chief Operating Officer and Director
            July
                2006Charles
                S. Aiken
            57
            Sr.
                Vice President, Manufacturing
            October
                2003Jeffery
                T. Cook
            45
            Sr.
                Vice President, Marketing
            February
                2006Sheila
                Jordan Cunningham
            55
            Sr.
                Vice President, General Counsel and Secretary
            April
                2000Steven
                G. Dean
            51
            Sr.
                Vice President and Chief Financial Officer
            July
                2007Douglas
                L. Dowdell
            49
            Sr.
                Vice President, Specialty Fibers
            February
                2006William
                M. Handel
            61
            Sr.
                Vice President, Lean Enterprise
            February
                2006Paul
                N. Horne
            52
            Sr.
                Vice President, Product and Market Development
            February
                2006Marko
                M. Rajamaa
            46
            Sr.
                Vice President, Nonwovens
            October
                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 and Director*


Mr.
      Matula has served as President and Chief Operating Officer since July 1,
      2006.  Mr. Matula was elected as a director of Buckeye in April
      2007.  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.


28


**Steven
      G. Dean**


*Sr.
      Vice President and Chief Financial Officer*


Mr.
      Dean
      has served as Sr. Vice President and Chief Financial Officer since July 1,
      2007.
      He served as Vice President and Chief Financial Officer from July 2006 to July
      2007. 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.





**Marko
      M. Rajamaa**


*Senior
      Vice President, Nonwovens*


Mr.
      Rajamaa has served as Senior Vice
      President, Nonwovens since October 26, 2006.  He served as Vice
      President, Nonwovens from February 2006 to October 2006 and as Vice President,
      Nonwovens Sales – Europe and Middle East from January 2002 to February
      2006.  Previously, he served as Manager, Nonwoven Sales, Europe,
      Middle East and Africa from 1999 to 2002.  Prior to joining Buckeye in
      1999, he held various sales management positions with Walkisoft /
      UPM-Kymmene.





*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.




Corporate
      Governance and Compliance with Section 16(a) of the Exchange Act




Information
      relating to corporate governance and compliance with Section
      16(a) of the Exchange Act will be included in our 2007 Annual Proxy Statement
      and is incorporated herein by reference.  As part of this Annual Report on
      Form 10-K, we are filing the applicable certifications of our Chief Executive
      Officer and Chief Financial Officer required under Section 302 and 906 of the
      Sarbanes-Oxley Act of 2002.  In addition, on September 7, we filed with the
      New York Stock Exchange the annual certification of our Chief Executive Officer
      stating that he is not aware of any violation by Buckeye Technologies Inc.
      of
      the New York Stock Exchange's corporate governance listing
      standards.




**Item
      11. Executive Compensation**





Information
      relating to this item will be included in our 2007 Annual Proxy Statement and
      is
      incorporated herein by reference.





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





Information
      relating to this item will be included under the captions “Security Ownership of
      Certain Beneficial Owners and Management” and “Equity Compensation Plan
      Information” in our 2007 Annual Proxy Statement and is incorporated herein by
      reference.





**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence**





Information
      relating to this item will be included in our 2007 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 2007
      Annual Proxy Statement and is incorporated by reference herein.










29


**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, 1997 file no. 001-14030,
                filed on February 13, 19983.1(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 for quarter ended March 31, 2006 file no. 001-14030,
                filed on April 27,20064.1
            First
                Amendment to the Rights Agreement
            Form
                8-A to Form 10-K for year ended June 30, 1997 file no. 001-41030,
                filed on
                September 26, 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 for year ended June 30, 1998 file no. 001-14030,
                filed
                on September 23, 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 for year ended June 30, 1998 file no. 001-14030,
                filed
                on September 23, 199810.4
            Form
                of Stock Option Subscription Agreement
            Exhibit
                10.4 to Form 10-K for year ended June 30, 1998 file no. 001-14030,
                filed
                on September 23, 199810.5
            Amended
                and Restated Formula Plan for Non-Employee Directors
            Exhibit
                10.1 to Form 10-Q for quarter ended December 31, 2000 file no. 001-14030,
                filed on February 6, 200110.6
            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 for quarter ended March 31, 1999 file no.
                001-14030, filed on May 12, 199910.9
            Form
                of Change in Control Agreement, dated August 8, 2006
            Exhibit
                10.1 to Form 8-K filed no. 001-14030, filed on August 11,
                200610.10
            Amended
              and Restated Credit Agreement dated 25, 2007 amount the Registrant;
              Bank
              of America NA; Banc of America Securities LLC; Citizens Bank of
              Pennsylvanis; Cobank, ACB; Regions Ban; and the other lenders party
              thereto
            Exhibit
              10.10 to Form 8-K file no. 001-14030, filed on July 31,
              200712.1
            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


30


**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:
            September
                6, 2007





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:
            September
                6, 2007





By:
            /s/
                Kristopher J. MatulaKristopher
                J. Matula, Director, President, and Chief Operating
                OfficerDate:
            September
                6, 2007





By:
            /s/
                Katherine Buckman GibsonKatherine
                Buckman Gibson, DirectorDate:
            September
                6, 2007





By:
            /s/
                Red CavaneyRed
                Cavaney, DirectorDate:
            September
                6, 2007





By:
            /s/
                Lewis E. HollandLewis
                E. Holland, DirectorDate:
            September
                6, 2007




By:
            /s/
                Steven G. DeanSteven
                G. Dean, Senior Vice President and Chief Financial
                OfficerDate:
            September
                6, 2007





By:
            /s/
                Elizabeth J. WelterElizabeth
                J. Welter, Vice President and Chief Accounting OfficerDate:
            September
                6, 2007


31


**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, 2007, June 30, 2006 and for the Three Years
                Ended June 30, 2007:Consolidated
                Statements of
                Income
            F-6Consolidated
                Balance
                Sheets
            F-7Consolidated
                Statements of
                Stockholders’ Equity
            F-8Consolidated
                Statements of Cash
                Flows
            F-9Notes
                to Consolidated Financial
                Statements
            F-10Schedule:Schedule
                II - Valuation and
                Qualifying Accounts
            F-36








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. Matual
            /s/
                Steven G. DeanJohn
                B. Crowe
            Kristopher
                J. Matula
            Steven
                G. DeanChairman
                of the Board and
            President
                and
            Senior
                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, 2007,
      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, 2007.





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





/s/
                John B. Crowe
            /s/
                Steven G. DeanJohn
                B. Crowe
            Steven
                G. DeanChairman
                of the Board and
            Senior
                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 Buckeye Technologies Inc.’s internal control over financial reporting as
      of June 30, 2007, 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 included in the accompanying Management’s Report on Internal Control
      Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing
      and evaluating the design and operating effectiveness of internal control based
      on the assessed risk, 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, Buckeye Technologies Inc. maintained, in all material respects,
      effective internal control over financial reporting as of June 30, 2007, 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, 2007 and 2006 and the related consolidated
      statements of income, stockholders’ equity, and cash flows for each of the three
      years in the period ended June 30, 2007 of Buckeye Technologies Inc. and our
      report dated September 5, 2007 expressed an unqualified opinion
      thereon.











Memphis,
      Tennessee                                                                                                           /s/
      Ernst & Young LLP


September
      5, 2007














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, 2007 and 2006 and the related consolidated statements of
      income, stockholders' equity, and cash flows for each of the three years in
      the
      period ended June 30, 2007. Our audits also included the financial statement
      schedule listed in Item 15 (a) in this Annual Report of Form
      10-K.  These financial statements and financial statement schedule are
      the responsibility of the Company’s management. Our responsibility is to express
      an opinion on these financial statements and financial statement schedule 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, 2007 and 2006, and the consolidated results of its
      operations and its cash flows for each of the three years in the period ended
      June 30, 2007, in conformity with U.S. generally accepted accounting
      principles.  Also, 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.





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, 2007, based on
      criteria established in Internal Control-Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission and our report
      dated September 5, 2007 expressed an unqualified opinion thereon.











