Introduction

The Company's revenues are primarily derived from (1) toll services and (2) product sales in the polymers processing industry. "Toll services" or "tolling" refers to processing customer-owned material for a service fee. Product sales entail the Company purchasing resin (primarily polyethylene) and other raw materials which are further processed within the Company's operating facilities. The further processing of raw materials may involve size reduction services, compounding services, and the production of masterbatches. Compounding services involve melt blending various resins and additives to produce a homogeneous material. Compounding services include the manufacture and sale of concentrates. Concentrates are polymers loaded with high levels of chemical and organic additives that are melt blended into base resins to give plastic films and other finished products desired physical properties. Masterbatches are concentrates that incorporate all additives a customer needs into a single package for a particular product manufacturing process, as opposed to requiring numerous packages. After processing, the Company sells the finished products to customers. Toll services involve both size reduction and compounding services whereby these services are performed on customer-owned material.

The Company's management structure and reportable segments are organized into five business segments defined as ICO Polymers North America, ICO Brazil, Bayshore Industrial, ICO Europe and ICO Asia Pacific. This organization is consistent with the way information is reviewed and decisions are made by executive management.

The ICO Polymers North America, ICO Brazil, ICO Europe and ICO Asia Pacific segments primarily produce competitively priced polymer powders for the rotational molding industry and other specialty markets, including masterbatch and concentrate producers, users of polymer-based metal coatings, and non-woven textile markets. Additionally, the above-referenced four segments provide specialty size reduction services on a tolling basis. The Bayshore Industrial segment designs and produces proprietary concentrates, masterbatches and specialty compounds, primarily for the plastic film industry, in North America and in selected export markets. The Company's ICO Europe segment includes operations in France, Holland, Italy and the U.K. The Company's ICO Asia Pacific segment includes operations in Australia, Malaysia, New Zealand and the United Arab Emirates.

Cost of sales and services is primarily comprised of purchased raw materials (resins and various additives), compensation and benefits to non-administrative employees, electricity, repairs and maintenance, and occupancy costs and supplies. Selling, general and administrative ("SG&A") expenses consist primarily of compensation and related benefits paid to the sales and marketing, executive management, information technology, accounting, legal, human resources and other administrative employees of the Company, other sales and marketing expenses, communications costs, systems costs, insurance costs, consulting costs and legal and professional accounting fees.

Demand for the Company's products and services tend to be driven by overall economic factors and, particularly, consumer spending. The recent downturn in the U.S. and global economies that has escalated in the last sixty days could also have an impact on the demand for our products and services. The trend of applicable resin prices also impacts customer demand. As resin prices fall, as they have in the last sixty days, customers tend to reduce their inventories and, therefore, reduce their need for the Company's products and services as customers choose to purchase resin upon demand rather than building large levels of inventory. Conversely, as resin prices are rising, customers often increase their inventories and accelerate their purchases of products and services from the Company to help control their raw material costs. Historically, resin price changes have generally followed the trend of oil and natural gas prices, and we believe that this trend will continue in the future. Additionally, demand for the Company's products and services tends to be seasonal, with customer demand historically being weakest during the Company's first fiscal quarter due to the holiday season and also due to property taxes levied in the U.S. on customers' inventories on January 1.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The consolidated financial statements are impacted by the accounting policies applied and the estimates and assumptions made by management during their preparation. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.

Use of Estimates - The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring use of estimates relate to valuation allowances for deferred tax assets, workers compensation, inventory reserves, and allowance for doubtful accounts related to accounts receivable and commitments and contingencies, including legal and environmental claims.

