ICO INC - 10-Q Quarterly Report

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, 2004

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

OF THE SECURITIES EX-CHANGE 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.)

5333 Westheimer, Suite 600
Houston, Texas	77056
(Address of principal executive offices)	(Zip Code)

(713) 351-4100

(Telephone Number)

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______ .

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES______ NO X .

Common stock, without par value 25,303,721 shares

outstanding as of August 9, 2004

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, 2004 and September 30, 2003	3

	Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2004 and 2003	4

	Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended June 30, 2004 and 2003	5

	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2004 and 2003	6

	Notes to Consolidated Financial Statements	7

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3. Quantitative and Qualitative Disclosures About Market Risks	35

	Item 4. Controls and Procedures	36


Part II. Other Information

	Item 1. Legal Proceedings	37

	Item 5. Other Information	37

	Item 6. Exhibits and Reports on Form 8-K	37


	-2-

ICO, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share data)

	June 30, 2004			September 30, 2003

ASSETS

Current assets:
Cash and cash equivalents	$	2,576		$	4,114
Trade accounts receivables (less allowance for doubtful accounts of $2,210 and $2,047, respectively)		50,887			41,310
Inventories		26,244			24,166
Assets held for sale		850			-
Prepaid expenses and other		8,719			11,952

Total current assets		89,276			81,542

Property, plant and equipment, net		52,540			54,639
Goodwill		8,454			8,245
Other		522			835

Total assets	$	150,792		$	145,261


LIABILITIES, STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE LOSS

Current liabilities:
Short-term borrowings	$	7,695		$	5,846
Current portion of long-term debt		6,537			3,210
Accounts payable		28,348			22,120
Accrued salaries and wages		4,148			3,766
Other accrued expenses		10,841			11,399
Oilfield Services liabilities retained		1,386			2,476

Total current liabilities		58,955			48,817


Deferred income taxes		3,889			4,108
Long-term liabilities		1,687			1,629
Long-term debt, net of current portion		18,419			23,378

Total liabilities		82,950			77,932


Commitments and contingencies		–			–
Stockholders’ equity:
Preferred stock, without par value - 345,000 shares authorized; 322,500 shares issued and outstanding with a liquidation preference of $35,514 and $33,882, respectively		13			13
Undesignated preferred stock, without par value- 105,000 shares authorized; 0 shares issued and outstanding		–			–
Junior participating preferred stock, without par value - 0 and 50,000 shares authorized, respectively; 0 shares issued and outstanding		–			–
Common stock, without par value - 50,000,000 shares authorized; 25,290,721 and 25,146,550 shares issued and outstanding, respectively		43,710			43,555
Additional paid-in capital		103,241			102,811
Accumulated other comprehensive loss		(2,874	)		(4,211	)
Accumulated deficit		(76,248	)		(74,839	)

Total stockholders’ equity		67,842			67,329

Total liabilities and stockholders’ equity	$	150,792		$	145,261

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,

		2004			2003			2004			2003

Revenues:
Sales	$	57,799		$	46,104		$	164,503		$	128,617
Service		8,980			8,312			26,624			24,551

Total Revenues		66,779			54,416			191,127			153,168
Cost and expenses:
Cost of sales and services		54,800			45,988			154,925			127,463
Selling, general and administrative expense		8,311			8,858			24,572			25,907
Stock option compensation expense		192			14			434			106
Depreciation and amortization		1,969			2,373			5,955			6,880
Impairment, restructuring and other costs		180			806			168			806

Operating income (loss)		1,327			(3,623	)		5,073			(7,994	)
Other income (expense):
Interest expense, net		(684	)		(663	)		(1,979	)		(2,841	)
Other income (expense)		(94	)		(28	)		177			492

Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle		549			(4,314	)		3,271			(10,343	)
Provision (benefit) for income taxes		152			(360	)		1,238			(1,872	)

Income (loss) from continuing operations before cumulative effect of change in accounting principle		397			(3,954	)		2,033			(8,471	)
Income (loss) from discontinued operations, net of provision (benefit) for income taxes of $(1,803), $459, $(1,854) and $749, respectively		(3,350	)		(388	)		(3,442	)		160

Net loss before cumulative effect of change in accounting principle		(2,953	)		(4,342	)		(1,409	)		(8,311	)
Cumulative effect of change in accounting principle, net of benefit for income taxes of $0, $0, $0 and $(580), respectively		-			-			-			(28,863	)


Net loss	$	(2,953	)	$	(4,342	)	$	(1,409	)	$	(37,174	)


Preferred dividends		-			-			-			(544	)


Net loss applicable to common stock	$	(2,953	)	$	(4,342	)	$	(1,409	)	$	(37,718	)


Basic and diluted income (loss) per share:
Basic net income (loss) from continuing operations before cumulative effect of change in accounting principle	$	.01		$	(.16	)	$	.08		$	(.36	)

Basic net loss per common share	$	(.12	)	$	(.17	)	$	(.06	)	$	(1.52	)


Diluted net income (loss) from continuing operations before cumulative effect of change in accounting principle	$	.01		$	(.16	)	$	.07		$	(.36	)

Diluted net loss per common share	$	(.10	)	$	(.17	)	$	(.05	)	$	(1.52	)


Basic weighted average shares outstanding		25,283,800			24,960,000			25,264,000			24,812,000

Diluted weighted average shares outstanding		28,818,400			24,960,000			28,869,600			24,812,000

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


	-4-

ICO, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited and in thousands)

	Three Months Ended June 30,						Nine Months Ended June 30,

		2004			2003			2004			2003


Net loss	$	(2,953	)	$	(4,342	)	$	(1,409	)	$	(37,174	)
Other comprehensive income (loss)
Foreign currency translation adjustment		(803	)		2,188			1,380			5,349
Unrealized gain (loss) on foreign currency hedges		(64	)		(151	)		(43	)		(214	)


Comprehensive loss	$	(3,820	)	$	(2,305	)	$	(72	)	$	(32,039	)

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,

		2004			2003

Cash flows from operating activities:
Net income (loss) from continuing operations	$	2,033		$	(37,334	)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used for) operating activities:
Depreciation and amortization		5,955			6,880
Stock option compensation expense		434			106
Matching contribution to employee savings plan		202			349
Impairment, restructuring and other costs		156			712
Cumulative effect of change in accounting principle before tax		-			29,443
Unrealized gain on foreign currency		(153	)		(419	)
Changes in assets and liabilities:
Receivables		(8,163	)		(2,167	)
Inventories		(1,544	)		(3,728	)
Prepaid expenses and other assets		(303	)		(1,012	)
Income taxes payable		815			147
Deferred taxes		(461	)		(4,189	)
Accounts payable		5,804			106
Accrued interest		(267	)		(3,884	)
Other liabilities		(487	)		(686	)

Total adjustments		1,988			21,658

Net cash provided by (used for) operating activities by continuing operations		4,021			(15,676	)
Net cash used for operating activities by discontinued operations		(1,342	)		(6,542	)

Net cash provided by (used for) operating activities		2,679			(22,218	)
Cash flows used for investing activities:
Capital expenditures		(3,664	)		(7,816	)
Proceeds from dispositions of property, plant and equipment		432			275

Net cash used for investing activities by continuing operations		(3,232	)		(7,541	)

Cash flows used for financing activities:
Common stock transactions		52			9
Payment of dividend on preferred stock		-			(1,088	)
Proceeds from debt		2,694			7,683
Term debt repayments		(3,781	)		(104,321	)
Debt retirement costs		-			(483	)

Net cash used for financing activities by continuing operations		(1,035	)		(98,200	)

Effect of exchange rates on cash		50			439

Net decrease in cash and equivalents		(1,538	)		(127,520	)
Cash and equivalents at beginning of period		4,114			129,072

Cash and equivalents at end of period	$	2,576		$	1,552

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


	-6-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

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 generally accepted accounting principles 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, 2003 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, 2004, the results of operations for the three and nine months ended June 30, 2004 and 2003 and the changes in its cash position for the nine months ended June 30, 2004 and 2003. Results of operations for the three and nine-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending September 30, 2004. 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, 2003.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring use of estimates relate to employee benefit liabilities, valuation allowances for deferred tax assets, workers compensation, inventory reserves, allowance for doubtful accounts related to accounts receivable and commitments and contingencies.