Memphis,
      Tennessee                                                                                                           /s/
      Ernst & Young LLP


September
      5, 2007

















F-5


**Consolidated
      Statements of Income**


(In
      thousands, except per share data)


**Year
                Ended June 30****2007**
            
            **2006**
            
            **2005****Net
                  sales**
            
            $
            769,321
            
            $
            728,485
            
            $
            712,782Cost
                  of goods sold
            
            
            637,505
            
            
            628,687
            
            
            592,726Gross
                  margin
            
            
            131,816
            
            
            99,798
            
            
            120,056Selling,
                  research and administrative expenses
            
            
            47,021
            
            
            47,762
            
            
            43,270Amortization
                  of intangibles and other
            
            
            2,335
            
            
            2,000
            
            
            2,280Impairment
                  of long-lived assets
            
            
            -
            
            
            2,090
            
            
            12,326Restructuring
                  costs
            
            
            1,249
            
            
            3,526
            
            
            4,579**Operating
                  income**
            
            
            81,211
            
            
            44,420
            
            
            57,601Other
                  income (expense):Interest
                  income
            
            
            355
            
            
            635
            
            
            943Interest
                  expense and
                  amortization of debt costs
            
            
            (39,153)
            
            
            (43,868
            )
            
            (45,142
            )Loss
                  on early
                  extinguishment of debt
            
            
            (832)
            
            
            (151
            )
            
            (242
            )Gain
                  on sale of assets held
                  for sale
            
            
            355
            
            
            -
            
            
            7,203Foreign
                  exchange and
                  other
            
            
            1,902
            
            
            (352
            )
            
            (649
            )Income
                  before income taxes
            
            
            43,838
            
            
            684
            
            
            19,714Income
                  tax expense (benefit)
            
            
            13,720
            
            
            (1,296
            )
            
            (490
            )**Net
                  income**
            
            $
            30,118
            
            $
            1,980
            
            $
            20,204**Earnings
                  per share**Basic
            
            $
            0.80
            
            $
            0.05
            
            $
            0.54Diluted
            
            $
            0.79
            
            $
            0.05
            
            $
            0.54**Weighted
                  average shares for earnings per share**Basic
            
            
            
            37,842
            
            
            37,622
            
            37,447Effect
                  of diluted shares
            
            
            376
            
            
            36
            
            151Diluted
            
            
            38,218
            
            
            37,658
            
            37,598






See
      accompanying notes.


F-6


**Consolidated
      Balance Sheets**




(In
      thousands, except share data)


**June
                30****2007**
            
            **2006****Assets****Current
                  assets:**Cash
                  and cash equivalents
            
            $
            14,790
            
            $
            8,734Accounts
                  receivable - trade, net of allowance for doubtful accounts of $1,399
                  in
                  2007 and $1,904 in 2006
            
            
            112,251
            
            
            110,218Accounts
                  receivable – other
            
            
            4,614
            
            
            2,540Inventories
            
            
            86,777
            
            
            98,567Deferred
                  income taxes
            
            
            4,630
            
            
            4,176Prepaid
                  expenses and other
            
            
            4,822
            
            
            4,297**Total
                  current assets**
            
            
            227,884
            
            
            228,532Property,
                  plant and equipment, net
            
            
            537,655
            
            
            531,898Goodwill
            
            
            155,937
            
            
            149,106Intellectual
                  property and other, net
            
            
            30,346
            
            
            38,677**Total
                  assets**
            
            $
            951,822
            
            $
            948,213**Liabilities
                  and stockholders’ equity****Current
                  liabilities:**Trade
                  accounts payable
            
            $
            41,030
            
            $
            32,973Accrued
                  expenses
            
            
            49,532
            
            
            47,076Current
                  portion of capital lease obligation
            
            
            399
            
            
            627Current
                  portion of long-term debt
            
            
            -
            
            
            1,294**Total
                  current liabilities**
            
            
            90,961
            
            
            81,970Long-term
                  debt
            
            
            445,138
            
            
            519,414Accrued
                  postretirement benefits
            
            
            24,509
            
            
            19,367Deferred
                  income taxes
            
            
            41,761
            
            
            35,686Capital
                  lease obligation
            
            
            356
            
            
            755Other
                  liabilities
            
            
            1,943
            
            
            1,304Commitments
                  and contingencies (Notes 9, 16, and 17)**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; 38,845,682 and 37,901,334 shares outstanding at June 30,
                  2007 and
                  2006, respectively
            
            
            431
            
            
            431Additional
                  paid-in capital
            
            
            48,032
            
            
            49,274Accumulated
                  other comprehensive income
            
            
            49,491
            
            
            33,819Retained
                  earnings
            
            
            307,851
            
            
            277,733Treasury
                  shares, 4,297,088 and 5,241,436 shares at June 30, 2007 and 2006,
                  respectively
            
            
            (58,651
            )
            
            (71,540
            )**Total
                  stockholders’ equity**
            
            
            347,154
            
            
            289,717**Total
                  liabilities and stockholders’ equity**
            
            $
            951,822
            
            $
            948,213


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, 2004**
            
            $
            431
            
            $
            53,594
            
            $
            (569
            )
            $
            255,549
            
            $
            (79,660
            )
            $
            229,345Comprehensive
                  income: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: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
            )
            $
            289,717Comprehensive
                  income:Net
                  income
            
            
            -
            
            
            -
            
            
            -
            
            
            30,118
            
            
            -
            
            
            30,118Other
                  comprehensive income:Foreign
                  currency translation adjustment
            
            
            -
            
            
            -
            
            
            18,707
            
            
            -
            
            
            -
            
            
            18,707Comprehensive
                  income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            48,825Adjustment
                  to apply SFAS 158, net of tax
            
            
            -
            
            
            -
            
            
            (3,035
            )
            
            -
            
            
            -
            
            
            (3,035
            )Issuance
                  of 944,348 shares of common stock
            
            
            -
            
            
            (3,032
            )
            
            -
            
            
            -
            
            
            12,889
            
            
            9,857Stock-based
                  compensation expense
            
            
            -
            
            
            785
            
            
            -
            
            
            -
            
            
            -
            
            
            785Tax
                  benefit from stock-based awards
            
            
            -
            
            
            1,005
            
            
            -
            
            
            -
            
            
            -
            
            
            1,005**Balance
                  at June 30, 2007**
            
            $
            431
            
            $
            48,032
            
            $
            49,491
            
            $
            307,851
            
            $
            (58,651
            )
            $
            347,154See
                  accompanying notes.








F-8





**Consolidated
      Statements of Cash Flows**


(In
      thousands)


**Year
                Ended June 30****2007**
            
            **2006**
            
            **2005****Operating
                activities**Net
                  income
            
            $
            30,118
            
            $
            1,980
            
            $
            $20,204Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Impairment
                  of long-lived assets
            
            
            -
            
            
            2,090
            
            
            12,326Depreciation
                  and depletion
            
            
            49,212
            
            
            46,903
            
            
            45,964Amortization
            
            
            3,258
            
            
            3,336
            
            
            3,477Loss
                  on early extinguishment of debt
            
            
            832
            
            
            151
            
            
            242Deferred
                  income taxes
            
            
            7,205
            
            
            (5,464
            )
            
            4,510Non-cash
                  tax benefit
            
            
            -
            
            
            -
            
            
            (5,481
            )Gain
                  on sale of assets held for sale
            
            
            (355
            )
            
            -
            
            
            (7,203
            )Provision
                  for bad debts
            
            
            (277
            )
            
            123
            
            
            1,372Other
            
            
            2,485
            
            
            2,192
            
            
            3,150Changes
                  in operating assets and liabilities:Accounts
                  receivable
            
            
            (1,931
            )
            
            7,611
            
            
            (5,971
            )Inventories
            
            
            13,159
            
            
            10,900
            
            
            (1,504
            )Other
                  assets
            
            
            (1,041
            )
            
            (5,030
            )
            
            463Accounts
                  payable and other current liabilities
            
            
            8,490
            
            
            (6,071
            )
            
            7,072**Net
                  cash provided by operating activities**
            
            
            111,385
            
            
            58,721
            
            
            78,621**Investing
                  activities**Purchases
                  of property, plant and equipment
            
            
            (45,200
            )
            
            (45,591
            )
            
            (45,329
            )Proceeds
                  from sales of assets
            
            
            521
            
            
            1,163
            
            
            13,648Other
            
            
            (539
            )
            
            (467
            )
            
            (567
            )**Net
                  cash used in investing activities**
            
            
            (45,218
            )
            
            (44,895
            )
            
            (32,248
            )**Financing
                  activities**Net
                  borrowings (payments) under revolving line of credit
            
            
            (3,000
            )
            
            350
            
            
            400Payments
                  on long-term debt and capital lease obligations
            
            
            (67,752
            )
            
            (16,813
            )
            
            (67,758
            )Payments
                  for debt issuance costs
            
            
            -
            
            
            -
            
            
            (5
            )Net
                  proceeds from sale of equity interests
            
            
            9,857
            
            
            549
            
            
            2,468**Net
                  cash used in financing activities**
            
            
            (60,895
            )
            
            (15,914
            )
            
            (64,895
            )**Effect
                  of foreign currency rate fluctuations on
                  cash**
            
            
            784
            
            
            896
            
            
            1,213**Increase
                  (decrease) in cash and cash equivalents**
            
            
            6,056
            
            
            (1,192
            )
            
            (17,309
            )**Cash
                  and cash equivalents at beginning of year**
            
            
            8,734
            
            
            9,926
            
            
            27,235**Cash
                  and cash equivalents at end of year**
            
            $
            14,790
            
            $
            8,734
            
            $
            9,926


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,
      2007 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, 2007, 2006 and 2005 was $269, $1,866 and $418,
      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, recoverability is evaluated based on the undiscounted cash flows
      expected to be generated by the asset.  If the carrying values of the
      assets are determined to not be recoverable, we measure the potential impairment
      by comparing the carrying value of the assets to their fair value. 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 fair value less costs to sell. See Note 3 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 14, “Segment
      Information,” 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.  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 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.   No impairment of goodwill was recorded during the years
      ending June 30, 2007, 2006 and 2005.  The change in goodwill resulted
      from changes in foreign currency exchange rates.





