Avant Brands Annual Report 2007

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FY2007 Annual Report · Avant Brands

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C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-CV1

2007 Annual Report

from strategy to solutions

VARN

100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-CV2

POLYONE CORPORATION, WITH ANNUAL REVENUES

OF MORE THAN $2.6 BILLION, IS A LEADING GLOBAL

PROVIDER OF SPECIALIZED POLYMER MATERIALS,

SERVICES AND SOLUTIONS. HEADQUARTERED OUTSIDE

OF CLEVELAND, OHIO, U.S.A., POLYONE HAS OPERATIONS

AROUND THE WORLD. SEE THE NEW WWW.POLYONE.COM

FOR ADDITIONAL INFORMATION ON POLYONE.

our vision

PolyOne will be the world’s premier provider of specialized
polymer materials, services and solutions.

our strategy

PolyOne is executing a transformational strategy that consists
of four core components:

■ Specialization differentiates us through value-creating
offerings that extend beyond products to help customers
who care about service, technology and problem solving.

■ Globalization takes us into high-growth markets where
our customers are migrating, and positions us to serve
them with consistency everywhere in the world.

■ Operational excellence empowers us to respond to the
voice of the customer with a relentless focus on continuous
improvement in everything we do.

■ Commercial excellence governs our activities in the
marketplace, where we deliver value to customers by
showing them how they can increase their proﬁ ts and grow.

from front to back
Industries and Applications

From Strategy to Solutions

From Cyclical to Stable

From Volume to Value

From Provider to Par tner

From Regional to Global

From Ordinar y to Outstanding

Form 10-K

Shareholder Information After Form 10-K

Board of Directors

Inside Back Cover

In this annual report, statements that are not reported ﬁ nancial results or other historical information are “forward-looking statements”

within the meaning of the Private Securities Litigation Reform Act of 1995. Factors that could cause our actual results to differ materially

from those implied by the forward-looking statements are described in detail on page 30 of the Form 10-K.

VARN

100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P1

industries and applications

PolyOne is a company
that lives by a simple
ideal: helping customers
succeed by providing
them the technologies,
services and solutions
they need to make them
more competitive and to
help them grow in the
global economy.

This list shows the
industries we serve,
with representative
end use applications.

Healthcare

Medical Devices
Equipment
Pharmaceutical Packaging
Wellness

Electrical &
Electronics

Business Machines
Electrical Equipment
Electronic Equipment
Power Transfer
Lighting

Appliance

Large Appliances
Small Appliances

Industrial

Agriculture
Fluid Handling
Material Handling

Wire & Cable

Automotive
Aerospace
Construction
Electrical/Electronic
Power/Telecommunications

Building &
Construction

Decking/Railing
Flooring
Pipe Fittings
Siding Trim
Windows/Doors
Window Treatments

Textiles

Apparel
Carpets
Fabrics

Transportation

Auto – After Market
Auto – Exterior
Auto – Interior
Auto – Under Hood
Non-automotive Transportation

Packaging

Food & Beverage
Personal Care

Consumer

Disposables
Durables
Sports/Leisure

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100

POLYONE CORPORATION

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P2

from strategy

to solutions

■ Change the basis of competition

to differentiation.

■ Revitalized the innovation process
to bring promising projects to
commercial launch.

■ Capitalize on opportunities

inherent in PolyOne’s extensive
global footprint.

■ Penetrated geographies with high
growth rates and strong projected
demand for plastics.

■ Transition the commercial

■ Upgraded commercial teams,

organization from product/price
selling to value-based selling.

invested in training and rewarded
profitable new business gains.

■ Instill a culture of continuous

improvement to answer the voice
of the customer.

■ Achieved an on-time delivery
target of 95 percent, up from
81 percent in early 2006.

■ Strengthen the financial profile
and improve the quality and
sustainability of the earnings mix.

■ Divested OxyVinyls and reduced
earnings volatility. Reduced high-
cost debt. Accelerated specialty
platform earnings.

VARN

100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P3

and sustainability of our earnings mix. A

■ Invigorated by a new management

To Our Shareholders T H E K E Y T O F U L F I L L I N G A B O L D V I S I O N

I S E X E C U T I O N . F O R P O LY O N E , 2 0 0 7 WA S A L L A B O U T D R I V I N G O U R

T R A N S F O R M AT I O N A L S T R AT E G Y.

We implemented our plan effectively

FINANCIAL PROGRESS IN 2007

and with urgency, and we were heartened

as the outlines of a stronger company be-

gan to emerge sooner than anticipated.

Altering the course of a large, estab-

lished organization is intense, demand-

ing work; it is not for the faint of heart.

We made substantial progress toward

our specialty business model, which

should meaningfully improve the quality

number of encouraging trends appeared

to validate the shift toward our high-value

Consequently, many corporate transforma-

specialty platform:

tions ﬁ zzle, with all the impact of a balloon

without helium. At PolyOne, we are prov-

ing each day that we know how to spark

dynamic, positive change.

Much work lies ahead, but we are

steadily positioning PolyOne as a provider of

value-added solutions for our customers and

sustainable, proﬁ table growth for our share-

■ Operating income for our specialty

businesses more than doubled

the prior-year ﬁ gure. This platform

now represents approximately 20

nearly triple its relative contribu-

tion in 2006.

holders. It is my privilege to share some of

■ With an unwavering focus on

the many ways we are bringing to life our

strategy of specialization and globalization,

underpinned by improved capabilities in

commercial and operational excellence.

improved product mix and opera-

tional and commercial disciplines,

our industry-leading North Ameri-

can Color and Additives business

VARN

100

Stephen D. Newlin
Chairman, President and Chief Executive Officer

reversed a history of steep losses,

generating an operating income

improvement of more

than

$9 million.

team and a transformative shift

to a high-value, dif ferentiated

mix, North American Engineered

Materials made impressive strides

to reposition itself as a specialty

solutions provider of engineering

thermoplastics.

Materials registered double-digit

growth in sales and operating

income year over year. In the last

three years, operating income

of our Asian business has more

than doubled.

POLYONE CORPORATION

percent of our total earnings,

■ International Color and Engineered

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P4

DIVESTITURE CHANGES THE GAME

We divested our OxyVinyls joint venture in July 2007. With

this action, we reduced our historical earnings volatility

and substantially diminished our exposure to the resi-

dential construction market. In addition, we signiﬁ cantly

rebalanced our business portfolio, elevating our specialty

businesses to become the primary drivers of sustainable

earnings growth.

Signiﬁ cantly, we deployed cash to eliminate our high-

yield debt and markedly strengthen our balance sheet.