Estimates surrounding employee benefit liabilities are related to the Company maintaining a self insured medical plan in the United States (with stop loss insurance coverage limiting the Company’s expense to $100 per claim). Estimates are required in evaluating the Company’s medical expense incurred, but not paid due to the timing difference between when an employee receives medical care and the time the claim is processed and paid by the Company (typically a two to three month timing difference). The valuation of deferred tax assets is based upon estimates of future pretax income in determining the ability to realize the deferred tax assets in each taxing jurisdiction. Estimates for workers’ compensation liabilities are due to the Company being self insured in the United States prior to fiscal year 2004 (with stop loss insurance coverage limiting the Company’s expense to $300 per claim). Estimates are made for ultimate costs associated with open workers’ compensation claims as well as for claims not yet reported. Inventory reserves are estimated based upon the Company’s review of its inventory. This review requires the Company to estimate the fair market value of certain inventory that has become old or obsolete. Determining the amount of the allowance for doubtful accounts involves estimating the collectibility of customer accounts receivable balances. Estimates surrounding commitments and contingencies are related primarily to litigation claims for which the Company evaluates the circumstances surrounding the claims to determine how much expense, if any, the Company should record. Actual results could differ from the estimates discussed above. Management believes that its estimates are reasonable.


	-7-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

Revenue and Related Cost Recognition- The Company’s accounting policy regarding revenue recognition is to recognize revenue when all of the following criteria are met:

Persuasive evidence of an arrangement exists: The Company has received an order from a customer.
Delivery has occurred or services have been rendered: For product sales, revenue recognition occurs when title and risk of ownership have passed to the customer. For service revenue, revenue recognition occurs upon the completion of service.
Seller’s price to the buyer is fixed or determinable: Sales prices are agreed with the customer before delivery has occurred or the services have been rendered.
Collectibility is reasonably assured: The Company has a customer credit policy to ensure collectibility is reasonably assured.

Revenues billed to customers related to shipping and handling are included in revenues while the associated shipping and handling costs to the Company are included in cost of sales and services.

Impairment of Goodwill and Other Intangible Assets- Effective October 1, 2002, the Company adopted Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which established standards for reporting acquired goodwill and other intangible assets. This statement accounts for goodwill based on the reporting units of the combined entity into which an acquired entity is integrated. In accordance with SFAS 142, goodwill and indefinite lived intangible assets are tested for impairment at least annually at the reporting unit level, rather than being amortized, and the amortization period of intangible assets with finite lives is no longer limited to forty years. The Company’s annual impairment test is performed on September 30 of each fiscal year.

Currency Translation- Amounts in foreign currencies are translated into United States Dollars. When local functional currency is translated to United States Dollars, the effects are recorded as a separate component of Other comprehensive income or loss. Exchange gains and losses resulting from foreign currency transactions are recognized in earnings.

The fluctuations of the United States Dollar against the Euro, Swedish Krona, British Pound, New Zealand Dollar, Australian Dollar and the Brazilian Real 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, 2004.

		Three Months Ended June 30, 2004		Nine Months Ended June 30, 2004


Revenues	$	5,020	$	14,300
Operating income		340		750
Income (loss) from continuing operations before tax		300		620
Net income (loss)		240		460

Forward Exchange Agreements. The Company reflects that all derivative financial instruments that qualify for hedge accounting be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are recognized in stockholders’ equity (as a component of comprehensive income (loss)). The Company recognizes the amount of hedge ineffectiveness in the Consolidated Statement of Operations.


	-8-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

Recently Issued Accounting Pronouncements. In December 2003, the FASB issued the revised disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, which requires companies to disclose in their interim financial reports net periodic benefit costs (and the components of those costs) for pension and other postretirement benefits and updated information on expected contributions. This statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. The Company adopted the interim period disclosure requirements effective January 1, 2004. The adoption did not have a material impact on the Company’s financial position or results of operations.

NOTE 3. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Effective October 1, 2002, the Company adopted Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which established Standards for reporting acquired goodwill and other intangible assets. This Statement accounts for goodwill based on the reporting units of the combined entity into which an acquired entity is integrated. In accordance with SFAS 142, goodwill and indefinite lived intangible assets are tested for impairment at least annually at the reporting unit level, rather than being amortized, and the amortization period of intangible assets with finite lives is no longer limited to forty years. The Company’s annual impairment testing date is September 30. Using the discounted cash flow method under the requirements of SFAS 142, the Company recorded an impairment of goodwill of $2 8,863, net of income tax benefit of $580 during the three months ended December 31, 2002 as a result of the adoption of SFAS 142 on October 1, 2002. This impairment charge is reflected in the consolidated statement of operations as a cumulative effect of change in accounting principle.

NOTE 4. EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY

Earnings per share is based on earnings applicable to common shareholders and is calculated using the weighted average number of common shares outstanding. During the three and nine months ended June 30, 2003, the potentially dilutive effects of the Company’s exchangeable preferred stock (which would have an anti-dilutive effect) and common stock options and warrants, with exercise prices exceeding fair market value of the underlying common shares, have been excluded from diluted earnings per share. Additionally, the potentially dilutive effects of common stock options have been excluded from diluted earnings per share for those periods in which the Company generated a net loss from continuing operations before cumulative effect of change in accounting principle. The total number of anti-dilutive securities for the three and nine months ended June 30, 2004 was 927,000 and 468,000, respectively, compared to 4,719,000 for the three and nine months ended June 30, 2003. The decrease in the number of anti-dilutive securities in fiscal year 2004, compared to fiscal year 2003, is due to the Company generating net income from continuing operations in the current fiscal year.


	-9-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

	Three Months Ended						Nine Months Ended
	June 30,						June 30,

		2004			2003			2004			2003

Basic income (loss) per share:
Income (loss) from continuing operations before cumulative effect of change in accounting principle	$	.01		$	(.16	)	$	.08		$	(.36	)
Income (loss) from discontinued operations		(.13	)		(.01	)		(.14	)		-

Loss before cumulative effect of change in accounting principle		(.12	)		(.17	)		(.06	)		(.36	)
Cumulative effect of change in accounting principle		-			-			-			(1.16	)

Basic net loss per common share	$	(.12	)	$	(.17	)	$	(.06	)	$	(1.52	)


Diluted income (loss) per share:
Income (loss) from continuing operations before cumulative effect of change in accounting principle	$	.01		$	(.16	)	$	.07		$	(.36	)
Income (loss) from discontinued operations		(.11	)		(.01	)		(.12	)		-

Loss before cumulative effect of change in accounting principle		(.10	)		(.17	)		(.05	)		(.36	)
Cumulative effect of change in accounting principle		-			-			-			(1.16	)

Diluted net loss per common share	$	(.10	)	$	(.17	)	$	(.05	)	$	(1.52	)

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,

		2004	2003		2004	2003


Basic		25,283,800	24,960,000		25,264,000	24,812,000
Stock Options		-	-		71,000	-
Preferred Stock		3,534,600	-		3,534,600	-

Diluted		28,818,400	24,960,000		28,869,600	24,812,000

Quarterly dividends (in an aggregate amount of $544 per quarter) have not been declared or paid on the Company’s Preferred Stock since January 1, 2003. Any undeclared or unpaid Preferred Stock dividends must be declared and paid before the Company may pay a dividend on the Company’s Common Stock.

On October 31, 1997, the Board of Directors adopted a Shareholders’ Rights Plan (the “Rights Plan”) and declared a dividend of one Junior Participating Preferred Share purchase right with respect to each share of common stock outstanding at the close of business on November 21, 1997. On April 1, 1998, a successor Rights Plan was adopted by the Board of Directors with essentially identical terms and conditions. Under the terms of the Rights Plan, the Board amended the Rights Plan on October 31, 2003, to provide that the plan would expire on November 3, 2003, and the Rights Plan so expired.

NOTE 5. INVENTORIES

Inventories consisted of the following:

		June 30, 2004			September 30, 2003

Raw materials	$	13,951		$	12,806
Finished goods		12,471			11,485
Supplies		1,073			1,356
Less reserve		(1,251	)		(1,481	)

Total inventory	$	26,244		$	24,166


	-10-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

NOTE 6. INCOME TAXES

The Company’s effective income tax rates were 28% and 38% during the three and nine months ended June 30, 2004, respectively, compared to benefits of 8% and 18% during the three and nine months ended June 30, 2003. The change was 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. During the three and nine months ended June 30, 2003, the Company’s foreign subsidiaries had a tax provision on a pre-tax net loss due to the reasons mentioned above including the impact of permanent differences and nondeductible items. In addition, during the fiscal 2003 periods, the Company placed valuation allowances against the deferred tax assets of the Company’s Italian and Swedish facilities. A valuation allowance is est ablished when it is more likely than not that some or all of a deferred tax asset will not be realized. The foreign tax provision during the three and nine months ended June 30, 2003 on the pretax foreign loss diluted the domestic effective tax benefit of 27% and 32% for the three and nine months ended June 30, 2003, respectively, which resulted in the consolidated rates of 8% and 18%.

During the nine months ended June 30, 2004, the Company’s domestic subsidiaries incurred state income tax on a pretax loss which had the effect of increasing the consolidated effective tax rate for the nine months ended June 30, 2004 to 38%. In addition, the three months ended June 30, 2004 were diluted by the valuation allowances placed against the deferred tax assets in the Company’s Italian, Swedish and Brazilian subsidiaries during the three months ended June 30, 2004. This reduced the domestic tax benefit of 35% during that period to a consolidated tax rate of 28%.

