10Q - 3rd Quarter June 30, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2006

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-10068

ICO, Inc.

(Exact name of registrant as specified in its charter)

Texas	76-0566682
(State of incorporation)	(I.R.S. Employer Identification No.)

1811 Bering Drive, Suite 200
Houston, Texas	77057
(Address of principal executive offices)	(Zip Code)

(713) 351-4100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company as defined in (Rule 12b-2 of the Exchange Act).

YES o NO x

There were 25,755,737 shares of common stock without par value

outstanding as of August 1, 2006

ICO, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Part I. Financial Information		Page

	Item 1. Financial Statements

	Consolidated Balance Sheets as of June 30, 2006 and September 30, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3

	Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2006 and 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5

	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6

	Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19

	Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29

	Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30


Part II. Other Information

	Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31

	Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31

	Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31

- 2 -

ICO, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share data)

	June 30, 2006			September 30, 2005
ASSETS

Current assets:
Cash and cash equivalents	$	7,032		$	3,234
Trade receivables (less allowance for doubtful accounts
of $2,315 and $2,144, respectively)		65,965			57,132
Inventories		38,261			35,006
Deferred income taxes		2,413			2,579
Prepaid and other current assets		6,351			5,542
Total current assets		120,022			103,493

Property, plant and equipment, net		51,618			49,274
Goodwill		8,325			8,831
Other assets		2,497			2,657
Total assets	$	182,462		$	164,255

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Short-term borrowings under credit facilities	$	10,619		$	8,989
Current portion of long-term debt		4,433			5,657
Accounts payable		32,947			31,387
Accrued salaries and wages		4,936			4,181
Income taxes payable		4,189			1,459
Other current liabilities		9,629			10,438
Total current liabilities		66,753			62,111

Long-term debt, net of current portion		20,756			18,993
Deferred income taxes		4,097			4,383
Other long-term liabilities		1,849			1,678
Total liabilities		93,455			87,165

Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, without par value -
345,000 shares authorized; 322,500 shares issued
and outstanding with a liquidation preference of
$39,866 and $38,234, respectively		13			13
Undesignated preferred stock, without par value -
105,000 shares authorized; no shares issued and outstanding		─			─
Common stock, without par value - 50,000,000 shares authorized;
25,751,842 and 25,544,977 shares issued
and outstanding, respectively		44,922			44,265
Additional paid-in capital		104,658			104,134
Accumulated other comprehensive loss		(645	)		(1,245	)
Accumulated deficit		(59,941	)		(70,077	)
Total stockholders’ equity		89,007			77,090
Total liabilities and stockholders’ equity	$	182,462		$	164,255

The accompanying notes are an integral part of these financial statements.

- 3 -

ICO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except share data)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Sales	$	73,186		$	67,530		$	211,334		$	199,054
Services		9,258			8,232			25,766			26,273
Total revenues		82,444			75,762			237,100			225,327
Cost and expenses:
Cost of sales and services		66,330			63,051			190,035			185,139
Selling, general and administrative		8,278			9,470			25,663			28,169
Depreciation and amortization		1,917			1,934			5,501			5,986
Impairment, restructuring and other costs		-			-			118			343
Operating income		5,919			1,307			15,783			5,690
Other income (expense):
Interest expense, net		(505	)		(748	)		(1,601	)		(2,208	)
Other		167			(65	)		313			(21	)
Income from continuing operations before income taxes		5,581			494			14,495			3,461
Provision for income taxes		1,470			475			4,307			1,030
Income from continuing operations		4,111			19			10,188			2,431
Loss from discontinued operations, net of benefit for income taxes of ($10), ($37), ($28) and ($206), respectively		(19	)		(63	)		(52	)		(383	)

Net income (loss)	$	4,092		$	(44	)	$	10,136		$	2,048

Basic income (loss) per share:
Income from continuing operations	$	.16		$	.00		$	.40		$	.10
Loss from discontinued operations		.00			.00			.00			(.02	)
Net income (loss) per common share	$	.16		$	.00		$	.40		$	.08
Diluted income (loss) per share:
Income from continuing operations	$	.14		$	.00		$	.34		$	.08
Loss from discontinued operations		.00			.00			.00			(.01	)
Net income (loss) per common share	$	.14		$	.00		$	.34		$	.07

Basic weighted average shares outstanding		25,739,000			25,455,000			25,653,000			25,426,000
Diluted weighted average shares outstanding		30,046,600			29,284,600			29,693,600			29,339,600

The accompanying notes are an integral part of these financial statements.

-4 -

ICO, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006		2005

Net income (loss)	$	4,092		$	(44	)	$	10,136	$	2,048
Other comprehensive income (loss)
Foreign currency translation adjustment		1,505			(1,589	)		516		275
Unrealized gain (loss) on foreign currency hedges		(83	)		60			84		171

Comprehensive income (loss)	$	5,514		$	(1,573	)	$	10,736	$	2,494

The accompanying notes are an integral part of these financial statements.

- 5 -

ICO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

	Nine Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	10,136		$	2,048
Loss from discontinued operations		52			383
Income from continuing operations		10,188			2,431
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		5,501			5,986
Stock option compensation expense		639			640
Changes in assets and liabilities:
Receivables		(7,510	)		(5,512	)
Inventories		(2,815	)		3,982
Other assets		(753	)		2,276
Income taxes payable		3,021			(1,377	)
Deferred taxes		81			(177	)
Accounts payable		586			(5,455	)
Other liabilities		294			(332	)
Total adjustments		(956	)		31
Net cash provided by operating activities by continuing operations		9,232			2,462
Net cash used for operating activities by discontinued operations		(287	)		(718	)
Net cash provided by operating activities		8,945			1,744

Cash flows used for investing activities:
Capital expenditures		(6,994	)		(3,393	)
Proceeds from dispositions of property, plant and equipment		10			953
Net cash used for investing activities by continuing operations		(6,984	)		(2,440	)

Cash flows provided by financing activities:
Common stock transactions		288			50
Increase (decrease) in short-term borrowings under credit facilities, net		1,842			(844	)
Proceeds from long-term debt		9,970			13,124
Repayments of long-term debt		(10,095	)		(9,131	)
Debt financing costs		(290	)		(281	)
Net cash provided by financing activities by continuing operations		1,715			2,918
Effect of exchange rates on cash		122			6
Net increase in cash and equivalents		3,798			2,228
Cash and equivalents at beginning of period		3,234			1,931
Cash and equivalents at end of period	$	7,032		$	4,159

The accompanying notes are an integral part of these financial statements.

- 6 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements," and accordingly do not include all information and footnotes required under accounting principles generally accepted in the United States of America for complete financial statements. The financial statements have been prepared in conformity with the accounting principles and practices as disclosed in the Annual Report on Form 10-K for the year ended September 30, 2005 for ICO, Inc. (the “Company”). In the opinion of management, these interim financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position as of June 30, 2006, the results of operations for the three and nine months ended June 30, 2006 and 2005 and the changes in its cash position for the nine months ended June 30, 2006 and 2005. Results of operations for the three and nine month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending September 30, 2006. For additional information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended September 30, 2005.

NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition via a cumulative effect adjustment within net income of the period of the change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of a change in accounting principle. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS 154 further requires a change in depreciation, amortization or depletion method for long-lived, non-financial assets to be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No.154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. The Company will adopt this statement effective October 1, 2006. The adoption of SFAS No. 154 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company will adopt this statement as required, and adoption is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

NOTE 3. EARNINGS PER SHARE (“EPS”) AND STOCKHOLDERS’ EQUITY

The Company presents both basic and diluted EPS amounts. The requirements for calculating basic EPS excludes the dilutive effect of securities. Diluted EPS assumes the conversion of all dilutive securities. The weighted average shares outstanding was increased by 4,307,600 and 3,829,600 shares to reflect the conversion of all potentially dilutive securities for the three months ended June 30, 2006 and 2005, respectively and by 4,040,600 and 3,913,600 for the nine months ended June 30, 2006 and 2005, respectively. The total amount of anti-dilutive securities for the three months ended June 30, 2006 and 2005 were 1,390,000 and 1,769,600 shares, respectively. The total amount of anti-dilutive securities for the nine months ended June 30, 2006 and 2005 were 1,657,000 and 1,796,500, respectively.

The dilutive effect of the Company’s Convertible $6.75 Exchangeable Preferred Stock (“Preferred Stock”) is reflected in diluted earnings (loss) per share by application of the if-converted method under SFAS 128. Under the if-converted method, the Company adds back any preferred stock dividends and assumes the conversion of the Preferred Stock as of the beginning of the period and the resulting common shares from the assumed conversion are included in the diluted weighted average number of common shares. During the nine months ended June 30, 2006 and 2005, the Company did not declare or pay Preferred Stock dividends. Based on the application of the if-converted method for the three and nine months ended June 30, 2006 and 2005, the Company included the resultant 3,534,600 common shares in the diluted weighted average number of common shares as if the Preferred Stock was converted as of the beginning of each period.

- 7 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The weighted average number of common shares used in computing earnings per share is as follows:

	Three Months Ended		Nine Months Ended
	June 30,		June 30,
	2006	2005	2006	2005
Basic	25,739,000	25,455,000	25,653,000	25,426,000
Stock Options	773,000	295,000	506,000	379,000
Preferred Stock	3,534,600	3,534,600	3,534,600	3,534,600
Diluted	30,046,600	29,284,600	29,693,600	29,339,600

The Company is prohibited from paying common stock dividends until all dividends in arrears are paid to the holders of the depositary shares representing the Preferred Stock. Quarterly dividends ($544,000 per quarter) have not been paid or declared on the Preferred Stock since January 1, 2003, and dividends in arrears through June 30, 2006 aggregated to $7.6 million. Any undeclared or unpaid Preferred Stock dividends must be declared and paid before the Company can pay a dividend on its common stock or redeem or repurchase any of its common stock. The Board of Directors must determine that payment of dividends is in the best interests of the Company prior to declaring dividends, and there can be no assurance that the Board of Directors will declare dividends on the Preferred Stock in the future.

During the first quarter of fiscal year 2006, SFAS No. 123R, Share-Based Payment, became effective for the Company. This standard requires, among other things, a Company to expense share-based payment transactions using the grant-date fair value based method. The Company prospectively adopted the fair value recognition provisions of SFAS No. 123 on October 1, 2002, thus the revised standard does not have a material impact on the Company’s financial statements. Total stock option compensation expense included in selling, general and administrative expense in the Consolidated Statement of Operations was $187,000 and $243,000 for the three months ended June 30, 2006 and 2005, respectively and $639,000 and $640,000 for the nine months ended June 30, 2006 and 2005, respectively. The total income tax benefit recognized related to stock option activity in the consolidated statement of operations was $74,000 and $92,000 for the three months ended June 30, 2006 and 2005, respectively and $270,000 and $224,000 for the nine months ended June 30, 2006 and 2005, respectively.

The following is a summary of stock option activity for the nine months ended June 30, 2006:

			Weighted
	Option Shares	Weighted Average Exercise	Average Remaining Contractual	Aggregate Intrinsic Value
	(000's)	Price	Term	(in thousands)
Outstanding at October 1, 2005	1,554	$2.38
Granted	935	3.40
Exercised	(120)	2.16
Forfeited/cancelled	(206)	3.30
Outstanding at June 30, 2006	2,163	$2.74	6 years	$4,716
Options exercisable at June 30, 2006	1,254	$2.31	6 years	$3,272

All Options granted during the fiscal year were granted at the fair market value of the Shares on the Date of Grant (as defined in the applicable stock option plan). The Company uses the Black-Scholes pricing model to calculate the grant - date fair value of its stock options for accounting purposes. The following table presents the assumptions used in valuing options granted during the nine months ended June 30, 2006 and June 30, 2005:

	2006	2005
Weighted Average Fair Value	$1.83	$1.66
Assumptions Used:
Expected life of stock options	5.2 years	5.4 years
Expected dividend yield over life of stock options	0%	0%
Expected stock price volatility	57%	69%
Risk-free interest rate	4.37%	3.67%

The total intrinsic value of options exercised during the nine months ended June 30, 2006 was $264,000 and the total cash received was $260,000.