Having gained the ﬁ nancial ﬂ exibility to accelerate strate-

gic growth investments, we recruited commercial talent

to drive our innovation and new business pipelines, target

high-growth industries, sell the value of our offering and

forge long-term relationships with customers.

from cyclical
to stable

OxyVinyls sale:

Reduced earnings volatility
Redeemed high-cost debt
Lowered interest expense

New opportunities to invest in commercial

resources and strategic acquisitions

PolyOne Distribution, another impor-

future. In 2008, we will accelerate the

stellar safety performance attests to the

tant business platform, achieved sales

momentum behind this effort.

diligence of our employees and to their sup-

and operating income records in 2007.

As expected, our Vinyl Business seg-

ment felt the brunt of the abrupt residential

construction slowdown, and earnings year

over year declined sharply.

Unfortunately, this downturn masks

an otherwise strong performance. The

magnitude of our non-vinyl income growth

reﬂ ects our early success in building an

earnings platform apart from the cyclical

residential housing market. In 2007, we

proved we could develop this base as a

primary source of earnings growth for the

A RECORD YEAR

port of a new culture of accountability.

FOR SAFETY PERFORMANCE

LANDMARK DIVESTMENT

No overview of 2007 would be com-

PRECEDES STRATEGIC INVESTMENT

plete without an acknowledgment of our

PolyOne’s ﬁ nancial proﬁ le is stronger

outstanding safety performance record. I

than ever, thanks to a relentless determi-

am proud to report that we lowered our

nation to generate cash and reduce debt.

recordable injury rate to a record 1.14

Since the end of 2003, we have generated

incidents per 100 full-time employees ver-

approximately $600 million in cash.

sus 1.33 in 2006. To put this achievement

In July 2007, we reshaped our busi-

in context, working at PolyOne is safer

ness portfolio by divesting our 24 percent

than working at a library.

share in the OxyVinyls joint venture.

Functioning safely and responsibly is

With this single action, we realized two

a distinguishing characteristic of opera-

primar y objectives: We eliminated a

tionally excellent companies. PolyOne’s

major source of earnings volatility and

P OLYO NE CO RP OR ATI ON

VARN

100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P5

PolyOne’s customized engineering-

grade polymer compounds deliver

the heightened functionality required

for many electrical and electronic

applications. Our robust offering for

this target industry includes thermo-

plastic materials that meet the

European Union RoHS Directive.

we gained the liquidity to redeem the en-

sales growth over the past 10 years,

tire outstanding balance of our high-yield

largely on the strength of delivering in-

Strengthening Financial Profile
(Dollars in Millions)

Senior Notes due 2010.

novation, speed to market and superior

$800

Both Moody’s Investors Services and

customer service. It has a strong foothold

Fitch Ratings reacted favorably, with credit

in the specialized, high-growth industries

rating upgrades. Moreover, the elimination

we have targeted, including healthcare

of this debt gives us tremendous ﬂ exibility

and consumer.

$700

$600

$639

$500

$590

to accelerate our strategic investments.

Upon closing this deal in January

$400

At the end of 2007, our debt-to-EBITDA

2008, PolyOne gained a leading position in

leverage ratio was 2.5 times and our long-

the TPE industry, a $3.5 billion global seg-

term debt was $331 million, the lowest in

ment with above-average market growth

PolyOne’s history.

and proﬁ t potential.

With a fortiﬁ ed balance sheet, we

made a catalytic acquisition: GLS Corpora-

tion, a North American leader in specialty

thermoplastic elastomers (TPEs). GLS has

achieved double-digit compounded annual

$300

$200

$100

$331

2005

2006

2007

Total Long-term Debt

POLYONE CORPORATION

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100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P6

Soft-touch thermoplastic elastomers,

which PolyOne formulates, produces

and markets, are key components

of the personal electronic devices

that have become central to the lives

of countless consumers throughout

the world.

VARN

100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P7

from volume
to value

Developing high-value, customized solutions

Earning customer trust as a strategic partner

Providing specialized TPE offerings

MAKING OUR CASE TO CUSTOMERS

PolyOne’s commercial teams deploy an in-depth eco-

nomic value validation process that helps customers

optimize operations, improve productivity and increase

their proﬁ t margins. In addition to creating measurable

value for customers, this process helps deﬁ ne and quan-

tify – in real dollars – the value PolyOne delivers.

With a leading international appliance company,

we utilized an economic value analysis to quantify

value drivers such as speed to market, effective

inventory management and cost savings from process

optimization.

As a result, the customer has committed to expand

its supply position with PolyOne, resulting in new cross-

selling opportunities, new program applications, an ex-

tended period of exclusive supply and, most importantly,

a stronger relationship.

We are operating GLS as a global

In less than two years, 10 top execu-

business unit, and we are pleased that its

tives have joined PolyOne. The pedigrees

highly experienced management team will

of these champions include positions at

remain in place. The more I see of GLS, the

successful, widely respected organizations

more excited I am – talented and energized

in the chemical and plastics industries.

employees, superb technology, customer

These newcomers don’t just talk special-

focus and an excellent business model!

ization; they know how to implement it.

NEW LEADERSHIP DRIVES CULTURE CHANGE

They are winners who see PolyOne’s po-

tential, believe in it and want to be part

A new leadership style is in place

of the turnaround. Their additions comple-

at PolyOne, where discipline, urgency

ment an experienced group of PolyOne

and accountability are the hallmarks of a

veterans.

changed culture. A new and reinvigorated

With their inﬂ uence, we are bring-

senior management team is setting the

ing rigor to our business processes

tone at the top.

– how we price our offerings, how we

interact with our customers and how

we quantify the value we bring them.

Specialty Platform Operating Income
(% of Total*)

25%

20%

15%

10%

20%

2005

2006

2007

*Excludes Corporate and eliminations

POLYONE CORPORATION

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100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P8

from provider
to partner

Formulating a solution through teamwork

Helping customers get to market quickly

Quantifying the value; making customers

more competitive

THE POLYONE DIFFERENCE

A leading producer of high-quality laboratory research

products wanted to expand into a growing segment of

the pipette tip market. Conductive pipette tips are used

in laboratory and production settings, where precise

measurement and dispensing of ﬁ nite amounts of liquid

can be critical.

PolyOne sales and technical professionals teamed to

perform a rigorous needs analysis that resulted in the

development of a specialized compound with a unique mix

of properties, including processing ease, superior tough-

ness and repeatable performance. Applying our expertise,

we formulated a new electrically conductive compound

within our Stat-Tech™ family.

This PolyOne solution delivered real value as

measured by cycle time reduction, increased productivity,

scrap rate reduction and reduced time to market.

With these beneﬁ ts, the customer was able to reach

a new, growing market segment in a quick and cost-

effective manner.

We are making the right moves to

investment in strengthening and upgrading

differentiation, where we can leverage our

focus on our customers and bring them

our commercial resources. Since early

in-depth knowledge of polymers, formula-

innovative solutions.