*Intellectual
      Property and Other*




At
      June
      30, 2007 and 2006, we had intellectual property totaling $18,016 and $25,173,
      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.  During fiscal year 2007, we reduced the amount recorded
      for Stac-PacTM
      patents by $5,000 when we cancelled a contingent note to Stac-PacTM Technologies
      Inc.
      that was issued in conjunction with the acquisition in
      2000.  Intellectual property is amortized by the straight-line method
      over 5 to 20 years and is net of accumulated amortization of $15,112 and $14,519
      at June 30, 2007 and 2006, respectively. Intellectual property amortization
      expense of $2,335, $2,000 and $2,280 was recorded during the years June 30,
      2007, 2006 and 2005, respectively. Estimated amortization expense for the five
      succeeding fiscal years follows: $2,231 in 2008, $2,233 in 2009, $2,235 in
      2010,
      $2,237 in 2011 and $2,239 in 2012.




Deferred
      debt costs of $5,407 and $7,534 at June 30, 2007 and 2006, respectively are
      amortized by the effective interest method over the life of the related debt
      and
      are net of accumulated amortization of $7,159 and $6,901 at June 30, 2007 and
      2006, respectively. We recorded amortization of deferred debt costs of $1,300,
      $1,487 and $1,556 during the years ending June 30, 2007, 2006 and 2005,
      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.  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.






F-11


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, *Accounting for Certain Derivative
      Instruments and Certain Hedging Activities*.** Mark-to-market
      gains and losses for forward foreign exchange contracts are recorded in foreign
      exchange and other.




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, 2007 or 2006 requiring fair value
      treatment.





Derivatives
      are recorded in the consolidated balance sheet at fair value. At June 30, 2007
      and 2006, 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 sales
      transaction have been classified as revenue. Costs incurred for shipping and
      handling have been classified as costs of goods sold.





*Repairs
      and Maintenance Costs*





Repairs
      and maintenance costs are
      expensed as incurred.





*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.




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 $18, $(551) and $(226) were recorded during the years
      ended June 30, 2007, 2006 and 2005, respectively.  The cumulative amount of
      Foreign Currency Translation adjustments included in Accumulated Other
      Comprehensive Income was $52,526 and $33,819 for fiscal years 2007 and 2006,
      respectively.







F-12




*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.





*Stock-Based
      Compensation*




In
      December 2004, the Financial
      Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
      Standard (“SFAS”) 123 (revised 2004), *Share-Based Payments* (“SFAS
      123(R)”).





On
      July
      1, 2005 (the first day of our 2006 fiscal year), we adopted SFAS 123(R)
      using a modified prospective application, as permitted. 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 SFAS 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 based on the fair value method under
      SFAS 123(R) which includes the consideration of the accelerated vesting
      described above.





Year
                Ended
              June
                30, 2005Net
                  income as reported
            
            
            
            
            $
            20,204Deduct:
                  Total stock-based compensation expense determined under fair value
                  based
                  method, net of related tax effect
            
            
            
            
            
            (4,856
            )Pro
                  forma net income
            
            
            
            
            $
            15,348Earnings
                  per share:Basic
                  - as reported
            
            
            
            
            $
            0.54Basic
                  - pro forma
            
            
            
            
            $
            0.41Diluted
                  - as reported
            
            
            
            
            $
            0.54Diluted
                  - pro forma
            
            
            
            
            $
            0.41




Stock-based
      compensation expense was $785 ($539 after tax and $0.01 per share) and $561
      ($365 after tax and $0.01 per share) for 2007 and 2006,
      respectively.  See Note 10 for a discussion of the assumptions
      underlying the pro forma calculations above.







F-13




**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
        the first quarter of 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.
  In
        September 2006, the FASB issued SFAS 157, *Fair Value Measurements* (SFAS
        157) and SFAS 158 *Employers Accounting for Defined Benefit Pension and Other
        Postretirement Plans* an amendment of FASB Statements No. 87, 88, 106 and
        132(R) (SFAS 158). SFAS 157 provides enhanced guidance for using fair value
        measurements.  It establishes a framework for measuring fair value
        under GAAP and expands disclosures about fair value measurements. This statement
        is effective for financial statements issued for fiscal years beginning after
        November 15, 2007 and for interim periods within those fiscal years. We are
        currently evaluating the provisions of SFAS 157.




Effective
      for fiscal year 2007, we adopted the disclosure provisions of SFAS No.
      158.  SFAS No. 158 requires that the funded status of defined-benefit
      postretirement plans be recognized in our consolidated balance sheet, with
      a
      corresponding adjustment to accumulated other comprehensive income, net of
      tax.  The adjustment to accumulated other comprehensive income at
      adoption represents the net unrecognized actuarial losses, unrecognized prior
      service costs, and unrecognized transition obligation remaining from the initial
      adoption of SFAS No. 106, all of which were previously netted against the plan’s
      funded status in our consolidated balance sheet pursuant to the provisions
      of
      SFAS No. 106.  These amounts will be subsequently recognized as net
      periodic benefit cost.  Actuarial gains and losses that arise in
      subsequent periods and are not recognized as net periodic benefit cost in the
      same periods will be recognized as a component of other comprehensive
      income.  Those amounts will be subsequently recognized as a component
      of net periodic benefit cost on the same basis as the amounts recognized in
      accumulated other comprehensive income at adoption of SFAS No.
      158.  SFAS No. 158 also requires the measurement date of the plan’s
      funded status to be the same as our fiscal year end.  However, the
      measurement date provision is not required to be adopted until fiscal year
      2009.  See Note 12 for further discussion of the implementation and
      impact of adoption of SFAS No. 158.





In
      February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities*, including an amendment for SFAS
      115 (“SFAS 159”).  SFAS 159 permits all entities the option to measure
      most financial instruments and certain other items at fair value at specified
      election dates and to report related unrealized gains and losses in
      earnings.  The fair value option will generally be applied on an
      instrument-by-instrument basis and is generally an irrevocable
      election.  SFAS 159 is effective for fiscal years beginning after
      November 15, 2007.  We have evaluated the new statement and have
      determined that the adoption of SFAS 159 is not expected to have a material
      effect on our consolidated financial position, results of operation or cash
      flows.





**NOTE
      3: 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 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. 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 and determined that these long-lived assets, with a
      carrying amount of $15,280 (net of $2,977 of foreign currency translation
      adjustment), were impaired.  Consequently, we wrote these assets 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.





F-14


In
      September 2006, the remaining assets were sold for $520 and we recognized a
      net
      gain of $355 ($244 net of tax and $0.01 per share net of tax) during fiscal
      2007.  The gain is presented under the “Gain on sale of assets held
      for sale” caption in the statement of operations.





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





*Cork,
      Ireland Facility*




During
      fiscal 2004, we initiated the discontinuation of production of nonwoven
      materials at our Cork, Ireland facility.  Subsequent to the closure of
      this facility, we completed the sale of our related building and
      equipment.  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.





**NOTE
      4: RESTRUCTURING COSTS**




During
      fiscal 2007, we entered into a restructuring program that complements our
      operations’ consolidations and involves consolidation in our European sales
      offices, product and market development and corporate overhead.  We
      anticipate the total cost of this program will be approximately $1,344 and
      will
      be completed during the first quarter of the 2008 fiscal year.  As a
      result of this restructuring, 21 positions will be eliminated which will provide
      annual savings over $2,000.





During
      fiscal 2005, we entered into a 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, and
      restructuring expenses related to the closure of $3,516 and $2,951 in fiscal
      years 2006 and 2005, respectively.





We
      discontinued production at our Cork, Ireland nonwovens facility in July
      2004.  The closure of the Cork facility resulted in the termination of
      89 employees and resulted in total restructuring expenses of $3,046, of which
      $1,239 were recorded in fiscal year 2005.





During
      fiscal 2003, we initiated the first phase of a restructuring program designed
      to
      deliver cost reductions through reduced expenses across our
      company.  The main component of this phase was the partial closure of
      our Lumberton, North Carolina facility resulting in the consolidation of our
      U.S. cotton linter pulp production at our Memphis, Tennessee facility and
      included the elimination of approximately 100 positions within the specialty
      fibers segment.  During the first quarter of fiscal 2004, we entered
      into a second phase of this restructuring program.  As a result of
      this restructuring, 78 positions were eliminated.  These positions
      included manufacturing, sales, product development and administrative functions
      throughout the organization.  The total cost of the two phases of this
      program was $6,174, of which $10 and $389 were expensed in fiscal years 2006
      and
      2005, respectively.





Restructuring
      expenses are included in “Restructuring costs” in our consolidated statements of
      income. 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,
      2007.


