Overview

Forward-Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our goals, beliefs, plans and expectations about our prospects for the future and other future events, such as our ability to generate sufficient working capital, the amount of availability under our credit facility, our ability to continue to maintain sales and profits of our operations, the implementation of our Board-approved plan to restructure and realign the recently acquired Atlantis Plastics Films businesses, and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs. Forward-looking statements include all statements that are not historical fact and can be identified by terms such as "may," "intend," "might," "will," "should," "could," "would," "anticipate," "expect," "believe," "estimate," "plan," "project," "predict," "potential," or the negative of these terms. Although these forward-looking statements reflect our good-faith belief and reasonable judgment based on current information, these statements are qualified by important factors, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including, but not limited to: the availability of raw materials; the ability to pass raw material price increases to customers in a timely fashion; the integration of Atlantis Plastics with us; the ongoing U.S. recession, the existing global credit and financial crisis and other changes in the United States or international economic or political conditions, such as fluctuations in interest or foreign exchange rates and inflation; the potential of technological changes that would adversely affect the need for our products; price fluctuations which could adversely impact our inventory; and other factors described from time to time in our reports filed or furnished with the U.S. Securities and Exchange Commission (the "SEC"), and in particular those factors set forth in Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended October 31, 2008 and other reports subsequently filed with the SEC. Given these uncertainties, you should not place undue reliance on any such forward-looking statements. Except as required by law, we assume no obligation to update these forward-looking statements, even if new information becomes available in the future.

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:

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Contractual Obligations and Off-Balance-Sheet Arrangements

• Critical Accounting Policies

• New Accounting Pronouncements

Investors should review this MD&A in conjunction with the consolidated financial statements and related notes included in this report under Item 1, our Annual Report on Form 10-K for the fiscal year ended October 31, 2008, other reports filed with the SEC and other publicly available information.

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 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 are volatile. The market for these resins has been extremely volatile, resulting in record price increases followed by significant decreases. 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.

We acquired substantially all of the assets of the Plastic Films segment of Atlantis Plastics, Inc. ("Atlantis") on October 30, 2008. 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 has provided us a stronger array of products and service to meet the needs of both companies' customers. Please refer to Note 3 of the consolidated financial statements for further discussion of the Atlantis acquisition.

Market Conditions

Following a decline in average resin costs in the first quarter of fiscal 2009, resin costs increased in the second and third quarters of fiscal 2009. We believe that resin prices will more than likely continue to rise during fiscal 2009 with volatility continuing to be driven by the oil and natural gas markets.

Resin prices increased during the third quarter of fiscal 2009 as compared to the second quarter of fiscal 2009, but were 37% lower, or $0.30 per pound, than the average resin cost during the three months ended July 31, 2008. Average resin cost during the nine months ended July 31, 2009 was 36% lower, or $0.27 per pound, than the average resin cost during the nine months ended July 31, 2008. We believe that resin prices will more than likely continue to increase during the remainder of fiscal 2009 due to operating losses among the resin suppliers combined with increasing prices of oil and support from the export markets. We believe that the marketplace in which we sell our products remains very

competitive, and is further complicated by adverse economic circumstances affecting many of our customers, distributors and suppliers. 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, if such costs were to increase.

Forecasts for the remainder of fiscal 2009 generally call for a weak economy in the United States, with the continuation of the economic recession. 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 have implemented cost-reduction initiatives, including accelerating the consolidation of staffing, facilities and products related to the Atlantis acquisition, that are designed to increase efficiency and improve the way we run our business to meet the challenges of volatile economic environment, as well as take advantage of opportunities in the marketplace. We are limited, however, in our ability to reduce costs to offset the results of a prolonged or severe downturn given the fixed cost nature of our business combined with our long term business strategy which demands that we remain in a position to respond when market conditions improve. We believe we are taking appropriate steps to minimize the impact of these conditions, primarily through staff reductions, shut downs of idle equipment and plant closures.

