OVERVIEW OF THE BUSINESS AND RECENT DEVELOPMENTS

A. Schulman, Inc. (the "Company," "we," "our," "ours"' and "us") is a leading international supplier of high-performance plastic compounds and resins headquartered in Akron, Ohio. The Company's customers span a wide range of markets including consumer products, industrial, automotive and packaging. The Company has approximately 2,000 employees and 16 plants in countries in North America, Europe and Asia.

The Company sells such products as color and additive concentrates, polyolefins, engineered compounds and polyvinyl chloride ("PVC") used in packaging, durable goods and commodity products. The Company also offers a limited amount of tolling service to customers through its Europe operations.

To identify reportable segments, the Company considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer ("CEO"), who is the Chief Operating Decision Maker ("CODM"). Globally, the Company operates primarily in three lines of business:
engineered plastics, masterbatch and distribution services. In North America, there is a general manager of each of these lines of business each of who report directly to the Company's CEO. Effective September 1, 2008, the Company named a general manager of Asia and a general manager of Europe. This change separated the responsibilities that were previously combined under the general manager of Europe, which then included Asia. Based on the Company's new management structure and an evaluation of how the CODM reviews performance and allocates resources, the Company redefined its European segment to separate the Asian operations from the European operations beginning in the first quarter of fiscal 2009. Prior periods have been restated to reflect the current presentation. The reportable segments are Europe, North America Masterbatch ("NAMB") (previously, referred to as North America Polybatch or NAPB), North America Engineered Plastics ("NAEP"), North America Distribution Services ("NADS") and Asia.

The Company experienced a challenging fiscal year 2009 as a result of the economic slowdown, particularly in the Company's second quarter when global demand declined dramatically. The slowdown led to lower revenues for the Company resulting from a significant decline in demand. The Company initiated various actions throughout fiscal 2009 in order to proactively address the global economic state and efficiently manage the slowdown. Despite poor conditions in the marketplace, the Company was able to significantly improve its liquidity position during fiscal 2009 and maintain a strong balance sheet.

On June 29, 2009, the Company announced that its board of directors approved a plan to cease the operation of its Invision® sheet production line at its Sharon Center, Ohio manufacturing facility. The Company completed the majority of the closing of its Invision sheet manufacturing facility during the fourth quarter of fiscal 2009. This business comprised the former Invision segment of the Company's business. The results of the Invision sheet business are reported as discontinued operations in the Company's consolidated statements of operations for all periods presented.

The remaining assets of the Invision business, including a facility in Findlay, Ohio, which was a dedicated building for the Invision business, and machinery and equipment at the Sharon Center, Ohio facility are considered held for sale as of August 31, 2009. The results of discontinued operations for the year ended August 31, 2009 included approximately $10.3 million of asset impairments for the Findlay, Ohio facility and certain equipment at the Sharon Center, Ohio facility. In addition, the Company recorded less than $0.1 million of cash charges related to employee termination costs. The results for the year ended August 31, 2008 include an impairment of $6.3 million related to the Findlay, Ohio building. The Company expects minimal additional charges as final shutdown of the equipment and facility continues into fiscal 2010.

The following summarizes the results for discontinued operations for the years ended August 31, 2009, 2008 and 2007. The loss from discontinued operations does not include any income tax effect as the Company was not in a taxable position due to its continued U.S. losses and full valuation allowance.

                                               2009          2008          2007
                                                        (In thousands)

         Net sales                           $     217     $     416     $    164

         Loss from operations                $  (3,619 )   $  (6,376 )   $ (5,738 )
         Asset impairment                      (10,317 )      (6,300 )          -
         Restructuring expense                     (20 )           -            -
         Other income                                -            57            -

         Loss from discontinued operations   $ (13,956 )   $ (12,619 )   $ (5,738 )

During fiscal 2009, the Company announced actions to restructure its operations and eliminate costs throughout the Company. These actions are part of the Company's ongoing strategic plan to realign its resources, control costs and improve efficiency to profitably serve key growth markets. These actions included a reduction in capacity and workforce reductions in manufacturing, selling and administrative positions throughout Europe and North America. The Company has taken these proactive actions to address the current global economic conditions and improve the Company's competitive position. The Company recorded restructuring charges of $8.7 million for the year ended August 31, 2009, which are primarily related to the actions taken in fiscal 2009. Related to the announcements, management initiated actions that were substantially complete by the end of fiscal 2009; however, the Company expects between approximately $2.0 million to $3.0 million, before income tax, of expense to be recognized primarily in the first half of fiscal 2010.