F-15





Year
                Ended June 30, 2007Accrual
              Balance
              as
                of
              June
                30,
              2006
            
            
            Additional
              Charges
            
            
            
            
            Payments
            
            
            Accrual
              Balance
              as
                of
              June
                30,
              2007
            
            
            Program
              Charges
              to
                Date**2005
                Restructuring Program**Specialty
                fibersSeverance
                and employee benefits
            
            $
            9
            
            $
            -
            
            
            
            $
            (9
            )
            $
            -
            
            $
            5,096Other
                miscellaneous expenses
            
            
            11
            
            
            (13
            )
            
            
            
            2
            
            
            -
            
            
            1,484**Total
                2005 Program**
            
            
            20
            
            
            (13
            )
            
            
            
            (7
            )
            
            -
            
            
            6,580**2007
                Restructuring Program**Severance
                and employee benefitsSpecialty
                fibers
            
            
            -
            
            
            765
            
            
            
            
            (765
            )
            
            -
            
            
            765Corporate
            
            
            -
            
            
            364
            
            
            
            
            (165
            )
            
            199
            
            
            364Other
                miscellaneous expensesSpecialty
                fibers
            
            
            -
            
            
            133
            
            
            
            
            (5
            )
            
            128
            
            
            133**Total
                2007 Program**
            
            
            **-**
            
            
            1,262
            
            
            
            
            (935
            )
            
            327
            
            
            1,262**Total
                All Programs**
            
            $
            20
            
            $
            1,249
            
            
            
            $
            (  942
            )
            $
            327
            
            $
            7,842




**NOTE
      5: INVENTORIES**




Components
                of inventoriesJune
                302007
            
            2006Raw
                  materials
            
            $
            25,816
            
            $
            30,028Finished
                  goods
            
            
            39,335
            
            
            45,759Storeroom
                  and other supplies
            
            
            21,626
            
            
            22,780$
            86,777
            
            $
            98,567





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




Components
                of property, plant and equipmentJune
                302007
            
            2006Land
                  and land improvements
            
            $
            16,745
            
            $
            16,209Buildings
            
            
            136,568
            
            
            131,521Machinery
                  and equipment
            
            
            832,854
            
            
            794,522Construction
                  in progress
            
            
            30,132
            
            
            15,4251,016,299
            
            
            957,677Accumulated
                  depreciation
            
            
            (478,644
            )
            
            (425,779
            )$
            537,655
            
            $
            531,898





F-16


**NOTE
      7: ACCRUED EXPENSES**




Components
                of accrued expensesJune
                302007
            
            2006Income
                  taxes
            
            $
            7,172
            
            $
            4,357Interest
            
            
            8,585
            
            
            11,323Retirement
                  plans
            
            
            6,351
            
            
            6,258Salaries
                  and incentive pay
            
            
            8,080
            
            
            4,430Customer
                  incentive programs
            
            
            3,760
            
            
            4,895Vacation
                  pay
            
            
            4,723
            
            
            5,033Other
            
            
            10,861
            
            
            10,780$
            49,532
            
            $
            47,076





**NOTE
      8: DEBT**




Components
                of long-term debtJune
                302007
            
            2006Senior
                Notes due:2013
            
            $
            200,000
            
            $
            $200,000Senior
                  Subordinated Notes due:2008
            
            
            59,948
            
            
            64,9022010
            
            
            151,568
            
            
            152,059Credit
                  Facilities
            
            
            33,622
            
            
            98,747Other
            
            
            -
            
            
            5,000445,138
            
            
            520,708Less
                  current portion
            
            
            -
            
            
            1,294$
            445,138
            
            $
            519,414




*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.





*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 2007, we redeemed $5,000 of the 2008 notes.  We redeemed
      $35,000 of the 2008 notes through fiscal year 2006.  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
      years 2007, 2006 and 2005, we recorded non-cash expenses of $26, $151 and $242,
      respectively related to the early extinguishment of this debt.





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 have been redeemable at our option, in whole or in part, at any time
      since
      October 15, 2006, at a redemption price of 100% of principal amount together
      with accrued and unpaid interest to the date of redemption.




F-17


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, 2007 and
      2006 the unamortized portion of the termination fee was recorded as an increase
      in debt of $1,881 and $2,452, respectively. During the years ended June 30,
      2007, 2006 and 2005, the swap reduced our interest expense by $571, $572 and
      $571, respectively and will continue to reduce interest expense through the
      original termination date.





*Revolving
      Credit Facility*





On
      July
      25, 2007, we established a new $200,000 senior secured revolving credit facility
      with a maturity date of July 25, 2012.  This facility amends and
      restates the Company's existing credit facility.  Initially, we used
      the proceeds from this new credit facility to pay the outstanding balance on
      the
      former credit facility plus fees and expenses.  The interest rate
      applicable to borrowings under the revolver is the agent’s prime rate plus 0.25%
      to 1.00% or a LIBOR-based rate ranging from LIBOR plus 1.25% to LIBOR plus
      2.00%.  We plan to use the proceeds from this facility to redeem the
      remaining $60,000 of our 2008 notes, to redeem $20,000 of the 2010 notes in
      mid-September 2007, and for general corporate purposes.  The credit
      facility is secured by substantially all of our assets located in the United
      States.





We
      had
      $33,622 outstanding on the term loan portion of our old credit facility at
      an
      average variable interest rate of 7.32% as of June 30, 2007.





The
      new
      credit facility contains covenants customary for financing of this type. The
      financial covenants include: maximum total leverage ratio of consolidated total
      debt to consolidated earnings before interest, taxes, depreciation and
      amortization (“EBITDA”), and minimum ratio of consolidated EBITDA to
      consolidated interest expense.  During fiscal year 2007, we were in
      compliance with the financial covenants under the old credit
      facility.




The
      new
      credit facility (taking into account the $33,622 outstanding on the old term
      loan) increased borrowing capacity to $161,383.  The new credit
      facility also contains a $50,000 increase option.  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 new
      revolving credit facility.  The commitment fee, on the unused portion
      of the new revolving credit facility, ranges from 0.25% to 0.40% per annum
      based
      on a grid related to our leverage ratio.  Total costs for the issuance
      of the new facility were approximately $1,300 and will be amortized to interest
      expense using the effective interest method over the life of the
      facility.





Aggregate
      maturities of long-term debt for the next five fiscal years and beyond are
      as
      follows: 2008-$0, 2009-$60,000, 2010-$0, 2011-$150,000, 2012-$0 and thereafter
      $233,622.  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, 2007, 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.







F-18




*Other*





During
      fiscal
      year 2007, we reduced the amount recorded for Stac-PacTM patents
      by $5,000
      when we cancelled a contingent note to Stac-PacTM Technologies
      Inc.
      that was issued in conjunction with the acquisition in 2000.  As a result
      of this cancellation, we reversed $1,867 of accrued interest related to this
      note.




Total
      cash
      interest payments for the years ended June 30, 2007, 2006 and 2005 was $41,043,
      $44,303 and $44,358, respectively.


We
        had no
        off-balance sheet financing except for operating leases as disclosed in Note
        9.


**NOTE
      9: LEASES**




*Capital
      Leases*




We
      entered into capital lease agreements for certain airlaid nonwovens plant
      equipment.  As of June 30, 2007, the total cost of the assets covered
      by these agreements was $2,566 and the accumulated depreciation on these assets
      was $419. At June 30, 2007, our future minimum lease payments, including
      interest totaling $62, for these assets were as follows:  2008—$449
      and 2009—$369. 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 $2,684, $2,940 and $3,371 during the years ended
      June 30, 2007, 2006 and 2005, respectively. The commitments under the operating
      leases at June 30, 2007 were as follows: 2008—$933; 2009—$337; 2010—$119;
      2011—$41 and thereafter—$0.





**NOTE
      10: 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).





We
      use the Black-Scholes option-pricing
      model to calculate the fair value of options for determining our option related
      compensation expense which is recognized on a pro-rated straight-line basis
      over
      the required service period of the award in the "selling, research and
      administrative expenses" caption of the consolidated statements of
      income.  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.  Due to the expiration of the plans, no options were granted
      in fiscal year 2007.  The table below indicates the key assumptions
      used in the option valuation calculations for options granted during fiscal
      years 2006 and 2005 and a discussion of our methodology for developing each
      of
      the assumptions used in the valuation model:




2006
            2005Expected
                  lives
            6.3
                  years
            5.9
                  yearsExpected
                  volatility
            55%
            49%Risk-free
                  interest rate
            4.4%
            3.7%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.