- 8 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the third quarter of fiscal year 2006, the Company granted options to purchase 170,000 shares of ICO, Inc. Common stock to the Company’s Presidents of ICO Polymers North America, ICO Europe, ICO Courtenay-Australasia and Bayshore Industrial. These options vest over four years. In the first quarter of fiscal year 2006, the Company granted options to purchase 360,000 shares of ICO, Inc. common stock to A. John Knapp, Jr., the Company’s President and Chief Executive Officer. The Options granted to Mr. Knapp vest over fiscal years 2006 and 2007, and 180,000 of the referenced Options contain certain performance conditions. Furthermore, in the first quarter of fiscal year 2006 the Company granted options to purchase 60,000 shares to the Chairman of the Company’s Board of Directors, Gregory T. Barmore. Options granted to Mr. Barmore will vest over fiscal years 2006 and 2007 and 30,000 of those Options contain certain performance conditions. There were no significant options granted to employees during the second quarter of fiscal year 2006.

As of June 30, 2006, there were 210,000 options outstanding that contained performance conditions, all of which were nonvested. The weighted average exercise price of these options was $2.40 and the weighted average remaining contractual term was 6 years. The weighted average grant date fair value of these options was $1.34. Aggregate intrinsic value of these outstanding options with performance conditions was $529,000.

A summary of the status of the Company’s nonvested stock options as of June 30, 2006 and changes during the nine months ended June 30, 2006, is presented below:

Nonvested Shares	Shares (000’s)	Weighted-Average Grant-Date Fair Value	Weighted-Average Exercise Price
Nonvested at October 1, 2005	330	$1.44	$2.24
Granted	818	1.89	3.54
Vested	(229)	1.40	2.29
Forfeited	(10)	1.79	2.68
Nonvested at June 30, 2006	909	$1.86	$3.40

As of June 30, 2006, the total stock option compensation expense not yet recognized in the Consolidated Statement of Operations related to the 909,000 of nonvested stock options was $1.1 million which will be recognized over a weighted-average period of approximately 2.5 years.

NOTE 4. INVENTORIES

Inventories consisted of the following:

	June 30, 2006			September 30, 2005
	(Dollars in Thousands)
Raw materials	$	21,103		$	20,854
Finished goods		17,195			14,208
Supplies		1,011			915
Less reserve		(1,048	)		(971	)
Total inventory	$	38,261		$	35,006

NOTE 5. INCOME TAXES

The amounts of income (loss) before income taxes attributable to domestic and foreign operations (including discontinued operations) are as follows:

	Three Months Ended June 30,					Nine Months Ended June 30,
	2006		2005			2006		2005
	(Dollars in Thousands)
Domestic	$	3,914	$	(76	)	$	9,035	$	(149	)
Foreign		1,638		470			5,380		3,021
Total	$	5,552	$	394		$	14,415	$	2,872

-9 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The provision (benefit) for income taxes (including discontinued operations) consists of the following:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in Thousands)
Current	$	1,622		$	464		$	4,476		$	1,751
Deferred		(162	)		(26	)		(197	)		(927	)
Total	$	1,460		$	438		$	4,279		$	824

A reconciliation of the income tax expense (including discontinued operations) at the federal statutory rate (35%) to the Company's effective rate of 26% and 30% for the three and nine months ending June 30, 2006 and 111% and 29% for the three and nine months ended June 30, 2005 is as follows:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in Thousands)
Tax expense at statutory rate	$	1,943		$	138		$	5,045		$	1,005
Change in the deferred tax assets valuation allowance		(45	)		51			(316	)		96
Foreign tax rate differential		(86	)		259			(14	)		13
Subpart F Income		-			-			-			341
State taxes, net of federal benefit		(50	)		-			(50	)		(307	)
Other, net		(302	)		(10	)		(386	)		(324	)
	$	1,460		$	438		$	4,279		$	824

The Company does not provide for U.S. income taxes on foreign subsidiaries’ undistributed earnings intended to be permanently reinvested in foreign operations. The Company has unremitted earnings from foreign subsidiaries of approximately $12.8 million. The Company is currently in the evaluation stage of a domestic reinvestment plan to repatriate earnings under the Code Section 965 dividends received deduction under the American Jobs Creation Act of 2004 (“Act”). The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated in either the Company’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. The Company is in the process of evaluating whether it will repatriate foreign earnings under the repatriation provisions of the Act, and if so, the amount that will be repatriated. The Company is not yet in a position to determine the impact of a qualifying repatriation, should it choose to make one, on its income tax expense for 2006.

NOTE 6. COMMITMENTS AND CONTINGENCIES

The Company has letters of credit outstanding in the United States of $2.1 million as of June 30, 2006 and $1.6 million as of September 30, 2005, and foreign letters of credit outstanding of $1.6 million and $4.5 million as of June 30, 2006 and September 30, 2005, respectively.

Varco Indemnification Claims. Between May 2003 and March 2004, Varco International, Inc. ("Varco") asserted approximately 30 claims for contractual indemnity against the Company in connection with the September 2002 sale of substantially all of the Company's oilfield services ("Oilfield Services") business to Varco International, Inc. (On March 11, 2005, Varco International, Inc. merged with National Oilwell, Inc. to form National Oilwell Varco, Inc.; as used herein, the term “Varco” refers, as the context requires, to the pre-merger entity Varco International, Inc. and its successor-by-merger, National Oilwell Varco, Inc.) Varco's indemnity demands are based on its contention that the Company breached a number of representations and warranties in the purchase agreement relating to this sale and that certain expenses or damages that Varco has incurred or may incur in the future constitute "excluded liabilities" under the purchase agreement. Varco alleges that the expected loss range for its indemnity claims is between $16.4 million and $22.0 million. A portion of those indemnity demands (representing aggregate losses of approximately $0.4 million) relate to product liability claims. The balance of the indemnity demands relates to alleged historical contamination or alleged non-compliance with environmental rules at approximately 26 former Company properties located in both the United States and Canada. The Company has engaged independent third-party environmental consultants to review Varco's claims, and has visited the sites to which substantially all of Varco's claims relate. Additionally, the Company's third-party consultants have prepared detailed reports for 23 of the subject properties responding to substantially all of Varco's environmental indemnity claims. Based on these reports and the Company's own assessment made from such visits, the Company believes that the majority of Varco's monetary claims fail to state a valid claim under the purchase agreement or are otherwise without merit and, where potential liability does exist, that Varco's cost estimates are grossly inflated.

- 10 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The parties have participated in limited settlement discussions in an attempt to resolve the disputed indemnity claims without resorting to litigation. In the purchase agreement relating to this sale, the Company agreed to indemnify Varco for losses arising out of breach of representations and warranties contained in the agreement in excess of $1.0 million. The indemnification obligation is subject to certain limitations, including the obligation of Varco to bear 50% of any losses relating to environmental matters in excess of the $1.0 million threshold, up to a maximum aggregate loss borne by Varco in respect of such environmental matters of $4.0 million (in addition to the $1.0 million threshold). The Company has placed $5.0 million of the sale proceeds in escrow to be used to pay for these indemnification obligations, should they arise. The $5.0 million in proceeds was included in the gain on the sale of the Oilfield Services business recognized in fiscal year 2002. Although the Company believes that the majority of Varco's monetary claims fail to state a valid claim under the purchase agreement or are otherwise without merit and, where potential liability does exist, that Varco's cost estimates are grossly inflated, in the third quarter of fiscal 2004 the Company deemed the $5.0 million receivable of the escrowed sales proceeds to be a doubtful collection, due to the continued inability of the parties to reach an agreement regarding the size of Varco’s indemnifiable loss. The $5.0 million reserve, net of income taxes, was recorded in the Consolidated Statement of Operations as a component of loss from discontinued operations. At this point, the Company is not aware of any formal litigation initiated by Varco against the Company in connection with this dispute, but in the event that it cannot avoid litigation to obtain a release of the escrowed funds, the Company intends to assert its entitlement to the funds and defend itself vigorously. In connection with any such litigation (whether instigated by the Company or Varco), or upon the development of additional material information, the Company may incur an additional charge to discontinued operations in excess of the $5.0 million receivable of escrowed sales proceeds. Any such additional charge, in excess of the $5.0 million reserve against the escrowed sales proceeds that has been recognized, would affect the Company's Consolidated Statement of Operations. The Company’s Consolidated Statement of Cash Flows would not be affected unless and until the Company agreed or was compelled to pay Varco more than the $5.0 million of escrowed sales proceeds. However, in the event of resolution of Varco’s claims such that the Company receives any amount of the $5.0 million of escrowed sales proceeds, the Company would recognize a gain on the settlement which would affect the Consolidated Statement of Operations and Consolidated Statement of Cash Flows.

There is no assurance that the Company will not be liable for all or a portion of Varco's claims or any additional amount under indemnification provisions of the purchase agreement, and a final adverse court decision awarding substantial money damages would have a material adverse impact on the Company's financial condition, results of operations and/or cash flows.

Thibodaux Litigation. In September 2004, C.M. Thibodaux Company, Ltd. (“Thibodaux”) amended its petition in a case pending in District Court in the Parish of Orleans Louisiana to add claims against the Company. Thibodaux’s claims are part of an extensive lawsuit (the “Thibodaux Lawsuit”) filed by Thibodaux against Intracoastal Tubular Services, Inc. (“ITCO”), thirty different oil companies (the “Oil Company Defendants”), several insurance companies and four trucking companies in October of 2001. Thibodaux, the owner of industrial property located in Amelia, Louisiana that has historically been leased to tenants conducting oilfield services businesses, contends that the property has been contaminated with naturally occurring radioactive material (“NORM”). NORM is found naturally occurring in the earth, and when pipe is removed from the ground it is not uncommon for the corroded rust on the pipe to contain very small amounts of NORM. The Company’s former Oilfield Services business leased a portion of the subject property from Thibodaux. At one time ITCO also leased a portion of the subject property from Thibodaux, and during another time period ITCO subleased portions of the Company’s leased property. Varco, which is not a party in the case, assumed the leases of ICO’s leased portions of the subject property following the sale of ICO’s Oilfield Services business to Varco in 2002. Varco has also leased another portion of the subject property from Thibodaux for many years both prior to and after 2002.

Thibodaux contends that the property was contaminated with NORM generated during the Company’s and ITCO’s servicing of oilfield equipment, and further alleges that the Oil Company Defendants (customers of Thibodaux’s tenants) and trucking companies (which delivered tubular goods and other oilfield equipment to the subject property) allowed or caused the uncontrolled dispersal of NORM on Thibodaux’s property. Thibodaux seeks recovery from the Defendants for clean-up costs, diminution or complete loss of property values, and other damages. However, the Company believes that a significant portion of the damages being sought, specifically the NORM remediation costs, are included within the claims being asserted by Varco in its indemnification claims. See “Varco Indemnification Claims” above. Discovery in the Thibodaux Lawsuit is ongoing (although delayed as a consequence of Hurricane Katrina), and the Company intends to assert a vigorous defense in this litigation. An adverse judgment against the Company in the lawsuit could have a material adverse effect on the Company's financial condition, results of operations and/or cash flows.

Silicosis Related Claims. Four coating plants (located in Louisiana, Canada, and Odessa and Houston, Texas) were sold to Varco in the fourth quarter of fiscal 2002 as part of the Company’s sale of its Oilfield Services business. Although the Company no longer owns or operates any of these four coating plants, Varco, as the purchaser of such business, did not assume any current or future liabilities related to silicosis or any other occupational health matters arising out of or relating to events or occurrences happening prior to the consummation of the sale (including the pending Koskey and Galvan litigation described below), and the Company has agreed to indemnify Varco for any such costs.