The Company also recorded $2.6 million of asset impairment charges, excluding the asset impairment charges included in discontinued operations. These impairments relate to assets held for sale.

During fiscal 2009, the Company received notification from a U.S. multi-employer pension plan that it was being assessed for partial and complete withdrawal liabilities from the plan. This plan covered the Company's employees who previously worked at the Company's Orange, Texas warehouse. The Company terminated over 70% of this location's workforce in fiscal 2004, and then terminated the remaining workforce in fiscal 2007. In accordance with the Employee Retirement Income Security Act ("ERISA") guidelines these workforce reductions qualified as partial and complete withdrawals from the plan. Accordingly, the plan assessed the Company for withdrawal liabilities of $1.8 million for the fiscal 2004 partial withdrawal and $0.6 million for the fiscal 2007 complete withdrawal for its share of the underfunded multi-employer plan. The Company revised the consolidated financial information for the fiscal years 2004 and 2007 to reflect the correction of an immaterial error identified in fiscal 2009 that related to prior periods. The Company reflected in its consolidated statements of stockholders' equity a change of $1.8 million to the August 31, 2006 ending retained earnings balance and a change of $0.6 million to fiscal 2007 income from continuing operations, net income and total stockholders' equity. The fiscal 2007 change of $0.6 million was included in the restructuring expense line item in the Company's consolidated statements of operations. In addition, the Company reflected a change of $2.4 million as a liability in the consolidated balance sheets as of August 31, 2009 and 2008.

See the Results of Operations section of this Management's Discussion and Analysis and Results of Operations for additional discussion regarding the Company's fiscal 2009 performance.

RESULTS OF OPERATIONS 2009

The year ended August 31, 2009 was a year of global economic crisis which caused a significant decline in demand for the Company's product and sales declined 35.5%. Overall tonnage was down 26.6% driven by low demand primarily in the second quarter of fiscal 2009.

A comparison of consolidated net sales by segment is as follows:

                                                     Increase (Decrease)          % Due to         % Due to              % Due to
Sales              2009             2008             Amount            %          Tonnage         Translation        Price/product Mix

Europe          $   935,895      $ 1,454,635      $   (518,740 )      (35.7 )         (21.3 )             (8.0 )                   (6.4 )
NAMB                108,474          136,124           (27,650 )      (20.3 )         (22.1 )            (12.0 )                   13.8
NAEP                121,701          211,259           (89,558 )      (42.4 )         (53.3 )             (3.2 )                   14.1
NADS                 67,920          131,811           (63,891 )      (48.5 )         (42.1 )             (0.2 )                   (6.2 )
Asia                 45,258           49,766            (4,508 )       (9.1 )         (10.5 )              1.7                     (0.3 )

                $ 1,279,248      $ 1,983,595      $   (704,347 )      (35.5 )         (26.6 )             (7.0 )                   (1.9 )

Due to the difficult economic conditions experienced in fiscal 2009, management believes segment performance in each of the quarters to be an important comparison between 2009 and 2008. The individual segments all experienced a decline in sales over fiscal 2008. The second quarter of fiscal 2009 was especially low for the Company, as the economic downturn worsened. However, the Europe, Asia and NAMB segments were each able to start to rebuild sales in the third and fourth quarters through sequential improvement.

A portion of the NAEP decline was planned due to the Company's fiscal 2008 actions to sell the Company's Orange, Texas manufacturing business in March 2008 and to close the Company's St. Thomas, Ontario, Canada manufacturing facility in June 2008, both NAEP facilities. These actions were a result of a strategic decision to reduce the Company's exposure to certain unprofitable markets, such as North American automotive and North American tolling, and focus its effort on more profitable market opportunities.

