Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative explanation from the perspective of our management on our business, financial condition, results of operations, and cash flows. Our MD&A is presented in six sections:

º •
º Overview

º •
º Results of Operations

º •
º Liquidity and Capital Resources

º •
º Contractual Obligations and Off-Balance-Sheet Arrangements

º •
º Critical Accounting Policies and

º •
º New Accounting Pronouncements

Investors should review this MD&A in conjunction with the consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data", of this Annual Report on Form 10-K.

Overview

AEP Industries Inc. is a leading manufacturer of plastic packaging films. We manufacture and market an extensive and diverse line of polyethylene, polyvinyl chloride and polypropylene flexible packaging products, with consumer, industrial and agricultural applications. Our plastic packaging films are used in the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, construction, agriculture, carpeting, furniture and textile industries.

We manufacture plastic films, principally from resins blended with other raw materials, which we either sell or further process by printing, laminating, slitting or converting. Our processing technologies enable us to create a variety of value-added products according to the specifications of our customers. Our principal manufacturing operations are located in the United States and Canada.

The primary raw materials used in the manufacture of our products are polyethylene, polypropylene and polyvinyl chloride resins. The prices of these materials are primarily a function of the price of petroleum and natural gas, and therefore typically is volatile. In fiscal 2008, we believe there was record volatility in resin prices. Since resin costs fluctuate, selling prices are generally determined as a "spread" over resin costs, usually expressed as cents per pound. Consequently, we review and manage our operating revenues and expenses on a per pound basis. The historical increases and decreases in resin costs have generally been reflected over a period of time in the sales prices of the products on a penny-for-penny basis. Assuming a constant volume of sales, an increase in resin costs would, therefore, result in increased sales revenues but lower gross profit as a percentage of sales or gross profit margin, while a decrease in resin costs would result in lower sales revenues with higher gross profit margins. Further, the gap between the time at which an order is taken, resin is purchased, production occurs and shipment is made, has an impact on our financial results and our working capital needs. In a period of rising resin prices, this impact is generally negative to operating results and in periods of declining resin prices, the impact is generally positive to operating results.

As discussed further in Item 1, "Business", of this Annual Report on Form 10-K and below, on October 30, 2008, we acquired substantially all of the assets of the Plastic Films segment of Atlantis Plastics, Inc. ("Atlantis"). Atlantis operated this segment through three divisions-stretch films, custom films and institutional products-with production in six plants located throughout the United States. Atlantis maintained a significant presence in many of its product categories, which are used in a variety

of applications, including storage, transportation, food packaging and other commercial and consumer applications. Atlantis also converted some institutional products internally from custom films. This transaction enhances our position as the preferred supplier of flexible packaging solutions. The acquisition of Atlantis will provide us a stronger array of products and service to meet the needs of both companies' customers.

Fiscal 2008 was a challenging year. Economic conditions in the United States have been difficult with global and financial markets experiencing substantial disruption. Resin prices, along with energy and freight costs, increased to unprecedented levels as demand for our products declined due to the economic slowdown. Average resin prices, which comprise 62% of our cost of goods sold in fiscal 2008, increased by 34% during fiscal 2008 relative to fiscal 2007. Although resin and energy costs have recently declined, it is not known whether resin and energy prices will remain lower or will revert to increasing price levels. Further, many of our customers, distributors and suppliers have been severely affected by the current turmoil. Sales price increases were met with more resistance than we customarily experience and such increases took longer to implement. In certain situations, we delayed price increases in order to remain competitive, as we believe that the marketplace in which we sell our products remains very competitive. There can be no assurance that we will be able to pass on resin price increases on a penny-for-penny basis in the future.