- 11 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company acquired the Odessa, Texas coating plant prior to the 1980’s. The other three coating plants (the “BHTS plants”), including the Houston, Texas plant, were acquired by ICO as part of the acquisition of Baker Hughes Tubular Services, Inc. (“BHTS”) from Baker Hughes Incorporated (“Baker Hughes”) in 1992. At these four plants, prior to 1989, a grit blasting process that produced silica dust was used to internally coat tubular goods. During and after 1989, an alternative blasting media (which is not known to produce silica dust) was used at each of the plants. Since the mid-1990’s, the Company has been named as a party in lawsuits filed on behalf of former employees of the coating plants located in Odessa and Houston who allegedly suffered from silicosis-related disease as a result of exposure to silica dust produced in the blasting process. Issues surrounding the defense of and the Company’s exposure in cases filed on behalf of employees of the former BHTS plants and the Odessa plant warrant separate analyses due to the different history of ownership of those plants. An agreement with Baker Hughes (described below) affects the Company’s defense and exposure in cases filed by former employees of the BHTS plants, but is not applicable to cases filed on behalf of former employees of the Odessa plant.

During prior fiscal years since the mid-1990’s, the Company has settled individual claims, including nine wrongful death suits, involving thirty former employees of the Odessa, Texas coating plant who were diagnosed with silicosis-related disease. Because the Company was a subscriber to workers’ compensation, under Texas law the Company has been generally precluded from liability for personal injury claims filed by former employees of the Odessa plant. However, under Texas law certain survivors of a deceased employee may bring a wrongful death claim for occupational injuries resulting in death. The referenced claims involving former employees of the Odessa plant that the Company has settled have included future wrongful death claims of individuals currently diagnosed with silicosis-related disease. There are no lawsuits presently pending against the Company involving former employees of the Odessa plant; however, while the Company has settled potential wrongful death claims with most of the former employees of the Odessa plant who have been diagnosed with silicosis, it is possible that additional wrongful death claims may arise and be asserted against the Company in the future.

The Company has been dismissed from two silicosis-related personal injury lawsuits, styled Richard Koskey vs. ICO, Inc., Baker Hughes, Inc., et al. pending in Jefferson County, Texas (the “Koskey litigation”), and Galvan et al. v. ICO, Inc., Baker Hughes, Inc., et al. pending in Orange County, Texas (the “Galvan litigation”), both of which were filed against Baker Hughes and the Company by former employees of the Houston plant (Richard Koskey and Celestino Galvan, respectively). Notwithstanding the Company’s dismissal from the Koskey litigation and the Galvan litigation, the Company may still have exposure in these cases because Koskey’s and Galvan’s claims against Baker Hughes have not been completely resolved. In the Koskey litigation Baker Hughes was awarded a summary judgment, with the court finding that as a matter of law Koskey has no viable claims against Baker Hughes; however on appeal the summary judgment was reversed on a procedural issue and the case was remanded to the trial court. Pursuant to Texas legislation that became effective on September 1, 2005, in the event that Koskey and/or Galvan did not produce a medical report by November 30, 2005 establishing the existence of specific medical criteria as required by the statute (a “Compliant Medical Report”), the defendants may request a transfer of the cases to the silica multi-district litigation court in Houston and thereafter preclude them from pursuing their claims unless or until they produce such a Compliant Medical Report. Koskey and Galvan both produced supplemental medical reports prior to the November 30, 2005 deadline; however, the Defendants are challenging these reports as not constituting Compliant Medical Reports.

Under the terms of the agreement with Baker Hughes, the Company’s exposure is capped at $0.5 million per claimant, and $5.0 million in the aggregate for all such claims that may be asserted (currently $4.3 million net of payments the Company has made to date referenced in the preceding paragraph); after those thresholds, Baker Hughes is responsible for all of the costs of defense, settlement, or judgments for occupational health claims governed by the Agreement.

Based on the Koskey and Galvan allegations and discovery conducted to date, both of these lawsuits are covered by the agreement with Baker Hughes, and therefore, the Company’s exposure is capped at $0.5 million per claimant; however, at this time the Company cannot predict with any reasonable certainty its potential exposure with respect to the Koskey and Galvan litigation. Issues affecting the Company’s exposure in these cases include: whether the medical reports recently produced by Koskey and Galvan constitute Compliant Medical Reports; other factors related to the defendants’ ability to effectively challenge each silicosis diagnosis and allegations that silicosis-related injuries, if any, resulted from exposure to silica dust in a BHTS plant; and successfully establishing that Baker Hughes is precluded from liability. Difficulty in estimating exposure in both the Galvan litigation and the Koskey litigation is due in part to the limited formal discovery that has been conducted in those cases.

At this time, the Company cannot predict whether or in what circumstances additional silicosis-related suits may be filed in connection with the four coating plants, or the outcome of future silicosis-related suits, if any. It is possible that future silicosis-related suits, if any, may have a material adverse effect on the Company's financial condition, results of operations and/or cash flows, if an adverse judgment is obtained against the Company which is ultimately determined not to be covered by insurance. The Company has in effect, in some instances, insurance policies that may be applicable to silicosis-related suits, but the extent and amount of coverage is limited.

-12 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Environmental Remediation. The Comprehensive Environmental Response, Compensation, and Liability Act, as amended (“CERCLA”), also known as “Superfund,” and comparable state laws impose liability without regard to fault or the legality of the original conduct on certain classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or the site where the release occurred, and companies that disposed or arranged for the disposal of the hazardous substances at the site where the release occurred. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain health studies, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances into the environment. The Company, through acquisitions that it has made, is identified as one of many potentially responsible parties (“PRPs”) under CERCLA in five claims relating to the following sites: (i) the French Limited site northeast of Houston, Texas; (ii) the Sheridan Disposal Services site near Hempstead, Texas; (iii) the Combe Fill South Landfill site in Morris County, New Jersey; (iv) the Gulf Nuclear Superfund sites at three locations in Texas; and (v) the Malone Service Company (MSC) Superfund site in Texas City, Texas.

Active remediation of the French Limited site was concluded in 1996, at which time the PRPs commenced natural attenuation of the site groundwater. Additional active remediation of the French Limited site is likely to be required at some point in the future, but under the terms of the Company’s February 1997 “buyout agreement,” the Company will not be required to participate in the first $2.0 million of any necessary additional remediation expenses, and currently it is not expected that such expenses will exceed $2.0 million. In the event that the Company is required to contribute to the costs of additional remediation, at the French Limited site, it is not expected to have a material adverse effect on the Company.

In the Gulf Nuclear Superfund matter, in the third quarter of fiscal 2006, the Company, as a de minimus PRP, executed a “buyout agreement” with certain members of the PRP group, pursuant to which such PRP group members agreed to an indemnity and buy-out of the liability of the Company and other de minimus PRP’s. The Company is paying $28,000 as consideration for the buyout agreement. At this time the Company believes that upon final execution of the buyout agreement by all parties, the Company shall have no further liability in the Gulf Nuclear Superfund matter.

With regard to the three remaining Superfund sites, the Company believes it remains responsible for only de minimus levels of wastes contributed to those sites, and that there are numerous other PRPs identified at each of these sites that contributed significantly larger volumes of wastes to the sites. The Company expects that its share of any allocated liability for cleanup of the Sheridan Disposal Services site, and the Combe Fill South Landfill site will not be significant, and based on the Company’s current understanding of the remedial status of each of these sites, together with its relative position in comparison to the many other PRPs at those sites, the Company does not expect its future environmental liability with respect to those sites to have a material adverse effect on the Company’s financial condition, results of operation, and/or cash flows. The Company has been involved in settlement discussions relating to the MSC site, and does not expect its liability with respect to this site to have a material adverse effect on the Company’s financial condition.

Tank Failure Claim. In September 2003, the Company's U.K. subsidiary was served by one of its former customers in a lawsuit filed in the High Court of Justice, Queen's Bench Division, Salford Court Registry Division in the U.K. The customer claims that above-ground oil storage tanks that it manufactured with colored resin purchased from the Company between 1997 and 2001 have failed or are expected to fail, and that such failure is the result of the unsatisfactory quality and/or unfitness for purpose of the Company's resin. In pleadings filed with the Court the customer seeks recovery from the Company for the customer's costs incurred in replacing failed tanks, lost profits, pre-judgment interest, legal expenses, and other unspecified damages. The customer is seeking recovery for 1,022 failed tanks as of November 30, 2005, and the customer’s forensic accountants contend that the customer’s replacement costs and other losses incurred to date by the customer relating to the failed tanks (excluding interest and legal expenses) are approximately $0.8 million. The Company denies that it is liable to the customer, and attributes the alleged defects to tank design flaws, inconsistent and uncontrolled manufacturing processes and procedures, insufficient recordkeeping, and failure to perform routine quality control testing, none of which are the responsibility of the Company. Furthermore, the Company’s forensic accountants believe that the customer’s forensic accountants’ estimate of the customer’s costs associated with failed tanks incurred to date is significantly inflated. It is difficult to estimate the number of additional tanks manufactured with the resin at issue that might prematurely fail and for which the customer may seek recovery, based in part on the customer's failure to produce production records and proper evidence of material traceability, and the wide variation in failure rates by tank model as reported by the customer. The 1,022 tanks that have been replaced represent approximately 16% of the 6,524 tanks that the customer claims it manufactured with the resin at issue. Based on the customer’s unaudited data furnished to the Company for 1,010 of the 1,022 reported failures as of October 31, 2005: approximately 638 (or approximately 63%) of these 1,010 reported failures involve one particular tank model, representing a failure rate of approximately 47% of the 1,357 tanks of that model in the aggregate tank group. An additional 1,851 tanks are reported to be five different tank models with failure rates through October 31, 2005 averaging approximately 15%. The remaining 3,316 of the 6,524 tanks allegedly manufactured with the resin at issue (representing slightly more than 50% of the tanks manufactured during the referenced 1997 - 2001 time period) are reported to be three different tank models with failure rates through October 31, 2005

- 13 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

of less than 3%. The failure patterns (including the customer's acknowledgement that certain tank models have extremely high failure rates, while other models manufactured during the same time frame with the same resin have negligible failure rates) strongly support the Company's opinion that the failures are attributed to design defects.

In the event that the Company's colored resin is found to have caused or contributed to the failures, the Company shall be entitled to indemnity for fifty percent (50%) of its damages from the supplier of the base resin used by the Company to manufacture the colored resin. The Company expects that it will be entitled to indemnity from its insurance carriers in the event that it is found to have any liability in this case; however, the Company changed liability insurance carriers during the time periods that may trigger coverage for this claim, has not received unqualified coverage acknowledgements from the two applicable insurance carriers, and is awaiting resolution of coverage issues. Both of the Company’s insurers have reimbursed a portion of ICO’s defense costs, and the Company believes that additional defense cost reimbursements are forthcoming. The case had been scheduled for trial commencing in late July of 2006, but the Court postponed the trial until early 2007, and a new trial date has not yet been established. The Company believes that the customer's claims are without merit, and will continue to vigorously defend its position in this case. However, if an adverse judgment is obtained against the Company which is ultimately determined not to be covered by insurance it may have a material adverse effect on the Company's financial condition, results of operations and/or cash flows.

Other Legal Proceedings. The Company is also named as a defendant in certain other lawsuits arising in the ordinary course of business. The outcome of these lawsuits cannot be predicted with certainty, but the Company does not believe they will have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

NOTE 7. DEBT

Long-term debt at June 30, 2006 and September 30, 2005 consisted of the following.