The Company's NADS segment experienced lower sales as a result of a decline in demand of large volume sales. However, the NADS segment began to see some recovery in sales in the fourth quarter of fiscal 2009.

The Company's Asia segment, while it experienced a 10.5% decline in tonnage, was impacted to a lesser extent by the global decline in demand compared to the other Company segments. The Asia segment was able to exceed fourth quarter 2008 sales in the fourth quarter of fiscal 2009.

The two largest markets served by the Company are the packaging and automotive markets. Other markets include agriculture, appliances, medical, consumer products, electrical/electronics and office equipment. The approximate percentage of consolidated net sales by market for 2009 compared to 2008 is as follows:

                     Market        Fiscal 2009       Fiscal 2008

                     Packaging               43 %              38 %
                     Automotive              12                15
                     Other                   45                47

                                            100 %             100 %

The North America segments include sales to customers in the automotive market amounting to approximately 28% and 33% for the years ended August 31, 2009 and 2008, respectively. The Company has strategically decreased its exposure to the U.S. automotive market, as this market continues to be under severe stress. For the Europe segment, sales to customers in the packaging market amounted to approximately 45% and 40% for the years ended August 31, 2009 and 2008, respectively. The Company's

Asia segment had approximately 86% and 93% of its sales from the packaging market for the years ended August 31, 2009 and 2008, respectively.

The majority of the Company's consolidated net sales can be classified into five primary product families. The approximate amount and percentage of consolidated net sales for these product families compared to the previous year are as follows:

                                                2009                      2008
      Product Family                      Amount          %         Amount          %
                                                (In thousands, except for %'s)

      Color and additive concentrates   $   566,363        44     $   714,770        36
      Polyolefins                           351,532        27         663,925        34
      Engineered compounds                  268,084        21         418,652        21
      Polyvinyl chloride (PVC)               36,768         3          59,174         3
      Tolling                                13,361         1          19,466         1
      Other                                  43,140         4         107,608         5

                                        $ 1,279,248       100     $ 1,983,595       100

A comparison of gross profit dollars and percentages by business segment for 2009 and 2008 is as follows:

                                                                      Increase (Decrease)
  Gross Profit $                          2009          2008             $              %
                                                   (In thousands, except for %'s)

  Europe                                $ 141,051     $ 192,910     $    (51,859 )     (26.9 )
  North America Masterbatch                 8,279        12,231           (3,952 )     (32.3 )
  North America Engineered Plastics         7,665        13,846           (6,181 )     (44.6 )
  North America Distribution Services       6,670        10,013           (3,343 )     (33.4 )
  Asia                                      6,372         5,530              842        15.2

                                        $ 170,037     $ 234,530     $    (64,493 )     (27.5 )

               Gross Profit %                         2009       2008

               Europe                                  15.1 %     13.3 %
               North America Masterbatch                7.6 %      9.0 %
               North America Engineered Plastics        6.3 %      6.6 %
               North America Distribution Services      9.8 %      7.6 %
               Asia                                    14.1 %     11.1 %
               Consolidated                            13.3 %     11.8 %

The Company generally experienced sequential improvement in gross profit dollars and percentages in its segments from second quarter through the fourth quarter of fiscal 2009. The Company's Asia segment declined only slightly in gross profit dollars and percentages in the fourth quarter of fiscal 2009 compared to third quarter of fiscal 2009, but increased significantly over fourth quarter of fiscal 2008. The Company's NAMB segment gross profit increased 60% in the fourth quarter of fiscal 2009 over the fourth quarter of fiscal 2008 as the effects of the Company's initiatives to reduce costs were realized.

The gross profit percentages for Europe for the year ended August 31, 2009 increased to 15.1% compared with 13.3% in the prior year. The Company was able to increase gross profit percentage in the Europe segment primarily through favorable product mix and cost reduction programs initiated throughout fiscal 2009. The Company was also encouraged by these results considering they were achieved during a period of significant decline in demand resulting in lower gross profits. In addition, European gross profits were negatively impacted by foreign currency translation losses of $16.3 million for the year ended August 31, 2009. The Company implemented measures to reduce fixed manufacturing costs by

temporarily reducing capacity and headcount during the second quarter of fiscal 2009 and scheduling some manufacturing facilities on a four-day work week as necessary.