Forecasts for fiscal 2009 generally call for a weakening economy in the United States, with the continuation of the economic recession and possibly an economic depression. It is difficult to predict the duration and depth of the economic slowdown and the impact on our business, but we expect that a weak economy will continue to strain the resources of our customers, distributors and suppliers and negatively impact our businesses and operations. We are limited in our ability to reduce costs to offset the results of a prolonged or severe downturn given certain fixed costs associated with our operations, difficulties if we overstrained our resources, and our long-term business approach that necessitates we remain in position to respond when market conditions improve. However, we believe we have taken appropriate steps to minimize the impact of these conditions, primarily through the acquisition of Atlantis (and the related reorganization of such business) and the completion of our amended and restated Credit Facility.

During fiscal 2008, we furthered our strategic plan to create additional long-term value for shareholders by enhancing our position as the preferred supplier of flexible packaging solutions in North America and strengthen our balance sheet. In particular:

º •
º In October 2008, we acquired the Atlantis assets for a purchase price of $99.2 million in cash, before expenses of approximately $1.5 million. The net assets acquired included approximately $56.8 million of net working capital. The purchase price is subject to a post-closing net working capital true-up of no more than plus or minus $2.5 million. The acquisition was funded with a $6.1 million deposit previously funded into an escrow account to the sellers, $23.0 million in cash on hand and $70.1 million under our Credit Facility. The acquisition had an immaterial effect on our results of operations in fiscal 2008, but we anticipate it will have a material effect in fiscal 2009;

º •
º In April 2008, we completed the sale of our subsidiary in the Netherlands, the final component of our former European operations. We received approximately $28.3 million in cash, before expenses, and the buyers also assumed all third party debt and capital lease obligations totaling approximately $12.0 million and all of the unfunded pension obligations (approximately

$5.6 million). In connection with the sale, we recorded a $10.7 million pre-tax gain on disposition from discontinued operations;

º •
º We entered into an amendment to our existing Credit Facility, increasing our maximum borrowings from $125.0 million to $150.0 million and extending the maturity from November 19, 2010 to December 15, 2012. The interest rate for borrowings under LIBOR increased to a range of LIBOR plus 2.25% to 2.75% from LIBOR plus 1.25% to 2.0%. We incurred approximately $1.4 million of fees related to the amendment to our Credit Facility;

º •
º We incurred approximately $28.0 million of capital expenditures during fiscal 2008 related primarily to an expansion of our North Carolina plant, including a cast stretch line (production began in November 2008) and a new pre-stretch line (production expected to begin in February 2009), two new three-layer co-extruded lines (one began production in our Pennsylvania plant in September 2008 and the other in our California plant with production beginning in December 2008), and investments in auxiliary pieces of equipment in our PVC business.

     Defined Terms

    The following table illustrates the primary costs classified in each major
operating expense category:

                 Cost of Sales:    Materials, including packaging
                                   Fixed manufacturing costs
                                   Labor, direct and indirect
                                   Depreciation
                                   Inbound freight charges,
                                   including intercompany
                                   transfer freight charges
                                   Utility costs used in the
                                   manufacturing process
                                   Research and development costs
                                   Quality control costs
                                   Purchasing and receiving costs
                                   Any inventory adjustments,
                                   including LIFO adjustments
                                   Warehousing costs
                 Delivery          All costs related to shipping
                 Expenses:         and handling of products to
                                   customers, including
                                   transportation costs by third
                                   party providers
                 Selling,          Personnel costs, including
                 General and       salaries, bonuses, commissions
                 Administrative    and employee benefits
                 Expenses:         Facilities and equipment costs
                                   Insurance
                                   Professional fees, including
                                   audit and Sarbanes-Oxley
                                   compliance

Our gross profit may not be comparable to that of other companies, since some companies include all the costs related to their distribution network in costs of sales and others, like us, include costs related to the shipping and handling of products to customers in delivery expenses, which is not a component of our cost of sales.

Unless otherwise noted, the following discussion regarding results of operations relates only to results from continuing operations.