F-19


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




2007
            
            2006
            
            2005Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Shares
            
            Weighted-
              Average
              Exercise
              PriceOutstanding
                  at beginning of year
            
            
            4,240,400
            
            $
            13.34
            
            
            4,765,150
            
            $
            13.57
            
            
            5,046,750
            
            $
            13.35Granted
                  at market
            
            
            -
            
            
            -
            
            
            358,000
            
            
            7.64
            
            
            100,000
            
            
            10.57Exercised
            
            
            (938,950
            )
            
            10.61
            
            
            (73,500
            )
            
            7.47
            
            
            (270,800
            )
            
            8.22Forfeited
            
            
            (29,600
            )
            
            7.62
            
            
            (4,000
            )
            
            7.62
            
            
            (67,600
            )
            
            11.98Expired
            
            
            (266,000
            )
            
            15.50
            
            
            (805,250
            )
            
            12.75
            
            
            (43,200
            )
            
            16.93Outstanding
                  at end of year
            
            
            3,005,850
            
            $
            14.06
            
            
            4,240,400
            
            $
            13.34
            
            
            4,765,150
            
            $
            13.57Exercisable
                  at end of year
            
            
            2,807,050
            
            $
            14.52
            
            
            3,854,800
            
            $
            13.91
            
            
            4,716,350
            
            $
            13.64





The
      total intrinsic value of options exercised during fiscal years 2007, 2006 and
      2005 was $3,203, $108 and $955, respectively.  The fair value of options
      vested during fiscal years 2007, 2006 and 2005 was $1,205, $1 and $6,
      respectively.  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 and $5.32 per option in 2006 and 2005,
      respectively.  No options were granted during fiscal year
      2007.  As of June 30, 2007, the total future compensation cost related
      to non-vested stock option grants was $712 over a weighted average period of
      3.0
      years.  The aggregate intrinsic value of vested options outstanding,
      defined as the excess fair value over the exercise price of the options, at
      June
      30, 2007 was $2,676.




Since
      our
      stock option plans expired during fiscal 2006, there were no options available
      for grant at June 30, 2007 or June 30, 2006.  There were 319,200
      shares reserved for grants of options at June 30, 2005. The following summary
      provides information about stock options outstanding and exercisable at June
      30,
      2007:




Outstanding
            
            ExercisableExercise
                Price
            
            Options
            
            Average
                Exercise Price
            
            Average
                Remaining Life (Years)
            
            Options
            
            Average
                Exercise Price$
                6.50-$12.00
            
            
            1,257,850
            
            $
            10.00
            
            
            5.9
            
            
            1,059,050
            
            $
            10.45$12.01-$18.00
            
            
            1,696,792
            
            
            16.80
            
            
            1.0
            
            
            1,696,792
            
            
            16.80$18.01-$24.00
            
            
            51,208
            
            
            23.04
            
            
            2.5
            
            
            51,208
            
            
            23.04Total
            
            
            3,005,850
            
            $
            14.06
            
            
            3.1
            
            
            2,807,050
            
            $
            14.52





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 1,649,000, 4,411,466 and 4,245,071 for
      the
      years ended June 30, 2007, 2006 and 2005, respectively.




*Restricted
      Stock Plan*




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




2007
            
            2006
            
            2005Shares
            
            Weighted-
              Average
              Price
            
            Shares
            
            Weighted-
              Average
              Price
            
            Shares
            
            Weighted-
              Average
              PriceNonvested
                  at beginning of year
            
            
            291,610
            
            $
            8.23
            
            
            51,440
            
            $
            12.49
            
            
            42,998
            
            $
            12.64Granted
                  at market
            
            
            5,398
            
            
            11.95
            
            
            240,170
            
            
            7.31
            
            
            8,898
            
            
            11.79Vested
            
            
            (34,216
            )
            
            (12.61
            )
            
            -
            
            
            -
            
            
            (282
            )
            
            (10.94
            )Forfeited
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (174
            )
            
            (11.79
            )Nonvested
                  at end of year
            
            
            262,792
            
            $
            7.73
            
            
            291,610
            
            $
            8.23
            
            
            51,440
            
            $
            12.49





F-20


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, 2007, 343,924
      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, 2007, the total future compensation cost
      related to non-vested restricted stock awards was $1,265 over a weighted average
      period of 9.4 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. We have not repurchased any shares of our common stock
      since fiscal year 2001.   A total of 5,009,300 shares have been
      repurchased through June 30, 2007.




**NOTE
      11: INCOME TAXES**




The
      components of income (loss) before income taxes were taxed under the following
      jurisdictions:




Year
                Ended June 302007
            
            2006
            
            2005Domestic
            
            $
            42,421
            
            $
            2,505
            
            $
            18,881Foreign
            
            
            1,417
            
            
            (1,821
            )
            
            833Income
                  before income taxes
            
            $
            43,838
            
            $
            684
            
            $
            19,714





Income
      tax expense (benefit):





Year
                Ended June 302007
            
            2006
            
            2005Current
                tax expense:Federal
            
            $
            827
            
            $
            435
            
            $
            503Foreign
            
            
            5,915
            
            
            4,458
            
            
            185State
                  and
                  other
            
            
            52
            
            
            (120
            )
            
            41Current
                  tax expense
            
            
            6,794
            
            
            4,773
            
            
            729Deferred
                  tax expense (benefit):Federal
            
            
            11,402
            
            
            (2,133
            )
            
            7,204Foreign
            
            
            (2,057
            )
            
            (2,048
            )
            
            (2,724
            )State
                  and
                  other
            
            
            (2,394
            )
            
            (1,381
            )
            
            515Deferred
                  tax expense
            
            
            6,951
            
            
            (5,562
            )
            
            4,995Noncurrent
            
            
            (25
            )
            
            (507
            )
            
            (6,214
            )Income
                  tax expense (benefit)
            
            $
            13,720
            
            $
            (1,296
            )
            $
            (490
            )





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





F-21


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 before
      income taxes is reconciled as follows:




Year
                Ended June 302007
            
            2006
            
            2005Expected
                  tax expense
            
            $
            15,343
            
            
            35.0
            %
            $
            239
            
            
            35.0
            %
            $
            6,900
            
            
            35.0
            %Extraterritorial
                  income exclusion
            
            
            (425
            )
            
            (1.0
            )
            
            (1,542
            )
            
            (225.4
            )
            
            (1,034
            )
            
            (5.2
            )Effect
                  of foreign operations
            
            
            (111
            )
            
            (0.3
            )
            
            (681
            )
            
            (99.6
            )
            
            (1,851
            )
            
            (12.9
            )Change
                  in tax reserves
            
            
            (25
            )
            
            (0.1
            )
            
            362
            
            
            52.9
            
            
            (6,214
            )
            
            (31.5
            )Change
                  in valuation allowances
            
            
            114
            
            
            0.3
            
            
            3,842
            
            
            561.7
            
            
            1,145
            
            
            9.3Adjustment
                  of prior year provision
            
            
            (1,535
            )
            
            (3.5
            )
            
            (1,711
            )
            
            (250.1
            )
            
            -
            
            
            -State
                  taxes and other, net
            
            
            359
            
            
            0.9
            
            
            (1,805
            )
            
            (263.9
            )
            
            564
            
            
            2.8Income
                  tax expense (benefit)
            
            $
            13,720
            
            
            31.3
            %
            $
            (1,296
            )
            
            (189.4
            )%
            $
            (490
            )
            
            (2.5
            )%





During
      fiscal
      year 2007, we increased our valuation allowance related to deferred tax assets
      for net operating losses of the Americana, Brazil operations by $2,482. This
      was
      almost entirely offset by a reduction of valuation allowances in the amount
      of
      $2,481 related to certain state net operating losses and tax credits due to
      tax
      planning efforts by the company.  The increase in our valuation
      allowance in fiscal year 2006 was primarily due to the allowance for losses
      of
      the Americana, Brazil operation.





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 was completed on December 31,
      2006.  For transactions during calendar years 2005 and 2006, the income
      exclusion was 80% and 60% of the exclusion otherwise allowed, respectively.
      Our
      extraterritorial income exclusion benefit was reduced in fiscal 2007 due to
      this
      phase-out and was phased-out completely during the second half of 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 2007 other than a slight reduction to alternative minimum
      taxes.





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 $791 net tax benefit in fiscal 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-22


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




June
                302007
            
            2006Deferred
                tax liabilities:Property,
                  plant and
                  equipment
            
            $
            (85,838
            )
            $
            (88,606
            )Inventory
            
            
            (2,290
            )
            
            (884
            )Other
            
            
            (16,874
            )
            
            (17,108
            )Total
                  deferred tax liabilities
            
            
            (105,002
            )
            
            (106,598
            )Deferred
                  tax assets:Postretirement
                  benefits
            
            
            8,899
            
            
            7,034Inventory
                  costs
            
            
            13
            
            
            141Net
                  operating
                  losses
            
            
            53,733
            
            
            63,373Nondeductible
                  reserves
            
            
            2,204
            
            
            1,960Credit
                  carryforwards
            
            
            11,979
            
            
            9,810Other
            
            
            2,763
            
            
            2,835Total
                  deferred tax assets
            
            
            79,591
            
            
            85,153Valuation
                  allowances
            
            
            (11,720
            )
            
            (10,065
            )Deferred
                  tax assets, net of valuation allowances
            
            
            67,871
            
            
            75,088Net
                  deferred tax liability
            
            $
            (37,131)
            
            $
            (31,510
            )





The
      valuation allowances at June 30, 2007 and 2006 relate specifically to net
      operating losses in certain state and foreign jurisdictions. 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,
      2007 will be fully utilized after consideration of the valuation allowance
      recorded.




Taxes
      paid in fiscal 2007 were $2,162.  Taxes paid net of refunds received
      resulted in no cash taxes paid for fiscal 2006 and we paid $3,075 in cash taxes
      during the year ended June 30, 2005.





