Introduction

How We Generate Our Revenues

Our revenues are primarily derived from (1) product sales and (2) toll processing services in the polymer processing industry. "Toll processing services" or "tolling" refers to processing customer-owned material for a service fee. Product sales result from the sale of finished products to the customer such as polymer powders, proprietary concentrates, masterbatches and specialty compounds. The creation of such products begins with the purchase of resin (primarily polyethylene) and other raw materials which are further processed within our 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, we sell our products to our customers. Our products are used by our customers to manufacture finished goods such as household items (e.g. toys, household furniture and trash receptacles), automobile parts, agricultural products (such as fertilizer and water tanks), paints, waxes, and metal and fabric coatings.

We are also a major supplier of concentrates to the plastic film industry in North America. These plastic films are predominantly used to produce plastic packaging. The concentrates we manufacture are melt-blended into base resins to produce plastic film having the desired characteristics. We sell concentrates to both resin producers and businesses that manufacture plastic films.

Toll processing services, which may involve size reduction, compounding, and other processing services, are performed on customer-owned material for a fee. We consider our toll processing services to be completed when we have processed the customer-owned material and no further services remain to be performed. Pursuant to the service arrangements with our customers, we are entitled to collect our agreed upon toll processing fee upon completion of our toll processing services. Shipping of the product to and from our facilities is determined by and paid for by the customer. The revenue we recognize for toll processing services is net of the value of our customer's product as we do not take ownership of our customer's material during any stage of the process.

Demand for our products and services tends to be driven by overall economic factors and, particularly, consumer spending. Accordingly, the recent downturn in the U.S. and global economies that has escalated over the past few months has had 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 dramatically in recent months, 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 our products and services tends to be seasonal, with customer demand historically being weakest during our 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.

Cost of Sales and Services

Cost of sales and services is primarily comprised of purchased raw materials (resins and various additives), compensation and benefits to non-administrative employees, electricity, repair and maintenance, occupancy costs and supplies.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") 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.

How We Manage Our Operations

Our 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, for powdered polymers, 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. Our ICO Europe segment includes operations in France, Holland, Italy and the U.K. Our ICO Asia Pacific segment includes operations in Australia, Malaysia, New Zealand and the United Arab Emirates.

Results of Operations

Three months ended December 31, 2008 compared to the three months ended December 31, 2007

Executive Summary

During the first quarter of fiscal year 2009, we generated revenues of $79.4 million, a decrease of $31.5 million compared to the first quarter of fiscal year 2008. The global economic downturn resulted in lower demand in all of our segments, causing a significant decrease in revenues. Also during the quarter resin prices fell dramatically. This downward resin price trend typically leads our customers to reduce their level of demand for our products and services as they reduce their inventory levels. As a result of the global economic downturn and the dramatic reduction in resin prices, our total volumes sold decreased 21%. Operating income decreased 107%, or $6.9 million to a loss of $(0.4) million. This was a result of the decrease in revenues and a lower gross margin (12.7% for the three months ended December 31, 2008 compared to 17.2% for the three months ended December 31, 2007). During the first quarter of fiscal year 2009, we experienced an unprecedented decline in resin prices which followed historically high resin prices. This dramatic and unfavorable change in resin price environment, led to a decline in our profitability. During the first quarter of fiscal year 2009 we reduced the carrying cost of our inventory by 33% to address these changing market conditions. After the end of the first fiscal quarter, we believe that resin prices have stabilized.

                                                     Summary Financial Information
                                                          Three Months Ended
                                                             December 31,
                                           2008           2007          Change           %
                                                        (Dollars in Thousands)
Total revenues                          $   79,358     $  110,865     $  (31,507 )         (28% )
SG&A                                         9,138         10,603         (1,465 )         (14% )
Operating income                              (448 )        6,496         (6,944 )        (107% )
Income from continuing operations           (1,076 )        3,526         (4,602 )        (131% )
Net income                              $   (1,076 )   $    3,510     $   (4,586 )        (131% )

Volumes (1)                                 64,600         81,900        (17,300 )         (21% )
Gross margin (2)                             12.7%          17.2%          (4.5% )
SG&A as a percentage of revenue              11.6%           9.6%           2.0%
Operating income as a percentage of
revenue                                      (0.6% )         5.9%          (6.5% )

(1) "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.
(2) Gross margin is calculated as the difference between revenues and cost of sales and services excluding depreciation, divided by revenues.