The Company had a prior year domestic net operating loss for tax purposes of approximately $7,832. This loss was carried back to the 2002 fiscal year generating a tax refund of approximately $2,741. The $2,741 receivable is included in Prepaid Expenses and Other in the consolidated balance sheet and the refund was received in July 2004.

NOTE 7. IMPAIRMENT, RESTRUCTURING AND OTHER COSTS

	Three Months Ended June 30,				Nine Months Ended June 30,

		2004		2003		2004		2003

Severance	$	157	$	231	$	145	$	231
Impairment of fixed assets		-		529		-		529
Other		23		46		23		46

Total impairment, restructuring and other costs	$	180	$	806	$	168	$	806

During the third quarter of fiscal 2004, the Company incurred severance cost of $157 related to the termination of certain employees in North America and the U.K.

During the second quarter of fiscal 2004, the Company negotiated the settlement of a severance obligation with a former employee and reversed $116 of previously recognized severance.

During the first quarter of fiscal 2004, the Company recognized severance expense associated with the closure of its operation in Greece of $104.


	-11-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

primarily to the consolidation of the Company’s China, Texas and Lovelady, Texas facilities during the first half of fiscal year 2004 as part of its cost reduction program. The UK impairment related to the shutdown of the facility’s cryogenic processing line. During the third quarter of fiscal 2003, the Company also recognized $231 of severance expenses primarily related to the Company’s Italian subsidiary.

See Note 17 – “Subsequent Events” related to impairment, restructuring and other costs.

NOTE 8. COMMITMENTS AND CONTINGENCIES

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 business ("Oilfield Services") to Varco. 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 $16,365 and $21,965. A portion of those indemnity demands (representing aggregate losses of approximately $365) relate to product liability claims. The balance of the indemnity demands relate 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 an independent third-party environmental consulting company 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 consultant has 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 most of Varco's indemnity 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. The Company's follow-up investigation on these claims is, however, still in process. The Company has r equested additional information from Varco where appropriate.

The parties have agreed to a limited information exchange 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 $1,000, subject to certain limitations, including the obligation of Varco to bear 50% of any losses relating to environmental matters in excess of the $1,000 threshold, up to a maximum aggregate loss borne by Varco in respect of such environmental matters of $4,000 (in addition to the $1,000 threshold). The Company has placed $5,000 of the sale proceeds in escrow to be used to pay for these indemnification obligations, should they arise. The $5,000 in proceeds was included in the gain on the sale of the Oilfield Services business recognized in fiscal year 2002. The Company does not believe that Varco has demonstrated, under the terms of the purchase agreement, that it is entitled to any material damages in excess of the $1,000 threshold. Although the Company believes that most of Varco's indemnity 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 $5,000 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 $5,000 reserve, net of income taxes, was recorded in the statement of operations as a component of income (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 $5,000 receivable of escrowed sales proceeds.


	-12-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

Any such additional charge, in excess of the $5,000 reserve against the escrowed sales proceeds that has been recognized, would affect the Company's consolidated statement of operations, but its consolidated statement of cash flows would not be affected unless and until the Company agreed or was compelled to pay Varco more than the $5,000 of escrowed sales proceeds. However, in the event of resolution of Varco’s claims such that the Company receives any amount of the $5,000 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 $21,965 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, liquidity and results of operations.

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 businesses, 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.

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. Since 1989, an alternative blasting media (which is not known to produce silica dust) has been used at each of the referenced coating plants. During the years 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 du st 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 six 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 forme r 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 and Baker Hughes are both presently named as defendants in a lawsuit involving two former employees who allege that they were employees of BHTS and that they suffer from silicosis-related


	-13-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

personal injuries, styled Celestino Galvan and Alfred Rogers v. ICO, Inc., Baker Hughes, Inc., et al. pending in Texas State Court in Orange County (the “Galvan litigation”). The Company was recently dismissed (subject to a tolling agreement, which is an agreement that would allow the plaintiff to bring the Company back into the suit on or before December 31, 2004) from a second silicosis-related personal injury lawsuit, styled Richard Koskey vs. ICO, Inc., Baker Hughes, Inc., et al. pending in Texas State Court in Jefferson County (the “Koskey litigation”), filed against Baker Hughes and the Company by a former employee of the Houston plant. Notwithstanding the Company’s dismissal from the Koskey litigation, the Company may still have exposure in that case because Baker Hughes remains a party.

The Company and Baker Hughes are sharing defense costs in both the Galvan and Koskey litigation pursuant to a cost sharing agreement (the “Agreement”) with Baker Hughes. Pursuant to the Agreement, the Company and Baker Hughes agreed to share equally the costs of defense and any judgment or mutually agreed to settlement of occupational health claims asserted against Baker Hughes (and also against the Company, in cases where the Company is also named as a defendant) by former employees of BHTS who contend that Baker Hughes has liability. The only such “occupational health” claims that have been asserted to date have been claims by employees of the BHTS plants who allegedly suffered from silicosis-related disease. Since the Agreement was executed in 1996, two suits to which the Agreement has applied have been settled (which were disclosed in the Company’s fili ngs for prior years, and for which the Company’s payments totaled $750). The Koskey and Galvan litigation are the only lawsuits presently pending that involve former employees of the BHTS plants.

Under the terms of the Agreement with Baker Hughes, the Company’s exposure is capped at $500 per claimant, and $5,000 in the aggregate for all such claims that may be asserted (currently $4,250 net of payments the Company has made to date referenced in the preceding paragraph); after those thresholds, Baker Hughes is responsible for 100% of the costs of defense, settlement, or judgments for occupational health claims governed by the Agreement.

Based on the plaintiffs’ allegations and discovery conducted to date, both the Galvan and Koskey litigation are covered by the Agreement with Baker Hughes, and therefore the Company’s exposure is capped at $500 per claimant; however, at this time the Company cannot predict with any reasonable certainty its potential exposure with respect to the Koskey or Galvan litigation. Issues affecting the Company’s exposure in these cases include the defendants’ ability to effectively challenge each claimant’s silicosis diagnosis and allegations that silicosis-related injuries, if any, resulted from exposure to silica dust in a BHTS plant, successfully asserting the Company’s preclusion from liability based on the workers’ compensation bar in the Galvan case, 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 otherwise, 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 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.


	-14-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

NOTE 9. DISCONTINUED OPERATIONS

On September 6, 2002, the Company completed the sale of substantially all of its Oilfield Services business to Varco. The initial purchase price was subject to a post-closing working capital adjustment for which a gain of $582 was recorded during the three months ended December 31, 2002. All proceeds from the sale have been received except for $5,000 which was placed in escrow to be used to pay for indemnification obligations, should they arise. The $5,000 was included in the gain recognized on the sale of the Oilfield Services business in fiscal year 2002. During the third quarter of fiscal 2004, the Company deemed the $5,000 receivable of 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 indemni fiable losses. The $5,000 reserve net of income taxes was recorded in the statement of operations as a component of income (loss) from discontinued operations. See Note 8 – “Commitments and Contingencies” for further discussion of the indemnification claims which, depending on the outcome, may result in additional liabilities and losses from discontinued operations in future periods.

The Oilfield Services results of operations are presented as discontinued operations, net of income taxes, in the consolidated statement of operations and the Oilfield Services liabilities retained are shown as a separate line item in the consolidated balance sheet. Legal fees or other expenses incurred related to discontinued operations are expensed as incurred to discontinued operations. The Company anticipates the settlement of the Oilfield Services liabilities in the Consolidated Balance Sheet as of June 30, 2004 of $1,386 to occur within the next twelve months. The expense associated with these liabilities has previously been recorded in the statement of operations as part of income (loss) from discontinued operations, and any adjustments to these liabilities will be reflected as income (loss) from discontinued operations in the period in which the adjustment becomes known.

On July 31, 2003, the Company sold its remaining oilfield service operation to Permian Enterprises, Ltd. for $4,053 in cash and the assumption of certain liabilities and recorded a pretax gain of $600.

NOTE 10. LONG-TERM DEBT

In the first quarter of fiscal 2003, the Company repurchased $104,480 principal amount of its 10 3/8% Senior Notes due 2007 at a weighted average net discount of $976.78 per $1,000 principal amount plus accrued interest in two separate transactions. The Company recorded in other income in the Consolidated Statement of Operations a gain on these purchases of approximately $14, net of transaction costs and write-off of debt offering costs.

NOTE 11. ASSETS HELD FOR SALE

In the first quarter of fiscal 2004, the Company received a No Further Action Determination (“NFA”) from the New Jersey Department of Environmental Protection in relation to certain land the Company acquired in 1996 as part of the Wedco Technology, Inc. acquisition. The Company entered into a contract to sell this land in 1999 and with the receipt of the NFA, the Company expects to close on the sale of this property in the next twelve months and expects to receive approximately $900. The net book value of the real estate is included in the Assets held for sale line item in the Consolidated Balance Sheet at June 30, 2004.