2006, we have made approximately 130

tions and compounding as we pursue

Internally, we are maintaining a focus

net new hires in sales, marketing, and re-

attractive, high-growth markets.

on operational excellence, with programs

search and development. These new recruits

In the second half of 2007, we made

to strengthen our capabilities and contin-

are transforming the way we innovate,

more than 20 commercial launch decisions.

uously improve our performance. We see

bring our solutions to market and commu-

We track these launches to ensure they

opportunities to develop and implement

nicate the value to our customers.

contribute to our specialty business goals.

supply chain initiatives that will generate

Our people understand that we no

Our innovation pipeline is ﬁ lling, with

an estimated $50 million in cost savings

longer intend to be viewed as a purveyor

60 commercial launch decisions pending

within the next three years.

of plastic pellets. Rather, we are striving

in 2008. We are also setting a brisk pace

FRESH IDEAS, NEW OPPORTUNITIES

to improve the quality of our earnings by

in patent applications, another measure

delivering solutions that help our customers

of ingenuity. Our inventor y of patents

To expedite innovation and commer-

prosper and grow. The basis of competi-

pending has grown steadily over the past

cial excellence, we have made a sizable

tion is shifting from cost/commodity to

several years.

P OLYO NE CO RP OR ATI ON

VARN

100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P9

There is no more challenging

ﬁ eld than healthcare, a highly

competitive industry with constant

regulatory demands and supply

chain issues. Collaborating closely

with our healthcare customers,

we provide polymer solutions that

deliver quantiﬁ able beneﬁ ts and

create value and differentiation.

Focused market development work

provide value by inspiring conﬁ dence in

is creating opportunities for new applica-

the integrity of our materials and solutions

tions in target industries such as health-

– which helps our customers secure the

care, electrical and electronics, and new

trust of their customers. Thus, amid wide-

biomaterials. To maximize these oppor-

spread concern last year about the purity

tunities, we are training our global sales

of raw materials in consumer products,

force to effectively communicate and sell

we created our No Surprises Pledge SM: our

the value of the PolyOne solution. We used

promise to customers everywhere that

to ask, “What is the best product we can

PolyOne is committed to delivering safe,

offer?” Now, the question is, “How can we

environmentally sound solutions. This im-

provide more value to our customers?”

portant statement is another reﬂ ection of

We have many answers to that last

a new culture of accountability.

question. At the most critical level, we

Patents Pending

2005

2006

2007

POLYONE CORPORATION

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C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P10

At PolyOne facilities around the

world, we provide a full suite of

value-creating services for our

customers. Our experts analyze

performance criteria to develop

custom compounds, select

appropriate materials, conduct

color use audits and much more.

VARN

100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P11

from regional
to global

Expanding into attractive, growing markets

Providing on-site technical expertise

Bridging the gap between concept and production

BRINGING SOLUTIONS TO NEW GEOGRAPHIES

Plastics demand is surging in India, China and Eastern

Europe. Just as our steadily widening manufacturing

footprint enables close proximity to global customers

in these areas, so it also allows us to bring our value-

creating technical expertise to their doorsteps.

Our global network of specialized, state-of-the-art

color design centers offers customers a creative envi-

ronment where they can learn about color and polymer

technology and work with PolyOne to develop unique

solutions for new markets and applications. Customers

often visit these facilities to prototype products under

real manufacturing conditions.

Matching colors and providing products? We still do

those things – but we’ve gone way beyond the basics.

Revenues Outside the U.S.

(Dollars in Millions)

$972

$879

$803

2005

2006

2007

$1000

$900

$800

$700

$600

$500

THINKING GLOBALLY, ACTING LOCALLY

platform in China. This plant is our fourth

Belgium, and in Cergy, France, a suburb of

Our global customers need a supplier

that performs consistently and delivers

a full bundle of services and solutions

around the world. PolyOne is uniquely po-

sitioned to ﬁ ll this role, with an increasing

global footprint and the potential to cross-

sell a broad offering.

We are targeting regions such as

Asia and Eastern Europe where demand

for plastics is burgeoning. On December

31, 2007, we completed the acquisition

of the assets and operations of Ngai Hing

PlastChem Company Ltd., including a man-

ufacturing facility in the city of Dongguan

that provides us with a vinyl compounding

China-based manufacturing site. In the

Paris. These facilities, which focus on the

northern city of Tianjin, we opened our

needs of our customers, serve primarily the

third specialized color design center in

European packaging industry. They advance

China. Looking toward the vast Asian mar-

specialization by showcasing our expertise

ket beyond China, we began implement-

with color and polymer technology.

ing OEM account strategies in Korea and

Geographic expansion is not the only

Japan and driving specialization growth in

tenet of our globalization strategy. Our

India, where we have opened a business

newly formed global key accounts teams

development ofﬁ ce in Mumbai.

are targeting the most attractive global

In Europe, we dedicated our new color

customers as well as OEMs, where we see

concentrates plant in Kutno, Poland, which

signiﬁ cant opportunities to provide broad-

serves rapidly growing markets stretch-

based, higher-value solutions.

ing into Russia. Additionally, we opened

state-of-the-art color design centers at our

European headquar ters in Assesse,

POLYONE CORPORATION

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100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-P12

A COMMITMENT TO EXCELLENCE

From a baseline on-time delivery performance of 81 per-

cent at the beginning of 2006, PolyOne improved to

90 percent at year-end 2006 and achieved a 95 percent

level in the fourth quarter of 2007. No single action drove

this dramatic advance. It came from a combination of ac-

tion items and process improvements across PolyOne and

across our supplier and customer operations.

Just as signiﬁ cant were regular measurement and

reporting of results and accountability for performance

improvement at every level of PolyOne. We made a com-

mitment to improve for the beneﬁ t of our customers – and

we delivered.

from ordinary
to outstanding

North American On-time Delivery
(% Performance)

100%

95%

90%

85%

80%

75%

95%

90%

81%

Q1 2006

Q4 2006

Q4 2007

OUR FOUR-YEAR HORIZON

Our specialty businesses are deliv-

Finally, we have renewed ﬁ nancial

Our strategic plan lays out ﬁ ve key

performance indicators and correspond-

ing objectives that we intend to reach by

ering demonstrably improved results; we

prowess to accelerate strategic growth

anticipate that this platform will become

both organically and through acquisition,

PolyOne’s principal earnings contributor

and to drive earnings. We project that

2011. Our management team is commit-

by 2011.

our ﬁ nancial position will continue to

ted to achieving these objectives. We will

use the following indicators to measure

our success:

Specialty business gross margin of
25 percent to 35 percent
40 percent of revenues outside the
United States
Vitality index of 25 percent of rev-
enues from solutions developed

within the past ﬁ ve years
A double-digit compound annual
operating income growth rate
Pretax return on invested capital in
excess of 15 percent

We expect that as we realize these

objectives, we will see signiﬁ cant improve-

Our Distribution business is robust,

strengthen throughout the 2008–2011

with opportunities in attractive industries

period covered by our strategic plan.

such as healthcare and in key growth mar-

Our new management team is justi-

kets such as Canada and Mexico, where

ﬁ ably excited about our prospects, and

we plan to accelerate expansion.

we believe we have a compelling story.