Results of Operations-Fiscal 2008 Compared to Fiscal 2007

The following table presents selected financial data for fiscal 2008 and 2007 (dollars per lb. sold is calculated by dividing the applicable consolidated statement of operations category by pounds sold in the period):

                                   For the Year Ended October 31,
                                  2008                         2007
                                                                                    % increase           $
                                     $ Per lb.                    $ Per lb.         /(decrease)      increase/
                             $          sold              $          sold              of $          (decrease)
                                                (in thousands, except for per pound data)
Net sales                $ 762,231    $    1.16       $ 666,318    $    1.01                14.4 %   $    95,913
Gross profit                96,822         0.15         139,152         0.21               (30.4 )%      (42,330 )
Operating expenses:
  Delivery                  36,425         0.05          34,629         0.05                 5.2 %         1,796
  Selling                   31,866         0.05          31,849         0.05                 0.1 %            17
  General and               18,596         0.03          19,762         0.03                (5.9 )%       (1,166 )
  administrative

  Total operating        $  86,887    $    0.13       $  86,240    $    0.13                 0.8 %   $       647
  expenses

Pounds sold                             659,887  lbs.                660,988  lbs.

Net sales for fiscal 2008 increased $95.9 million, or 14.4%, to $762.2 million from $666.3 million for fiscal 2007. The increase was the result of a 13.9% increase in average selling prices, driven primarily by higher resin costs, positively affecting net sales by $92.7 million, partially offset by a 0.2% decrease in sales volume which negatively affected net sales by $1.2 million. Fiscal 2008 also included $4.4 million of positive impact of foreign exchange relating to our Canadian operations.

Gross profit for fiscal 2008 decreased $42.4 million to $96.8 million from $139.2 million for fiscal 2007. The decrease in gross profit was primarily due to lagging increases in selling prices during a period of unprecedented resin price increases, as well as a $13.5 million increase in the LIFO reserve during the current year ($3.4 million of this amount relates to the increase of approximately 20.9 million pounds of inventory in connection with the Atlantis acquisition) and a slight decrease in pounds sold. Fiscal 2008 also included $0.7 million of positive impact of foreign exchange relating to our Canadian operations.

Operating expenses for fiscal 2008 increased $0.6 million, or 0.8%, to $86.9 million as compared to fiscal 2007. Included in general and administrative expenses for fiscal 2008 is a payment of approximately $1.6 million, excluding professional fees, related to a commercial dispute. Other increases are primarily due to an increase in delivery expense due to higher fuel costs, an increase in bad debt expense resulting from a customer's bankruptcy and advisory costs incurred as a result of our exploration of strategic alternatives related to our subsidiary in the Netherlands (sale was completed in April 2008), partially mitigated by a decrease in our accrual for bonuses and a decrease in compensation costs recorded in accordance with SFAS 123R for our share-based compensation. Fiscal 2008 also includes $0.5 million unfavorable effect of foreign exchange increasing total operating expenses.

Other operating expense for fiscal 2008 was $0.3 million and represented net losses on sales of fixed assets during the period as compared to net losses on sales of fixed assets of $46,000 in fiscal 2007.

Interest expense for fiscal 2008 increased $0.2 million to $15.7 million from $15.5 million in fiscal 2007, resulting primarily from higher average borrowings on our Credit Facility during fiscal 2008 as compared to fiscal 2007, partially offset by lower interest rates on Credit Facility borrowings.

Other, net for fiscal 2008 amounted to $0.9 million in income, as compared to $0.8 million in income for fiscal 2007. The increase is primarily due to an increase of $0.5 million in foreign currency transaction gains, partially offset by income in fiscal 2007 of $0.3 million from interest income on tax refunds in our New Zealand subsidiary.

The benefit for income taxes for fiscal 2008 was $8.5 million on loss from continuing operations before the benefit for income taxes of $5.2 million. Included in this amount is a $7.0 million tax benefit arising from previously unrecognized tax benefits resulting from the completion in September 2008 of an IRS examination for fiscal years 2005 and 2006. The difference between the effective tax rate of 28.5%, excluding the $7.0 million benefit, and the U.S. statutory tax rate of 34.0% primarily relates to the following: (i) $0.2 million for state taxes in the United States, net of federal benefit (+4.1%); and
(ii) $0.2 million true-up of prior year's estimates in the United States (-4.7%).