	-15-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

NOTE 12. RELATED PARTY

During the first quarter of fiscal 2003, the Company repurchased $104,480 principal amount of its 10 3/8% Senior Notes due 2007. The Company used the investment banking services of Jefferies and Company to manage the repurchases. David E.K. Frischkorn, Jr., a member of the Company’s Board of Directors, was a Managing Director of Jefferies and Company during the time of the Senior Notes repurchases. The Company paid Jefferies and Company approximately $380 for their services related to those transactions.

NOTE 13. STOCK-BASED COMPENSATION

During the second quarter of fiscal 2004, the Company granted options to purchase 600,000 shares of the Company’s common stock to W. Robert Parkey, Jr., the Company’s President and Chief Executive Officer, with exercise prices of $2.16 per share (applicable to 400,000 of the options), and $2.25 per share (applicable to 200,000 of the options). The Company also granted options to purchase 126,000 shares of the Company’s common stock to Jon C. Biro, the Company’s Chief Financial Officer and Treasurer, with an exercise price of $2.49 per share. The Company will expense the fair value of the options under SFAS 123, Accounting for Stock-Based Compensation, over the vesting periods of the options, which range from immediate vesting to three years from the date of grant. The total pretax compensation expense recognized in the Consolidated Statement of Operations with t he above options was $155 and $325 during the three and nine months ended June 30, 2004, respectively.

NOTE 14. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposures include debt obligations carrying variable interest rates and foreign currency exchange risks. The Company enters into forward purchase contracts to mitigate its exposure to foreign currency exchange risks by selling a functional currency forward for a future purchase obligation denominated in a nonfunctional currency. These forward 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, 2004 and 2003, respectively. As of June 30, 2004 and September 30, 2003, the Company had approximately $2,800 of notional value (fair value at June 30, 2004 was $2,881) and $2,845 of notional value (fair value at September 30, 20 03 was $2,920), respectively, in forward exchange contracts to buy foreign currency to hedge anticipated expenses.


	-16-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

The following table summarizes the Company’s market-sensitive financial instruments. These transactions are considered non-trading activities:

Financial Instruments

Variable Interest Rate Debt

	US$ Equivalent				Weighted Average Interest Rate

Currency Denomination		June 30,		September 30,		June 30,		September 30,
of Indebtedness ⁽¹⁾		2004		2003		2004		2003

Euro	$	3,617	$	2,496		4.44	%	4.71	%
British Pounds Sterling		1,568		1,198		5.72	%	5.75	%
New Zealand Dollar		1,472		1,197		6.83	%	7.23	%
Swedish Krona		999		909		5.45	%	5.45	%
United States Dollar		20		-		4.50	%	-
Malaysian Ringgit		19		46		7.75	%	7.75	%

⁽¹⁾ Maturity dates are less than one year.

The Company does not have any financial instruments classified as off-balance sheet (other than operating leases) as of June 30, 2004 and September 30, 2003.

Forward Contracts

	June 30, 2004	September 30, 2003

Receive US$/Pay Australian $:

Contract Amount	US $2,455	US $2,178
Average Contractual Exchange Rate	(US$/A$) .6833	(US$/A$) .6624
Expected Maturity Dates	July 2004 through	October 2003 through
	September 2004	December 2003

Receive US$/Pay New Zealand $:

Contract Amount	None	US $667
Average Contractual Exchange Rate		(US$/NZ$) .5872
Expected Maturity Dates		October 2003 through
		November 2003

Receive Australian $/Pay Malaysian Ringgit:

Contract Amount	A $90	None
Average Contractual Exchange Rate	(A$/MYR) .3820
Expected Maturity Dates	July 2004

Receive Singapore $/Pay Malaysian Ringgit:

Contract Amount	SG $186	None
Average Contractual Exchange Rate	(SG$/MYR) .4522
Expected Maturity Dates	July 2004


	-17-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

NOTE 15. 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 service time with the Company. The plan in which each employee is eligible to participate depends upon the subsidiary that employs the employee. 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 is voluntarily matched, typically with ICO common stock. Domestic employees’ interests in the Company’s contributions and earnings are vested over five years of service, while foreign employees’ interests are generally vested immediately.

The Company maintains a defined benefit plan for employees of the Company’s Dutch operating subsidiary. Participants contribute a range of 2.5% to 4% of the cost associated with their individual pension basis. The plan provides retirement benefits at the normal retirement age of 65. This subsidiary also maintains a pre-pension plan for all employees who are eligible for the basic pension plan. Under this plan, an employee may choose between the ages of 60-62 to retire early. These employees will remain under the pre-pension plan until the age of 65 at which time they will be eligible for the basic pension plan. During the early retirement period, eligible employees opting for early retirement will receive 50% to 75% of their salaries on the date of retirement. Annually, employees contribute 1.43% of their salaries towards their pre-pensions. These plans are insured by participating annuity contracts with Aegon Levensverzekering N.V. (“Aegon”), located in The Hague, the Netherlands. These participating annuity contracts guarantee the funding of the Company’s future pension

obligations for both its defined benefit pension plan and its defined benefit pre-pension plan. In accordance with the contract, Aegon will pay all future obligations under the provisions of these plans, 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 obligations 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 amount of defined benefit plan pension expense recognized during the three and nine months ending June 30, 2004 was $125 and $370, respectively compared to $100 and $330 during the three and nine months ended June 30, 2003, respectively.

NOTE 16. SEGMENT INFORMATION

The Company historically aggregated its operating segments into one reportable segment due to the similarities of the Company’s operating segments and based upon the Company’s management structure. During the third quarter of fiscal year 2004, the Company reorganized its management structure into four geographical areas defined as ICO Americas (consisting of ICO Polymers North America and ICO Brazil), Bayshore Industrial, ICO Europe and ICO Australasia. This reorganization modified the way information is reviewed and decisions are made by executive management. The Company’s reportable segments include: ICO Europe, Bayshore Industrial, ICO Australasia, ICO Polymers North America and ICO Brazil.

ICO Polymers North America, ICO Brazil, ICO Europe and ICO 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 selected export markets. The Company’s European segment includes operations in France, Holland, Italy, Sweden and UK. The Company’s Australasia segment includes operatio ns in Australia, Malaysia and New Zealand. Due to the reorganization of the Company’s reportable segments as well as the Company’s desire to provide additional segment information, the Company has disclosed segment data below in accordance with SFAS 131.


	-18-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

Nine Months Ended June 30, 2004		ICO Europe		Bayshore Industrial		ICO Australasia		ICO Polymers North America		ICO Brazil		Other^(a)		Total

Revenue From External Customers	$	85,292	$	43,675	$	29,557	$	27,602	$	5,001		-	$	191,127
Intersegment Revenues		161		-		-		1,483		-		-		1,644
Operating Income (Loss)		2,294		3,938		3,070		1,735		67		(6,031	)	5,073
Operating Income %		3	%	9	%	10	%	6	%	1	%	-		3	%
Depreciation and Amortization		2,752		1,293		512		1,020		104		274		5,955
Impairment, Restructuring and Other Costs (Income)^(b)		(22	)	-		-		103		-		87		168

Expenditures for Additions to Long Lived Assets		836		405		1,397		683		93		250		3,664

Nine Months Ended June 30, 2003

Revenue From External Customers	$	67,617	$	35,997	$	23,994	$	23,292	$	2,268		-	$	153,168
Intersegment Revenues		268		-		10		3,079		-		-		3,357
Operating Income (Loss)		(3,205	)	1,153		2,832		(1,728	)	(525	)	(6,521	)	(7,994	)
Operating Income %		(5	%)	3	%	12	%	(7	%)	(23	%)	-		(5	%)
Depreciation and Amortization		3,086		1,301		300		1,789		77		327		6,880
Impairment, Restructuring and Other Costs^(b)		495		-		15		296		-		-		806

Expenditures for Additions to Long Lived Assets		4,068		1,086		542		1,318		252		550		7,816


	-19-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

Three Months Ended June 30, 2004		ICO Europe		Bayshore Industrial		ICO Australasia		ICO Polymers North America		ICO Brazil		Other^(a)		Total

Revenue From External Customers	$	30,932	$	14,401	$	9,557	$	10,120	$	1,769		-	$	67,779
Intersegment Revenues		74		-		-		522		-		-		596
Operating Income (Loss)		673		1,313		730		670		104		(2,163	)	1,327
Operating Income %		2	%	9	%	8	%	7	%	6	%	-		2	%
Depreciation and Amortization		934		423		165		330		34		83		1,969
Impairment, Restructuring and Other Costs ^(b)		77		-		-		103		-		-		180

Expenditures for Additions to Long Lived Assets		187		290		109		273		15		45		919

Three Months Ended June 30, 2003

Revenue From External Customers	$	24,540	$	11,707	$	8,824	$	8,162	$	1,183		-	$	54,416
Intersegment Revenues		193		-		10		2,552		-		-		2,755
Operating Income (Loss)		(1,899	)	627		943		(1,128	)	(192	)	(1,974	)	(3,623	)
Operating Income %		(8	%)	5	%	11	%	(14	%)	(16	%)	-		(7	%)
Depreciation and Amortization		1,088		434		120		606		36		89		2,373
Impairment, Restructuring and Other Costs^(b)		495		-		15		296		-		-		806

Expenditures for Additions to Long Lived Assets		1,469		235		324		112		75		129		2,344

(a) Consists of corporate expenses and other adjustments
(b) Impairment, restructuring and other costs (income) are included in operating income (loss).