Our Vinyl business is instilling opera-

The success behind this story lies with

tional excellence processes throughout

our employees, who have embraced our

its operations, expanding its position in

vision, aligned with our goals, and unceas-

China, and working to innovate new prod-

ingly demanded the best of themselves

ucts and materials that diversify our mix

and their peers. We are indebted as well

and reduce our exposure to the building

to our customers who are, quite simply,

and construction industry. Let there be no

the reason PolyOne is here.

doubt: We have the world’s premier vinyl

I also want to acknowledge our Board

brand, and we are strengthening its foun-

of Directors for its steadfast support. In

dation for meaningful growth and proﬁ t-

closing, I thank you, our shareholders, for

ability when housing demand rebounds, as

the trust you have shown in us. We value

ment in the quality and sustainability of our

we know it will.

it, and will continue transforming PolyOne

earnings mix and sizable earnings growth,

which will drive a marked increase in long-

term shareholder value creation.

As demand for our solutions and in-

to produce the rewards you deserve.

depth knowledge grows throughout the

world, we are expanding our global reach

aggressively but prudently. Our investment

OUR MESSAGE TO INVESTORS

in commercial talent is resulting in a revi-

Stephen D. Newlin

We have shaped a highly credible

talized innovation pipeline, the targeting

Chairman, President and Chief Executive Ofﬁ cer

of attractive, high-growth industries and a

March 17, 2008

transition to value-based selling.

value proposition.

1 2

P OLYO NE CO RP OR ATI ON

VARN

100

United States
Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission file number 1-16091

PolyOne Corporation

(Exact name of registrant as specified in its charter)

Ohio

(State or other jurisdiction of

incorporation or organization)

33587 Walker Road,
Avon Lake, Ohio
(Address of principal executive offices)

34-1730488

(IRS Employer Identification No.)

44012
(Zip Code)

Registrant’s telephone number, including area code

(440) 930-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, par value $.01 per share

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes n

No ¥

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes n

No ¥

(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Indicate by check mark whether the registrant:
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
the past
90 days. Yes ¥

to such filing requirements for

No n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer n

Accelerated filer ¥

Non-accelerated filer n

Smaller reporting company n

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

No ¥

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates on June 29, 2007,
determined using a per share closing price on that date of $7.19, as quoted on the New York Stock Exchange, was
$623,115,000.

The number of shares of common stock outstanding as of February 27, 2008 was 93,157,719.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrant’s definitive
Proxy Statement with respect to the 2008 Annual Meeting of Shareholders.

P O L Y O N E C O R P O R A T I O N

PART I

ITEM 1. BUSINESS

Business Overview

PolyOne Corporation is a leading global provider of specialized
polymer materials, services and solutions with operations in ther-
moplastic compounds, specialty polymer formulations, color and
additive systems, thermoplastic resin distribution and specialty
polyvinyl chloride (PVC) vinyl resins, with equity investments in
manufacturers of caustic soda and chlorine, and PVC compound
products and in a formulator of polyurethane compounds. When
used in this Annual Report on Form 10-K, the terms “we,” “us,”
“our” and the “Company” mean PolyOne Corporation and its
subsidiaries.

We are incorporated in Ohio and our headquarters are in Avon
Lake, Ohio. We employ approximately 4,800 people and have 56
manufacturing sites and 13 distribution facilities in North America,
Europe, Asia and Australia, and joint ventures in North America and
South America. We sell more than 35,000 different specialty and
general purpose products to over 11,000 customers on 6 conti-
nents. In 2007, we had sales of $2.6 billion, 37% of which were to
customers outside the United States.

We provide value to our customers through our ability to link our
knowledge of polymers and formulation technology with our manu-
facturing and supply chain processes to provide an essential link
between large chemical producers (our raw material suppliers) and
designers, assemblers and processors of plastics (our customers).
We believe that large chemical producers are increasingly outsourc-
ing less-than-railcar business; polymer and additive producers need
multiple channels to market; processors continue to outsource
compounding; and international companies need suppliers with
global reach. Our goal is to provide our customers with specialized
material and service solutions through our global reach and product
platforms, low-cost manufacturing operations, a fully integrated
information technology network, broad market knowledge and raw
material procurement leverage. Our end markets are primarily in the
building materials, wire and cable, automotive, durable goods,
packaging, electrical and electronics, medical and telecommunica-
tions markets, as well as many industrial applications.

PolyOne was formed on August 31, 2000 from the consolida-
tion of The Geon Company (Geon) and M.A. Hanna (Hanna). Geon’s
roots date back to 1927 when BFGoodrich scientist Waldo Semon
produced the first usable vinyl polymer. In 1948, BFGoodrich cre-
ated a vinyl plastic division that was subsequently spun off through
a public offering in 1993, creating Geon, a separate publicly-held
company. Hanna was formed in 1885 as a privately-held company
and became publicly-held in 1927. In the mid-1980s, Hanna began
to divest its historic mining and shipping businesses to focus on
polymers. Hanna purchased its first polymer company in 1986 and
completed its 26th polymer company acquisition in 2000.

Recent Developments

Sale of businesses and discontinued operations

In July 2007, we sold our 24% interest in Oxy Vinyls LP (OxyVinyls) for
$261 million in cash. During the second quarter of 2007 an impair-
ment of $14.8 million was recorded on our investment in OxyVinyls
due to an other than temporar y decline in value. This sale resulted
in the reversal of an associated deferred tax liability, which reduced
tax expense by $31.5 million for the year ended December 31,
2007. Proceeds from the sale were used for the redemption of the
balance of our 10.625% senior notes as well as for the reduction of
borrowings under short-term facilities. The redemption of the senior
notes resulted in debt redemption premium costs and the write-off
of unamor tized debt issuance fees for 2007 of $15.6 million
($10.1 million after tax).

Purchase of businesses

In January 2008, we acquired 100% of the outstanding capital stock
of GLS Corporation (GLS), a global provider of specialty thermoplas-
tic elastomer compounds for consumer, packaging and medical
applications.

In December 2007, we acquired the vinyl compounding busi-
ness and assets of Ngai Hing PlastChem Company Ltd. (NHPC), a
subsidiary of Ngai Hing Hong Company Limited, a publicly-held
company listed on the Hong Kong Stock Exchange for $3.3 million,
net of cash received.