	June 30, 2006		September 30, 2005
	(Dollars in Thousands)
Term loan of the Company’s Italian subsidiary, collaterized by a mortgage over the subsidiary’s real estate. Principal and interest paid quarterly with a fixed interest rate of 5.2% through June 2016.	$	6,390	$	-
Term loans of two of the Company’s U.S. subsidiaries, collateralized by a mortgage over the subsidiaries’ real estate. Principal and interest paid monthly with a fixed interest rate of 6.0% through April 2020.		4,195		4,338
Term loans of one of the Company’s U.S. subsidiaries, collaterized by a mortgage over the subsidiary’s real estate. Principal and interest paid monthly with a fixed interest rate of 6.0% through May 2021.		3,309		-
Term loan of the Company’s U.K. subsidiary, collateralized by property, plant and equipment of the subsidiary. Interest paid quarterly with a fixed interest rate (due to an interest rate swap with same terms as the debt) of 7.2% through March 2015. Principal repayments made monthly.		2,103		2,185
Term loan of the Company’s Australian subsidiary, collateralized by a mortgage over the subsidiary’s assets. Interest rates as of June 30, 2006 and September 30, 2005 were 8.2%. Interest rate is adjusted quarterly and limited to a minimum rate of 7.7% and a maximum rate of 9.0%. Interest and principal payments are made quarterly.		1,752		2,377
Term loan of the Company’s Dutch subsidiary, collateralized by property, plant and equipment of the subsidiary. Principal and interest paid quarterly with a fixed interest rate of 5.4% through October 2014.		1,693		1,688
Term loan of the Company’s U.K. subsidiary, collateralized by property, plant and equipment of the subsidiary. Principal and interest paid monthly with a fixed interest rate of 6.7% through March 2010.		1,303		1,460
Term loan of the Company’s Dutch subsidiary, collateralized by property, plant and equipment of the subsidiary. Principal and interest paid monthly with a fixed interest rate of 5.0% through January 2010.		947		1,062
Term loan of one of the Company’s U.S. subsidiaries, collateralized by certain machinery and equipment of the subsidiary. Principal and interest paid monthly with a variable interest rate through June 2012. Interest rates as of June 30, 2006 and September 30, 2005 were 7.3% and 5.9%, respectively.		857		964
Term loans of the Company’s Italian subsidiary collateralized by certain property, plant and equipment of the subsidiary.		-		4,155
10 3/8% Series B Senior Notes		-		3,000
Various others loans collateralized by mortgages on certain land and buildings and other assets of the Company. As of June 30, 2006, interest rates range between 3.0% and 8.1% with maturity dates between October 2006 and February 2027. The interest and principal payments are made monthly, quarterly or semi-annually.		2,640		3,421
Total		25,189		24,650
Less current maturities		4,433		5,657
Long-term debt less current maturities	$	20,756	$	18,993

-14-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During December 2005, the Company redeemed the remaining $3.0 million of the Company’s 10 3/8% Series B Senior Notes at par value. During April 2006, the Company obtained new long-term loans of $3.3 million within one of the Company’s U.S. subsidiaries. During June 2006, the Company put in place new long-term debt within the Company’s Italian subsidiary of $6.4 million and used the proceeds to repay existing long-term loans and short-term debt.

As of June 30, 2006, the Company’s Australian subsidiary was in violation of a financial debt covenant related to $1.8 million of term debt and $2.6 million of short-term borrowings under credit facilities. These debt amounts are classified as current liabilities in the Company’s Consolidated Balance Sheet as the maturity dates are less than one year.

The Company maintains several lines of credit through its wholly-owned subsidiaries. Total credit availability net of outstanding borrowings, letters of credit and applicable foreign currency contracts totaled $40.3 million and $34.5 million at June 30, 2006 and September 30, 2005, respectively. The facilities are collateralized by certain assets of the Company. Borrowings under these agreements totaled $11.5 million and $10.0 million at June 30, 2006 and September 30, 2005, respectively.

The Company has a $25.0 million domestic credit facility maturing April 9, 2009. The facility contains a $20.0 million revolving credit line collateralized by domestic receivables and inventory and a $5.0 million line of credit to finance certain existing equipment and equipment to be purchased. The $25.0 million facility contains a variable interest rate equal to either (at the Company’s option) zero (0%) or one-quarter (¼%) percent per annum in excess of the prime rate or one and three quarters (1¾%) or two and one quarter (2¼%) percent per annum in excess of the adjusted Eurodollar rate and may be adjusted depending upon the Company’s leverage ratio, as defined in the credit agreement, and excess credit availability under the credit facility. The borrowing capacity varies based upon the levels of domestic receivables and inventory. There was $0.9 million and $1.0 million of outstanding borrowings under the domestic credit facility as of June 30, 2006 and September 30, 2005, respectively. The amount of available borrowings under the domestic credit facility was $21.9 million and $19.7 million based on the credit facility limits, current levels of accounts receivables and inventory, outstanding letters of credit and borrowings as of June 30, 2006 and September 30, 2005, respectively.

The Company’s domestic credit facility contains a number of covenants including, among others, limitations on the ability of the Company and its restricted subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or redeem any capital stock, (iii) incur liens or other encumbrances on their assets, (iv) enter into transactions with affiliates, (v) merge with or into any other entity or (vi) sell any of their assets. In addition, any “change of control” of the Company or its restricted subsidiaries will constitute a default under the facility (“change of control” means (i) the sale, lease or other disposition of all or substantially all of the assets of such entity, (ii) the adoption of a plan relating to the liquidation or dissolution of such entity, (iii) any person or group becoming beneficial owner of more than 50% of the total voting power of the voting stock of such entity or (iv) a majority of the members of the board of directors of any such entity no longer being “continuing directors” where “continuing directors” means the members of the board on the date of the credit facility and members that were nominated for election or elected to the board with the affirmative vote of a majority of the “continuing directors” who were members of the board at the time of such nomination or election).

The Company has various foreign credit facilities in eight foreign countries. The available credit under these facilities varies based on the levels of accounts receivable within the foreign subsidiary, or is a fixed amount. The foreign credit facilities are collateralized by assets owned by the foreign subsidiaries and also carry various financial covenants. There were $10.6 million and $9.0 million of outstanding borrowings under these foreign credit facilities as of June 30, 2006 and September 30, 2005, respectively. The amount of available borrowings under the foreign credit facilities was $18.4 million and $14.8 million based on the credit facility limits, current levels of accounts receivables, outstanding letters of credit and borrowings as of June 30, 2006 and September 30, 2005, respectively.

NOTE 8. EMPLOYEE BENEFIT PLANS

The Company maintains several defined contribution plans that cover domestic and foreign employees that meet certain eligibility requirements related to age and period of service with the Company. The plan in which each employee is eligible to participate depends upon the subsidiary for which the employee works. All plans have a salary deferral feature that enables employees to contribute up to a certain percentage of their earnings, subject to governmental regulations. Many of the foreign plans require the Company to match employees’ contributions in cash. The Company’s domestic 401(k) plan has historically been voluntarily matched, typically with ICO common stock. For Company matching contributions in the Company’s 401(k) plan made prior to calendar 2006, domestic employees’ interests and earnings related thereto vest over five years of service. The Company’s matching contributions in the Company’s 401(k) plan made in calendar year 2006 will be mandatory and will vest immediately. Foreign employees’ interests in Company matching contributions are generally vested immediately.

- 15 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company maintains a defined benefit plan for employees of the Company’s Dutch operating subsidiary. Participants contribute a portion of the cost associated with the benefit plan. The plan provides retirement benefits at the normal retirement age of 65. This plan is insured by a participating annuity contract with Aegon Levensverzekering N.V. ("Aegon"), located in The Hague, The Netherlands. The participating annuity contract guarantees the funding of the Company’s future pension obligations for its defined benefit pension plan. In accordance with the contract, Aegon will pay all future obligations under the provisions of this plan, while the Company pays annual insurance premiums. Payment of the insurance premiums by the Company constitutes an unconditional and irrevocable transfer of the related pension obligation from the Company to Aegon. Aegon has a Standard and Poor’s financial strength rating of AA. The premiums for the participating annuity contracts are included in pension expense.

The Company also maintains several termination plans, usually mandated by law, within certain of its foreign subsidiaries that provide a one time payment if a covered employee is terminated.

The amount of defined contribution plan expense for the three and nine months ended June 30, 2006 was $267,000 and $747,000 compared to $232,000 and $697,000 for the three and nine months ended June 30, 2005. The amount of defined benefit plan pension expense for the three and nine months ended June 30, 2006 was $181,000 and $526,000 compared to $251,000 and $586,000 for the three and nine months ended June 30, 2005.

NOTE 9. DISCONTINUED OPERATIONS

During fiscal years 2002 and 2003, the Company completed the sale of its Oilfield Services business. Legal fees or other expenses incurred related to the Company’s former Oilfield Services business are expensed as incurred to discontinued operations. See Note 6 - “Commitments and Contingencies” for discussion of indemnification claims which, depending on the outcome, may result in additional liabilities and losses from discontinued operations in future periods.

NOTE 10. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposures include debt obligations carrying variable interest rates, foreign currency exchange risk and resin price risk. As of June 30, 2006, the Company had $51.1 million of net investment in foreign wholly-owned subsidiaries. The Company does not hedge the foreign exchange rate risk inherent with this non-U.S. Dollar denominated investment. The Company does enter into forward currency exchange contracts related to future purchase obligations denominated in a nonfunctional currency. These forward currency exchange contracts qualify as cash flow hedging instruments and are highly effective. The Company recognizes the amount of hedge ineffectiveness in the Consolidated Statement of Operations. The hedge ineffectiveness was not a significant amount for the three and nine months ended June 30, 2006 and 2005, respectively. The Company’s principle foreign currency exposures relate to the Euro, British Pound, Australian Dollar, New Zealand Dollar, Malaysian Ringgit and Brazilian Real. The following table includes the total foreign exchange contracts outstanding on June 30, 2006 and September 30, 2005:

	As of
	June 30, 2006		September 30, 2005
	(Dollars in Thousands)
Notional value	$	2,953	$	6,383
Fair market value		2,946		6,461

The Company’s revenues and profitability are impacted by the change in resin prices. The Company uses various resins (primarily polyethylene) to make its products. As the price of resin increases or decreases, market prices for the Company’s products will generally also increase or decrease. This will typically lead to higher or lower average selling prices and will impact the Company’s gross profit and gross margin. The impact on gross profit is due to a lag in matching the change in raw material cost of goods sold and the change in product sales prices. As of June 30, 2006 and September 30, 2005, the Company had $21.1 million and $20.9 million of raw material inventory and $17.2 million and $14.2 million of finished goods inventory, respectively. The Company attempts to minimize its exposure to resin price changes by monitoring and carefully managing the quantity of its inventory on hand and product sales prices.

- 16 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

functional currency of the foreign subsidiaries. Because these intercompany debts are accounted for in the local functional currency of the foreign subsidiary, any appreciation or devaluation of the foreign currencies the transactions are denominated in will result in a gain or loss, respectively, to the Consolidated Statement of Operations. These intercompany loans are eliminated in the Company’s Consolidated Balance Sheet. At June 30, 2006, the Company had the following significant outstanding intercompany amounts as described above:

Country of subsidiary with intercompany receivable	Country of subsidiary with intercompany payable	Amount in US$ as of June 30, 2006	Currency denomination of receivable
New Zealand	Australia	$2.5 million	New Zealand Dollar
New Zealand	Malaysia	$1.2 million	New Zealand Dollar
U.S.	Italy	$1.5 million	U.S. Dollar

NOTE 11. SEGMENT INFORMATION

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

ICO Polymers North America, ICO Brazil, ICO Europe and ICO Courtenay - Australasia primarily produce competitively priced engineered polymer powders for the rotational molding industry as well as other specialty markets for powdered polymers, including masterbatch and concentrate producers, users of polymer-based metal coatings, and non-woven textile markets. Additionally, these segments provide specialty size reduction services on a tolling basis (“tolling” refers to processing customer owned material for a service fee). The Bayshore Industrial segment designs and produces proprietary concentrates, masterbatches and specialty compounds, primarily for the plastic film industry, in North America and in select export markets. The Company’s European segment includes operations in France, Holland, Italy and U.K. The Company’s Australasia segment includes operations in Australia, Malaysia and New Zealand.