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 Expenses:              All costs related to shipping and handling of
                                products to customers, including transportation
                                costs to third party providers




Selling, General and            Personnel costs, including salaries, bonuses,
Administrative Expenses:        commissions and employee benefits


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

AEP and Atlantis were significant competitors in the plastic films industry for many years, competing to sell similar products to a similar customer base. One of the primary factors in AEP's determination to pursue and consummate the Atlantis acquisition was the potential realization of synergistic benefits derived from SKU consolidation, logistical savings, resin cost savings and manufacturing and operating cost efficiencies. Immediately upon the completion of the acquisition, AEP began the process of reducing and combining SKU's, reformulating common products to their most effective common denominator and changing the manufacturing location of certain products to maximize operating and logistical efficiencies. For example, within a week of the Atlantis closing, AEP shut down Atlantis' Fontana, CA facility and began to implement a plan under which the customers previously serviced by Fontana would, in the future, be serviced by AEP's Chino, CA plant or Atlantis' Tulsa plant. We have devoted significant time and effort throughout fiscal 2009 to achieve these synergistic benefits, and we will continue to pursue such synergies for the remainder of the fiscal year. However, as a result of the foregoing, no meaningful operational or financial information exists subsequent to the acquisition that segregates the impact of Atlantis from AEP as a whole. Therefore, although the Atlantis acquisition materially impacted AEP's net sales and results of operations for the three and nine months ended July 31, 2009, the following Management's Discussion and Analysis of Financial Condition and Results of Operations does not include any separate information regarding Atlantis.

Third Quarter of Fiscal 2009 Compared to Third Quarter of Fiscal 2008

The following table presents unaudited selected financial data for the three
months ended July 31, 2009 and 2008 (dollars per lb. sold is calculated by
dividing the applicable consolidated statements of operations category by pounds
sold in the period):




                                                For the Three Months Ended                           %
                                      July 31, 2009                    July 31, 2008             increase/
                                               $ Per lb.                        $ Per lb.        (decrease)          $ increase/
                                   $              sold              $              sold             of $             (decrease)
                                                           (in thousands, except for per pound data)
Net sales                      $ 189,750     $         0.94     $ 207,020     $         1.15           (8.3 )%      $     (17,270 )
Gross profit                      37,483               0.19        18,061               0.10          107.5 %              19,422
Operating expenses:
Delivery                           9,781               0.05        10,340               0.06           (5.4 )%               (559 )
Selling                           10,027               0.05         7,981               0.04           25.6 %               2,046
General and administrative         6,347               0.03         3,584               0.02           77.1 %               2,763

Total operating expenses       $  26,155     $         0.13     $  21,905     $         0.12           19.4 %       $       4,250

Pounds sold                                    202,529 lbs.                     180,626 lbs.

Net Sales

Net sales for the third quarter of fiscal 2009 decreased $17.3 million, or 8.3%, to $189.7 million from $207.0 million for the third quarter of fiscal 2008. The decrease was the result of a 17.1% decrease in average selling prices coinciding with decreases in resin costs from the prior year, negatively affecting net sales by $35.5 million, partially offset by a 12.1% increase in sales volume driven primarily by the Atlantis acquisition and positively affecting net sales by $20.8 million. We continued to experience the adverse effects of the economic recession, primarily in our construction and housing related products, causing total volume to be below management's expectations. The third quarter of fiscal 2009 also included a $2.6 million negative impact of foreign exchange relating to our Canadian operations.

Gross Profit

Gross profit for the third quarter of fiscal 2009 increased $19.4 million to $37.5 million from $18.1 million in the same quarter of the prior fiscal year. The improvement in gross profit is primarily due to increased volume combined with cost saving programs including the shut down of the Fontana, California plant and internal efficiency initiatives designed to align production with demand at our manufacturing facilities. The gross profit for the third quarter of fiscal 2009 included an increase in the LIFO reserve of $5.0 million which negatively impacted gross profit for the quarter. The third quarter of fiscal 2009 also included $0.5 million of negative impact of foreign exchange relating to our Canadian operations.