	ICO Europe		Bayshore Industrial		ICO Australasia		ICO Polymers North America		ICO Brazil		Other^(c)		Total

Total Assets
As of June 30, 2004	$ 69,045	$	28,036	$	22,914	$	20,504	$	3,906	$	6,387	$	150,792
As of September 30, 2003	$ 62,696	$	26,951	$	9,828	$	21,245	$	3,814	$	10,727	$	145,261

(c) Consists of unallocated Corporate assets including: cash, an income tax receivable and corporate fixed assets.


	-20-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

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

	Three Months Ended June 30,						Nine Months Ended June 30,

		2004			2003			2004			2003

Operating income (loss)	$	1,327		$	(3,623	)	$	5,073		$	(7,994	)
Other income (expense):
Interest expense, net		(684	)		(663	)		(1,979	)		(2,841	)
Other		(94	)		(28	)		177			492

Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle		549			(4,314	)		3,271			(10,343	)
Provision (benefit) for income taxes		152			(360	)		1,238			(1,872	)

Income (loss) from continuing operations before cumulative effect of change in accounting principle		397			(3,954	)		2,033			(8,471	)
Income (loss) from discontinued operations, net of provision (benefit) for income taxes		(3,350	)		(388	)		(3,442	)		160

Net loss before cumulative effect of change in accounting principle		(2,953	)		(4,342	)		(1,409	)		(8,311	)
Cumulative effect of change in accounting principle, net of benefit for income taxes		-			-			-			(28,863	)


Net loss	$	(2,953	)	$	(4,342	)	$	(1,409	)	$	(37,174	)

NOTE 17. SUBSEQUENT EVENTS

In July 2004, the Company notified the employees of the Company’s Swedish subsidiary of the Company’s plans to close the Swedish manufacturing operation during fiscal 2004. The Company will serve the Swedish market from its locations throughout the rest of Europe. Relating to this closure, the Company expects to record a charge over the next two quarters between $300 and $500.


	-21-

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

Introduction

The Company’s revenues are primarily derived from (1) product sales and (2) toll services in the polymers processing industry. Product sales entail the Company purchasing resin which is further processed within the Company’s operating facilities. The further processing of the material may involve size reduction services and/or compounding services. Compounding services include the manufacture and sale of concentrates. After processing, the Company sells the finished products to customers. Toll services involve both size reduction and compounding services whereby these services are performed on customer owned material.

During the third quarter of fiscal year 2004, the Company reorganized its management structure into four geographical areas defined as ICO Americas (consisting of ICO Polymers North America and ICO Brazil), Bayshore Industrial, ICO Europe and ICO Australasia. This reorganization modified the way information is reviewed and decisions are made by executive management. The Company’s reportable segments include: ICO Europe, Bayshore Industrial, ICO Australasia, ICO Polymers North America and ICO Brazil.

ICO Polymers North America, ICO Brazil, ICO Europe and ICO 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 selected export markets. The Company’s European segment includes operations in France, Holland, Italy, Sweden and UK. The Company’s Australasia segment includes operatio ns in Australia, Malaysia and New Zealand.

Cost of sales and services is primarily comprised of purchased raw materials, compensation and benefits to non-administrative employees, electricity, repair and maintenance, occupancy costs and supplies. Selling, general and administrative expenses consist primarily of compensation and related benefits 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 and legal and accounting professional fees.

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 upon demand rather than building large levels of inventory. Conversely, as resin prices are rising, customers often increase their inventories and accelerate their purchases of products and services from the Company to help control their cost of products. 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 and also due to property taxes levie d in the U.S. on customers’ inventories on January 1. The Company’s fourth fiscal quarter also tends to be softer 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. During the first three quarters of fiscal 2004, the Company’s sales volumes have been stronger than the volumes sold in the first three quarters of each of the previous two fiscal years. The Company believes this is primarily caused by an increase in customer demand due to improving worldwide economies, the fact that resin prices were rising during fiscal year 2004, and successful sales and marketing efforts.


	-22-

(Unaudited and in thousands, except share and per share data)

Critical Accounting Policies

The Company’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

Estimates surrounding employee benefit liabilities are related to the Company maintaining a self insured medical plan in the United States (with stop loss insurance coverage limiting the Company’s expense to $100 per claim). Estimates are required in evaluating the Company’s medical expense incurred, but not paid due to the timing difference between when an employee receives medical care and the time the claim is processed and paid by the Company (typically a two to three-month timing difference). The valuation of deferred tax assets is based upon estimates of future pretax income in determining the ability to realize the deferred tax assets in each taxing jurisdiction. Estimates for workers’ compensation liabilities are due to the Company being self insured prior to fiscal year 2004 (with stop loss insurance coverage limiting the Company’s expense to $300 per c laim). Ultimate costs associated with open workers’ compensation claims are estimated as well as an estimate for claims not yet reported. Inventory reserves are estimated based upon the Company’s review of its inventory. This review requires the Company to estimate the fair market value of certain inventory that has become old or obsolete. Determining the amount of the allowance for doubtful accounts involves estimating the collectibility of customer accounts receivable balances. Estimates surrounding commitments and contingencies are related primarily to litigation claims for which the Company evaluates the circumstances surrounding the claims to determine how much expense, if any, the Company should record. Actual results could differ from the estimates discussed above. Management believes that its estimates are reasonable.


	-23-

(Unaudited and in thousands, except share and per share data)

Revenue and Related Cost Recognition- The Company’s accounting policy regarding revenue recognition is to recognize revenue when all of the following criteria are met:

Persuasive evidence of an arrangement exists: The Company has received an order from a customer.
Delivery has occurred or services have been rendered: For product sales, revenue recognition occurs when title and risk of ownership have passed to the customer. For service revenue, revenue recognition occurs upon the completion of service.
Seller’s price to the buyer is fixed or determinable: Sales prices are agreed with the customer before delivery has occurred or the services have been rendered.
Collectibility is reasonably assured: The Company has a customer credit policy to ensure collectibility is reasonably assured.

Revenues billed to customers related to shipping and handling are included in revenues while the associated shipping and handling costs to the Company are included in cost of sales and services.

Impairment of Property, Plant and Equipment- Property, plant and equipment are reviewed for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes comparison of undiscounted future cash flows expected to be generated by the asset or group of assets with the associated assets’ carrying value. If the carrying value of the asset or group of assets exceeds the expected future cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value.

Impairment of Goodwill and Other Intangible Assets- Effective October 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which established standards for reporting acquired goodwill and other intangible assets. This statement accounts for goodwill based on the reporting units of the combined entity into which an acquired entity is integrated. In accordance with SFAS 142, goodwill and indefinite lived intangible assets are tested for impairment at least annually at the reporting unit level, rather than being amortized, and the amortization period of intangible assets with finite lives is no longer limited to forty years. The Company’s annual impairment test is performed on September 30 of each fiscal year.

Currency Translation- Amounts in foreign currencies are translated into United States Dollars. When local functional currency is translated to United States Dollars, the effects are recorded as a separate component of other comprehensive income or loss. Exchange gains and losses resulting from foreign currency transactions are recognized in earnings.

		Three Months Ended June 30, 2004		Nine Months Ended June 30, 2004


Revenues	$	5,020	$	14,300
Operating income		340		750
Income (loss) from continuing operations before tax		300		620
Net income (loss)		240		460


	-24-

(Unaudited and in thousands, except share and per share data)

Stock Options- Effective October 1, 2002, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”) to all employee awards granted, modified or settled after October 1, 2002. The Company adopted the prospective method to implement SFAS 123 under the provisions of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure- an amendment of SFAS 123. Awards under the Company’s plans vest over periods ranging from immediate vesting to four years.

Results of Operations

Three and nine months ended June 30, 2004 compared to the three and nine months ended June 30, 2003

	Summary Financial Information

	Three Months Ended June 30,				Nine Months Ended June 30,

	2004	2003	Change		2004		2003		Change

Sales revenue	$ 57,799	$ 46,104	$ 11,695	$	164,503	$	128,617	$	35,886
Service revenue	8,980	8,312	668		26,624		24,551		2,073

Total revenues	66,779	54,416	12,363		191,127		153,168		37,959
SG&A ⁽¹⁾	8,503	8,872	(369)		25,006		26,013		(1,007)
Operating income (loss)	1,327	(3,623)	4,950		5,073		(7,994)		13,067
Net loss	$ (2,953)	$ (4,342)	$ 1,389	$	(1,409)	$	(37,174)	$	35,765

Volumes ⁽²⁾	78,300	68,300	10,000		229,400		205,100		24,300
Gross margin ⁽³⁾	17.9%	15.5%	2.4%		18.9%		16.8%		2.1%
SG&A as a percentage of revenue	13%	16%	(3%)		13%		17%		(4%)
Effective income tax rate (benefit)	28%	(8%)	36%		38%		(18%)		56%

⁽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 by 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.