In July 2007, in a transaction related to the sale of our interest
in OxyVinyls, we purchased the remaining 10% minority interest in
Powder Blends, LP, for $11 million in cash.

Polymer Industry Overview

Polymers are a class of organic materials that are generally pro-
duced by converting natural gas or crude oil derivatives into mono-
mers, such as ethylene, propylene, vinyl chloride and styrene. These
monomers are then polymerized into chains called polymers, or
plastic resin, in its most basic form. Large petrochemical compa-
nies, including some in the petroleum industry, produce a majority
of the monomers and base resins because they have direct access
to the raw materials needed for production. Monomers make up the
majority of the variable cost of manufacturing the base resin. As a
result, the cost of a base resin tends to move in tandem with the
industry market prices for monomers and the cost of raw materials
and energy used during production. Resin selling prices can move in
tandem with costs, but are largely driven by supply and demand
balances. Through our equity interest in SunBelt Chlor-Alkali Part-
nership (SunBelt), we realize a portion of the economic benefits of a
base resin producer for PVC resin, one of our major raw materials.

Thermoplastic polymers make up a substantial majority of the
resin market and are characterized by their ability to be reshaped
repeatedly into new forms after heat and pressure are applied.
Thermoplastics offer versatility and a wide range of applications.
The major types of thermoplastics include polyethylene, polyvinyl
chloride, polypropylene, polystyrene, polyester and a range of

P O L Y O N E C O R P O R A T I O N

specialized engineering resins. Each type of thermoplastic has
unique qualities and characteristics that make it appropriate for
use in a particular product.

Thermoplastic resins are found in a number of end-use prod-
ucts and in a variety of markets, including packaging, building and
construction, wire and cable, automotive, medical, furniture and
furnishings, durable goods, institutional products, electrical and
electronics, adhesives, inks and coatings. Each type of thermoplas-
tic resin has unique characteristics (such as flexibility, strength or
durability) suitable for use in a particular end-use application. The
packaging industry, the largest consumer of plastics, requires
plastics that help keep food fresh and free of contamination while
providing a variety of options for product display, and offering
advantages in terms of weight and user-friendliness. In the building
and construction industry, plastic provides an economical and
energy efficient replacement for other traditional materials in piping
applications, siding, flooring, insulation, windows and doors, as well
as structural and interior or decorative uses. In the wire and cable
industry, thermoplastics serve to protect by providing electrical
insulation, flame resistance, durability, water resistance, and color
coding to wire coatings and connectors. In the automotive industry,
plastic has proved to be durable, lightweight and corrosion resistant
while offering fuel savings, design flexibility and high performance.
In the medical industry, plastics help save lives by safely providing a
range of transparent and opaque thermoplastics that are used for a
vast array of devices including blood and intravenous bags, medical
tubing, masks, lead replacement for radiation shielding, clamps
and connectors to bed frames, curtains and sheeting, and elec-
tronic enclosures. In the electronics industry, plastic enclosures
and connectors not only enhance safety through electrical insula-
tion, but thermally and electrically conductive plastics provide heat
transferring, cooling, antistatic, electostatic discharge, and elec-
tromagnetic shielding per formance for critical applications includ-
ing integrated circuit chip packaging.

Various additives can be combined with a base resin to provide
it with greater versatility and per formance. These combinations are
known as plastic compounds. Plastic compounds have advantages
over metals, wood, rubber and other traditional materials, which
have resulted in the replacement of these materials across a wide
spectrum of applications that range from automobile parts to con-
struction materials. Plastic compounds offer advantages compared
to traditional materials that include processability, weight reduction,
chemical resistance, flame retardance and lower cost. Plastics
have a reputation for durability, aesthetics, ease of handling and
recyclability.

PolyOne Segments

We operate within four reportable segments: Vinyl Business; Inter-
national Color and Engineered Materials; PolyOne Distribution; and
Resin and Intermediates. All Other is comprised of the remaining
operating segments and includes North American Color and Addi-
tives, North American Engineered Materials, Producer Services and
Specialty Inks and Polymer Systems operating segments. For more
information about our segments, see Note R to the Consolidated

Financial Statements, which is incorporated by reference into this
Item 1.

Vinyl Business:

Our Vinyl Business operating segment is a global leader offering an
array of products and services for vinyl coating, molding and extru-
sion processors. Our product offerings include: rigid, flexible and
dry blend vinyl compounds; industry-leading dispersion, blending
and specialty suspension grade vinyl resins; and specialty coating
materials based largely on vinyl. These products are sold to a wide
variety of manufacturers of plastic parts and consumer-oriented
products. We also offer a wide range of services to the customer
base utilizing these products to meet the ever changing needs of our
multi-market customer base. These services include materials test-
ing and component analysis, custom compound development, col-
orant and additive services, design assistance, structural analyses,
process simulations and extruder screw design.

Much of the revenue and income for the Vinyl Business is
generated in North America. However, production and sales in Asia
and Europe constitute a minor but growing portion of this segment.
In addition, PolyOne owns 50% of a joint venture producing and
marketing vinyl compounds in Latin America.

Vinyl is one of the most widely used plastics, utilized in a wide
range of applications in building and construction, wire and cable,
consumer and recreation markets, automotive, packaging and
healthcare. Vinyl resin can be combined with a broad range of
additives, resulting in per formance versatility, particularly when fire
resistance, chemical resistance or weatherability is required. We
believe we are well-positioned to meet the stringent quality, service
and innovation requirements of this diverse and highly competitive
marketplace.

Our Vinyl Business segment had total sales of $933.0 million,
of which sales to external customers were $833.0 million, with
operating income of $50.8 million in 2007 and total assets of
$467.3 million as of December 31, 2007.

International Color and Engineered Materials:

Our International Color and Engineered Materials operating seg-
ment combines the strong regional heritage of our color and additive
masterbatches and engineered materials operations to create glo-
bal capabilities with plants, sales and service facilities located
throughout Europe and Asia.

We operate 13 facilities in Europe (Belgium, Denmark, France,
Germany, Hungary, Poland, Spain, Sweden and Turkey) and 5 facil-
ities in Asia (China, Singapore and Thailand).

Working in conjunction with our North American Color and
Additives and North American Engineered Materials operating seg-
ments, we provide solutions that meet our international customers’
demands for both global and local manufacturing, service and
technical support.

Our International Color and Engineered Materials segment had
sales to external customers of $610.9 million, with operating

P O L Y O N E C O R P O R A T I O N

income of $26.6 million in 2007 and total assets of $424.4 million
as of December 31, 2007.

