The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("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 accompanying unaudited financial statements and our Annual Report on Form 10-K for the year ended June 30, 2009 ("Annual Report"), which include additional information about our significant accounting policies, practices and transactions that underlie our financial results. Our MD&A is composed of four major sections: Executive Summary, Results of Operations, Financial Condition, and Critical Accounting Policies.

Except as otherwise specified, references to years (e.g., "2010") indicate our fiscal year ending June 30 of the year referenced and comparisons are to the corresponding period of the prior year. The following discussion includes a comparison of the results of operations for the three months ended September 30, 2009 to the three months ended September 30, 2008.

Except for specific historical information, many of the matters discussed in this report may express or imply projections of revenues or expenditures, plans and objectives for future operations, growth or initiatives, expected future economic performance, or the expected outcome or impact of pending or threatened litigation. These and similar statements regarding events or results which we expect will or may occur in the future, are forward-looking statements that involve risks, uncertainties and other factors which may cause our actual results and performance to differ materially from those expressed or implied by those statements. All forward-looking information is provided pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these risks, uncertainties and other factors. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "trends," "assumptions," "target," "guidance," "outlook," "opportunity," "future," "plans," "goals," "objectives," "expectations," "near-term," "long-term," "projection," "may," "will," "would," "could," "expect," "intend," "estimate," "anticipate," "believe," "potential," "regular," "should," "projects," "forecasts" or "continue" (or the negative or other derivatives of each of these terms) or similar terminology.

We believe the assumptions underlying any forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in or implied by the forward-looking statements. The following important factors, among others, could affect future results, causing these results to differ materially from those expressed in our forward-looking statements: pricing fluctuations and worldwide economic conditions; dependence on large customers; fluctuation in the costs of raw materials and energy resources; competition; changes in the net benefit realized from the alternative fuel mixture credit: changes in fair values of long-lived assets; inability to predict the scope of future environmental compliance costs or liabilities; inability to predict the scope of future restructuring costs or liabilities; and the ability to obtain additional capital, maintain adequate cash flow to service debt as well as meet operating needs. Other factors and risks that may result in actual results differing from this forward-looking information include, but are not limited to, those contained in Part I, Item 1A of the Annual Report, which is incorporated herein by this reference, or from time to time, in our filings with the Securities and Exchange Commission (the "SEC"), press releases and other communications.

Readers are cautioned not to place undue reliance on forward-looking statements made in this report, since the statements speak only as of the report's date. Except as may be required by law, we have no obligation, and do not intend, to publicly update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any future public disclosures that we may make on related subjects in reports that we file with or furnish to the SEC or in our other public disclosures.

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, 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. The key focus areas for Buckeye over the next twelve months include living within our means by focusing on cash flow maximization to pay down debt, optimizing capacity utilization, investing in the Foley Energy Project and identifying new bio-energy initiatives that support profitable, sustainable growth, and accelerating the rate of change to a Lean Enterprise culture.

Sales for the three months ended September 30, 2009 of $177 million were down $44 million or 20% versus the same period in 2008. Reduced shipment volume from our specialty cotton cellulose plants accounted for about $22 million of this sales reduction. Shipment demand for products supplied by these plants was off about 40% compared with the same quarter a year ago, as demand from end-markets supplied by these plants such as LCD screens, specialty paper, construction and automotive paints and laquers was more severely affected by the global economic slowdown than our other businesses. Shipment volumes for our wood specialty fibers facility and our nonwovens facilities were up compared to the same period in 2008. Lower selling prices accounted for another $15 million of the year over year reduction in net sales. Lower fluff pulp prices, which were down about 20%, accounted for about half of this amount. During the recent economic downturn, however, fluff pulp prices have held up better than most expected and have not descended to the levels experienced during earlier downturns. We believe this is due to growing demand for fluff pulp products, mainly in emerging markets, and we have seen several fluff pulp price increases announced in the past several months. A less favorable product mix in our Wood Specialty Fibers business accounted for another $8 million of the sales reduction. While sales of our wood specialty fibers are well-diversified among many end uses, we have seen demand weakness over the past two quarters even in markets that originally held up well at the start of the economic downturn, such as those for food casings and cigarette tow, in addition to markets like those for automotive applications, where demand has been down since the recession began. We were able to keep our wood specialty fibers facility sold out by shifting sales into other specialty markets to offset demand weakness in our traditional markets, but this negatively impacted our sales revenue due to the lower prices in these markets.