Nine Months Ended June 30, 2006	ICO Europe	Bayshore Industrial	ICO Courtenay - Australasia	ICO Polymers North America	ICO Brazil	Corporate	Stock Option Expense	Total
(Dollars in Thousands)
Revenue From External Customers	$95,162	$67,437	$34,528	$33,079	$6,894	-	-	$237,100
Intersegment Revenues	335	22	-	2,976	-	-	-	3,333
Operating Income (Loss)	4,931	10,879	1,700	3,717	(450)	(4,355)	(639)	15,783
Depreciation and Amortization	2,288	1,245	725	979	156	108	-	5,501
Impairment, Restructuring and Other
Costs ^(a)	63	-	-	55	-	-	-	118
Expenditures for Additions to Long
Lived Assets	723	3,220	646	1,986	73	346	-	6,994

Nine Months Ended June 30, 2005	ICO Europe	Bayshore Industrial	ICO Courtenay - Australasia	ICO Polymers North America	ICO Brazil	Corporate	Stock Option Expense	Total
(Dollars in Thousands)
Revenue From External Customers	$99,227	$55,150	$34,564	$30,369	$6,017	-	-	$225,327
Intersegment Revenues	468	392	-	1,800	-	-	-	2,660
Operating Income (Loss)	3,560	6,377	1,877	514	(767)	(5,231)	(640)	5,690
Depreciation and Amortization	2,733	1,236	701	966	127	223	-	5,986
Impairment, Restructuring and Other
Costs ^(a)	343	-	-	-	-	-	-	343
Expenditures for Additions to Long
Lived Assets	993	392	680	1,274	30	24	-	3,393

- 17 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended June 30, 2006	ICO Europe	Bayshore Industrial	ICO Courtenay - Australasia	ICO Polymers North America	ICO Brazil	Corporate	Stock Option Expense	Total
(Dollars in Thousands)
Revenue From External Customers	$35,181	$22,574	$10,356	$12,261	$2,072	-	-	$82,444
Intersegment Revenues	170	-	-	1,448	-	-	-	1,618
Operating Income (Loss)	1,659	3,720	340	1,862	(114)	(1,361)	(187)	5,919
Depreciation and Amortization	810	421	254	346	53	33	-	1,917
Expenditures for Additions to Long
Lived Assets	229	1,404	92	852	45	281	-	2,903

Three Months Ended June 30, 2005	ICO Europe	Bayshore Industrial	ICO Courtenay - Australasia	ICO Polymers North America	ICO Brazil	Corporate	Stock Option Expense	Total
(Dollars in Thousands)
Revenue From External Customers	$33,754	$17,080	$12,228	$10,691	$2,009	-	-	$75,762
Intersegment Revenues	149	163	-	503	-	-	-	815
Operating Income (Loss)	646	1,869	555	310	(192)	(1,638)	(243)	1,307
Depreciation and Amortization	893	406	232	316	45	42	-	1,934
Expenditures for Additions to Long
Lived Assets	297	150	385	558	5	10	-	1,405

^(a)Impairment, restructuring and other costs are included in operating income (loss).

	ICO Europe	Bayshore Industrial	ICO Courtenay - Australasia	ICO Polymers North America	ICO Brazil	Other^(b)	Total
(Dollars in Thousands)
Total Assets^(c)
As of June 30, 2006	$79,663	$37,356	$29,563	$25,099	$4,386	$6,395	$182,462
As of September 30, 2005	$70,793	$31,534	$31,945	$22,527	$4,909	$2,547	$164,255

^(b) Consists of unallocated corporate assets including: cash and corporate fixed assets. ^(c)Includes goodwill of $3.8 million and $4.3 million for ICO Courtenay - Australasia as of June 30, 2006 and September 30, 2005, respectively, and $4.5 million for Bayshore Industrial as of June 30, 2006 and September 30, 2005.

A reconciliation of total segment operating income to net income (loss) is as follows:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
	(Dollars in Thousands)
Operating income	$	5,919		$	1,307		$	15,783		$	5,690
Other income (expense):
Interest expense, net		(505	)		(748	)		(1,601	)		(2,208	)
Other		167			(65	)		313			(21	)
Income from continuing operations before income taxes		5,581			494			14,495			3,461
Provision for income taxes		1,470			475			4,307			1,030
Income from continuing operations		4,111			19			10,188			2,431
Loss from discontinued operations, net of benefit for income taxes		(19	)		(63	)		(52	)		(383	)
Net income (loss)	$	4,092		$	(44	)	$	10,136		$	2,048

- 18 -

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

How We Generate Our Revenues

The Company’s revenues are primarily derived from product sales and toll processing services in the polymer processing industry.

Product sales result from the sale of finished products to the customer. The creation of such products begins with the Company purchasing resin (primarily polyethylene) and other raw materials that are further processed by the Company. The further processing of the material may involve size reduction and/or compounding.

Compounding involves melt blending various resins and additives to produce a homogeneous material. Compounding includes 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. After processing, the Company sells the finished products to customers. Toll processing services involve both size reduction and compounding whereby these services are performed on customer owned material for a fee.

Demand for the Company’s products and services tends to be driven by overall economic factors and, particularly, consumer spending. The trend of applicable resin prices also impacts customer demand. As resin prices are falling, customers tend to reduce their inventories and, therefore, reduce their need for the Company’s products and services as customers choose to purchase resin on a just-in-time basis 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 lower their raw material costs. Additionally, demand for the Company’s products and services tends to be seasonal, with customer demand historically being weakest during the Company’s first fiscal quarter due to the holiday season. The Company’s fourth fiscal quarter also tends to be weaker compared to the Company’s second and third fiscal quarters, in terms of customer demand, due to vacation periods in the Company’s European markets.

Cost of Sales and Services

Cost of sales and services is primarily comprised of 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 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

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

ICO Polymers North America, ICO Brazil, ICO Europe and ICO Courtenay - Australasia primarily produce competitively priced polymer powders for the rotational molding industry as well as other specialty markets for powdered polymers, including masterbatch and concentrate producers, users of polymer-based metal coatings, and non-woven textile markets. Masterbatches are concentrates that incorporate all of the additives a customer needs into a single package for a particular product manufacturing process, as opposed to requiring numerous packages. Additionally, these segments provide specialty size reduction services on a tolling basis. The Bayshore Industrial segment designs and produces proprietary concentrates, masterbatches and specialty compounds, primarily for the plastic film industry, in North America and in selected export markets. The Company’s ICO Europe segment includes operations in France, Holland, Italy and the U.K. The Company’s ICO Courtenay - Australasia segment includes operations in Australia, Malaysia and New Zealand.

- 19 -

Results of Operations

Three and nine months ended June 30, 2006 compared to the three and nine months ended June 30, 2005

Executive Summary

The Company’s fiscal 2006 third quarter and the first nine months of fiscal 2006 showed very strong revenues, operating income and volumes compared to the prior year periods. Gross margins and gross profit improved due in large part to the operating leverage obtained on the increased volume. SG&A declined during fiscal 2006 which also contributed to the improved operating income.

The Company’s U.S. segments performed very well and four out of the seven U.S. plants are operating at strong levels. The Company plans to continue to expand capacity in the U.S. facilities at a measured pace, and the expansion at Bayshore Industrial that will increase capacity at Bayshore by approximately 10% is expected to be completed in the fourth quarter of fiscal year 2006. The Company’s Australasian segment is underperforming as a result of difficult market conditions. Several expansion opportunities are being considered within this region, primarily for the Company’s facility in Malaysia, which has experienced tremendous growth in revenues and profitability since the Company acquired the Malaysian operation in fiscal 2000.

	Summary Financial Information
	Three Months Ended June 30,						Nine Months Ended June 30,
	2006	2005	Change	%			2006	2005	Change	%
	(Dollars in Thousands)
Total revenues	$82,444	$75,762	$6,682		9%		$237,100	$225,327	$11,773	5%
SG&A ⁽¹⁾	8,278	9,470	(1,192)		(13%)		25,663	28,169	(2,506)	(9%)
Operating income	5,919	1,307	4,612		353%		15,783	5,690	10,093	177%
Income from continuing operations	4,111	19	4,092		>100%		10,188	2,431	7,757	319%
Net income (loss)	$4,092	$(44)	4,136		N.M.	⁽⁴⁾	$10,136	$2,048	$8,088	395%

Volumes ⁽²⁾	82,000	72,500	9,500		12%		239,000	218,500	20,500	9%
Gross margin ⁽³⁾	19.5%	16.8%	2.7%				19.9%	17.8%	2.1%
SG&A as a percentage of revenues	10.0%	12.5%	(2.5%)				10.8%	12.5%	(1.7%)
Operating income as a percentage of revenues	7.2%	1.7%	5.5%				6.7%	2.5%	4.2%

⁽¹⁾“SG&A” is defined as selling, general and administrative expense (including stock option compensation expense).
⁽²⁾“Volumes” refers to total metric tons sold either selling proprietary products or toll processing services.
⁽³⁾Gross margin is calculated as the difference between revenues and cost of sales and services, divided by revenues. ⁽⁴⁾Not meaningful.

Revenues. Total revenues increased $6.7 million or 9% to $82.4 million during the three months ended June 30, 2006, compared to the same period of fiscal 2005. During the nine month period, revenues increased $11.8 million or 5%.

The components of the increase in revenue were:

	Increase/(Decrease)
	Three Months Ended June 30, 2006		Nine Months Ended June 30, 2006
	%	$	%	$
	(Dollars in Thousands)
Volume	7%	$5,482	7%	$15,373
Price/product mix ⁽¹⁾	4%	3,100	1%	1,800
Translation effect ⁽²⁾	(2%)	(1,900)	(3%)	(5,400)
Total increase	9%	$6,682	5%	$11,773
⁽¹⁾Price/product mix refers to the impact on revenues due to changes in selling prices and the impact on revenues due to a change in the mix of finished products sold or services performed.
⁽²⁾Translation effect refers to the impact on revenues from the changes in foreign currencies relative to the U.S. Dollar.

- 20 -

An increase in volumes sold of 12% for the three months ended June 30, 2006 led to an increase in revenues of $5.5 million while an increase in volumes sold of 9% led to an increase in revenues of $15.4 million for the nine months ended June 30, 2006. The volume increase was most notable at the Company’s Bayshore Industrial location due to an increase in customer demand. The translation effect of changes in foreign currencies relative to the U.S. Dollar caused a reduction in revenues of $1.9 million for the three months ended June 30, 2006 and $5.4 million for the nine months ended June 30, 2006. This revenue change was primarily due to a stronger U.S. Dollar compared to the Euro.

The Company’s revenues are impacted by product sales mix as well as the change in the Company’s raw material prices (“resin prices”). As the price of resin increases or decreases, market prices for the Company’s products will generally also increase or decrease. This will typically lead to higher or lower average selling prices. During the third quarter of fiscal year 2006, resin prices were 22% - 32% higher (depending upon the region and type of raw material) than the fiscal 2005 third quarter and for the first nine months of fiscal 2006 have averaged 9% - 19% higher than the same period of fiscal 2005. A change in the Company’s overall product mix caused by the increase in sales at Bayshore Industrial offset a portion of the impact on revenue from higher average prices. These two factors combined led to a net increase of $3.1 million and $1.8 million on revenues as a result of changes in price/mix for the three and nine months ended June 30, 2006. Although the Company participates in numerous markets and purchases numerous grades of resin, the graph below illustrates the trend in resin prices typically purchased by the Company.

Source: Chemical Market Associates, Inc.

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

Revenues by segment for the three months ended June 30, 2006 compared to the three months ended June 30, 2005:

	Three Months Ended June 30,
	2006	% of Total	2005	% of Total	Change	%
	(Dollars in Thousands)
ICO Europe	$35,181	43%	$33,754	44%	$1,427	4%
Bayshore Industrial	22,574	27%	17,080	23%	5,494	32%
ICO Courtenay - Australasia	10,356	13%	12,228	16%	(1,872)	(15%)
ICO Polymers North America	12,261	15%	10,691	14%	1,570	15%
ICO Brazil	2,072	2%	2,009	3%	63	3%
Total	$82,444	100%	$75,762	100%	$6,682	9%

- 21 -

Three Months Ended June 30, 2006 Three Months Ended June 30, 2005

Revenues by Segment Revenues by Segment

ICO Europe’s revenues increased $1.4 million or 4%. This increase was a result of the effect of an increase in average selling prices as a result of higher resin prices ($4.5 million impact) partially offset by lower volumes (primarily due to lower tolling volumes) as a result of lower customer demand ($1.1 million impact) and a stronger U.S. Dollar compared to the relevant European currencies (reduced revenues by $2.0 million.)

Bayshore Industrial’s revenues increased $5.5 million or 32% as a result of a 54% increase in volumes sold due to an increase in customer demand, partially offset by the impact of a change in product mix.

ICO Courtenay - Australasia’s revenues declined $1.9 million or 15% primarily caused by lower volumes sold of 14%. The volume decline was most notable in the Company’s Australian region where customer demand has fallen due to a challenging market environment.