PolyOne Distribution:

Our PolyOne Distribution operating segment distributes more than
3,500 grades of engineering and commodity grade resins, including
PolyOne-produced compounds, to the North American market.
These products are sold to over 5,000 custom injection molders
and extruders who, in turn, convert them into plastic parts that are
sold to end-users in a wide range of industries. Representing over
20 major suppliers, we offer our customers a broad product port-
folio, just-in-time delivery from multiple stocking locations, and local
technical support.

Our PolyOne Distribution segment had total sales of $744.3 mil-
lion, of which sales to external customers were $739.6 million, with
operating income of $22.1 million in 2007 and total assets of
$175.2 million as of December 31, 2007.

Resin and Intermediates:

We report the results of our Resin and Intermediates operating
segment on the equity method. This segment consists almost
entirely of our 50% equity interest in SunBelt and our
former
24% equity interest in OxyVinyls, through its disposition date of
July 6, 2007. SunBelt, a producer of chlorine and caustic soda, is a
partnership with Olin Corporation. OxyVinyls, a producer of PVC
resins, vinyl chloride monomer (VCM), and chlorine and caustic
soda, was a partnership with Occidental Chemical Corporation. In
2007, SunBelt had production capacity of approximately 320 thou-
sand tons of chlorine and 358 thousand tons of caustic soda. Most
of the chlorine manufactured by SunBelt is consumed by OxyVinyls
to produce PVC resin. Caustic soda is sold on the merchant market
to customers in the pulp and paper, chemical, construction and
consumer products industries.

Our Resin and Intermediates segment had operating income of
$34.8 million in 2007, not including a $14.8 million impairment
charge related to the disposition of our 24% interest in OxyVinyls,
and had total assets of $15.6 million as of December 31, 2007. We
also received $35.0 million of cash from dividends and distributions
from our Resin and Intermediates segment equity affiliates in
2007, in addition to net proceeds of $261 million from the sale
of our interest in OxyVinyls.

All Other:

All Other includes our North American Color and Additives, North
American Engineered Materials, Producer Services and Specialty
Inks and Polymer Systems operating segments.

pre-colored base resins, our colorants help our customers achieve a
wide array of specialized colors and effects that are targeted at the
demands of today’s highly design-oriented consumer and industrial
end markets. Our additive masterbatches encompass a wide variety
of performance enhancing characteristics and are commonly cate-
gorized by the function that they per form, such as UV stabilization,
anti-static, chemical blowing, antioxidant and lubricant, and pro-
cessing enhancement.

Our colorant and additives masterbatches are used in most
including injection molding,
plastics manufacturing processes,
extrusion, sheet, film, rotational molding and blow molding through-
out the plastics industry, particularly in the packaging, automotive,
consumer, outdoor decking, pipe and wire and cable markets. They
are also incorporated into such end-use products as stadium seat-
ing, toys, housewares, vinyl siding, pipe, food packaging and med-
ical packaging.

Our North American Engineered Materials operating segment is
a leading provider of custom plastic compounding services and
solutions for processors of thermoplastic materials across a wide
variety of markets and end-use applications including applications
currently employing traditional materials such as metal. Our product
portfolio, one of the broadest in our industry, includes standard and
custom formulated high-per formance polymer compounds that we
manufacture using a full range of thermoplastic compounds and
elastomers, which are then combined with advanced polymer addi-
tive, reinforcement, filler, colorant and biomaterial technologies.

Our depth of compounding expertise helps us expand the
per formance range and structural properties of traditional engi-
neering-grade thermoplastic resins that meet our customers’
unique per formance requirements. Our product development and
application reach is further enhanced by the capabilities of our
North American Engineered Materials Solutions Center, which pro-
duces and evaluates prototype and sample parts to help assess
end-use per formance and guide product development. Our manu-
facturing capabilities, which include a facility located in Avon Lake,
Ohio, are targeted at meeting our customers’ demand for speed,
flexibility and critical quality.

Our Producer Services operating segment offers custom com-
pounding services to resin producers and processors that design
and develop their own compound recipes. We also offer a complete
product line of custom black masterbatch products for use in the
pressure pipe industry. Customers often require high quality, cost
effective and confidential services. As a strategic and integrated
supply chain partner, Producer Services offers resin producers a
way to develop custom products for niche markets by using our
compounding expertise and multiple manufacturing platforms.

Our North American Color and Additives operating segment is a
leading provider of specialized colorants and additive concentrates
that offers an innovative array of colors, special effects and per-
formance-enhancing and eco-friendly solutions. Our color master-
batches contain a high concentration of color pigments and/or
additives that are dispersed in a polymer carrier medium and are
sold in pellet, liquid, flake or powder form. When combined with non

Our Specialty Inks and Polymer Systems operating segment
provides custom-formulated liquid systems that meet a variety of
customer needs and chemistries, including vinyl, natural rubber and
latex, polyurethane and silicone. Our products and services are
designed to meet the specific requirements of our customers’
applications by providing unique solutions to their market needs.
Products also include proprietar y fabric screen-printing inks,

P O L Y O N E C O R P O R A T I O N

latexes, specialty additives and colorants. Specialty Inks and Poly-
mer Systems serves diversified markets that include recreational
and athletic apparel, construction, filtration, outdoor furniture and
healthcare. We also have a 50% interest in BayOne, a joint venture
between PolyOne and Bayer Corporation, which sells polyurethane
systems into many of the same markets.

All Other had total sales of $487.8 million, of which sales to
external customers were $459.2 million, with operating income of
$10.0 million in 2007 and total assets of $296.5 million as of
December 31, 2007.

Competition

The production of compounded plastics and the manufacture of
custom and proprietary formulated color and additives systems for
the plastics industry are highly competitive. Competition is based
on speed, delivery, service, per formance, product innovation, prod-
uct recognition, quality and price. The relative importance of these
factors varies among our products and services. We believe that we
are the largest independent compounder of plastics and producer of
custom and proprietar y formulated color and additive masterbatch
systems in the United States and Europe, with a growing presence
in Asia. Our competitors range from large international companies
with broad product offerings to local
independent custom com-
pounders whose focus is a specific market niche or product
offering.

The distribution of polymer resin is also highly competitive.
Speed, delivery, service, brand recognition, quality and price are the
principal factors affecting competition. In less-than-truckload ther-
moplastic resin and compound distribution, we believe that we are
the second largest independent thermoplastic resin distributor in
North America. We compete against other national independent
resin distributors in North America, along with other regional dis-
tributors. Growth in the thermoplastic resin and compound distri-
bution market is directly correlated with growth in the base polymer
resins market.

We believe that the strength of our company name and repu-
tation, the broad range of product offerings from our suppliers and
our speed and responsiveness, coupled with the quality of products
and flexibility of our distribution network, allow us to compete
effectively.