Operating income for the three months ended September 30, 2009 was $48.0 million, which was up $25.3 million compared to the same period in 2008. Income from the alternative fuel mixture credits was $35.8 million compared to zero in the year ago quarter. Assuming that the tax credit is not terminated by Congress prior to its scheduled expiration date of December 31, 2009, we would expect to realize a similar amount of income from these credits in the second quarter. Gross margin was down $11.2 million (13.6% of sales compared to 16.0%) and selling, research and administrative expenses were lower by $0.7 million. Raw materials, chemicals, energy and transportation costs were all down significantly compared to the year ago quarter, collectively accounting for an approximate $21 million reduction in cost of goods sold. This reduction, however, did not offset the combined $25 million unfavorable impact of lower selling prices and unfavorable product mix on gross margin. Lower shipment and production volumes accounted for the rest of the year over year drop in gross margin. We continue to take significant downtime at our Memphis and Americana plants to match production to shipment demand. During the three months ended September 30, 2009 we further reduced staffing at our Memphis Plant, aligning capacity utilization with current market conditions. There were approximately $0.8 million in severance costs recognized during the period relating to this staffing reduction. Over the past 12 months, we have reduced staffing at these two plants by a combined total of 70 employees.

Net earnings for the three months ended September 30, 2009 of $39.2 million or $1.00 per diluted share, were up $30.4 million or $0.77 per diluted share compared to the same period in 2008. The alternative fuel mixtures credits accounted for $35.1 million or $0.89 per share of this improvement. Net interest expense for the quarter was down $2.1 million, accounting for an additional earnings improvement of $1.4 million or $0.04 per share. The net impact of the lower gross margin and favorable selling, research and administrative expenses discussed above explain the rest of the year over year change in earnings.

Strong cash flow generation, including $7.7 million from alternative fuel mixture credits, enabled us to reduce debt by $32.5 million in the three months ended September 20, 2009. Net cash provided by operating activities was up $12.0 million compared to the year ago period and net cash used in investing activities was lower by $9.7 million due to the Florida grant of $7.4 million and lower capital expenditures by $2.3 million.

On July 31, 2009, we redeemed the remaining outstanding $110 million of our 8% senior subordinated notes due 2010 (the "2010 Notes") using borrowings under our credit facility. Our interest and amortization of debt costs decreased $2.1 million versus the same period in the prior year as the result of our lower debt levels and lower interest rates as we replaced 8% fixed rate debt for variable rates that are currently below 2%. Our debt target for the end of our 2010 fiscal year has been set at $275 million.

On September 30, 2009 we received a $7.4 million grant to support the Foley Energy Project from the State of Florida. This grant, along with the alternative fuel mixture credits and our strong cash flow, has allowed us to resume this energy project. During the three months ended September 30, 2009, we spent $2.1 million on this project and expect to spend an additional $15.4 million during the current fiscal year.

Results of Operations

Consolidated results

The following table compares components of operating income for the three months
ended September 30, 2009 and 2008.

 (millions)                                                     Three Months Ended September 30
                                                              2009       2008     Change     % Change
Net sales                                                 $   177.3    $  221.3   $ (44.0 )      (19.9 )%
Cost of goods sold                                            153.1       186.0     (32.9 )      (17.7 )%
Gross margin                                                   24.2        35.3     (11.1 )      (31.4 )%
Selling, research and
administrative expenses                                        11.5        12.2      (0.7 )       (5.7 )%
Amortization of
intangibles and other                                           0.5         0.5         -            -
Alternative fuel mixture
credits                                                       (35.8 )         -      35.8        100.0  %
Operating income                                          $    48.0    $   22.6   $  25.4        112.4  %

Net sales decreased for the three months ended September 30, 2009 versus the same period in 2008 primarily due to lower shipment volume in cotton specialty fibers, lower selling prices overall, and unfavorable product mix in wood specialty fibers.

Gross margin was lower for the three months ended September 30, 2009 versus the same period in 2008. For the three months ended September 30, 2009, the impacts of lower selling prices overall, unfavorable product mix in wood specialty fibers and significantly reduced shipment volumes for cotton specialty fibers were partially offset by lower raw material costs, energy costs, chemical costs and transportation costs. Direct cost spending was reduced at all sites, particularly at the cotton specialty fibers plants, where we have reduced headcount by 70 employees, or more than 20%, over the past 12 months.

The U.S. Internal Revenue Code permits a refundable excise tax credit under certain circumstances for the production and use of alternative fuels and alternative fuel mixtures in lieu of fossil-based fuels. The credit is equal to $.50 per gallon of alternative fuel contained in the mixture. We qualify for the alternative fuel mixture credit because we produce liquid fuels derived from biomass, byproducts of our wood pulping process, and utilize those fuels to power our Foley Plant. We recorded $35.8 million in alternative fuel mixture credits, which was net of expenses, in our consolidated statements of operations related to credits earned for the three months ended September 30, 2009. During the three months ended September 30, 2009 we received $2.8 million in cash related to these credits and $5.6 million related to prior period credits. We will be applying for an additional $35.6 million in income tax credits. We expect to use a portion of the alternative fuel mixture credits in 2010 to offset U.S. federal estimated income tax payments and to receive the balance in 2011 as a cash refund after filing our 2010 tax return. We have treated the credits received in cash as taxable income and the income tax credits as non-taxable income. The alternative fuel mixture credits are subject to audit by the Internal Revenue Service ("IRS").