Revenues. Total revenues decreased year-over-year by $31.5 million or 28% to $79.4 million. The decrease in revenues was a result of the changes in volumes sold by us ("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 decrease in revenue are:

                                           Increase/(Decrease)
                                             %            $
                                          (Dollars in Thousands)
                 Volume                     (16%)       ($18,307)
                 Price/product mix           (4%)         (4,000)
                 Translation effect          (8%)         (9,200)
                 Total change in revenue    (28%)       $(31,507)

As mentioned above, the Company's revenues and profitability are impacted by the change in raw material prices ("resin" prices) as well as product sales mix. As the price of resin increases or decreases, market prices for our products will also generally increase or decrease. This will typically lead to higher or lower average selling prices. Although average resin prices were lower in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008, our average selling prices tended to be slightly higher than the previous year's first quarter due to the spike in resin prices in the fourth quarter of fiscal year 2008 and the rapid and dramatic decline in resin prices in the first quarter of fiscal year 2009. An unfavorable change in product mix at our Bayshore Industrial facility caused a decline in revenues. As a result of the slightly higher average prices and the unfavorable product mix change at our Bayshore Industrial facility, the revenue impact from changes in price and product mix led to a reduction in revenues of $4.0 million. Although we participate in numerous markets, the graph below illustrates the general trend in the prices of resin we purchased.

[[Image Removed]]

Total volumes sold decreased 17,300 metric tons, or 21%, during the first quarter of fiscal year 2009 compared to the first quarter of the previous fiscal year. This decrease in volumes sold led to a decrease in revenues of $18.3 million. All segments of the Company experienced a decrease in volumes, primarily a result of the slowing global economy and the downward trend in resin prices.

In addition, the translation effect of changes in foreign currencies relative to the U.S. Dollar caused a decrease in revenues of $9.2 million due primarily to weaker European and Australian currencies compared to the U.S. Dollar.

A comparison of revenues by segment and discussion of the significant segment changes is provided below.

Revenues by segment for the three months ended December 31, 2008 compared to the three months ended
December 31, 2007:

                                                   Three Months Ended
                                                      December 31
                      2008       % of Total        2007        % of Total       Change          %
                                                 (Dollars in Thousands)
 ICO Europe         $ 34,762             44%     $  46,313             42%     $ (11,551 )      (25% )
 Bayshore
 Industrial           18,330             23%        31,777             29%       (13,447 )      (42% )
 ICO Asia Pacific     14,481             18%        17,945             16%        (3,464 )      (19% )
 ICO Polymers
 North America         8,889             11%        10,331              9%        (1,442 )      (14% )
 ICO Brazil            2,896              4%         4,499              4%        (1,603 )      (36% )
 Total              $ 79,358            100%     $ 110,865            100%     $ (31,507 )      (28% )

December 31, 2008 Revenues by Segment December 31, 2007 Revenues by Segment
[[Image Removed]][[Image Removed]]

ICO Europe's revenues decreased $11.6 million or 25% year-over-year due to lower volumes sold of 20% which negatively impacted revenues by $7.1 million. The lower volumes were caused by lower customer demand due to a decline in the global economic environment and the downward trend in resin prices. Additionally, the translation effect of weaker European currencies compared to the U.S. Dollar caused a decrease in revenues of $5.0 million.

Bayshore Industrial's revenues decreased $13.4 million or 42% as a result of a lower volumes sold which negatively impacted revenues by $7.5 million as well as an unfavorable change in product mix and lower average prices which decreased revenues $5.9 million.

ICO Asia Pacific's revenues decreased $3.5 million or 19% primarily due to the $3.4 million translation effect of weaker foreign currencies of that region (Australian Dollar, New Zealand Dollar and Malaysian Ringgit) compared to the U.S. Dollar. An increase in product sales volumes led to an increase in revenues of $1.2 million while changes in product mix led to a $0.8 million decline in revenues.