Operating Expenses

Operating expenses for the third quarter of fiscal 2009 increased $4.2 million from the comparable period in the prior fiscal year, or 19.4%, to $26.2 million. The increase in operating expenses is primarily due to increased volumes sold in the current period, combined with increased general and administrative expense due to an increase in compensation costs recorded in accordance with SFAS 123R for stock options and performance units and an increase in bad debt expense. The decrease in delivery expense is primarily due to a decrease in fuel costs in the current period compared to the same period of the prior year. The third quarter of fiscal 2009 includes $0.3 million favorable effect of foreign exchange decreasing reported total operating expenses.

Interest Expense

Interest expense for the three months ended July 31, 2009 remained flat at $3.8 million as compared to the prior year period, resulting primarily from lower interest rates on Credit Facility borrowings and lower interest expense on our 2013 Notes as a result of the extinguishment of $14.8 million of the 2013 Notes on April 1, 2009, offset by higher average borrowings on our Credit Facility during the three months ended July 31, 2009 as compared to the same period in the prior fiscal year and interest expense incurred on the new capital leases originating on March 27, 2009.

Other, net

Other, net for the three months ended July 31, 2009 amounted to $0.2 million in expense, as compared to $0.2 million in income for the three months ended July 31, 2008. The expense in the current period is primarily attributable to higher foreign currency losses in the current period as compared to gains the prior period due to an increase in unrealized losses on foreign currency denominated payables and receivables resulting primarily from the deterioration in the third quarter of the U.S. dollar to the Canadian dollar.

Income Tax Provision

The provision for income taxes for the three months ended July 31, 2009 was $1.9 million on income from continuing operations before the provision for income taxes of $7.3 million. The difference between our effective tax rate of 26.2 percent and the U.S. statutory tax rate of 35.0 percent primarily relates to a benefit for a true-up of prior year estimates in the United States, including additional New Jersey AMA and research and development tax credits resulting from conclusion of the New Jersey state audit, partially offset by the provision for state taxes in the United States, net of federal benefit.

The benefit for income taxes for the three months ended July 31, 2008 was $2.5 million on loss from continuing operations before the benefit for income taxes of $7.3 million. The effective rate for the three months ended July 31, 2008 was 35.0 percent, the same as the U.S. statutory tax rate, and is primarily due to a benefit for state taxes in the United States offset by a true-up of prior year's estimates in the United States.

Discontinued Operations-Third Quarter of Fiscal 2009 Compared to Third Quarter of Fiscal 2008

The financial statements at July 31, 2009 and for the three months ended July 31, 2009 and 2008 include as discontinued operations our Spanish operation which is in liquidation.

A consolidated summary of the operating results of discontinued operations for the three months ended July 31, 2009 and 2008 is as follows:

                                                     For the Three
                                                         Months
                                                     Ended July 31,
                                                   2009       2008
                                                     (in thousands)
               Net sales                           $   -    $       -
               Gross profit                            -            -
               Loss from discontinued operations       -          (38 )
               Loss from discontinued operations   $   -    $     (38 )

First Nine Months of Fiscal 2009 Compared to First Nine Months of Fiscal 2008

The following table presents unaudited selected financial data for the nine
months ended July 31, 2009 and 2008 (dollars per lb. sold is calculated by
dividing the applicable consolidated statements of operations category by pounds
sold in the period):



                                                 For the Nine Months Ended
                                      July 31, 2009                    July 31, 2008             % increase/
                                               $ Per lb.                        $ Per lb.        (decrease)           $ increase/
                                   $              sold              $              sold             of $              (decrease)
                                                            (in thousands, except for per pound data)
Net sales                      $ 552,529     $         0.98     $ 561,921     $         1.13            (1.7 )%      $      (9,392 )
Gross profit                     127,248               0.22        68,240               0.14            86.5 %              59,008
Operating expenses:
Delivery                          28,246               0.05        27,565               0.05             2.5 %                 681
Selling                           28,610               0.05        24,055               0.05            18.9 %               4,555
General and administrative        16,929               0.03        14,856               0.03            14.0 %               2,073

Total operating expenses       $  73,785     $         0.13     $  66,476     $         0.13            11.0 %       $       7,309

Pounds sold                                    565,752 lbs.                     498,863 lbs.