ICO Polymers North America revenues increased $1.6 million or 15% as a result of increased average prices and change in product mix for the Company’s toll service business due to an increase in specialty grinding.

Revenues by segment for the nine months ended June 30, 2006 compared to the nine months ended June 30, 2005:

	Nine Months Ended June 30,
		2006	% of Total		2005	% of Total		Change		%
	(Dollars in Thousands)
ICO Europe	$	95,162	40%	$	99,227	44%	$	(4,065	)	(4%	)
Bayshore Industrial		67,437	28%		55,150	24%		12,287		22%
ICO Courtenay - Australasia		34,528	15%		34,564	15%		(36	)	-
ICO Polymers North America		33,079	14%		30,369	14%		2,710		9%
ICO Brazil		6,894	3%		6,017	3%		877		15%
Total	$	237,100	100%	$	225,327	100%	$	11,773		5%

Nine Months Ended June 30, 2006 Nine Months Ended June 30, 2005

Revenues by Segment Revenues by Segment

- 22 -

ICO Europe’s revenues declined $4.1 million or 4% primarily due to the translation effect of a stronger U.S. Dollar compared to the relevant European currencies which caused a reduction in revenues of $5.3 million. Lower volumes sold of 9% as a result of lower customer demand (primarily lower tolling volumes) reduced revenues by $5.3 million. Partially offsetting these declines were higher average selling prices, compared to average selling prices of the prior year prompted by higher resin costs, which caused a revenue increase of $6.5 million.

Bayshore Industrial’s revenues increased $12.3 million or 22% primarily caused by an increase in volumes sold of 36% due to an increase in customer demand, partially offset by a change in product mix.

ICO Polymers North America revenues increased $2.7 million or 9% as a result of higher tolling revenues of $2.0 million due in part to an increase in specialty grinding. As a result of higher average selling prices partially offset by lower volumes, product sales revenues increased $0.7 million.

Gross Margins. Consolidated gross margins (calculated as the difference between revenues and cost of sales and services, divided by revenues) improved to 19.5% and 19.9% for the three and nine months ended June 30, 2006 compared to 16.8% and 17.8% for the three and nine months ended June 30, 2005. The improvements were primarily due to the benefits of operating leverage driven by the growth in total volumes sold. The Company takes advantage of operating leverage when volumes increase because cost of goods sold expenses such as labor and other plant expenses increase (or decrease) in a lower proportion relative to the increase in volumes.

Selling, General and Administrative. Selling, general and administrative expenses (including stock option compensation expense) (“SG&A”) declined $1.2 million or 13% and $2.5 million or 9% during the three and nine months ended June 30, 2006 compared to the same periods in fiscal 2005.

The decline in SG&A of $1.2 million or 13% for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 was due to lower third party Sarbanes-Oxley implementation costs which declined $0.5 million (a 92% reduction), lower legal fees of $0.2 million and lower employee medical claims expense of $0.2 million. A stronger U.S. Dollar compared to relevant foreign currencies reduced SG&A by $0.2 million. As a percentage of revenues, SG&A declined to 10.0% from 12.5% in last year’s quarter as a result of the reduction in SG&A and increase in revenues.

The decline in SG&A for the nine month period comparison of $2.5 million or 9% was due to lower third party Sarbanes-Oxley implementation costs which declined $0.8 million (91%), lower severance expenses of $0.4 million, lower legal fees of $0.5 million and lower employee medical claims expense of $0.2 million. A stronger U.S. Dollar compared to relevant foreign currencies reduced SG&A by $0.4 million. As a percentage of revenues, SG&A declined to 10.8% from 12.5% primarily a result of the reduction in SG&A.

Depreciation and amortization. Depreciation and amortization expense declined $0.5 million or 8% during the nine months ended June 30, 2006 compared to the same period of fiscal year 2005 due to relatively low capital expenditure levels in the last two fiscal years.

Impairment, restructuring and other costs. In the first quarter of fiscal year 2006, the Company incurred $55,000 of costs as a result of Hurricane Rita which impacted the Company’s China, Texas plant in September 2005. These expenses were temporary plant expenses expended in order to reestablish the facility’s production operations. The Company also incurred $63,000 of lease cancellation costs associated with the former location of its European technical center, which was relocated in fiscal 2005.

During the first nine months of fiscal 2005, the Company recognized $170,000 of costs during the first fiscal quarter and $22,000 of costs during the second fiscal quarter associated with the relocation of its European technical center discussed above. In the first quarter of fiscal 2005, the Company incurred $151,000 of additional costs associated with the closure of its Swedish manufacturing operation.

Operating income. Consolidated operating income improved $4.6 million or 353% during the three months ended June 30, 2006 to $5.9 million, compared to the three months ended June 30, 2005. The increase was primarily due to an increase in gross profit (caused by the growth in volumes sold) and a reduction in SG&A expenses.

Consolidated operating income was $15.8 million for the nine months ended June 30, 2006, an increase of $10.1 million or 177% from the nine months ended June 30, 2005. This increase was caused by the increase in gross profit (caused primarily by the volume increase) and a reduction in SG&A.

- 23 -

Operating income (loss) by segment and discussion of significant segment changes for the three months ended June 30, 2006 follows.

Operating income (loss)	Three Months Ended June 30,
	2006			2005			Change
	(Dollars in Thousands)
ICO Europe	$	1,659		$	646		$	1,013
Bayshore Industrial		3,720			1,869			1,851
ICO Courtenay - Australasia		340			555			(215	)
ICO Polymers North America		1,862			310			1,552
ICO Brazil		(114	)		(192	)		78
Subtotal		7,467			3,188			4,279
General Corporate Expense		(1,361	)		(1,638	)		277
Unallocated Stock Option Expense		(187	)		(243	)		56
Consolidated	$	5,919		$	1,307		$	4,612

Operating income (loss) as a percentage of revenues	Three Months Ended June 30,
	2006	2005	Change
ICO Europe	5%	2%	3%
Bayshore Industrial	16%	11%	5%
ICO Courtenay - Australasia	3%	5%	(2)%
ICO Polymers North America	15%	3%	12%
ICO Brazil	(6%)	(10%)	4%
Consolidated	7%	2%	5%

ICO Europe’s operating income increased $1.0 million or 157% primarily caused by an increase in gross margin due to improved feedstock margins (the difference between product sales revenues and related cost of raw materials sold) as well as a reduction in SG&A due to lower third party Sarbanes-Oxley implementation costs of $0.3 million.

Bayshore Industrial’s operating income improved $1.9 million or almost 100% due to the benefits of operating leverage as total sales volumes increased 54%.

ICO Polymers North America’s operating income improved $1.6 million to income of $1.9 million primarily caused by an increase in tolling revenues of $1.3 million (30%) and lower employee medical claims expense of $0.7 million. The tolling revenue increase was a result of an increase in volumes processed due in part to processing more specialty tolling product.

Operating income (loss) by segment and discussion of significant segment changes for the nine months ended June 30, 2006 follows.

Operating income (loss)	Nine Months Ended June 30,
	2006			2005			Change
	(Dollars in Thousands)
ICO Europe	$	4,931		$	3,560		$	1,371
Bayshore Industrial		10,879			6,377			4,502
ICO Courtenay - Australasia		1,700			1,877			(177	)
ICO Polymers North America		3,717			514			3,203
ICO Brazil		(450	)		(767	)		317
Subtotal		20,777			11,561			9,216
General Corporate Expense		(4,355	)		(5,231	)		876
Unallocated Stock Option Expense		(639	)		(640	)		1
Consolidated	$	15,783		$	5,690		$	10,093

Operating income (loss) as a percentage of revenues	Nine Months Ended June 30,
	2006	2005	Change
ICO Europe	5%	4%	1%
Bayshore Industrial	16%	12%	4%
ICO Courtenay - Australasia	5%	5%	-
ICO Polymers North America	11%	2%	9%
ICO Brazil	(7%)	(13%)	6%
Consolidated	7%	3%	4%

- 24 -

ICO Europe’s operating income increased $1.4 million or 39% primarily due to improved feedstock margins, a decline in SG&A, and lower operating costs. These benefits were partially offset by the reduction in volumes sold. The improved feedstock margins were a result of improved management of product selling prices and resin procurement. SG&A declined $0.9 million or 9% as a result of lower Sarbanes-Oxley implementation costs of $0.3 million and $0.5 million due to the translation effect of a stronger U.S. Dollar against the relevant European currencies.

Bayshore Industrial’s operating income improved $4.5 million or 71% due to a 36% growth in total sales volumes. Although operating costs such as electricity and payroll increased due to the volume increase, this operation benefited from increased operating leverage.

ICO Polymers North America’s operating income improved $3.2 million to income of $3.7 million caused by an increase in tolling revenues of $2.0 million or 15%. In addition, SG&A declined $0.7 million (14%) due to a reduction of $0.6 million (16%) in payroll and employee medical claims expense. Last, an increase in product sales margins caused in part by a favorable product mix improved operating income by $0.6 million.

General corporate expenses declined $0.9 million or 17% due primarily to lower severance costs of $0.3 million, lower third party Sarbanes-Oxley implementation costs of $0.3 million (91%), lower legal fees ($0.1 million reduction) and a reduction in business related insurance expenses ($0.1 million reduction).

Interest expense, net. Interest expense, net declined $0.2 million and $0.6 million for the three and nine months ended June 30, 2006 compared to the same periods of the prior year. These declines were primarily caused by the refinancings that occurred during fiscal years 2006 and 2005 which had the effect of lowering the Company’s overall borrowings and borrowing rates, including the repayment of the Company’s 10 3/8% Senior Notes.

Income Taxes (from continuing operations). The Company’s effective income tax rates were provisions of 26% and 30% during the three and nine months ended June 30, 2006 compared to the U.S. statutory rate of 35%. The difference between the company’s effective tax rate and the statutory rate was primarily due to the utilization of part of the previously reserved tax asset in the amount of $0.3 million largely due to the Company’s Italian subsidiary for the nine months ended June 30, 2006. Additionally, other tax benefits including the release of a portion of the tax reserve contributed to the lower tax rate.

The Company’s effective income tax rates were 96% and 30% during the three and nine months ended June 30, 2005, respectively, compared to the U.S. statutory rate of 35%. The rate for the three months ended June 30, 2005 was more than the U.S. statutory rate primarily due to the relation between pretax income or loss to nondeductible items and other permanent differences and the mix of pretax income or loss generated by the Company’s operations in various taxing jurisdictions. In addition, the valuation allowance for the Brazilian subsidiary increased by $56,000 which had the effect of increasing the tax rate for the three months. The rate for the nine months ending June 30, 2005 was less than the U.S. statutory rate of 35% primarily due to a decrease in the state deferred tax liability as a result of tax planning in the amount of $0.3 million during the three months ended December 31, 2004. In addition, the utilization of a previously reserved deferred tax asset in the Company’s Italian subsidiary of $0.3 million reduced the tax rate for the nine months ended June 30, 2005. These items were partially offset by an increase in the overall valuation allowance in the Company’s Brazilian subsidiary of $0.3 million and the Swedish subsidiary of $0.1 million for the nine months ended June 30, 2005.

As described in Note 5 to the Consolidated Financial Statements, our 2006 results do not reflect the impact of a dividend the Company may declare from its European operations during the fourth fiscal quarter under the American Jobs Creation Act of 2004. We have not completed the process of reevaluating our position with respect to the indefinite reinvestment of foreign earnings to take into account the possible election under the repatriation provisions and the resulting lower U.S. tax rate on dividends contained in the American Jobs Creation Act.

Loss From Discontinued Operations. The loss from discontinued operations during the periods relates to legal fees and other expenses incurred by the Company associated with its discontinued operations.

Net Income. For the three and nine months ended June 30, 2006, net income increased to $4.1 million and $10.1 million, respectively compared to a net loss of $44,000 and net income of $2.0 million for the comparable periods in fiscal 2005, respectively due to the factors discussed above.

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 the Company’s international operations. The table below summarizes the impact of changing exchange rates for the above currencies for the three and nine months ended June 30, 2006.