The provision for income taxes for fiscal 2007 was $15.2 million on income from continuing operations before the provision for income taxes of $38.1 million. The difference between the effective tax rate of 39.9% and the U.S. statutory tax rate of 35 percent primarily relates to the following:
(i) $1.7 million provision for state taxes in the United States (+4.5%), no federal tax benefit was recognized in fiscal 2007 as the Company is not in a state tax paying position; and (ii) a $0.2 million true-up of prior year's estimates (-0.5%).

In April 2008, we completed the sale of our Netherlands operation. Our Netherlands operation was a component of our consolidated entity, as defined by SFAS No. 144, and as such requires discontinued operations reporting treatment. As a result, the financial statements at and for the year ended October 31, 2007 have been restated to reflect our Netherlands operations as discontinued operations and are included as such in the discussion below. The financial statements at and for fiscal 2008 and 2007 also include as discontinued operations our UK and Spanish operations which are in liquidation. The financial statements at and for fiscal 2007 also include as discontinued operations our Australian land and building, which was sold in the fourth quarter of fiscal 2007.

A consolidated summary of the operating results of discontinued operations for fiscal 2008 and 2007 is as follows:

                                                       For the Year
                                                     Ended October 31,
                                                     2008        2007
                                                      (in thousands)
             Net sales                              $ 56,238   $ 119,697
             Gross profit                              5,436      12,261
             Income from discontinued operations         898       6,716
             Gain from disposition                    10,708         459
             Income tax provision                     (2,674 )         -
             Income from discontinued operations    $  8,932   $   7,175

Net sales and gross profit of the discontinued operations decreased $63.5 million and $6.8 million, respectively, during fiscal 2008 as compared to fiscal 2007 and primarily represents the activity of our Netherlands operation. The Netherlands operation was sold on April 4, 2008 and therefore, prior fiscal year amounts include seven additional months of activity. Prior to the disposition, net sales and gross profit of our Netherlands operation were positively affected by an increase in average selling prices combined with a positive effect of foreign exchange, partially offset by a decrease in sales volume resulting from a decrease in demand in specialty products and decreased material margins due to lagging sale price increases over rising resin costs.

Included in income from discontinued operations for fiscal 2008 is $0.4 million of income from our Spanish subsidiary resulting primarily from the return of a deposit held for a tax assessment currently being appealed. The asset had been fully reserved in fiscal 2005 as we believed it was more likely than not that the deposit would not be recovered. In exchange for the release of the deposit, the U.S. company issued a standby letter of credit, reducing availability under our Credit Facility. We do not believe we will need to perform under this standby letter of credit. Also included in income is a loss in UK of $0.3 million which primarily includes reclassification of UK's accumulated foreign currency translation losses.

Included in gain from disposition from discontinued operations for fiscal 2008 is $6.9 million of realized foreign currency exchange gains before provision for taxes ($4.2 million after tax) resulting from the settlement of all intercompany loans, denominated in Euros ($5.1 million of which had been previously recognized in accumulated other comprehensive income at October 31, 2007), a $1.5 million gain on sale of AEP Netherlands, after all costs to sell, and the reclassification of AEP Netherlands accumulated foreign currency translation gains into income in the amount of $2.3 million.

Included in income from discontinued operations in fiscal 2007 is $2.5 million of income from the reclassification of Australia's accumulated foreign currency translation gains in accordance with SFAS No. 52, "Foreign Currency Translation" ("SFAS No. 52"), $0.6 million of rental income received during fiscal 2007 from our land and building in Sydney, Australia, and $0.3 million of foreign currency gains. No tax provision has been recognized for the $2.5 million reclassification of Australia's accumulated foreign currency translation gains into income for fiscal 2007. Also included in income for fiscal 2007 is a $0.3 million reversal of provisions established at the time of sale of certain assets and liabilities of our New Zealand operation in May 2005 relating to non-collection of trade receivables (used as basis of cash advance to us by the buyers of the New Zealand operation) and clean-up of leased properties. The fiscal 2007 income from discontinued operations also includes interest income earned and expenses paid by our Spanish operation and expenses incurred by our UK operations during the period. The gain from disposition in fiscal 2007 of $0.5 million includes a $0.4 million gain on the sale of our land and building in Sydney, Australia and a $29,000 final settlement on closing balance sheet adjustments related to our Bordex operation sold in July 2006.