The gross profit dollars for the NAMB business declined $4.0 million for the year ended August 31, 2009 compared with the prior year. The decrease in gross profit dollars for NAMB is primarily the result of demand declines. In addition, the effect of foreign currency translation losses decreased NAMB gross profit by $2.9 million in fiscal 2009. The NAMB gross profit percentage declined to 7.6% for fiscal 2009 from 9.0% in the prior year. The Company was not able to reduce manufacturing costs as quickly as the decline in demand, which negatively impacted the gross profit primarily in the second quarter of fiscal 2009. The gross profit for NAMB also includes approximately $0.9 million of start-up costs for the year ended August 31, 2009 related to the Company's new masterbatch facility in Akron, Ohio. These costs were recognized primarily in the first six months of fiscal 2009.

The gross profit dollars for the NAEP business have declined $6.2 million, or 44.6%, for the year ended August 31, 2009, compared with fiscal 2008. A portion of this decline was planned as a result of the restructuring announced in fiscal 2008 which included the shutdown of the St. Thomas, Ontario, Canada facility and the sale of the Orange, Texas facility. The decline in gross profit dollars for NAEP are primarily related to significant declines in demand as well as the planned tonnage declines. The lower demand resulted in the inability to absorb the majority of overhead costs. The NAEP gross profit percentage declined slightly to 6.3% in fiscal 2009 from 6.6% in fiscal 2008 driven by weakness in the first and second quarters of fiscal 2009. The Company was encouraged that the NAEP segment was able to maintain gross profit percentages during a significant decline in demand as experienced in fiscal 2009. This was achieved through focusing on higher-value-added products and improving utilization of the NAEP facilities, primarily in the latter half of fiscal 2009. In order to offset the effects of weakening markets, in December 2008, the Company announced further restructuring efforts that reduced capacity and headcount in this segment. These restructuring plans included the closing of a production line in the NAEP segment which resulted in $1.2 million in fiscal 2009 of accelerated depreciation which is included in cost of sales. This contributed to the decline in gross profit for NAEP.

The gross profit dollars for the NADS business have declined $3.3 million, or 33.4%, for the year ended August 31, 2009 compared with last year. However, the NADS segment was able to increase margins in the weak market primarily as a result of favorable product mix.

The Company's Asia segment gross profit dollars increased 15.2% for the year ended August 31, 2009. The increase in gross profit dollars and percentage is primarily a result of reduced manufacturing costs and improved supply chain management.

A comparison of capacity utilization levels is as follows:

                                                       2009     2008

                  Europe                                75 %      89 %
                  North America Masterbatch             67 %     101 %
                  North America Engineered Plastics     63 %      75 %
                  Asia                                  61 %      66 %
                  Worldwide                             72 %      85 %

The Company's overall worldwide utilization declined compared with the prior year due to a dramatic decrease in demand resulting from the challenging marketplace. Worldwide capacity utilization, although having suffered earlier in fiscal 2009, rebounded in the fourth quarter of fiscal 2009 to exceed earlier fiscal 2009 quarters and the prior year fourth quarter as the Company realized some increase in demand later in the year. Each of the Company's segments experienced sequential quarterly improvement in their capacity utilizations after the second quarter of fiscal 2009. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant.

Europe capacity utilization declined for the 2009 fiscal year compared with the prior year primarily as a result of the significant global economic slowdown and the Company's working capital initiatives to reduce inventory. The volumes were especially low during the second quarter of fiscal 2009 as some

customers reduced production for extended periods of time. The capacity utilization for Europe increased in the fourth quarter compared with earlier fiscal 2009 quarters and the prior year fourth quarter as the Company experienced an increase in demand.