At
      June
      30, 2007, foreign net operating loss carryforwards total approximately $51,710,
      which have no expiration date, federal and state net operating loss
      carryforwards total approximately $85,302 and $156,608, respectively, and expire
      between 2018 and 2027. Additionally, at June 30, 2007, we have a minimum tax
      carryforward of $8,092 which has an indefinite life and general business credits
      which will expire between 2021 and 2027.





**NOTE
      12: 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, 2007, 2006 and 2005 was $7,388, $7,153 and $6,743,
      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
      are 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 obligation reduction is being amortized over 7.75
      years.





F-23


Effective
      for fiscal year 2007, we adopted the disclosure provisions of SFAS No.
      158.  SFAS No. 158 requires that the funded status of defined-benefit
      postretirement plans be recognized in our consolidated balance sheet, with
      a
      corresponding adjustment to accumulated other comprehensive income, net of
      tax.  The adjustment to accumulated other comprehensive income at
      adoption represents the net unrecognized actuarial losses, unrecognized prior
      service costs, and unrecognized transition obligation remaining from the initial
      adoption of SFAS No. 106, all of which were previously netted against the plan’s
      funded status in our consolidated balance sheet pursuant to the provisions
      of
      SFAS No. 106.  These amounts will be subsequently recognized as net
      periodic benefit cost.  Actuarial gains and losses that arise in
      subsequent periods and are not recognized as net periodic benefit cost in the
      same periods will be recognized as a component of other comprehensive
      income.  Those amounts will be subsequently recognized as a component
      of net periodic benefit cost on the same basis as the amounts recognized in
      accumulated other comprehensive income at adoption of SFAS No.
      158.  SFAS No. 158 also requires the measurement date of the plan’s
      funded status to be the same as our fiscal year end.  However, the
      measurement date provision is not required to be adopted until fiscal year
      2009.





The
      adoption of the disclosure provisions of SFAS No. 158 resulted in an increase
      in
      accrued postretirement benefits of $4,817, an increase in deferred tax assets
      of
      $1,782 and a decrease in accumulated other comprehensive income of
      $3,035.  The adoption of SFAS No. 158 had no effect on our
      consolidated statement of income for the year ended June 30, 2007 or for any
      prior period presented, and it will not affect our operating results in future
      periods.





The
      components of net periodic benefit costs are as follows:




Year
                Ended June 302007
            
            2006
            
            2005Service
                  cost for benefits earned
            
            $
            598
            
            $
            629
            
            $
            703Interest
                  cost on benefit obligation
            
            
            1,408
            
            
            1,258
            
            
            1,432Amortization
                  of prior service cost
            
            
            (1,002
            )
            
            (1,055
            )
            
            (1,125
            )Amortization
                  of actuarial loss
            
            
            567
            
            
            597
            
            
            389Total
                  cost
            
            $
            1,571
            
            $
            1,429
            
            $
            1,399





The
      following table provides a reconciliation of the changes in the plans’ benefit
      obligations over the two-year period ending June 30, 2007, and a statement
      of
      the plans’ funded status as of June 30, 2007 and 2006:




June
                302007
            
            2006Change
                in benefit obligation:Obligation
                  at beginning of year
            
            $
            22,459
            
            $
            22,567Service
                  cost
            
            
            598
            
            
            629Interest
                  cost
            
            
            1,408
            
            
            1,258Participant
                  contributions
            
            
            565
            
            
            328Actuarial
                  loss (gain)
            
            
            1,289
            
            
            (703
            )Benefits
                  paid
            
            
            (1,755
            )
            
            (1,620
            )Obligation
                  at end of year
            
            
            24,564
            
            
            22,459Change
                  in plan assets:Fair
                  value of plan assets at beginning of year
            
            
            -
            
            
            -Employer
                  contributions
            
            
            1,190
            
            
            1,292Plan
                  participant contributions
            
            
            565
            
            
            328Benefits
                  paid
            
            
            (1,755
            )
            
            (1,620
            )Fair
                  value of plan assets at end of year
            
            
            -
            
            
            -Funded
                  status at end of year
            
            
            (24,564
            )
            
            (22,459
            )Unrecognized
                  prior service credit
            
            
            -
            
            
            (5,550
            )Unrecognized
                  loss
            
            
            -
            
            
            8,642Other
            
            
            (1,687
            )
            
            (1,536
            )Accrued
                  post retirement benefit obligation
            
            
            (26,251
            )
            
            (20,903
            )Less
                  current portion included in accrued expenses
            
            
            1,742
            
            
            1,536Noncurrent
                  obligation recognized in the consolidated balance
                  sheet
            
            $
            (24,509
            )
            $
            (19,367
            )







F-24


As
      a
      result of the adoption of SFAS No. 158 on June 30, 2007, the accrued benefit
      obligation recorded on the consolidated balance sheet at June 30, 2007 reflects
      the accumulated benefit obligation less any portion that is currently
      funded.  The accumulated actuarial loss and prior service cost that
      had not yet been reflected in the net periodic benefit costs were included
      in
      accumulated other comprehensive income at June 30, 2007, as
      follows:





Prior
                service credit
            
            $
            4,548Accumulated
                actuarial loss
            
            
            (9,365
            )Decrease
                in accumulated other comprehensive income due to SFAS No.
                158
            
            
            (4,817
            )Tax
                effect
            
            
            1,782Decrease
                in accumulated other comprehensive income due to  SFAS No. 158,
                net of tax
            
            $
            (3,035
            )





The
      prior service credit and
      accumulated actuarial loss included in other comprehensive income and expected
      to be recognized in net periodic benefit cost during the fiscal year ended
      June 30, 2008 is $(1,002), ($(628) net of tax) and $583 ($366 net of tax),
      respectively.





Expected
      annual benefit payments net of retiree contributions are as follows: 2008 -
      $1,742; 2009 - $1,783; 2010 - $1,782; 2011 - $1,805, 2012 - $1,802 and 2013
      to
      2017 - $9,853.




The
      weighted average assumptions used to determine benefit obligations were as
      follows:





2007
            
            
            2006Discount
                rate
            
            5.90%
            
            
            6.25%Measurement
                date
            
            April
                30, 2007
            
            
            April
                30, 2006




The
      weighted average assumptions used to determine net periodic benefit cost were
      as
      follows:





2007
            
            2006
            
            2005Discount
                rate
            
            
            6.25%
            
            
            5.75%
            
            
            6.50%Measurement
                date
            
            
            April
                30, 2006
            
            
            April
                30, 2005
            
            
            April
                30, 2004





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% and 10.0% for 2007 and 2006, respectively.  The rate is assumed
      to decline gradually to 5.0% in 2011 and remain level thereafter.  The
      effect of the health care cost trend rate diminishes as the net employer cost
      approaches the net employer cost cap, hence; for the fiscal years ending June
      30, 2007 and 2006, the health care cost trend rate assumption does not have
      a
      significant effect on the amounts reported.





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 provided 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
      13: SIGNIFICANT CUSTOMER**




Net
      sales
      to The Procter & Gamble Company and its affiliates for the years ended June
      30, 2007, 2006 and 2005 were 12%, 13% and 14%, respectively, of total net sales.
      Nonwoven materials accounted for 62%, 60% and 56% of these sales in fiscal
      years
      2007, 2006 and 2005, respectively.  The remainder of these sales were
      derived from the specialty fiber segment.





F-25


**NOTE
      14: 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**
            
            
            **2007**
            
            **$**
            **543,831**
            
            **$**
            **258,843**
            
            **$**
            **(33,353**
            **)**
            **$**
            **769,321**2006
            
            
            515,855
            
            
            240,873
            
            
            (28,243
            )
            
            728,4852005
            
            
            513,588
            
            
            226,492
            
            
            (27,298
            )
            
            712,782**Operating
                income (loss)**
            
            
            **2007**
            
            
            **63,671**
            
            
            **21,233**
            
            
            **(3,693**
            **)**
            
            **81,211**2006
            
            
            35,842
            
            
            15,919
            
            
            (7,341
            )
            
            44,4202005
            
            
            64,148
            
            
            12,963
            
            
            (19,510
            )
            
            57,601**Depreciation
                and amortization**
            
            
            **2007**
            
            
            **31,770**
            
            
            **16,047**
            
            
            **3,775**
            
            
            **51,592****of
                intangibles**
            
            
            2006
            
            
            29,945
            
            
            15,835
            
            
            3,398
            
            
            49,1782005
            
            
            28,159
            
            
            16,904
            
            
            3,388
            
            
            48,451**Total
                assets**
            
            
            **2007**
            
            
            **479,121**
            
            
            **270,168**
            
            
            **202,533**
            
            
            **951,822**2006
            
            
            472,559
            
            
            276,589
            
            
            199,065
            
            
            948,2132005
            
            
            467,736
            
            
            285,338
            
            
            196,663
            
            
            949,737**Capital
                expenditures**
            
            
            **2007**
            
            
            **36,614**
            
            
            **4,316**
            
            
            **4,270**
            
            
            **45,200**2006
            
            
            42,410
            
            
            1,939
            
            
            1,242
            
            
            45,5912005
            
            
            39,356
            
            
            3,690
            
            
            2,283
            
            
            45,329





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 3.  Corporate assets primarily
      include cash, goodwill and intellectual property.