Revenues. Total revenues increased $12,363 or 23% to $66,779 and $37,959 or 25% to $191,127 during the three and nine months ended June 30, 2004, compared to the same periods of fiscal 2003.

The reasons for the change in revenues for the three and nine months ended June 30, 2004, respectively, are as follows:

	Increase/(Decrease)

	Three Months Ended June 30, 2004		Nine Months Ended June 30, 2004

Volume		22%		19%
Price/product mix ⁽¹⁾		(8%)		(3%)
Translation effect ⁽²⁾		9%		9%

Percentage change in revenue		23%		25%

⁽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 US Dollar.


	-25-

(Unaudited and in thousands, except share and per share data)

Higher volumes increased revenue $11,900 and $28,500, excluding the impact of foreign currencies, for the three and nine months ended June 30, 2004, respectively, primarily due to an increase in market share and customer demand. The increase in volumes was most notable for our Bayshore Industrial operation. During the three months ended June 30, 2004, changes in prices and product mix led to a $4,557 decline in revenue compared to the three months ended June 30, 2003 due primarily to a change in the mix of finished products sold at Bayshore Industrial and ICO Polymers North America. The translation effect of stronger foreign currencies relative to the US Dollar increased revenues by $5,020 and $14,300 for the three and nine months ended June 30, 2004, respectively.

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

Revenues by segment for the three months ended June 30, 2004 compared to the three months ended June 30, 2003

	Three Months Ended June 30,

	2004	% of Total	2003	% of Total	Change	%

ICO Europe	$ 30,932	46	$ 24,540	45	$ 6,392	26
Bayshore Industrial	14,401	22	11,707	22	2,694	23
ICO Australasia	9,557	14	8,824	16	733	8
ICO Polymers North America	10,120	15	8,162	15	1,958	24
ICO Brazil	1,769	3	1,183	2	586	50

Total	$ 66,779	100	$ 54,416	100	$ 12,363	23

ICO Europe’s revenues increased $6,392 or 26% caused by the translation effect of stronger European currencies compared to the US Dollar of $3,500 and an increase in volumes sold of 8%. The increase in volumes sold increased revenues by $3,500 and was due to both an increase in market share and an increase in customer demand.

Bayshore Industrial’s revenues increased $2,694 or 23% as a result of an increase in volumes sold of 45% ($5,320 positive impact on revenues) offset by a change in the mix of finished products sold ($2,626 negative impact on revenues). Volumes increased primarily due to an increase in customer demand and to a lesser extent an increase in market share.

ICO Polymers North America’s revenues increased $1,958 or 24% due to an increase in product volumes sold of 89% which increased revenues by $3,070. This increase was offset by a decrease in revenues of $960 caused primarily by a change in the mix of finished products sold.

Revenues by segment for the nine months ended June 30, 2004 compared to the nine months ended June 30, 2003

	Nine Months Ended June 30,

	2004	% of Total	2003	% of Total	Change	%

ICO Europe	$ 85,292	45	$ 67,617	44	$ 17,675	26
Bayshore Industrial	43,675	23	35,997	24	7,678	21
ICO Australasia	29,557	15	23,994	16	5,563	23
ICO Polymers North America	27,602	14	23,292	15	4,310	19
ICO Brazil	5,001	3	2,268	1	2,733	121

Total	$ 191,127	100	$ 153,168	100	$ 37,959	25


	-26-

(Unaudited and in thousands, except share and per share data)

ICO Europe’s revenues increased $17,675 or 26% caused by the translation effect of stronger European currencies compared to the US Dollar of $9,730 and an increase of $7,150 due to an increase in volumes sold of 6%. The increase in volumes sold was caused by both an increase in market share and an increase in customer demand.

Bayshore Industrial’s revenues increased $7,678 or 21% due to an increase in volumes sold of 38% ($13,700 positive impact on revenues) offset by a decline of $6,100 due to a change in the mix of finished products sold. Volumes increased due primarily to an increase in customer demand and to a lesser extent an increase in market share.

ICO Australasia’s revenues increased $5,563 or 23% primarily due to stronger Australian and New Zealand currencies compared to the US Dollar which increased revenues by $4,220. The majority of the remaining change was caused by an increase in average selling prices caused by an increase in the cost of raw materials and due to an increase in toll service volumes due to new business.

Gross Margins. Consolidated gross margins (calculated as the difference between revenues and cost of sales and services, divided by revenues) improved to 17.9% and 18.9% for the three and nine months ended June 30, 2004 compared to 15.5% and 16.8% in the three and nine months ended June 30, 2003, respectively. Gross margins improved due to the increase in volumes sold of 15% and 12% during the three and nine months ended June 30, 2004, respectively. The Company gains operating leverage when volumes increase because costs of good sold expenses such as labor, electricity and plant expenses increase in a lower proportion relative to increases in volume. ICO Europe and ICO Polymers North America operating results improved significantly versus last year due to prior year cost reductions, an increase in customer demand and improved performance of two plants tha t dramatically underperformed last year. Bayshore also experienced a significant improvement in gross margin due to improved operating leverage.

Selling, General and Administrative. Selling, general and administrative expenses (including stock option compensation expense) (“SG&A”) declined $369 or 4% and $1,007 or 4% during the three and nine months ended June 30, 2004, respectively, compared to the same periods in fiscal 2003.

The decrease in SG&A of $369 or 4% for the three months ended June 30, 2004, was primarily due to the cost reduction program implemented in the fourth quarter of fiscal 2003 which reduced SG&A by approximately $1,350, partially offset by the effect of stronger foreign currencies relative to the US Dollar (an impact of approximately $500), an increase in profit sharing expense of $510 and an increase in stock option compensation expense of $178. As a percentage of revenues, SG&A (including stock option compensation expense) declined to 13% of revenue during the three months ended June 30, 2004 compared to 16% for the same quarter last year due to the increase in revenues while SG&A expenses declined slightly.

The decline of $1,007 or 4% in SG&A for the nine month period was primarily due to the cost reduction program implemented in the fourth quarter of fiscal 2003 (impact of approximately $4,050) offset by the impact of stronger foreign currencies (increased SG&A $1,400), an increase in profit sharing expense of $830, and an increase in stock option expense of $328. During the nine months ended June 30, 2004, SG&A (including stock option compensation expense) as a percentage of revenue declined to 13% compared to 17% for the nine months ended June 30, 2003 due primarily to the increase in revenues while SG&A expenses declined.


	-27-

(Unaudited and in thousands, except share and per share data)

Impairment, restructuring and other costs.

	Three Months Ended June 30,				Nine Months Ended June 30,

		2004		2003		2004		2003

Severance	$	157	$	231	$	145	$	231
Impairment of fixed assets		-		529		-		529
Other		23		46		23		46

Total impairment, restructuring and other costs	$	180	$	806	$	168	$	806

During the third quarter of fiscal 2004, the Company incurred severance cost of $157 related to the termination of certain employees in North America and the UK.

During the second quarter of fiscal 2004, the Company negotiated the settlement of a severance obligation with a former employee and reversed $116 of previously recognized severance.

During the first quarter of fiscal 2004, the Company recognized severance expense associated with the closure of its operation in Greece of $104.

During the third quarter of fiscal 2003, the Company recognized an impairment of fixed assets of $529 at the Company’s ICO Polymers North America and UK locations. The North American impairment related primarily to the consolidation of the Company’s China, Texas and Lovelady, Texas facilities during the first half of fiscal year 2004 as part of its cost reduction program. The UK impairment related to the shutdown of the facility’s cryogenic processing line. During the third quarter of fiscal 2003, the Company also recognized $231 of severance expenses primarily related to the Company’s Italian subsidiary.

See Note 17 – “Subsequent Events” related to impairment, restructuring and other costs.

Depreciation and Amortization. Depreciation and amortization decreased $404 or 17% and $925 or 13% due to the fixed asset impairment recorded in the fourth quarter of fiscal year 2003 which reduced the carrying value of fixed assets which had the effect of reducing depreciation expense for the three and nine months ending June 30, 2004, respectively.

Operating income (loss).

Consolidated operating income (loss) improved $4,950 during the three months ended June 30, 2004 from a loss of $(3,623) to income of $1,327. For the nine months ended June 30, 2004, operating income (loss) improved $13,067 from a loss of $(7,994) to income of $5,073. These increases are primarily due to the increase in revenues, improved gross margins and reduction in SG&A expenses.