Valuation of deferred tax assets is based upon estimates of future pretax income in each taxing jurisdiction in determining the ability to realize the deferred tax assets. Estimates for workers' compensation liabilities are required because the Company is partially self-insured in the United States, with stop loss insurance coverage limiting the exposure per claim. Estimates are made for ultimate costs associated with workers' compensation claims. Inventory reserves are estimated based upon the Company's review of its inventory. This review requires the Company to estimate the fair market value of certain inventory that has become old or obsolete. Determining the amount of the allowance for doubtful accounts involves estimating the collectability of customer accounts receivable balances. Estimates relating to commitments and contingencies pertain primarily to litigation and claims, for which the Company evaluates relevant facts and circumstances, and applicable laws and regulations, to determine how much expense, if any, the Company should record. Actual results could differ from the estimates discussed above. Management believes that its estimates are reasonable.

Revenue and Related Cost Recognition - The Company's accounting policy regarding revenue recognition is to recognize revenue when all of the following criteria are met:

††† Persuasive evidence of an arrangement exists: The Company has received an order from a customer.

††† Delivery has occurred or services have been rendered: For product sales, revenue recognition occurs when title and risk of ownership have passed to the customer. For service revenue, revenue recognition occurs upon the completion of service.

††† Seller's price to the buyer is fixed or determinable: Sales prices are agreed upon with the customer before delivery has occurred or the services have been rendered.

††† Collectability is reasonably assured: The Company has a customer credit policy to ensure collectability is reasonably assured.

Impairment of Property, Plant and Equipment - Property, plant and equipment are reviewed for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes comparison of undiscounted future cash flows expected to be generated by the asset or group of assets with the associated assets' carrying value. If the carrying value of the asset or group of assets exceeds the expected future cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value.

Goodwill - The Company does not amortize goodwill. However, the Company tests annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired) using the market value approach and income approach. The Company's goodwill is recorded in the Company's Bayshore Industrial and ICO Asia Pacific segments. For fiscal year 2008, the Company completed its impairment testing as of September 30, 2008 which resulted in no impairment loss being recognized.

Stock-based Compensation - The Company expenses stock-based payment transactions using the grant-date fair value-based method. Outstanding awards under the Company's stock-based compensation plans vest over periods ranging from immediate vesting to four years. The Company expenses the fair value of stock option and restricted stock awards over the vesting period, where applicable. In awards with a graded vesting schedule, the Company recognizes the fair value of the stock-based award over the requisite service period for the entire award and ensures that the amount recognized at any date at least equals the portion of the grant-date value of the stock-based compensation that has vested.

Income Taxes - The provision for income taxes includes federal, state and foreign income taxes currently payable and deferred based on currently enacted tax laws. Deferred income taxes are provided for the tax consequences of differences between the financial statement and tax basis of assets and liabilities. The Company reduces deferred tax assets by a valuation allowance when, based on its estimates, it is more likely than not that a portion of those assets will not be realized in a future period.

Results of Operations

The following discussion regarding the Company's financial performance during the past three fiscal years should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements.

Executive Summary

For fiscal year 2008, our revenues increased $28.8 million or 7%. The increase in revenues was primarily due to the translation effect of foreign currencies compared to the U.S. Dollar, with equivalent offsetting changes in revenue owing to lower volumes (decrease) and more favorable pricing and product mix (increase). Our European segment performed very well during fiscal year 2008, producing strong increase in revenues and operating income. However, compared to fiscal year 2007, the Company saw its business slow down primarily at our Bayshore Industrial segment and our Australian locations, where it was strong in the prior fiscal year, due to diminished customer demand and challenging general market conditions. Due to our Brazilian subsidiary's continued improvement in earnings, the Company expanded operations in Brazil during fiscal year 2008 and also reversed a valuation allowance in the amount of $0.7 million that was placed on the subsidiary's deferred tax assets.