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, cigarette filters, 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 302007
            
            2006
            
            2005Chemical
                  cellulose
            
            
            33
            %
            
            32
            %
            
            32
            %Customized
                  fibers
            
            
            16
            %
            
            17
            %
            
            18
            %Fluff
                  pulp
            
            
            18
            %
            
            18
            %
            
            18
            %Nonwoven
                  materials
            
            
            33
            %
            
            33
            %
            
            32
            %100
            %
            
            100
            %
            
            100
            %




F-26


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:
            
            2007
            
            2006
            
            2005United
                States
            
            $
            578,047
            
            
            75
            %
            $
            539,233
            
            
            74
            %
            $
            503,367
            
            
            71
            %Germany
            
            
            104,031
            
            
            14
            
            
            120,970
            
            
            17
            
            
            133,088
            
            
            19Other
            
            
            87,243
            
            
            11
            
            
            68,282
            
            
            9
            
            
            76,327
            
            
            10Total
            
            $
            769,321
            
            
            100
            %
            $
            728,485
            
            
            100
            %
            $
            712,782
            
            
            100
            %








Year
                Ended June 30Net
                sales by point of destination:
            
            2007
            
            2006
            
            2005North
                America
            
            $
            332,825
            
            
            43
            %
            $
            302,527
            
            
            42
            %
            $
            299,192
            
            
            42
            %Europe
            
            
            288,754
            
            
            38
            
            
            274,157
            
            
            38
            
            
            271,806
            
            
            38Asia
            
            
            71,967
            
            
            9
            
            
            76,851
            
            
            10
            
            
            70,390
            
            
            10South
                America
            
            
            28,072
            
            
            4
            
            
            25,865
            
            
            4
            
            
            29,091
            
            
            4Other
            
            
            47,703
            
            
            6
            
            
            49,085
            
            
            6
            
            
            42,303
            
            
            6Total
            
            $
            769,321
            
            
            100
            %
            $
            728,485
            
            
            100
            %
            $
            712,782
            
            
            100
            %





As
                of June 302007
            
            2006
            
            2005Long-lived
                assets by geographical area:United
                States
            
            $
            458,421
            
            $
            464,637
            
            $
            482,113Canada
            
            
            137,911
            
            
            134,102
            
            
            125,099Germany
            
            
            53,596
            
            
            54,658
            
            
            59,294Brazil
            
            
            73,970
            
            
            66,195
            
            
            36,633Other
            
            
            40
            
            
            89
            
            
            94Total
                long-lived assets
            
            $
            723,938
            
            $
            719,681
            
            $
            703,233





**NOTE
      15: RESEARCH AND DEVELOPMENT EXPENSES**




Research
      and development costs of $8,316, $9,182 and $8,785 were charged to expense
      as
      incurred for the years ended June 30, 2007, 2006 and 2005,
      respectively.





**NOTE
      16: COMMITMENTS**




We
      have
      significant purchase contracts for both timber and energy under separate
      agreements expiring at various dates through fiscal year 2014.  Under
      two separate timber contracts we are required to purchase certain timber from
      specified tracts of land that is available for harvest.  The energy
      contract is for our Americana, Brazil operation and requires us to purchase
      a
      minimum amount of contracted energy each year.  The contract prices
      under the terms of the timber agreements are fixed annually based on market
      prices and the contract prices under the energy contract are adjusted annually
      based on inflation indices.  At June 30, 2007, total estimated annual
      purchase obligations for those agreements noted above were as
      follows:  2008—$13,700; 2009—$14,700; 2010—$15,200; 2011—$8,800;
      2012—$2,300; thereafter—$3,400.  Purchases under these agreements for
      the years ended June 30, 2007, 2006 and 2005 were $11,988; $12,978 and $13,672,
      respectively.





**NOTE
      17: 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.


F-27


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, without
      EPA
      objection.  The proposed permit was subsequently challenged by some
      members of the public and an administrative hearing to address the issues was
      subsequently scheduled for April 2007.   The April 2007
      administrative hearing was continued and has yet to be
      rescheduled.  In the interim, Buckeye has been working with the
      agencies to correct some technical errors in the proposed permit.  The
      proposed 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 proposed permit, we
      expect to incur capital expenditures of approximately $10,000 over the next
      four
      years (beginning fiscal year 2008) on in-plant process changes, and additional
      capital expenditures of approximately $50,000 over at least five years, possibly
      beginning as early as fiscal year 2012.  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 an 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
      Foley
      Plant is also subject to FDEP and EPA air emission standards.  The EPA
      had recently adopted new boiler air emission regulations that are applicable
      to
      the Foley Plant and plans had been developed to comply with these
      regulations.  However, these regulations have now been vacated and the
      impact of the anticipated revision of these regulations is not yet
      known.





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.





**NOTE
      18: 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 and fair value of long-term debt and capital leases at June 30, 2007
      were
      $445,893 and $450,833, respectively and at June 30, 2006 were $522,090 and
      $497,256, respectively.****





F-28


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





First
                Quarter
            
            Second
                Quarter
            
            Third
                Quarter
            
            Fourth
                Quarter*Year
                ended June 30, 2007*Net
                  sales
            
            $
            191,406
            
            $
            184,730
            
            $
            193,009
            
            $
            200,176Gross
                  margin
            
            
            29,335
            
            
            29,019
            
            
            32,939
            
            
            40,523Operating
                  income
            
            
            17,487
            
            
            17,338
            
            
            19,558
            
            
            26,828Net
                  income
            
            
            3,807
            
            
            3,820
            
            
            6,573
            
            
            15,918Earnings
                  per shareBasic
            
            $
            0.10
            
            $
            0.10
            
            $
            0.17
            
            $
            0.42Diluted
            
            $
            0.10
            
            $
            0.10
            
            $
            0.17
            
            $
            0.41*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




(1) During
      the
      fourth quarter of fiscal 2007, we incurred a pretax benefit of $2,000 ($1,274
      after tax) from a water partnership payment, $1,867 ($1,171 after tax) from
      reversal of acrued interest related to cancellation of a contingent note, and
      a
      $2,481 tax benefit from adjustments related to state valuation allowances and
      credits.




**NOTE
      20:  SUBSEQUENT EVENTS**





We
      announced on August 17, 2007 our
      intention to call for redemption prior to their maturity $60,000 in aggregate
      principal amount of our outstanding 9 1⁄4% Senior Subordinated Notes due 2008 (the
“2008 Notes”) and will redeem on September 17, 2007, in accordance with their
      terms.  Upon completion of this redemption, none of the 2008 Notes
      will remain outstanding.  A formal notice of redemption has been sent
      separately to the affected holders of the 2008 Notes, in accordance with the
      terms of the indenture for the 2008 Notes.  We plan to finance this
      redemption using our new revolving credit facility.





We
      announced on August 28, 2007 our
      intention to call for redemption prior to their maturity $20,000 in aggregate
      principal amount of our outstanding 8% Senior Subordinated Notes due 2010 (the
      “2010 Notes”) and will redeem on September 24, 2007, in accordance with their
      terms.  Upon completion of this redemption, $130,000 of the 2010 Notes
      will remain outstanding.  A formal notice of redemption has been sent
      separately to the affected holders of the 2010 Notes, in accordance with the
      terms of the indenture for the 2010 Notes.  We plan to finance this
      redemption using our new revolving credit facility.





**NOTE
      21: 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 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, 2007


Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidating
              Adjustments
            
            ConsolidatedNet
                  sales
            
            $
            118,258
            
            $
            496,269
            
            $
            191,635
            
            $
            (36,841
            )
            $
            769,321Cost
                  of goods sold
            
            
            98,736
            
            
            402,463
            
            
            172,656
            
            
            (36,350
            )
            
            637,505Gross
                  margin
            
            
            19,522
            
            
            93,806
            
            
            18,979
            
            
            (491
            )
            
            131,816Selling,
                  research and administrative expenses, and other
            
            
            8,574
            
            
            29,381
            
            
            11,401
            
            
            -
            
            
            49,356Restructuring
                  and impairment costs
            
            
            501
            
            
            51
            
            
            697
            
            
            -
            
            
            1,249**Operating
                  income (loss)**
            
            
            10,447
            
            
            64,374
            
            
            6,881
            
            
            (491
            )
            
            81,211Other
                  income (expense):Net
                  interest expense and amortization of debt
            
            
            (38,919
            )
            
            (131
            )
            
            252
            
            
            -
            
            
            (38,798
            )Other
                  income/(expense), including equity income in
              affiliates
            
            
            39,700
            
            
            1,998
            
            
            288
            
            
            (40,561
            )
            
            1,425Intercompany
                  interest income/(expense)
            
            
            28,345
            
            
            (22,346
            )
            
            (5,999
            )
            