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


	-28-

(Unaudited and in thousands, except share and per share data)

Operating income (loss) by segment for the three months ended June 30, 2004 compared to the three months ended June 30, 2003

Operating Income (loss)	Three Months Ended June 30,

		2004			2003			Change

ICO Europe	$	673		$	(1,899	)	$	2,572
Bayshore Industrial		1,313			627			686
ICO Australasia		730			943			(213	)
ICO Polymers North America		670			(1,128	)		1,798
ICO Brazil		104			(192	)		296

Subtotal		3,490			(1,649	)		5,139
General Corporate Expense		(2,163	)		(1,974	)		(189	)

Consolidated	$	1,327		$	(3,623	)	$	4,950

Operating Income (loss) as a percentage of revenues	Three Months Ended June 30,

		2004		2003		Increase/ (Decrease)

ICO Europe		2	%	(8	%)	10	%
Bayshore Industrial		9	%	5	%	4	%
ICO Australasia		8	%	11	%	(3	%)
ICO Polymers North America		7	%	(14	%)	21	%
ICO Brazil		6	%	(16	%)	22	%
Consolidated		2	%	(7	%)	9	%

ICO Europe’s operating income improved $2,572 from a loss of $(1,899) to income of $673. This improvement was primarily a result of improved gross margins, lower impairment, restructuring and other costs and lower SG&A expenses. The improved gross margins were the result of improved product sales prices relative to raw material costs. The reduced impairment, restructuring and other costs was caused by the impairment of the UK’s cryogenic processing line in the third quarter of fiscal 2003. The reduction in SG&A expense was primarily caused by the cost reduction program implemented in the fourth quarter of fiscal 2003.

ICO Polymers North America operating income improved to income of $670 compared to a loss of $(1,128), an improvement of $1,798. This improvement was primarily due to the improvement in performance of one of the segment’s operating facilities due to the cost reduction program implemented in late fiscal year 2003, an increase in product sales volumes and improved selling prices.


	-29-

(Unaudited and in thousands, except share and per share data)

Operating income (loss) by segment for the nine months ended June 30, 2004 compared to the nine months ended June 30, 2003

Operating income (loss)	Nine Months Ended June 30,

		2004			2003			Change

ICO Europe	$	2,294		$	(3,205	)	$	5,499
Bayshore Industrial		3,938			1,153			2,785
ICO Australasia		3,070			2,832			238
ICO Polymers North America		1,735			(1,728	)		3,463
ICO Brazil		67			(525	)		592

Subtotal		11,104			(1,473	)		12,577
General Corporate Expense		(6,031	)		(6,521	)		490

Consolidated	$	5,073		$	(7,994	)	$	13,067

Operating income (loss) as a percentage of revenues	Nine Months Ended June 30,

		2004		2003		Increase/ (Decrease)

ICO Europe		3	%	(5	%)	8	%
Bayshore Industrial		9	%	3	%	6	%
ICO Australasia		10	%	12	%	(2	%)
ICO Polymers North America		6	%	(7	%)	13	%
ICO Brazil		1	%	(23	%)	24	%
Consolidated		3	%	(5	%)	8	%

ICO Europe’s operating income increased $5,499 from a loss of $(3,205) to income of $2,294. The significant improvement was caused by the growth in revenues, improved gross margins and lower SG&A expenses (due to the cost reduction program implemented in late fiscal 2003). Gross margins improved primarily as a result of the operating leverage gained from the growth of volumes sold.

Bayshore Industrial’s operating income improved $2,785 or 242% to $3,938 caused by the growth in revenues and improved gross margin. The gross margin improvement was caused by increased operating leverage.

ICO Polymers North America’s operating income improved $3,463 to income of $1,735 from a loss of $1,728. This improvement was primarily the result of improvement in the performance of one of the segment’s operating facilities. This operation improved due to the cost reduction program implemented in late fiscal year 2003, an increase in product sales volumes and improved selling prices relative to raw material costs.

Net Interest Expense. During the three months ended June 30, 2004, compared to the three months ended June 30, 2003, consolidated interest expense increased $21 or 3% due to increased borrowings. Net interest expense for the nine months ended June 30, 2004 decreased $862 or 30% compared to the same period in fiscal 2003 due to the repurchase of $104,480 of 10 3/8% Senior Notes during the first quarter of fiscal 2003.

Income Taxes. The Company’s effective income tax rates were 28% and 38% during the three and nine months ended June 30, 2004, respectively, compared to benefits of 8% and 18% during the three and nine months ended June 30, 2003. The change was 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. During the three and nine months ended June 30, 2003, the Company’s foreign subsidiaries had a tax provision on a pre-tax net loss due to the reasons mentioned above including the impact of permanent differences and nondeductible items. In addition, during the fiscal 2003 periods, the Company placed valuation allo wances against the deferred tax assets of the Company’s Italian and Swedish facilities. A valuation allowance is established when it is more likely than not that some or all of a deferred tax asset will not be realized. The foreign tax provision on the pretax foreign loss diluted the domestic effective tax benefit of 27% and 32% for the three and nine months ended June 30, 2003, respectively, which resulted in the consolidated rates of 8% and 18%.


	-30-

(Unaudited and in thousands, except share and per share data)

Income (loss) from continuing operations before cumulative effect of change in accounting principle. Income (loss) from continuing operations before cumulative effect of change in accounting principle increased $4,351 to income of $397 for the three months ended June 30, 2004 and increased $10,504 to income of $2,033 for the nine months ended June 30, 2004 due to the factors discussed above.

Income (Loss) From Discontinued Operations. During the third quarter of fiscal 2004, the Company deemed the $5,000 receivable of 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 losses. The $5,000 reserve was the primary cause of the decrease in income (loss) from discontinued operations for the three and nine month comparable periods. See Note 8 - “Commitments and Contingencies” for further discussion surrounding the $5,000.

The income from discontinued operations of $160 during the nine months ended June 30, 2003 was primarily due to the $582 of gain on the post-closing working capital adjustment recorded during the three months ended December 31, 2002 and the income from the remaining oilfield services operation sold in July 2003.

The loss from discontinued operations during the three months ended June 30, 2003 was primarily due to tax expense recorded in the quarter related to the fiscal year 2002 Oilfield Services sale as a result of finalizing and filing the U.S. tax return in June 2003.

Cumulative Effect of Change in Accounting Principle. Effective October 1, 2002, the Company adopted Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets, which established Standards for reporting acquired goodwill and other intangible assets. This Statement accounts for goodwill based on the reporting units of the combined entity into which an acquired entity is integrated. In accordance with SFAS 142, goodwill and indefinite lived intangible assets are tested for impairment at least annually at the reporting unit level, rather than being amortized, and the amortization period of intangible assets with finite lives is no longer limited to forty years. Using the discounted cash flow method under the requirements of SFAS 142, the Company recorded an impairment of goodwill of $28,863, net of income tax benefit of $580 during the three months ended December 31, 2002 as a result of the adoption of SFAS 142 on October 1, 2002. This impairment charge is reflected in the consolidated statement of operations as a cumulative effect of change in accounting principle. (See Note 3- “Cumulative Effect of Change of Accounting Principle” for further information on this charge).

Net Income (Loss). For the three and nine months ended June 30, 2004, the Company had net loss of ($2,953) and ($1,409) compared to net losses of ($4,342) and ($37,174) for the comparable periods in fiscal 2003, due to the factors discussed above.


	-31-

(Unaudited and in thousands, except share and per share data)

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

		June 30, 2004		September 30, 2003

Cash and cash equivalents	$	2,576	$	4,114
Working capital	$	30,321	$	32,725

Cash and cash equivalents declined $1,538 and working capital decreased $2,404 during the nine months ended June 30, 2004 due to the factors described below.

For the nine months ended June 30, 2004, cash provided by (used for) operating activities by continuing operations increased to cash provided of $4,021 compared to cash used of $(15,676) for the nine months ended June 30, 2003. This improvement to cash provided by continuing operations occurred primarily due to lower interest payments caused by the early repayment of $104,480 of the Company’s 10 3/8% Senior Notes, higher net income from continuing operations before cumulative effect of change in accounting principle, a larger increase in accounts payable, a smaller increase in inventory, offset by a larger increase in accounts receivable. Accounts receivable increased $9,577 or 23% due primarily to the increase in revenues. The Company increased its inventory by $2,078 or 9% primarily due to higher average resin purchase prices. Accounts payable increased $6,228 or 28% during fiscal 2004 due primarily to increases in the value of inventory purchases.

Cash used for operating activities by discontinued operations for the nine months ended June 30, 2004 decreased to cash used of $1,342 compared to cash used of $6,542 for the nine months ended June 30, 2003. This decrease was primarily due to the Company’s domestic income tax payment made in fiscal year 2003 due to the gain recorded on the disposition of the oilfield services business. The cash used of $1,342 for the nine months ended June 30, 2004 was related to payments of oilfield services liabilities retained and expenses incurred related to discontinued operations.