Year Ended September 30, 2008 Compared to the Year Ended September 30, 2007

                                                               Summary Financial Information
                                                                     Fiscal Year Ended
                                                                       September 30,
                                            2008                2007               Change              % Change
                                                                  (Dollars in Thousands)
Total revenues                           $   446,701         $   417,917         $    28,784                    7%
SG&A (1)                                      41,254              37,676               3,578                    9%
Operating income                              25,707              29,816              (4,109 )                (14% )
Income from continuing operations             15,382              19,762              (4,380 )                (22% )
Net income                               $    15,314         $    21,118              (5,804 )                (27% )

Volumes (2)                                  318,700             338,500             (19,800 )                 (6% )
Gross margin (3)                               16.4%               17.6%               (1.2% )
SG&A as a percentage of revenue                 9.2%                9.0%                0.2%
Operating income as a percentage of
revenue                                         5.8%                7.1%               (1.3% )

(1) "SG&A" is defined as selling, general and administrative expense.
(2) "Volumes" refers to total metric tons of materials for which the Company's customers are invoiced, either in connection with product sales or the performance of toll processing services.
(3) Gross margin is calculated as the difference between revenues and cost of sales and services excluding depreciation, divided by revenues.

Revenues. Total revenues increased $28.8 million or 7% to $446.7 million during fiscal year 2008 compared to fiscal year 2007. The change in revenues is a result of the changes in volumes sold by the Company ("volume"), changes in selling prices and mix of finished products sold or services performed ("price/product mix") and, finally, the impact from changes in foreign currencies relative to the U.S. Dollar ("translation effect"). Due to the variance in average prices between our product sales revenues and our toll processing revenues due to the raw material component embedded in the product sales average price, we compute the volume impacts and the price/product mix impacts separately for each of those components and then combine them in the table that follows.

The components of the $28.8 million and 7% increase in revenues are:

                                            Increase/(Decrease) on
                                                    Revenues
                                                  $               %
                                              (Dollars in Thousands)
               Volume                    $       (11,200 )       (2.7% )
               Price/product mix                  10,904          2.7%
               Translation effect                 29,080          7.0%
               Total change in revenue   $        28,784          7.0%

The Company's revenues are impacted by product sales mix as well as the change in the Company's raw material prices ("resin prices"). As resin prices increase or decrease, market prices for the Company's products will generally also increase or decrease. Typically, this will lead to higher or lower average selling prices. During fiscal year 2008, average resin prices were higher than in fiscal year 2007 in all the Company's regions. Although the Company participates in numerous markets and purchases numerous grades of resin, the graph below illustrates the general trend in the prices of resin typically purchased by the Company.

[[Image Removed]]

Total volumes sold decreased 19,800 metric tons, or 6%, during fiscal year 2008 to 318,700 metric tons. This decrease in volumes sold led to a decrease in revenues of $11.2 million. Bayshore Industrial's volumes fell 12%, which reduced revenue by $12.5 million, primarily as a result of reduced customer demand and market conditions. Our Australian division's volumes declined 28% in fiscal year 2008, which decreased revenues by $17.0 million, due to reduced customer demand in the water tank market. These amounts were partially offset by volume improvements in our Malaysian and Brazilian divisions. The translation effect of changes in foreign currencies relative to the U.S. Dollar caused an increase in revenues of $29.1 million in fiscal year 2008 compared to fiscal year 2007. This revenue change was primarily due to stronger European, Australian and Brazilian currencies compared to the U.S. Dollar.

Revenues by segment for the year ended September 30, 2008 compared to the year ended September 30, 2007

                                                         Fiscal Year Ended
                                                           September 30,
                                             % of                     % of
                                2008        Total        2007         Total       Change         %
                                                      (Dollars in Thousands)
 ICO Europe                   $ 207,209        46%     $ 170,135         41%     $  37,074        22%
 Bayshore Industrial             90,736        20%       108,360         26%       (17,624 )     (16% )
 ICO Asia Pacific                82,390        19%        84,790         20%        (2,400 )      (3% )
 ICO Polymers North America      45,090        10%        41,377         10%         3,713         9%
 ICO Brazil                      21,276         5%        13,255          3%         8,021        61%
 Total                        $ 446,701       100%     $ 417,917        100%     $  28,784         7%

In fiscal year 2008, ICO Europe's revenues increased $37.1 million or 22%, in part due to the translation effect of stronger European currencies relative to U.S. Dollar, which contributed $18.7 million to the revenue increase. Additionally, an increase in average selling prices in Europe due in part to higher resin costs resulted in an increase of $17.6 million in the Company's revenues.