Fiscal 2007 Compared to Fiscal 2006

    The following table presents selected financial data for fiscal 2007 and
2006 (dollars per lb. sold is calculated by dividing the applicable consolidated
statement of operations category by pounds sold in the period):

                                   For the Year Ended October 31,
                                  2007                         2006
                                                                                    % increase           $
                                     $ Per lb.                    $ Per lb.         /(decrease)      increase/
                             $          sold              $          sold              of $          (decrease)
                                                (in thousands, except for per pound data)
Net sales                $ 666,318    $    1.01       $ 697,233    $    1.12                (4.4 )%  $   (30,915 )
Gross profit               139,152         0.21         151,236         0.24                (8.0 )%      (12,084 )
Operating expenses:
  Delivery                  34,629         0.05          33,369         0.05                 3.8 %         1,260
  Selling                   31,849         0.05          29,877         0.05                 6.6 %         1,972
  General and               19,762         0.03          22,367         0.04               (11.6 )%       (2,605 )
  administrative

  Total operating        $  86,240    $    0.13       $  85,613    $    0.14                 0.7 %   $       627
  expenses

Pounds sold                             660,988  lbs.                624,964  lbs.

Net sales for fiscal 2007 decreased $30.9 million, or 4.4%, to $666.3 million from $697.2 million for fiscal 2006. The decrease was primarily due to a 10% decrease in average selling prices, attributable to lower resin costs, negatively affecting net sales by $69.3 million, partially mitigated by a 6% increase in sales volume which positively affected net sales by $36.2 million. Fiscal 2007 also included $2.2 million of positive impact of foreign exchange relating to our Canadian operations.

Gross profit for fiscal 2007 decreased $12.0 million to $139.2 million from $151.2 million for fiscal 2006. The decrease in gross profit was primarily due to a $19.5 million cumulative gross profit impact related to the LIFO reserve combined with lagging increases in selling prices, partially mitigated by an increase in sales volume. Fiscal 2007 also included $0.4 million of positive impact of foreign exchange relating to our Canadian operations.

Operating expenses for fiscal 2007 increased $0.6 million, or 0.7%, to $86.2 million as compared to fiscal 2006. Fiscal 2007 includes $0.3 million unfavorable effect of foreign exchange increasing total operating expenses. The remaining increase is primarily due to an increase in delivery and selling expenses resulting from higher volumes sold, an increase in compensation costs recorded in accordance with SFAS 123R for our share-based compensation and advisory costs incurred as a result of our exploration of strategic alternatives related to our subsidiary in the Netherlands. These increases were partially mitigated by a decrease in audit and consulting fees associated with compliance with the Sarbanes-Oxley Act of 2002 and a decrease in bonuses earned in fiscal 2007.

Other operating expense for fiscal 2007 was $46,000 and represented net losses on sales of fixed assets as compared to $1.3 million in income during fiscal 2006, which primarily was the result of the gain on sale of our FIAP land and building in January 2006 producing a gain, after costs to sell, of $1.4 million.

Interest expense of $15.5 million for fiscal 2007 remained relatively flat in comparison to fiscal 2006. Interest expense on our Credit Facility increased $0.3 million during fiscal 2007 as compared to fiscal 2006 resulting from higher average borrowings, partially offset by lower average interest rates during fiscal 2007. Interest expense in our Canadian location decreased $0.2 million primarily due to reduced borrowings, partially offset by higher average interest rates during fiscal 2007 as compared to fiscal 2006.

Other, net for fiscal 2007 amounted to $0.8 million in income as compared to $7.7 million in expense for the prior fiscal year. During the prior fiscal year, we charged operations $8.0 million for the accumulated foreign currency . . .