Raw Materials

The primary raw materials used by our manufacturing operations
are PVC resin, VCM, polyolefin and other thermoplastic resins,
plasticizers, inorganic and organic pigments, all of which are in
adequate supply. We have long-term supply contracts with OxyVinyls
under which the majority of our PVC resin and all of our VCM is
supplied. These contracts will expire in 2013, although they contain
two five-year renewal provisions that are at our option. We believe
these contracts should assure the availability of adequate amounts
of PVC resin and VCM. We also believe that the pricing under these
contracts provides PVC resins and VCM to us at a competitive cost.

Patents and Trademarks

We own and maintain a large number of U.S. and foreign patents
and trademarks that contribute to our competitiveness in the mar-
kets we serve because they protect our inventions and product
names against infringement by others. Patents vary in duration up
to 13 years, and trademarks have an indefinite life based upon
continued use. While we view our patents and trademarks to be
valuable because of the broad scope of our products and services
and brand recognition we enjoy, we do not believe that the loss or
expiration of any single patent or trademark would have a material
adverse effect on our results of operations, financial position or the
continuation of our business. Nevertheless, we have implemented
management processes designed to protect our inventions and
trademarks.

Seasonality and Backlog

Sales of our products and services are slightly seasonal as demand
is generally slower in the first and fourth calendar quarters of the
year. Because of the nature of our business, we do not believe that
our backlog is a meaningful indicator of the level of our present or
future business.

Working Capital Practices

The nature of our business does not require us to carry significant
amounts of inventories to meet the delivery requirements for our
products or services or assure ourselves of a continuous allotment
of goods from suppliers. Our products are generally manufactured
with a short turnaround time, and the scheduling of manufacturing
activities from customer orders generally includes enough lead time
to assure delivery of an adequate supply of raw materials. We offer
payment terms to our customers that are competitive. We generally
allow our customers to return merchandise if pre-agreed quality
standards or specifications are not met; however, we employ quality
assurance practices that seek to minimize customer returns.

Significant Customers

No customer accounts for more than 3% of our consolidated rev-
enues, and neither we nor any of our operating segments would
suffer a material adverse effect if we were to lose any single
customer.

Research and Development

We have substantial technology development capabilities. Our
efforts are largely devoted to developing new product formulations
to satisfy defined market needs, providing quality technical services
to evaluate alternative raw materials, assuring the continued suc-
cess of our products for customer applications, providing technol-
ogy to improve our products, processes and applications, and
providing support to our manufacturing plants for cost reduction,
productivity and quality improvement programs. We operate
research and development centers that support our commercial
development activities and manufacturing operations. These facil-
ities are equipped with state-of-the-ar t analytical, synthesis,

P O L Y O N E C O R P O R A T I O N

polymer characterization and testing equipment, along with pilot
plants and polymer compounding operations that simulate specific
production processes that allow us to rapidly translate new tech-
nologies into new products.

Our investment in product research and development was
$21.6 million in 2007, $20.3 million in 2006 and $19.5 million
in 2005. In 2008, we expect our investment in research and
development
resources to
to increase as we deploy greater
increase and accelerate material and service innovations.

Methods of Distribution

We sell products primarily through direct sales personnel, distrib-
utors, including our PolyOne Distribution segment, and commis-
sioned sales agents. We primarily use truck carriers to transpor t our
products to customers, although some customers pick up product
at our operating facilities or warehouses. We also ship some of our
manufactured products to customers by railroad cars.

Employees

As of February 27, 2008, we employed approximately 4,800 people.
Approximately 90 employees were represented by labor unions
under collective bargaining agreements that expire on May 31,
2008 (4 employees), July 31, 2010 (15 employees), October 31,
2010 (26 employees), November 30, 2010 (16 employees) and
January 31, 2011 (29 employees) and approximately another
103 employees are currently in negotiations to enter into a collec-
tive bargaining agreement. We believe that relations with our
employees are good, and we do not anticipate significant operating
issues to occur as a result of current negotiations or when we
renegotiate collective bargaining agreements as they expire.

Environmental, Health and Safety

We are subject to various environmental laws and regulations that
apply to the production, use and sale of chemicals, emissions into
the air, discharges into waterways and other releases of materials
into the environment and the generation, handling, storage, trans-
portation, treatment and disposal of waste material. We endeavor
to ensure the safe and lawful operation of our facilities in the
manufacture and distribution of products, and we believe we are
in material compliance with all applicable laws and regulations.

We maintain a disciplined environmental and occupational
safety and health compliance program and conduct periodic internal
and external regulatory audits at our facilities to identify and cat-
egorize potential environmental exposures, including compliance
issues and any actions that may be required to address them. This
effort can result in process or operational modifications, the instal-
lation of pollution control devices or cleaning up grounds or facil-
ities. We believe that we are in material compliance with all
applicable requirements.

Based on September 2007 court rulings (see Note N to the
Consolidated Financial Statements) in the case of Westlake Vinyls,
Inc. v. Goodrich Corporation, et al. and a settlement agreement

related to the former Goodrich Corporation (now Westlake Vinyls,
Inc.) Calvert City facility, we recorded a charge during 2007 of
$15.6 million for past remediation costs payable to Goodrich Cor-
poration. We also adjusted our environmental reserve for future
remediation costs, a portion of which already related to the Calvert
City site, resulting in an additional charge of $28.8 million in 2007.

We incurred total environmental expense of $48.8 million in
2007, $2.5 million in 2006 and $0.2 million in 2005. Our environ-
mental expenses in 2007 were largely driven by the charges stem-
ming from the aforementioned Calvert City settlement and
subsequent reserve adjustment. Environmental expense is pre-
sented net of insurance recoveries of $8.1 million in 2006 and
$2.2 million in 2005. There were no insurance recoveries in 2007.
The insurance recoveries all relate to inactive or formerly owned
sites.

We expect environmental remediation expenditures will be
approximately $14 million in 2008 and $6 million to $8 million
per year thereafter.

We are strongly committed to safety as evidenced by the fact
that our injury incidence rate was 1.14 per 100 full-time workers per
year in 2007, an improvement from 1.33 in 2006. The 2006
average injury incidence rate for our NAICS Code (326 Plastics
and Rubber Products Manufacturing) was 6.8.

We believe that compliance with all current governmental reg-
ulations will not have a material adverse effect on our results of
operations or financial condition. The risk of additional costs and
liabilities, however, is inherent in certain plant operations and
certain products produced at these plants, as is the case with
other companies in the plastics industry. Therefore, we may incur
additional costs or liabilities in the future. Other developments,
such as increasingly strict environmental, safety and health laws,
regulations and related enforcement policies, discovery of unknown
conditions, and claims for damages to property, persons or natural
resources resulting from plant emissions or products could also
result in additional costs or liabilities.