	Three Months Ended June 30, 2006			Nine Months Ended June 30, 2006
	(Dollars in Thousands)
Net revenues		($1,900	)		($5,400	)
Operating income		(100	)		(400	)
Pre-tax income		(90	)		(350	)
Net income		(70	)		(290	)

- 25 -

Recently Issued Accounting Pronouncements

Liquidity and Capital Resources

The following are considered by management as key measures of liquidity applicable to the Company:

	June 30, 2006	September 30, 2005
Cash and cash equivalents	$7.0 million	$3.2 million
Working capital	$53.3 million	$41.4 million

Cash and cash equivalents increased $3.8 million and working capital increased $11.9 million during the nine months ended June 30, 2006 due to the factors described below.

Cash Flows

	Nine Months Ended June 30,
	2006			2005
	(Dollars in Thousands)
Net cash provided by operating activities by continuing operations	$	9,232		$	2,462
Net cash used for investing activities		(6,984	)		(2,440	)
Net cash provided by financing activities		1,715			2,918
Net cash used for operating activities by discontinued operations		(287	)		(718	)
Effect of exchange rate changes		122			6
Net increase in cash and equivalents	$	3,798		$	2,228

Net cash provided by operating activities by continuing operations for the nine months ended June 30, 2006 improved $6.8 million compared to the nine months ended June 30, 2005. Most of the $6.8 million increase was due to an improvement in income from continuing operations of $7.8 million, offset partially by changes in certain working capital accounts. An increase in accounts payable and income tax payable were sources of cash during the year. The increase in accounts payable was due to higher purchasing levels to support higher sales levels in the nine months ended June 30, 2006. The increase in income taxes payable was due to a difference in the timing of tax payments in fiscal 2006 compared to fiscal 2005. These sources of cash were offset by the use of cash in accounts receivable and inventory. The increase in accounts receivable was primarily due to an increase in revenues in the three months ended June 30, 2006 along with an increase in days sales outstanding and the increase in inventory was due to higher production levels to support the increase in revenues in the nine months ended June 30, 2006.

- 26 -

Capital expenditures totaled $7.0 million during the nine months ended June 30, 2006 and were related primarily to expanding the Company’s production capacity. Approximately 46% of the $7.0 million of capital expenditures was spent at the Company’s Bayshore subsidiary to add a production line that is expected to increase the facility’s capacity by approximately 10%. Capital expenditures for the remainder of fiscal 2006 are expected to be approximately $2.0 million and will be primarily used to upgrade and expand the Company’s production capacity. The Company anticipates that cash flow from operations, available cash, existing credit facilities and new borrowings will be sufficient to fund remaining fiscal 2006 capital expenditure requirements.

Cash provided by financing activities declined during the nine months ended June 30, 2006 to cash provided of $1.7 million compared to cash provided of $2.9 million during the nine months ended June 30, 2005. The change was primarily the result of completing several financing arrangements within the Company’s U.S. and European subsidiaries which totaled approximately $12.0 million during the second quarter of fiscal 2005, offset by completion of financing arrangements within the Company’s U.S. and European subsidiaries totaling $9.7 million during the third quarter of fiscal 2006. In December 2005, the Company redeemed the remaining $3.0 million of the Company’s 10 3/8% Series B Senior Notes at par value.

The Company expects that its working capital, over time, will continue to grow due to an increase in sales revenues which requires the Company to purchase raw materials and maintain inventory, and therefore increases the Company’s accounts receivables and inventory. In addition, rising resin prices will also have the effect of increasing working capital.

Financing Arrangements

During December 2005, the Company redeemed the remaining $3.0 million of the Company’s 10 3/8% series B Senior Notes at par value. During April 2006, the Company obtained new long-term loans of $3.3 million within one of the Company’s U.S. subsidiaries. During June 2006, the Company put in place new long-term debt within the Company’s Italian subsidiary of $6.4 million and used the proceeds to repay existing long-term loans and short-term debt.

The Company has a $25.0 million domestic credit facility maturing April 9, 2009. The facility contains a $20.0 million revolving credit line collateralized by domestic receivables and inventory and a $5.0 million line of credit to finance certain existing equipment and equipment to be purchased. The $25.0 million facility contains a variable interest rate equal to either (at the Company’s option) zero (0%) or one-quarter (¼%) percent per annum in excess of the prime rate or one and three quarters (1¾%) or two and one quarter (2¼%) percent per annum in excess of the adjusted Eurodollar rate and may be adjusted depending upon the Company’s leverage ratio, as defined in the credit agreement, and excess credit availability under the credit facility. The borrowing capacity varies based upon the levels of domestic receivables and inventory. There was $0.9 million and $1.0 million of outstanding borrowings under the domestic credit facility as of June 30, 2006 and September 30, 2005, respectively. The amount of available borrowings under the domestic credit facility was $21.9 million and $19.7 million based on the credit facility limits, current levels of accounts receivables, inventory, outstanding letters of credit and borrowings as of June 30, 2006 and September 30, 2005, respectively.

- 27 -

Contractual Obligations and Commercial Commitments

A summary of future payments owed for contractual obligations and commercial commitments as of June 30, 2006 are shown in the table below:

		Three Months Ended	Fiscal Year
Contractual Obligations:	Total	September 30, 2006	2007	2008	2009	2010	Thereafter
	(Dollars in Thousands)
Long-term debt	$24,618	$2,394	$2,448	$2,500	$2,896	$1,856	$12,524
Capital leases	571	53	220	233	65	-	-
Operating leases	3,703	382	1,249	820	560	447	245
Total contractual obligations	28,892	2,829	3,917	3,553	3,521	2,303	12,769
Commercial commitments:
Short-term borrowings under
credit facilities	10,619	10,619	-	-	-	-	-
Total contractual obligations and commercial commitments	$39,511	$13,448	$3,917	$3,553	$3,521	$2,303	$12,769

There can be no assurance the Company will be successful in obtaining sources of capital that will be sufficient to support the Company’s requirements in the long-term.

Off-Balance Sheet Arrangements. The Company does not have any financial instruments classified as off-balance sheet (other than operating leases) as of June 30, 2006 and September 30, 2005.

- 28 -

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

	As of
	June 30, 2006	September 30, 2005
	(Dollars in Thousands)
Notional value	$2,953	$6,383
Fair market value	2,946	6,461

The Company’s variable interest rates subject the Company to the risks of increased interest costs associated with any upward movements in market interest rates. As of June 30, 2006, the Company had $14.1 million of variable interest rate debt. The Company’s variable interest rates are tied to various bank rates. At June 30, 2006, based on our current level of borrowings, a 1% increase in interest rates would increase interest expense annually by approximately $0.1 million.

Foreign Currency Intercompany Accounts and Notes Receivable. From time-to-time, the Company’s U.S. subsidiaries provide capital to foreign subsidiaries of the Company through U.S. dollar denominated interest bearing promissory notes. In addition, certain of the Company’s foreign subsidiaries also provide access to capital to other foreign subsidiaries of the Company through foreign currency denominated interest bearing promissory notes. Such funds are generally used by the Company’s foreign subsidiaries to purchase capital assets and/or for general working capital needs. In addition, the Company’s U.S. subsidiaries sell products to the Company’s foreign subsidiaries in U.S. dollars on trade credit terms. The Company’s foreign subsidiaries also sell products to other foreign subsidiaries of the Company denominated in foreign currencies that may not be the functional currency of the foreign subsidiaries. Because these intercompany debts are accounted for in the local functional currency of the foreign subsidiary, any appreciation or devaluation of the foreign currencies the transactions are denominated in will result in a gain or loss, respectively, to the Consolidated Statement of Operations. These intercompany loans are eliminated in the Company’s Consolidated Balance Sheet. At June 30, 2006, the Company had the following significant outstanding intercompany amounts as described above:

Country of subsidiary with intercompany receivable	Country of subsidiary with intercompany payable	Amount in US$ as of June 30, 2006	Currency denomination of receivable
New Zealand	Australia	$2.5 million	New Zealand Dollar
New Zealand	Malaysia	$1.2 million	New Zealand Dollar
U.S.	Italy	$1.5 million	U.S. Dollar

- 29 -

ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to allow timely decisions regarding disclosures to be included in the Company’s periodic filings with the Securities and Exchange Commission.

There were no changes in the Company’s internal controls over financial reporting during the Company’s third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

- 30 -

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of the Company’s legal proceedings, see Note 6 to the Consolidated Financial Statements included in Part I, Item 1 of this quarterly report on Form 10-Q and Part I, Item 3 of the Company’s Form 10-K filed December 9, 2005.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 7, under the heading "Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 6. EXHIBITS

The following instruments and documents are included as Exhibits to this Form 10-Q:

Exhibit No.		Exhibit
10.1*	—	Fourth Amended and Restated 1993 Director Stock Option Plan.
10.2*	—	Fourth Amended and Restated 1998 Stock Option Plan.
31.1*	—	Certification of Chief Executive Officer and ICO, Inc. pursuant to 15 U.S.C. Section 7241.
31.2*	—	Certification of Chief Financial Officer and ICO, Inc. pursuant to 15 U.S.C. Section 7241.
32.1**	—	Certification of Chief Executive Officer of ICO, Inc. pursuant to 18 U.S.C. Section 1350.
32.2**	—	Certification of Chief Financial Officer of ICO, Inc. pursuant to 18 U.S.C. Section 1350.
Filed herewith *Furnished herewith

- 31 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ICO, Inc.
	(Registrant)


August 7, 2006	/s/ A. John Knapp, Jr.
	A. John Knapp, Jr.
	President, Chief Executive Officer, and
	Director (Principal Executive Officer)


	/s/ Jon C. Biro
	Jon C. Biro
	Chief Financial Officer, Treasurer, and
	Director (Principal Financial Officer)

-32-

Exhibit 10.1

FOURTH AMENDED AND RESTATED

1993 STOCK OPTION PLAN

FOR NON-EMPLOYEE DIRECTORS

ICO, INC.

Purpose. The purpose of this Plan is to advance the interests of ICO, Inc., a Texas corporation (the “Company”), by providing an additional incentive to attract and retain qualified and competent Directors, upon whose efforts and judgment the success of the Company is largely dependent, through the encouragement of stock ownership in the Company by such persons.

2.	Definitions. As used herein, the following terms shall have the meaning indicated:

(a)

“Board” shall mean the Board of Directors of the Company.

(b)

“Committee” shall mean those members of the Board who are not Eligible Persons.

(c)

“Date of Grant” shall mean the date on which an Option is granted to an Eligible Person pursuant to Section 4(a) or 4(b) hereof.

(d)

“Director” shall mean a member of the Board.

(e)

“Eligible Person(s)” shall mean those persons who are Directors of the Company and who are not employees or officers of the Company or a Subsidiary.

(f)

“Fair Market Value” of a Share on any date of reference shall be the Closing Price on the business day immediately preceding such date. For this purpose, the Closing Price of the Shares on any business day shall be (i) if the Shares are listed or admitted for trading on any United States national securities exchange, the last reported sale price of Shares on such exchange, as reported in any newspaper of general circulation, (ii) if Shares are quoted on NASDAQ, or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for such day of Shares on such system, (iii) if neither clause (i) or (ii) is applicable, the mean between the high bid and low asked quotations for Shares as reported by the National Daily Quotation Service if at least two securities dealers have inserted both bid and asked quotations for Shares on at least five of the ten preceding business days, or (iv) in lieu of the above, if actual transactions in the Shares are reported on a consolidated transaction reporting system, the last sales price of the Shares on such system. If there is no Closing Price as determined above, the Fair Market Value shall be determined by any fair and reasonable means prescribed by the Committee.

(g)

“Internal Revenue Code” or “Code” shall mean the Internal Revenue Code of 1986, as it now exists or as it may be amended from time to time.

(h)

“Non-incentive Stock Option” shall mean an option that is not an incentive stock option as defined in Section 422A of the Internal Revenue Code.

(i)

“Option” (when capitalized) shall mean any option granted under this Plan.

(j)

“Optionee” shall mean a person to whom a stock option is granted under this Plan or any successor to the rights of such person under this Plan by reason of the death of such person.