Selling, research and administrative expenses decreased $0.7 million for the three months ended September 30, 2009 versus the same period in the prior year, the result of overall spending decreases.

Segment results

Although nonwoven materials, processes, customers, distribution methods and regulatory environment are 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 consists of our chemical cellulose, customized fibers and fluff pulp product lines which are cellulosic fibers based on both wood and cotton. We make separate financial decisions and allocate resources based on the sales and operating income of each segment. We allocate selling, research, and administrative 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, the impact of goodwill impairment loss, alternative fuel mixture credits, amortization of intangibles, and unallocated at-risk and stock-based compensation.

Specialty fibers

The following table compares specialty fibers net sales and operating income for the three months ended September 30, 2009 and 2008.

(millions)               Three Months Ended September 30
                     2009         2008     Change     % Change
Net sales          $   122.2    $  165.0   $ (42.8 )      (25.9 )%
Operating income         8.5        20.1     (11.6 )      (57.7 )%

Net sales were down for the three months ended September 30, 2009 versus the same period in 2008. Shipment volume for the specialty fibers segment was down 6% compared to the same quarter a year ago, with lower specialty cotton fibers shipments of 42% being partially offset by higher specialty wood fibers shipments of 3%. Specialty wood fibers shipment volume was positively affected by increased demand for fluff pulp. Lower prices for fluff pulp and cotton specialty fibers and the mix of wood specialty fibers shipments also negatively affected sales versus the prior year. Fluff pulp pricing decreased by $163 per ton compared to the same period a year ago.

During the three months ended September 30, 2009, lower sales volumes and prices along with production downtime at our specialty cotton fiber facilities accounted for most of the reduction in operating income compared to the three months ended September 30, 2008. Lower raw material costs ($5.4 million), primarily due to the decrease in cotton fibers costs, lower chemical costs ($1.5 million), lower energy costs ($5.1 million), lower transportation costs ($3.5 million), and lower direct cost spending ($3.7 million) partially offset the impact of lower sales.

Nonwoven materials

The following table compares nonwoven materials net sales and operating income for the three months ended September 30, 2009 and 2008.

(millions)                Three Months Ended September 30
                     2009         2008       Change     % Change
Net sales          $    62.7    $    65.9    $  (3.2 )       (4.9 )%
Operating income         5.2          3.6        1.6         44.4 %

Nonwoven materials sales decreased during the three months ended September 30, 2009 versus the same period in 2008. Sales volume was higher during the period but was more than offset by the impacts of lower prices, unfavorable product mix and foreign currency exchange rates.

Operating income increased for the three months ended September 30, 2009 versus the three months ended September 30, 2008, primarily due to lower raw material, energy and transportation costs and lower direct cost spending.

Corporate

The following tables compare corporate net sales and operating loss for the
three months ended September 30, 2009 and 2008.

(millions)                       Three Months Ended September 30
                            2009         2008       Change     % Change
Net sales                 $    (7.6 )  $    (9.6 )  $   2.0         20.8 %
Operating income (loss)        34.3         (1.1 )     35.4          N/A

The operating income (loss) for the three months ended September 30 consists of:

                                                     Three Months Ended September 30
(millions)                                               2009                 2008
Unallocated at-risk compensation                  $             (0.6 )   $          (0.6 )
Unallocated stock-based compensation                            (0.6 )              (0.5 )
Intellectual property amortization                              (0.4 )              (0.5 )
Gross margin on intercompany sales                               0.1                 0.5
Alternative fuel mixture credits                                35.8                   -
                                                  $             34.3     $          (1.1 )

Net interest expense and amortization of debt costs

Net interest expense and amortization of debt costs decreased $2.1 million for the three months ending September 30, 2009 versus the same period in the prior year. Net interest expense decreased due to debt reduction of $97.7 million at September 30, 2009 versus September 30, 2008 and lower average interest rates of approximately 80 basis points. The early retirement of our 8% notes on July 31 and refinancing of these notes on our credit facility at LIBOR plus 125 basis points accounts for approximately $1.2 million of the year over year reduction in net interest expense and amortization of debt costs. The weighted average effective interest rate on our variable rate debt, which totaled $95.0 million at September 30, 2009 decreased from 5.07% at September 30, 2008 to 1.7% at September 30, 2009.

We file income tax returns with federal, state, local and foreign jurisdictions. As of September 30, 2009, we remain subject to examinations of our U.S. federal and state income tax returns for 2002 through 2009, Canadian income tax returns for 2002 through 2009 and German tax filings for 2004 through 2009.