Net Sales

Net sales for the nine months ended July 31, 2009 decreased $9.4 million, or 1.7%, to $552.5 million from $561.9 million in the same period of the prior fiscal year. The decrease was the result of a 12.0% decrease in average selling prices negatively affecting net sales by $67.4 million, partially offset by a 13.4% increase in sales volume driven primarily by the Atlantis acquisition and positively affecting net sales by $66.3 million. Consolidated sales volume for the first nine months of fiscal 2009 was below management's expectations due to the adverse effects of the economic recession, primarily in our construction and housing related products. The first nine months of fiscal 2009 also included an $8.3 million negative impact of foreign exchange relating to our Canadian operations.

Gross Profit

Gross profit for the first nine months of fiscal 2009 increased $59.0 million to $127.2 million from $68.2 million in the same period in the prior fiscal year. The increase in gross profit was primarily due to higher sales volume, combined with a $21.3 million decrease in the LIFO reserve during the current period resulting from a decrease in resin prices and inventory quantities during the first nine months of fiscal 2009. The first nine months of fiscal 2009 also included $1.4 million of negative impact of foreign exchange relating to our Canadian operations.

Operating Expenses

Operating expenses for the nine months ended July 31, 2009 increased $7.3 million, or 11.0%, to $73.8 million from the comparable period in the prior fiscal year. The increase in operating expenses is primarily due to higher delivery and selling expenses resulting from greater volumes sold in the current period, combined with increased general and administrative expenses due to an increase in compensation costs recorded in accordance with SFAS 123R for stock options and performance units, and increased accruals related to potential current year bonuses. General and administrative expenses in the current period also include costs related to transitional services associated with the Atlantis acquisition. General and administrative expenses in the nine month period ended July 31, 2008 included approximately $1.6 million, excluding professional fees, related to a commercial dispute and approximately $0.4 million of 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). The first nine months of fiscal 2009 includes $1.1 million favorable effect of foreign exchange decreasing reported total operating expenses.

Interest Expense

Interest expense for the nine months ended July 31, 2009 increased $0.2 million to $12.1 million from $11.9 million in the prior period, resulting primarily from higher average borrowings on our Credit Facility during the nine months ended July 31, 2009 as compared to the same period in the prior fiscal year and higher amortization of fees associated with the Amended Credit Facility, partially offset by lower interest rates on Credit Facility borrowings and lower interest expense on our 2013 Notes resulting from the extinguishment of $14.8 million of the 2013 Notes on April 1, 2009.

Gain on Extinguishment of Debt

On April 1, 2009, we repurchased and retired $14.8 million (principal amount) of the Company's 2013 Notes at a price of 62.8% of par. The cash paid was $9.4 million, which included $0.1 million of accrued interest. In connection with the partial retirement, we recognized a $5.3 million gain on extinguishment of debt, which is the difference between the repurchase amount of $9.3 million and the principal amount retired of $14.8 million, net of the pro-rata write-off of the unamortized debt financing costs related to the 2013 Notes of $0.2 million.

Other, net

Other, net for the nine months ended July 31, 2009 amounted to $0.6 million in expense, as compared to $0.7 million in income for the nine months ended July 31, 2008. The expense in the current period is primarily attributable to higher foreign currency losses in the current period as compared to gains in the prior period resulting from changes in foreign exchange rates and an increase in unrealized losses on foreign currency denominated payables and receivables resulting primarily from the deterioration during the current nine month period of the U.S. dollar to the Canadian dollar.

Income Tax Provision

The provision for income taxes for the nine months ended July 31, 2009 was $17.0 million on income from continuing operations before the provision for income taxes of $46.1 million. The difference between our effective tax rate of 36.9 percent and the U.S. statutory tax rate of 35.0 percent primarily relates to the provision for state taxes in the United States, net of federal benefit, partially offset by a benefit for a true-up of prior year estimates in the United States. . . .