ICO Polymers North America's revenues decreased $1.4 million or 14% due to lower volumes sold ($2.8 million impact), offset by the positive impact of $1.4 million resulting from favorable changes in product mix.

ICO Brazil's revenues decreased $1.6 million or 36% due to lower volumes sold which negatively impacted revenues by $1.1 million, and also due to the negative effect of the weaker Brazilian currency compared to the U.S. Dollar, which negatively impacted revenues by $0.8 million.

Gross Margin. Consolidated gross margins (calculated as the difference between revenues and cost of sales and services, divided by revenues) decreased from 17.2% to 12.7%. This decline was primarily due to the lower volumes sold and due to lower feedstock margins (the difference between product sales revenues and related cost of raw materials sold). The decline in volumes sold was primarily caused by the global recession and the dramatic downward trend in resin prices in the first quarter of fiscal year 2009, both of which led to reduced customer demand. The decline in feedstock margins was primarily caused by the unfavorable resin price environment. The unfavorable resin price environment was caused by resin prices reaching historically high levels in the fourth quarter of fiscal year 2008, followed by the rapid and dramatic fall in resin prices in the first quarter of fiscal year 2009. This combination led to a reduction in our feedstock margins. These negative impacts were partially offset by lower operating expenses, primarily payroll and utility costs.

Selling, General and Administrative. SG&A decreased $1.5 million or 14%. The decrease in SG&A was due to the effect of weaker foreign currencies related to the U.S. Dollar, which decreased SG&A by $0.8 million, lower external professional fees of $0.7 million and lower compensation and benefits cost of $0.3 million. The declines were partially offset by an increase in bad debt expense of $0.6 million. As a percentage of revenues, SG&A increased to 11.6% of revenue during the three months ended December 31, 2008 compared to 9.6% for the same quarter last year due to lower revenues.

Impairment, restructuring and other costs (income). During the three months ended December 31, 2008, the Company recorded an insurance reimbursement of $0.4 million related to financial losses resulting from the loss of power experienced at its Bayshore Industrial location as a result of Hurricane Ike which hit the Gulf Coast area in the fourth quarter of fiscal year 2008.

On July 26, 2008, the Company's facility in New Jersey suffered a fire which caused damage to one of the facility's buildings. The Company incurred $0.1 million of one-time expenses related to the fire offset by the recording of $0.2 million in insurance claims receivable during the three months ended December 31, 2008. During fiscal year 2008, the Company moved its New Jersey operations to Allentown, Pennsylvania and is no longer operating in New Jersey.

During the fourth quarter of fiscal year 2008, the Company decided to close its plant in the United Arab Emirates, effective with the expiration of its lease agreement on January 31, 2009. As a result of the closure, we recorded a $0.2 million impairment related to property, plant and equipment and plant closure costs in the three months ended December 31, 2008.

During the first quarter of fiscal year 2007, the Company incurred $0.2 million of costs related to the fire that occurred in the Company's facility in New Jersey on July 2, 2007.

Operating income. As compared with the same quarter in the previous fiscal year, consolidated operating income decreased $6.9 million or 107% during the three months ended December 31, 2008 to $(0.4) million. The decrease was primarily due to the decrease in volumes sold and lower feedstock margins as a result of the unfavorable resin pricing environment partially offset by lower operating costs and lower SG&A.

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

                                                          Three Months Ended
    Operating income (loss)                                  December 31,
                                              2008         2007        Change         %
                                                        (Dollars in Thousands)
    ICO Europe                              $   (149 )   $  2,998     $ (3,147 )     (105% )
    Bayshore Industrial                        1,718        3,928       (2,210 )      (56% )
    ICO Asia Pacific                          (1,287 )        862       (2,149 )     (249% )
    ICO Polymers North America                   582          446          136         30%
    ICO Brazil                                   (58 )        137         (195 )     (142% )
    Total reportable segments                    806        8,371       (7,565 )      (90% )
    Unallocated general corporate expense     (1,254 )     (1,875 )        621        (33% )
    Consolidated                            $   (448 )   $  6,496     $ (6,944 )     (107% )