During the three months ended September 30, 2009, we claimed the alternative fuel mixture credits as cash refunds through the filing of periodic excise tax refund claims and as income tax credits on the federal income tax return to be filed for the 2010 tax year. For purposes of calculating federal and state income taxes, we treat the credits claimed as cash refunds of excise tax as taxable income and the credits claimed on the federal income tax return as nontaxable income. During the three months ended September 30, 2009, we recorded a tax benefit of $11.8 million due to the nontaxable nature of the alternative fuel mixture credits claimed on the federal income tax return.

Our effective tax rate for the three month period ended September 30, 2009 was 8.2% versus 38.5% for the same period in 2008. We would expect that our effective tax rate would return to a more normal level in the third quarter of this fiscal year after the expiration of the alternative fuel mixture credits program. Assuming the alternative fuel mixture credits are allowed to continue through the scheduled expiration date of December 31, 2009, we would expect a similar low effective tax rate in the second quarter before returning to more normal levels for the remainder of 2010.

Financial Condition

Liquidity and capital resources

We have the following major sources of financing: a senior secured credit facility and senior notes. Our senior secured credit facility and senior notes contain various covenants. We were in compliance with these covenants as of September 30, 2009, and believe we will continue to remain in compliance for the foreseeable future. Our 8.5% senior notes due 2013 (the "2013 Notes") limit the amount of funds we can use to make dividend payments and repurchase stock. The amount of funds available for these purposes includes 50% of net income or losses since October 2003. We are currently restricted from these activities.

On September 30, 2009, we had $23.3 million of cash and cash equivalents and $100.1 million in borrowing capacity on our revolving credit facility. As of September 30, 2009, our liquidity, including available borrowings and cash and cash equivalents, was $123.4 million.

We recorded $35.8 million in alternative fuel mixture credits, which was net of expenses, in our consolidated statements of operations related to credits earned for the three months ended September 30, 2009. During the three months ended September 30, 2009 we received $2.8 million in cash related to these credits and $5.6 million related to prior period credits. We will be applying for an additional $35.6 million in income tax credits. We expect to use a portion of the alternative fuel mixture credits in 2010 to offset U.S. federal estimated income tax payments and to receive the balance in 2011 as a cash refund after filing our 2010 tax return. We have treated the credits received in cash as taxable income and the income tax credits as non-taxable income. Our plan is to claim future alternative fuel mixture credits as income tax credits. The alternative fuel mixture credits are subject to audit by the IRS.

The application of the alternative fuel mixture tax credit to the alternative fuel used in the pulp and paper industry is a complicated issue that has received significant attention from the U.S. Congress. The credit is scheduled to expire on December 31, 2009.

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 next twenty-four months.

Cash Flow

The following table provides a summary of cash flows for the three month periods
ended September 30, 2009 and September 30, 2008.

                                                         Three Months Ended
                                                            September 30
(millions)                                                2009         2008
Operating activities:
Net income                                             $      39.2    $   8.9
Noncash charges and credits, net                              11.5       15.3
Changes in operating assets and liabilities, net             (16.6 )     (2.1 )
Net cash provided by operating activities                     34.1       22.1

Investing activities:
Purchases of property, plant and equipment                    (8.8 )    (11.1 )
Other investing activities                                     7.4          -
Net cash used in investing activities                         (1.4 )    (11.1 )

Financing activities:
Net borrowings (payments) under lines of credit               77.5       (1.2 )
Net payments on long-term debt and other                    (110.0 )     (0.6 )
Net proceeds from sale of equity interests                     0.2          -
Net cash used in financing activities                        (32.3 )     (1.8 )

Effect of foreign currency rate fluctuations on cash           0.8       (1.1 )

Net increase in cash and cash equivalents              $       1.2    $   8.1

Cash provided by operating activities

Cash provided by operating activities for the three months ended September 30, 2009 was $12.0 million more than for the same period in 2008. The majority of the increase was due to lower inventory levels of $6.6 million and lower accounts receivable of $4.9 million, offset by lower gross margin of $11.2 million. We also benefitted from receiving $7.7 million in cash from the alternative fuel mixture credits.

Net cash used in investing activities

Purchases of property, plant and equipment decreased slightly during the three months ended September 30, 2009 versus the same period in 2008. Spending on the Foley Energy Project accounted for $2.1 million of our capital spending for the three months ended September 30, 2009. Through September 30, 2009, we have spent $20.3 million of this three-year, $45 million project, which involves the installation of a steam turbine generator and upgrade of two recovery boilers, and is expected to save the equivalent of 200,000 barrels of oil per year, and improve the energy self-sufficiency of our Foley mill from about 85% to about 95%. On September 30, 2009, we received a $7.4 million grant from the State of Florida that will help us fund this energy project. We anticipate spending an additional $15.4 million on this energy project during our current fiscal year.

Net cash used in financing activities

. . .