(k)

“Plan” shall mean this 1993 Stock Option Plan for Non-employee Directors of ICO, Inc., as amended and restated August 29, 1996, as amended and restated January 8, 1999, as amended and restated on December 18, 2001, as amended and restated on November 18, 2005, and as it may be amended from time to time thereafter.

(l)

“Share(s)” shall mean a share or shares of the Common Stock, no par value, of the Company.

(m)

“Subsidiary” shall mean any corporation (other than the Company) in any unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing more than 50% of the total combined voting power of all classes of stock in one of the other corporations in such chain.

Shares and Options. The maximum number of Shares to be issued pursuant to Options under this Plan shall be FOUR HUNDRED TEN THOUSAND (410,000) Shares, such number having been adjusted for all previous stock splits, from Shares held in the Company’s treasury or from authorized and unissued Shares. If any Option granted under this Plan shall terminate, expire, or be canceled or surrendered as to any Shares, new Options may thereafter be granted covering such Shares. Any Option granted hereunder shall be a Non-incentive Stock Option.

4.	Grant of Options

(a)

Automatic Grants

(i)

Unless otherwise provided by the Committee, Options shall automatically be granted to Eligible Persons as provided in this Section 4(a).

(ii)

The Options automatically granted to Directors under this Section 4(a) shall be in addition to regular Director’s fees or other benefits with respect to the Director’s position with the Company or its subsidiaries.

(iii)

Options granted under this Section 4(a) shall be automatically granted as follows:

(A)

each Director who is an Eligible Person on the first business day after the date of the 1999 Annual Meeting of Shareholders of the Company, on that date shall automatically receive an Option for FIVE THOUSAND (5,000) Shares, such date being the Date of Grant of such Option;

(B)

each Director who is an Eligible Person on the first business day after the date of each subsequent Annual Meeting of Shareholders of the Company, commencing with the Annual Meeting of Shareholders held in 2000, on that date shall automatically receive an Option for FIVE THOUSAND (5,000) Shares, such date being the Date of Grant of such Option; and

(C)

each Eligible Person who is elected a Director by the Company’s Shareholders or the Board of Directors (not previously being a Director) on a date other than the date of the Annual Meeting of Shareholders of the Company shall be granted an Option for FIVE THOUSAND (5,000) Shares on the date of such Eligible Person’s election as a Director, such date being the Date of Grant for such Option.

(iv)

Any Option that may be granted pursuant to this Section 4(a) shall vest and may be exercised six months and one day after the Date of Grant.

(b)

Discretionary Grants. The Committee, in its discretion, may from time to time grant Options to one or more Eligible Persons on such terms and conditions as determined by the Committee on or after the Date of Grant, including but not limited to provisions regarding vesting and exercise. Options may be granted to the same Eligible Person on more than one occasion. Options granted under this Section 4(b) may be granted to an Eligible Person even if the Eligible Person receives an automatic grant of Options under Section 4(a).

(c)

Option Agreement. Each Option shall be evidenced by an option agreement (an “Option Agreement”) and shall contain such terms as are not inconsistent with this Plan or any applicable law. Any person who files with the Board, in a form satisfactory to the Board, a written waiver of eligibility to receive any Option under this Plan shall not be eligible to receive any Option under this Plan for the duration of such waiver.

(d)

Director Rights. Neither the Plan nor any Option granted under the Plan shall confer upon any person any right to continue to serve as a Director.

Option Price. The option price per Share of any automatic grant of Options under Section 4(a) shall be one hundred percent (100%) of the Fair Market Value per Share on the Date of Grant. The option price per Share of any discretionary grant of Options under Section 4(b) shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the Date of Grant.

Exercise of Options. An Option shall be deemed exercised when (i) the Company has received written notice of such exercise in accordance with the terms of the Option Agreement, (ii) full payment of the aggregate Option Price of the Shares as to which the Option is exercised has been made, and (iii) arrangements that are satisfactory to the Committee in its sole discretion have been made for the Optionee’s payment to the Company of the amount, if any, that the Committee determines to be necessary for the Company to withhold in accordance with applicable federal or state income tax withholding requirements. Pursuant to procedures approved by the Committee, tax withholding requirements, at the option of an Optionee, may be met by withholding Shares otherwise deliverable to the Optionee upon the exercise of an Option. Unless further limited by the Committee in any Option Agreement, the Option Price of any Shares purchased shall be paid solely in cash, by certified or cashier’s check, by money order, with Shares (but with Shares only if permitted by the Option Agreement or otherwise permitted by the Committee in its sole discretion at the time of exercise) or by a combination of the above; provided, however, that the Committee in its sole discretion may accept a personal check in full or partial payment of any Shares. If the exercise price is paid in whole or in part with Shares, the value of the Shares surrendered shall be their Fair Market Value on the date received by the Company. Any permitted payment through the tender of Shares may be made by instruction from the Optionee to the Company to withhold from the Shares issuable upon exercise that number which have a Fair Market Value equal to the exercise price for the Option or portion thereof being exercised.

7.	Termination of Option Period

(a)

Termination of Options granted under Section 4(a). The unexercised portion of any automatic grant of Options under Section 4(a) shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following:

(i)

thirty (30) days after the date that an Optionee ceases to be a Director regardless of the reason therefor other than as a result of such termination by death of the Optionee;

(ii)

one year after the date that an Optionee ceases to be a Director by reason of death of the Optionee, or six months after the Optionee shall die if that shall occur during the thirty-day period described in Subsection 7(i); or

(iii)

the tenth (10th) anniversary of the Date of Grant of the Option.

(b)

Termination of Options granted under Section 4(b). The unexercised portion of any discretionary grant of Options under Section 4(b) shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following:

(i)

the termination date specified in the Option Agreement; however, if no termination date is specified in the Option Agreement, the earlier of (A) thirty (30) days after the date that an Optionee ceases to be a Director regardless of the reason therefor other than as a result of such termination by death of the Optionee, or (B) one year after the date that an Optionee ceases to be a Director by reason of death of the Optionee; or

(ii)

the tenth (10th) anniversary of the Date of Grant of the Option.

8.	Adjustment of Shares.

(a)

If at any time while this Plan is in effect or unexercised Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding Shares through the declaration of a stock dividend or through any recapitalization resulting in a stock split-up, combination or exchange of Shares, then and in such event:

(i)

appropriate adjustment shall be made in the maximum number of Shares then subject to being optioned under the Plan, so that the same proportion of the Company’s issued and outstanding Shares shall continue to be subject to being so optioned; and

(ii)

appropriate adjustment shall be made in the number of Shares and the exercise price per Share thereof then subject to any outstanding Option, so that the same proportion of the Company’s issued and outstanding Shares shall remain subject to purchase at the same aggregate exercise price.

(b)

Except as otherwise expressly provided herein, the issuance by the Company of Shares of its capital stock of any class, or securities convertible into Shares of capital stock of any class, either in connection with a direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of Shares or obligations of the Company convertible into such Shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of or exercise price of Shares then subject to outstanding Options granted under this Plan.

(c)

Without limiting the generality of the foregoing, the existence of outstanding Options granted under this Plan shall not affect in any manner the right or power of the Company to make, authorize or consummate (1) any or all adjustments, recapitalizations, reorganizations or other changes in the Company’s capital structure or its business; (2) any merger or consolidation of the Company; (3) any issue by the Company of debt securities, or preferred or preference stock which would rank above the Shares subject to outstanding Options; (4) the dissolution or liquidation of the Company; (5) any sale, transfer or assignment of all or any part of the assets or business of the Company; or (6) any other corporate act or proceeding, whether of a similar character or otherwise.

Transferability of Options. Each Option Agreement shall provide that such Option shall not be transferable by the Optionee other than by will or by the laws of descent and distribution provided, however, that the Committee, in its sole discretion may allow for the transferability of any option previously granted or to be granted pursuant to this Plan.

10.

Issuance of Shares. No person shall be, or have any of the rights or privileges of, a Shareholder of the Company with respect to any of the Shares subject to an Option, unless and until certificates representing such Shares shall have been issued and delivered to such person. As a condition of any transfer of the certificate for Shares, the Committee may obtain such agreements or undertakings, if any, as it may deem necessary or advisable to assure compliance with any provision of this Plan, any Option Agreement or any law or regulation including, but not limited to, the following:

(i)

a representation, warranty or agreement by the Optionee to the Company, at the time any Option is exercised, that he or she is acquiring the Shares to be issued to him or her for investment and not with a view to, or for sale in connection with, the distribution of any such Shares; and

(ii)

a representation, warranty or agreement to be bound by any legends that are, in the opinion of the Committee, necessary or appropriate to comply with the provisions of any securities law deemed by the Committee to be applicable to the issuance of the Shares and are endorsed upon the Share certificates.

Share certificates issued to an Optionee who is a party to any Shareholders agreement or a similar agreement shall bear the legends contained in such agreements.

11.

Amendment, Modification, Suspension or Discontinuance of this Plan. The Board of Directors may amend, modify, suspend or terminate the Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. Subject to changes in law or other legal requirements, including any change in the provisions of Rule 16b-3 and Section 162(m) of the Code that would permit otherwise, the Plan may not be amended without the consent of the holders of a majority of the Shares of stock represented at a meeting of Shareholders for which a quorum is present, to (i) increase materially the aggregate number of Shares of stock that may be issued under the Plan (except for adjustments pursuant to paragraph 8 of the Plan), (ii) increase materially the benefit accruing to Optionees under the Plan, or (iii) modify materially the requirements as to eligibility for participation in the Plan.

12.	Interpretation.

(a)

If any provision of this Plan is held to be invalid for any reason, such holding shall not affect the remaining provisions hereof, but instead this Plan shall be construed and enforced as if such provision had never been included in this Plan.

(b)

THIS PLAN SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS.

(c)

Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan.

(d)

Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate.

13.

Section 83(b) Election. If as a result of exercising an Option, an Optionee receives Shares that are subject to a “substantial risk of forfeiture” and are not “transferable” as those terms are defined for purposes of Section 83(a) of the Code, then such Optionee may elect under Section 83(b) of the Code to include in his gross income, for his taxable year in which the Shares are transferred to him, the excess of the Fair Market Value of such Shares at the time of transfer (determined without regard to any restriction other than one which by its terms will never lapse), over the amount paid for the Shares. If the Optionee makes the Section 83(b) election described above, the Optionee shall (i) make such election in a manner that is satisfactory to the Committee, (ii) provide the Company with a copy of such election, (iii) agree to promptly notify the Company if any Internal Revenue Service or state tax agent, on audit or otherwise, questions the validity or correctness of such election or of the amount of income reportable on account of such election, and (iv) agree to such withholding as the Committee may reasonably require in its sole and absolute discretion.

14.

Effective Date and Termination Date; Adoption of Plan. The effective date of this Plan is the 13th day of April, 1993, the date on which the Board originally adopted this Plan. The Shareholders of the Company approved the Plan on June 15, 1993. The Plan was subsequently amended and restated by the Board on August 29, 1996, which amendment and restatement was approved by the Shareholders on October 7, 1996. In connection with the corporate restructuring effected on April 1, 1998, pursuant to a Plan of Merger of ICO Merger Sub, Inc. with and into ICO, Inc., the Company (which prior to such merger was named “ICO Holdings, Inc.”) adopted the Plan and assumed the obligations under the Plan from the entity previously named “ICO, Inc.” (which after such merger was renamed “ICO P&O, Inc.”). The Plan was again amended and restated by the Board on January 8, 1999. The Plan was again amended and restated by the Board on December 18, 2001, which amendment and restatement was approved by the Shareholders on March 15, 2002. The Plan was again amended and restated by the Board on November 18, 2005, which amendment and restatement was approved by the Shareholders on March 14, 2006. No further Options may be granted under this Plan after on January 8, 2009, subject to early termination by the Board pursuant to Paragraph 11 of the Plan. The Plan shall remain in effect until all Options granted under the Plan have been exercised or have expired.

15.

Government Regulations. The Plan, and the granting and exercise of Options thereunder, and the obligation of the Company to sell and deliver shares under such Options, shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

Date:	August 7, 2006
	/s/ A. John Knapp, Jr.
Name:	A. John Knapp, Jr.
Title:	Chief Executive Officer