            -
            
            
            -Income/(loss)
                  before income taxes
            
            
            39,573
            
            
            43,895
            
            
            1,422
            
            
            (41,052
            )
            
            43,838Income
                  tax expense/(benefit)
            
            
            9,455
            
            
            14,161
            
            
            3,857
            
            
            (13,753
            )
            
            13,720**Net
                  income (loss)**
            
            $
            30,118
            
            $
            29,734
            
            $
            (2,435
            )
            $
            (27,299
            )
            $
            30,118





**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


F-30


**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-31


**BALANCE
      SHEETS**


As
      of
      June 30, 2007





Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidating
              Adjustments
            
            Consolidated**Assets**Current
                assetsCash
                  and cash equivalents
            
            $
            6,329
            
            $
            447
            
            $
            8,014
            
            $
            -
            
            $
            14,790Accounts
                  receivable,
                  net
            
            
            15,147
            
            
            71,753
            
            
            29,965
            
            
            -
            
            
            116,865Inventories
            
            
            18,468
            
            
            48,739
            
            
            20,501
            
            
            (931
            )
            
            86,777Other
                  current
                  assets
            
            
            2,724
            
            
            5,690
            
            
            1,038
            
            
            -
            
            
            9,452Intercompany
                  accounts receivable
            
            
            -
            
            
            96,305
            
            
            -
            
            
            (96,305
            )
            
            -**Total
                  current assets**
            
            
            42,668
            
            
            222,934
            
            
            59,518
            
            
            (97,236
            )
            
            227,884Property,
                  plant and equipment, net
            
            
            58,941
            
            
            328,480
            
            
            150,234
            
            
            -
            
            
            537,655Goodwill
                  and intangibles, net
            
            
            15,805
            
            
            49,786
            
            
            108,361
            
            
            -
            
            
            173,952Intercompany
                  notes receivable
            
            
            304,310
            
            
            -
            
            
            -
            
            
            (304,310
            )
            
            -Other
                  assets, including investment in subsidiaries
            
            
            451,638
            
            
            327,254
            
            
            99,443
            
            
            (866,004
            )
            
            12,331**Total
                  assets**
            
            $
            873,362
            
            $
            928,454
            
            $
            417,556
            
            $
            (1,267,550
            )
            $
            951,822**Liabilities
                  and stockholders’ equity**Current
                  liabilitiesTrade
                  accounts payable
            
            $
            7,799
            
            $
            25,473
            
            $
            7,758
            
            $
            -
            
            $
            41,030Other
                  current liabilities
            
            
            18,843
            
            
            17,684
            
            
            13,409
            
            
            (5
            )
            
            49,931Intercompany
                  accounts payable
            
            
            84,733
            
            
            -
            
            
            11,571
            
            
            (96,304
            )
            
            -**Total
                  current liabilities**
            
            
            111,375
            
            
            43,157
            
            
            32,738
            
            
            (96,309
            )
            
            90,961Long-term
                  debt
            
            
            445,138
            
            
            -
            
            
            -
            
            
            -
            
            
            445,138Deferred
                  income taxes
            
            
            (38,450
            )
            
            61,034
            
            
            19,177
            
            
            -
            
            
            41,761Other
                  long-term liabilities
            
            
            8,145
            
            
            16,976
            
            
            1,687
            
            
            -
            
            
            26,808Intercompany
                  notes payable
            
            
            -
            
            
            193,789
            
            
            110,520
            
            
            (304,309
            )
            
            -Stockholders’/invested
                  equity
            
            
            347,154
            
            
            613,498
            
            
            253,434
            
            
            (866,932
            )
            
            347,154**Total
                  liabilities and stockholders’ equity**
            
            $
            873,362
            
            $
            928,454
            
            $
            417,556
            
            $
            (1,267,550
            )
            $
            951,822








F-32





**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
            
            
            29,156
            
            
            -
            
            
            112,758Inventories
            
            
            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
            
            
            57,972
            
            
            (57,547
            )
            
            228,532Property,
                  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
            
            
            380,153
            
            
            337,654
            
            
            93,066
            
            
            (797,369
            )
            
            13,504**Total
                  assets**
            
            $
            845,016
            
            $
            900,479
            
            $
            400,112
            
            $
            (1,197,394
            )
            $
            948,213**Liabilities
                  and stockholders’ equity**Current
                  liabilitiesTrade
                  accounts payable
            
            $
            4,857
            
            $
            21,077
            
            $
            7,039
            
            $
            -
            
            $
            32,973Other
                  current liabilities
            
            
            20,416
            
            
            17,390
            
            
            13,890
            
            
            1
            
            
            48,997Intercompany
                  accounts payable
            
            
            52,297
            
            
            -
            
            
            4,808
            
            
            (57,105
            )
            
            -**Total
                  current liabilities**
            
            
            77,570
            
            
            38,467
            
            
            23,037
            
            
            (57,104
            )
            
            81,970Long-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
            
            
            289,717
            
            
            582,513
            
            
            215,299
            
            
            (797,812
            )
            
            289,717**Total
                  liabilities and stockholders’ equity**
            
            $
            845,016
            
            $
            900,479
            
            $
            400,112
            
            $
            (1,197,394
            )
            $
            948,213





F-33


**STATEMENTS
      OF CASH FLOWS**


Year
      ending June 30, 2007


Buckeye
                Technologies Inc.
            
            Guarantors
              US
              Subsidiaries
            
            Non-
              Guarantor
              Subsidiaries
            
            Consolidated**Net
                  cash provided by operations**
            
            $
            74,098
            
            $
            33,395
            
            $
            3,892
            
            $
            111,385**Investing
                  activities:**Purchases
                  of property, plant and equipment
            
            
            (9,037
            )
            
            (31,945
            )
            
            (4,218
            )
            
            (45,200
            )Other
            
            
            -
            
            
            (538
            )
            
            520
            
            
            (18
            )**Net
                  cash used in
                  investing** **activities**
            
            
            (9,037
            )
            
            (32,483
            )
            
            (3,698
            )
            
            (45,218
            )**Financing
                  activities**Net
                  payments under revolving line of credit
            
            
            (3,000
            )
            
            -
            
            
            -
            
            
            (3,000
            )Net
                  payments on long-term debt and other
            
            
            (57,268
            )
            
            (627
            )
            
            -
            
            
            (57,895
            )**Net
                  cash used in financing activities**
            
            
            (60,268
            )
            
            (627
            )
            
            -
            
            
            (60,895
            )Effect
                  of foreign currency rate fluctuations on cash
            
            
            -
            
            
            -
            
            
            784
            
            
            784**Increase
                  in cash and cash equivalents**
            
            
            4,793
            
            
            285
            
            
            978
            
            
            6,056**Cash
                  and cash equivalents at beginning of period**
            
            
            1,535
            
            
            162
            
            
            7,037
            
            
            8,734**Cash
                  and cash equivalents at end of period**
            
            $
            6,328
            
            $
            447
            
            $
            8,015
            
            $
            14,790





**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
            
            
            (24,762
            )
            
            (11,312
            )
            
            19,810
            
            
            (16,264
            )**Net
                  cash used in financing activities**
            
            
            (24,412
            )
            
            (11,312
            )
            
            19,810
            
            
            (15,914
            )Effect
                  of foreign currency rate fluctuations on cash
            
            
            -
            
            
            -
            
            
            896
            
            
            896**Increase
                  (decrease) in cash and cash equivalents**
            
            
            679
            
            
            11
            
            
            (1,882
            )
            
            (1,192
            )**Cash
                  and cash equivalents at beginning of period**
            
            
            860
            
            
            151
            
            
            8,915
            
            
            9,926**Cash
                  and cash equivalents at end of period**
            
            $
            1,539
            
            $
            162
            
            $
            7,033
            
            $
            8,734








F-34





**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-35


**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 30, 2007
            
            $
            1,904
            
            $
            277
            
            $
            (782)(a
            )
            $
            1,399Year
                  ended June 30, 2006
            
            $
            5,602
            
            $
            123
            
            $
            (3,821)(a
            )
            $
            1,904Year
                  ended June 30, 2005
            
            $
            4,240
            
            $
            1,372
            
            $
            (10)(a
            )
            $
            5,602**Accrual
                  for restructuring**Year
                  ended June 30, 2007
            
            $
            20
            
            $
            1,249
            
            $
            (942)(b
            )
            $
            327Year
                  ended June 30, 2006
            
            $
            2,471
            
            $
            3,550
            
            $
            (6,001)(b
            )
            $
            20Year
                  ended June 30, 2005
            
            $
            2,134
            
            $
            4,579
            
            $
            (4,242)(b
            )
            $
            2,471**Deferred
                  tax assets valuation allowance**Year
                  ended June 30, 2007
            
            $
            10,065
            
            $
            114
            
            $
            1,541(c
            )
            $
            11,720Year
                  ended June 30, 2006
            
            $
            5,813
            
            $
            3,842
            
            $
            410(c
            )
            $
            10,065Year
                  ended June 30, 2005
            
            $
            4,125
            
            $
            1,145
            
            $
            543(c
            )
            $
            5,813


(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.





F-36