                                                              Three Months Ended
  Operating income (loss) as a percentage of revenues            December 31,
                                                          2008        2007      Change
                                                            (Dollars in Thousands)
  ICO Europe                                                  0%         6%         (6% )
  Bayshore Industrial                                         9%        12%         (3% )
  ICO Asia Pacific                                           (9% )       5%        (14% )
  ICO Polymers North America                                  7%         4%          3%
  ICO Brazil                                                 (2% )       3%         (5% )
  Consolidated                                               (1% )       6%         (7% )

ICO Europe's operating income decreased $3.1 million or 105% due to a decrease in volumes sold and to a lesser extent the negative impact from feedstock margins as a result of the unfavorable resin price environment.

ICO Asia Pacific's operating income declined year-over-year from income of $0.9 million to a loss of $1.3 million. This decline in operating income was primarily a result of reduced feedstock margins due to the unfavorable resin price environment. This decline was partially offset by reduced operating expenses. The company incurred an operating loss in the three months ended December 31, 2008 of $0.7 million related to its facility in the United Arab Emirates.

Bayshore Industrial's operating income decreased $2.2 million or 56%, primarily as a result of a decrease in volumes sold due to lower customer demand.

ICO Polymers North America's operating income increased $0.1 million or 30% primarily due to lower impairment, restructuring and other costs of $0.3 million and lower operating expenses of $0.5 million during the three months ended December 31, 2008 as compared to the same three months ended December 31, 2007. These benefits were partially offset by a reduction in volumes sold which reduced operating income by approximately $0.7 million.

ICO Brazil's operating income declined from income of $0.1 million to a loss of $0.1 million primarily caused by the reduction in volumes sold due to lower customer demand.

Unallocated general corporate expense decreased $0.6 million or 33% due to lower external professional fees.

Interest Expense, Net. For the three months ended December 31, 2008, net interest expense decreased $0.4 million or 38% year-over-year primarily as a result of a decrease in borrowings.

Income Taxes (from continuing operations). The Company's effective income tax rates were a benefit of 24% and a provision of 34% during the three months ended December 31, 2008 and 2007. The Company's effective income tax rate of 24% during the three months ended December 31, 2008 was primarily due to the mix of pre-tax income and loss in the Company's various tax jurisdictions.

Net Income. For the three months ended December 31, 2008, the Company incurred a net loss of $1.1 million compared to net income of $3.5 million for the comparable period in fiscal year 2008, due to the above factors.

Foreign Currency Translation. The fluctuations of the U.S Dollar against the Euro, British Pound, New Zealand Dollar, Brazilian Real, Malaysian Ringgit and the Australian Dollar have impacted the translation of revenues and expenses of our international operations. The table below summarizes the impact of changing exchange rates for the above currencies for the three months ended December 31, 2008.

                                         Three Months Ended
                                          December 31, 2008
                      Net revenues          $(9.2) million
                      Operating income        $0.3 million
                      Pre-tax income          $0.4 million
                      Net income              $0.2 million

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS 141 (R)") and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements ("SFAS 160"). The goal of these standards is to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The provisions of SFAS 141 (R) and SFAS 160 are effective for us on October 1, 2009. As SFAS No. 141 (R) will apply to future acquisitions, it is not possible at this time for us to determine the impact of adopting this standard.

In March 2008, the FASB issued SFAS No. 161 ("SFAS 161"), Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We will be required to adopt this standard in the interim period ending March 31, 2009. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We are currently evaluating the impact of adopting this new standard.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. We do not anticipate that the adoption of FSP FAS 142-3 will have a material impact on our results of operations or financial condition.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities ("FSP EITF 03-6-1"). This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in computing earnings per share under the two-class method described in SFAS No. 128, Earnings Per Share. This FSP will be effective for the Company beginning with the first quarter of fiscal year 2010 and will be applied retrospectively. We are currently evaluating the impact of adopting this new standard.

In December 2008, the FASB issued FSP FAS 132 (R)-1, Employers' Disclosures about Post-retirement Benefit Plan Assets, which amends SFAS No. 132, Employers' . . .