Bayshore Industrial's revenues decreased $17.6 million or 16% due to a decline in volumes sold due to reduced customer demand, general market conditions and, to a lesser extent, the impact of Hurricane Ike. Hurricane Ike hit the Houston area on September 13, 2008, causing the Bayshore Industrial facility to lose power for several days. An unfavorable change in product mix led to a $5.1 million decrease in the Company's revenues.

ICO Asia Pacific's fiscal year 2008 revenues decreased $2.4 million or 3%. A decline in volumes sold in this segment caused by reduced customer demand reduced the Company's revenues by $5.3 million. This reduction in customer demand occurred primarily in the Company's Australian locations, where revenues fell $17.0 million as a result of lower volumes. This was partially offset by an increase in volumes sold by the Company's Malaysian location. Lower average selling prices due to challenging market conditions and changes in product mix negatively impacted revenues by $4.1 million. Partially offsetting these declines was the translation effect of the stronger Australian and New Zealand Dollar and Malaysian Ringgit, which increased revenues by $7.0 million.

ICO Polymers North America's revenues increased $3.7 million or 9% due to an increase in average selling prices as a result of higher resin prices.

ICO Brazil's revenues increased $8.0 million or 61% due to an increase in volumes of 24% ($5.1 million revenue impact), and the translation effect of a stronger Brazilian Real compared to the U.S. Dollar of $3.4 million.

Gross Margins. Consolidated gross margins (calculated as the difference between revenues and cost of sales and services, excluding depreciation, divided by revenues) decreased from 17.6% to 16.4%. Gross margins declined as a result of several items. First, our product sales mix changed. Revenues increased at our European segment, which generally has lower gross margins than the rest of the Company. Revenues at our Bayshore Industrial segment, which has a higher gross margin than the rest of the Company, declined. Also, the increase in resin prices in fiscal year 2008 compared to the prior year had the effect of increasing our average selling prices and revenue base without a corresponding increase in gross profit by the same percentage, which results in a lower gross margin. Additionally, higher operating costs per metric ton, including increased logistics and electricity costs, and lower margins in the Asia Pacific segment, contributed to the reduction in gross margins. These items were partially offset by an increase in our feedstock margins (the difference between product sales revenues and related costs of raw materials sold).

Selling, General and Administrative. Selling, general and administrative expenses ("SG&A") increased $3.6 million or 9% during fiscal year 2008 compared to fiscal year 2007. The increase of $3.6 million was caused primarily by the impact from stronger foreign currencies of $2.2 million, higher external professional fees of $0.6 million and increased bad debt expense of $0.4 million. As a percentage of revenues, SG&A increased from 9.0% to 9.2%.

Impairment, restructuring and other costs (income). On July 2, 2007, the Company's facility in New Jersey suffered a fire (the "2007 fire") that damaged certain equipment and one of the facility's buildings. During fiscal year 2008, the Company received in aggregate $3.5 million from its insurance carrier for reimbursement of costs associated with the 2007 fire, $2.3 million of which is classified in the statement of cash flows as investing activities. The remaining $1.2 million in insurance proceeds received as a result of

the 2007 fire is reflected in the statement of cash flows as operating activities. As of September 30, 2008, the Company recorded a receivable of $1.5 million in its consolidated balance sheet for total insurance recoveries of $5.0 million related to the damage to certain equipment and one of the facility's buildings as well as reimbursement for business interruption expenses and lost income associated with the 2007 fire, $3.4 million of which was recognized in the fiscal year 2008 consolidated statement of operations and $1.6 million of which was recognized in fiscal year 2007. The $1.5 million receivable was received in November 2008. The Company also incurred one-time expenses associated with the 2007 fire of $0.7 million during fiscal year 2008. As a result of the above, the Company recognized a net gain of $2.7 million in fiscal year 2008 in impairment, restructuring and other costs (income).