The capacity utilization for NAMB declined significantly during fiscal 2009 compared with the prior year due to the weak North America marketplace. In addition, the start-up of the Akron, Ohio plant in the second quarter of fiscal 2009 and efforts to reduce inventory impacted the utilization of the plants for NAMB. Capacity utilization for the NAEP segment decreased for fiscal 2009 compared with prior year as a result of the weak marketplace. However, the restructuring efforts announced in fiscal 2008 and fiscal 2009 to close the Company's St. Thomas, Ontario, Canada facility, the sale of the Company's Orange, Texas facility and a line shutdown in the Bellevue, Ohio facility helped mitigate the decline. As a result of the reductions, annual capacity in the North America segments declined 134.4 million pounds. In addition, the fourth quarter of fiscal 2009 showed improved capacity utilization levels as compared with prior year fourth quarter and earlier fiscal 2009 quarters.

The Company's Asia segment experienced lower capacity utilization in the earlier quarters of fiscal 2009, as a result of the weakened global markets and initiatives to reduce inventory. However, the Asia segment significantly increased its capacity utilization levels in the fourth quarter compared with earlier fiscal 2009 quarters and the prior year fourth quarter as a result of a slight rebound in the Asia economy.

The changes in selling, general and administrative expenses are summarized as follows:

                                                                  For the Year Ended August 31, 2009
                                                                 $ Decrease                 % Decrease
                                                                        (In thousands, except
                                                                               for %'s)

Total change in selling, general and administrative
expenses                                                     $           (21,132 )                  (12.5 )%
Effect of foreign currency translation                                   (12,521 )                   (7.4 )

Total change in selling, general and administrative
expenses, excluding the effect of foreign currency
translation                                                  $            (8,611 )                   (5.1 )%

The Company's decline in selling, general and administrative expenses was generally a result of the restructuring initiatives put in place over fiscal years 2008 and 2009, primarily in the Company's North America segments. The Company's Europe segment selling, general and administrative expenses for the year ended August 31, 2009 increased approximately $5.5 million, excluding the effect of foreign currency translation, compared to the previous year. This increase is primarily attributable to increased bad debt expense of approximately $1.6 million due to certain increased customer financial difficulties. The increase in Europe selling, general and administrative expenses also includes costs to implement the Company's European shared service center to consolidate back-office operations during fiscal 2009.

Minority interest represents a 30% equity position of Mitsubishi Chemical MKV Company in a partnership with the Company and a 35% equity position of P.T. Prima Polycon Indah in an Indonesian joint venture with the Company.

Interest expense was $4.8 million and $7.8 million for the years ended August 31, 2009 and 2008, respectively. The decrease of $3.0 million is primarily related to the lower borrowing levels and interest rates as compared to the prior year.

Foreign currency transaction gains or losses represent changes in the value of currencies in major areas where the Company operates. The Company experienced $5.6 million in foreign currency transaction gains for the year ended August 31, 2009 as compared with foreign currency transaction losses of $1.1 million for the year ended August 31, 2008. The foreign currency transaction gains or losses primarily relate to the changes in the value of the U.S. dollar compared with the Canadian dollar, the Mexican peso and to a lesser extent the euro. The Company enters into forward foreign exchange contracts to reduce the impact of changes in foreign exchange rates on the consolidated statements of operations. These contracts reduce exposure to currency movements affecting existing foreign currency denominated

assets and liabilities resulting primarily from trade receivables and payables. Any gains or losses associated with these contracts as well as the offsetting gains or losses from the underlying assets or liabilities are recognized on the foreign currency transaction line in the consolidated statements of operations.

During fiscal 2009, the Company announced various plans to realign its domestic and international operations to strengthen the Company's performance and financial position. The Company initiated these proactive actions to address the current global economic conditions and improve the Company's competitive position. The actions included a reduction in capacity and workforce reductions in manufacturing, selling and administrative positions throughout Europe and North America. In addition, the Company is in the process of eliminating certain positions related to the previously announced consolidation of back-office operations to the Company's European shared service center located in Belgium.

The Company reduced its workforce by approximately 190 positions worldwide during fiscal 2009, primarily as a result of the actions taken in early fiscal 2009 to realign the Company's operations and back-office functions. In addition, to further manage costs during a period of significant declines in demand primarily in the second quarter of fiscal 2009, the Company's major European locations implemented a "short work" schedule when necessary and the NAEP . . .