The $5,000 reserve recorded in the third quarter of fiscal 2004 related to discontinued operations was a non-cash item which did not have an impact on the Company’s statement of cash flow, but did decrease working capital.

Capital expenditures totaled $3,664 during the nine months ended June 30, 2004 and were related primarily to expanding and upgrading the Company’s production capacity. Approximately 35% of the $3,664 of capital expenditures was spent in the Company’s Australian subsidiary to expand production capacity. Capital expenditures for the remainder of fiscal 2004 are expected to be less than $500 and will be primarily used to upgrade and/or expand the Company’s production capacity. The Company anticipates that available cash and existing credit facilities will be sufficient to fund remaining fiscal 2004 capital expenditure requirements.

Cash used for financing activities during the nine months ended June 30, 2004 was cash used of $(1,035) compared to cash used of $(98,200) during the nine months ended June 30, 2003. The change was primarily the result of decreased debt repayments due to the retirement of $104,480 of Senior Notes during the three months ended December 31, 2002. The Company retired the 10 3/8% Senior Notes in order to lower the Company’s interest expense and debt obligations using the proceeds from the disposition of its Oilfield Services Business.

As of June 30, 2004, the Company had approximately $19,460 of additional borrowing capacity available under various foreign and domestic credit arrangements. In April 2002, the Company established a three-year domestic credit facility secured by domestic receivables and inventory with a maximum borrowing capacity of $15,000. The borrowing capacity varies based upon the levels of domestic receivables and inventory. As of June 30, 2004, the Company had approximately $10,260 of available borrowing capacity under the domestic credit facility and $9,200 available under various foreign credit facilities.


	-32-

(Unaudited and in thousands, except share and per share data)

Upon the sale of the Oilfield Services business in September 2002, the Company used a majority of the sales proceeds to retire $104,480 of 10 3/8% Senior Notes during the three months ended December 31, 2002 in order to lower the Company’s interest expense and debt obligations. In addition, 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 will increase the Company’s accounts receivables. The Company does not have material commitments for capital expenditures beyond fiscal year 2004. Annual capital expenditures required to upgrade existing equipment to maintain existing production capacity are approximately $2,000. The Company anticipates that existing cash balances of $2,576, cash flow from operations, future borrowings and exist ing borrowing capacity of $19,460 will provide adequate liquidity for the next twelve months. There can, however, 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.

The Company’s foreign credit facilities are generally collateralized by assets owned by subsidiaries of the Company and also carry various financial covenants. The Company’s domestic credit facility is collateralized by domestic receivables and inventory and carries a variable interest rate. The variable interest rate is currently equal to either one-quarter (¼%) percent per annum in excess of the prime rate or two and one-quarter (2¼%) percent per annum in excess of the adjusted euro dollar rate and may be adjusted depending upon the Company’s leverage ratio, as defined, excess credit availability under the credit facility and the Company’s financial results. The Company’s weighted average interest rate on its domestic credit facility was 4.50% as of June 30, 2004. The Company’s domestic credit facility contains customary financial covenants which vary depending upon excess availability, as defined in the credit facility agreement.

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 o f 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).

In connection with the Company’s November 2002 repurchase of $89,570 principal amount of the Company’s outstanding Senior Notes, the terms of the Senior Notes indenture were amended significantly. The amended Senior Notes indenture contains a number of covenants including: restrictions on the sale of assets of the Company in excess of $150,000 and a change of control provision that requires the Company to repurchase all of the Senior Notes at a repurchase price in cash equal to 101% of the principal amount of the Senior Notes upon the occurrence of a change of control. A “change of control” means (i) the sale, lease or other disposition of all or substantially all of the assets of the Company and its restricted subsidiaries, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) any person or group becomi ng the beneficial owner of more than 50% of the total voting power of the voting stock of the Company or (iv) a majority of the members of the Board of Directors no longer being “continuing directors” where “continuing directors” means the members of the Board of Directors on the date of the indenture and members that were nominated for election or elected to the Board of Directors 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 interpretation of the phrase “all or substantially all” as used in the Senior Notes indenture varies according to the facts and circumstances of the subject transaction, has no clearly established meaning


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(Unaudited and in thousands, except share and per share data)

under New York law (which governs the indenture) and is subject to judicial interpretation. As of June 30, 2004 and September 30, 2003, Senior Notes outstanding were $10,095.

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, 2004 and September 30, 2003.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

(Unaudited and in thousands, except share and per share data)

The following table summarizes the Company’s market-sensitive financial instruments. These transactions are considered non-trading activities:

Financial Instruments

Variable Interest Rate Debt

	US$ Equivalent				Weighted Average Interest Rate

Currency Denomination		June 30,		September 30,		June 30,		September 30,
of Indebtedness ⁽¹⁾		2004		2003		2004		2003

Euro	$	3,617	$	2,496		4.44	%	4.71	%
British Pounds Sterling		1,568		1,198		5.72	%	5.75	%
New Zealand Dollar		1,472		1,197		6.83	%	7.23	%
Swedish Krona		999		909		5.45	%	5.45	%
United States Dollar		20		-		4.50	%	-
Malaysian Ringgit		19		46		7.75	%	7.75	%

⁽¹⁾ Maturity dates are expected to be less than one year.

Forward Contracts

	June 30, 2004	September 30, 2003

Receive US$/Pay Australian $:

Contract Amount	US $2,455	US $2,178
Average Contractual Exchange Rate	(US$/A$) .6833	(US$/A$) .6624
Expected Maturity Dates	July 2004 through	October 2003 through
	September 2004	December 2003


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(Unaudited and in thousands, except share and per share data)

	June 30, 2004	September 30, 2003

Receive US$/Pay New Zealand $:

Contract Amount		US $667
Average Contractual Exchange Rate	None	(US$/NZ$) .5872
Expected Maturity Dates		October 2003 through
		November 2003

Receive Australian $/Pay Malaysian Ringgit:

Contract Amount	A $90	None
Average Contractual Exchange Rate	(A$/MYR) .3820
Expected Maturity Dates	July 2004

Receive Singapore $/Pay Malaysian Ringgit:

Contract Amount	SG $186	None
Average Contractual Exchange Rate	(SG$/MYR) .4522
Expected Maturity Dates	July 2004

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act, as amended), have concluded that as of June 30, 2004 the Company’s disclosure controls and procedures were effective to ensure that the information the Company is required to disclose in reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

(b) Changes in internal controls. There have been no significant changes in the Company's internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Company's internal controls subsequent to the evaluation referred to in the preceding paragraph (a). There were no significant deficiencies or material weakness identified and, therefore, no corrective actions were taken.


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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of the Company’s legal proceedings, see Note 8 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 19, 2003.

ITEM 5. OTHER INFORMATION

The Company’s Board of Directors determined not to declare any dividend on its depositary shares, each representing ¼ of a share of the Company’s $6.75 convertible exchangeable preferred stock (“Preferred Stock”) for the quarter ending on June 30, 2004. Because this resulted in the Company not declaring dividends on the shares of Preferred Stock for six consecutive quarters, on July 1, 2004, the holders of the Preferred Stock became entitled to elect two additional directors to the Company’s Board of Directors. On July 2, 2004, the holders of a majority of the Preferred Stock elected Gregory T. Barmore and Eric O. English to serve on the Company’s Board of Directors. Mr. Barmore and Mr. English shall serve until all dividends in arrears are paid to the holders of the depositary shares, or until their successors are elected.

Effective August 9, 2004, William C. Willoughby resigned as a director of the Company to spend more time operating his own business. Mr. Willoughby's resignation was not due to any disagreement with the Company on any matter relating to the Company's operations, policies or practices.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits – Reference is hereby made to the exhibit index which appears below.

The following instruments and documents are included as Exhibits to this Form 10-Q. Exhibits incorporated by reference are so indicated by parenthetical information.

Exhibit No.	Exhibit


4.1*	—	Certificate of Amendment of Statement of Designations Establishing $6.75 Convertible Exchangeable Preferred Stock
10.1*	—	Second Amended and Restated ICO, Inc. 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

(b) Reports on Form 8-K

On May 10, 2004, the Company filed a Current Report on Form 8-K reporting that it had announced its financial results for the quarter ended March 31, 2004.

On May 28, 2004, the Company filed a Current Report on Form 8-K reporting that it had provided its directors and executive officers notice restricting them from trading in the Company’s common stock during the period beginning on June 28, 2004 and continuing through the week of July 4, 2004 after having received prospective notification of suspension of trading in one of its 401(k) plans in connection with the merger of its two 401(k) plans.


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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 12, 2004	/s/ W. Robert Parkey, Jr.

	W. Robert Parkey, Jr. President and Chief Executive Officer



	/s/ Jon C. Biro

	Jon C. Biro Chief Financial Officer and Treasurer


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