On July 26, 2008, the Company's facility in New Jersey suffered a second fire (the "2008 fire") which caused damage to one of the facility's buildings. In connection with 2008 fire, the Company recorded an involuntary conversion loss of $0.5 million for damage to the building and incurred one-time expenses associated with the fire of $0.7 million. The Company recorded a receivable in the fourth quarter of fiscal year 2008 for $0.4 million of insurance proceeds related to its initial insurance claims for damages resulting from the 2008 fire, which was received in November 2008. The Company expects to make additional claims under its insurance policy related to damages and losses suffered as a result of the 2008 fire. As a result of the foregoing, the Company recorded a net loss of $0.8 million in the fourth quarter of fiscal year 2008 in impairment, restructuring and other costs (income).

During the fourth quarter of fiscal year 2008, the Company decided to close its plant in the United Arab Emirates. As a result of the closure, the Company recorded a $0.4 million impairment related to property, plant and equipment.

During the fourth quarter of fiscal year 2008, the Company incurred costs of $0.1 million as a result of Hurricane Ike which caused minor damage to the Company's China, Texas plant.

As a result of the 2007 and 2008 fires, the United Arab Emirates plant closure, and the costs incurred as a result of Hurricane Ike, the Company recorded a net gain of $1.3 million for fiscal year 2008 in impairment, restructuring and other costs (income).

During fiscal year 2007, the Company recorded a net gain of $1.0 million in impairment, restructuring and other costs. The Company recorded a net gain of $0.9 million associated with the July 2007 fire. The Company also impaired property, plant and equipment in two of the Company's locations outside of the United States for $0.6 million, and recorded a pre-tax gain of $0.6 million related to the sale of real estate previously owned by the Company's Dutch subsidiary.

Operating income. Consolidated operating income was $25.7 million in fiscal year 2008, a decrease of $4.1 million or 14% from fiscal year 2007. This decrease was caused primarily by a decline in sales volumes and an increase in operating and production costs.

Operating income (loss) by segment and discussion of significant segment changes follows.

Operating income (loss) by segment for the year ended September 30, 2008 compared to the year ended September 30, 2007

  Operating income (loss)                          Fiscal Year Ended September 30,
                                            2008         2007       Change        % Change

  ICO Europe                              $ 13,201     $  9,008     $  4,193            47%
  Bayshore Industrial                       10,241       15,358       (5,117 )         (33% )
  ICO Asia Pacific                           1,822        5,914       (4,092 )         (69% )
  ICO Polymers North America                 5,618        6,022         (404 )          (7% )
  ICO Brazil                                   982          301          681           226%
  Total reportable segments               $ 31,864     $ 36,603     $ (4,739 )         (13% )
  Unallocated General Corporate Expense     (6,157 )     (6,787 )        630            (9% )
  Consolidated                            $ 25,707     $ 29,816     $ (4,109 )         (14% )




     Operating income (loss) as a
     percentage of revenues                   Fiscal Year Ended September 30,
                                                                          Increase
                                          2008            2007           (Decrease)
     ICO Europe                                6%              5%                 1%
     Bayshore Industrial                      11%             14%                (3% )
     ICO Asia Pacific                          2%              7%                (5% )
     ICO Polymers North America               12%             15%                (3% )
     ICO Brazil                                5%              2%                 3%
     Consolidated                              6%              7%                (1% )

In fiscal year 2008, ICO Europe's operating income increased $4.2 million or 47% due primarily to an improvement in product sales volumes and feedstock margins. Additionally, the effect of the stronger European currencies compared to the U.S. Dollar improved operating income by $1.3 million.

Bayshore Industrial's operating income decreased $5.1 million or 33% due primarily from a decline in volumes sold and an increase in production costs per metric ton.

ICO Asia Pacific's operating income decreased $4.1 million or 69% as a result of . . .