A number of foreign countries and domestic communities have
enacted, or are considering enacting, laws and regulations concern-
ing the use and disposal of plastic materials. Widespread adoption
of these laws and regulations, along with public perception, may
have an adverse impact on sales of plastic materials. Although
many of our major markets are in durable, longer-life applications
that could reduce the impact of these kinds of environmental reg-
ulations, more stringent regulation of the use and disposal of
plastics may have an adverse effect on our business.

The European business community (EU) has adopted REACH, a
legislative act to cover Registration, Evaluation, Authorization and
Restriction of Chemicals. The goal of this legislation, which became
effective in June 2007, is to minimize risk to human health and to
the environment. We have a global team of experts to provide our
customers with compliance solutions to adapt to these regulations.
As these regulations evolve, we will endeavor to remain in compli-
ance with REACH.

P O L Y O N E C O R P O R A T I O N

We have been notified by federal and state environmental
agencies and by private parties that we may be a potentially respon-
sible party (PRP) in connection with the investigation and remedia-
tion of a number of environmental waste disposal sites. While
government agencies assert that PRPs are jointly and severally
liable at these sites, in our experience, interim and final allocations
of liability costs are generally made based on the relative contribu-
tion of waste. However, even when allocations of costs based on
relative contribution of waste have been made, we cannot assure
that our allocation will not increase if other PRPs do not pay their
allocated share of these costs.

We also conduct investigations and remediation at several of
our active and inactive facilities and have assumed responsibility for
the resulting environmental liabilities from operations at sites for-
merly owned or operated by us or our predecessors. We believe that
our potential continuing liability at these sites will not have a
material adverse effect on our results of operations or financial
position. In addition, we voluntarily initiate corrective and preventive
environmental projects at our facilities. Based on current informa-
tion and estimates prepared by our environmental engineers and
consultants, we had reserves on our December 31, 2007 Consol-
idated Balance Sheet totaling $83.8 million to cover probable future
environmental expenditures related to previously contaminated
sites. This figure represents management’s best estimate of costs
for probable remediation, based upon the information and technol-
ogy currently available and management’s view of the most likely
remedy.

Depending upon the results of future testing, the ultimate
remediation alternatives undertaken, changes in regulations,
new information, newly discovered conditions and other factors,
it is reasonably possible that we could incur additional costs in
excess of the amount accrued at December 31, 2007. Such costs,
if any, cannot be currently estimated. We may revise our estimate of
this liability as new regulations or technologies are developed or
additional information is obtained.

International Operations

Our international operations are subject to a variety of risks, includ-
ing currency fluctuations and devaluations, exchange controls, cur-
rency restrictions and changes in local economic conditions. While
the impact of these risks is difficult to predict, any one or more of
them could adversely affect our future operations. For more infor-
mation about our international operations, see Note R to the Con-
solidated Financial Statements, which is incorporated by reference
into this Item 1.

Available Information

file or furnish them to the SEC. These reports are also available on
the SEC’s website at www.sec.gov.

ITEM 1A. RISK FACTORS

The following are certain risk factors that could affect our business,
results of operations and financial condition. These risk factors
should be considered along with the forward-looking statements
contained in this Annual Report on Form 10-K because these
factors could cause our actual results or financial condition to
differ materially from those projected in forward-looking state-
ments. The risks that are discussed below are not the only ones
we face. If any of the following risks occur, our business, results of
operations or financial condition could be negatively affected.

In 2006, we developed an enterprise risk management process
to manage risks we face in a holistic and integrated approach. The
purpose of this process is to manage risks that can prevent us from
achieving our strategic, operational and financial goals. It is impor-
tant to understand that this process is designed to manage risks
and not to eliminate risks. This risk management process is a
component of our strategic planning process and as such, is
reviewed at regular intervals with our Board of Directors and Audit
Committee.

Demand for and supply of our products and services may be
adversely affected by several factors, some of which we cannot
predict or control, that could adversely affect our results of
operations.

Several factors may affect the demand for and supply of our prod-
ucts and services, including:

(cid:129) economic downturns in the significant end markets that we

serve;

(cid:129) product obsolescence, technological changes that unfavor-
ably alter the value / cost proposition of our products and
services;

(cid:129) competition from existing and unforeseen polymer and non-

polymer based products;

(cid:129) declines in general economic conditions or reductions in
industrial production growth rates, both domestically and
globally, which could impact our customers ability to pay
amounts owed to us;

(cid:129) changes in environmental regulations that would limit our
ability to sell our products and services in specific markets;
and

Our Internet address is www.polyone.com. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 are available, free of charge, on our website or upon written
request, as soon as reasonably practicable after we electronically

(cid:129) inability to obtain raw materials or supply products to cus-
tomers due to factors such as supplier work stoppages,
supply shortages, plant outages or regulatory changes that
may limit or prohibit overland transpor tation of certain haz-
ardous materials and exogenous factors,
like severe
weather.

P O L Y O N E C O R P O R A T I O N

If any of these factors occur, the demand for and supply of our
products and services could suffer, which would adversely affect
our results of operations.

Our manufacturing operations are subject to hazards and other
risks associated with polymer production and the related stor-
age and transportation of raw materials, products and wastes.

Our manufacturing operations are subject to the usual hazards and
risks associated with polymer production and the related storage
and transpor tation of raw materials, products and wastes. These
hazards and risks include, but are not limited to:

(cid:129) explosions, fires, inclement weather and natural disasters;

(cid:129) mechanical failure resulting in protracted or short duration

unscheduled downtime;

(cid:129) regulatory changes that affect or limit the transpor tation of

raw materials;

(cid:129) inability to obtain or maintain any required licenses or

permits;

(cid:129) interruptions and environmental hazards such as chemical
spills, discharges or releases of toxic or hazardous sub-
stances or gases into the environment or workplace; and

(cid:129) storage tank leaks or other issues resulting from remedial

activities.

The occurrence of any of these operating problems at our
facilities may have a material adverse effect on the productivity
and profitability of a particular manufacturing facility or on our
operations as a whole, during and after the period of these oper-
ating difficulties. These operating problems may also cause per-
sonal injury and loss of life, severe damage to or destruction of
property and equipment and environmental damage. We are subject
to present and potential future claims with respect to workplace
exposure, workers’ compensation and other matters. Although we
maintain property and casualty insurance of the types and in the
amounts that we believe are customary for the industry, we are not
fully insured against all potential hazards that are incident to our
business.

Extensive environmental, health and safety laws and regula-
tions impact our operations and assets, and compliance with
these regulations could adversely affect our results of
operations.

Our operations on and ownership of real property are subject to
extensive environmental, health and safety laws and regulations at
the national, state and local governmental levels. The nature of our
business exposes us to risks of liability under these laws and
regulations due to the production, storage, transpor tation, recycling
or disposal and/or sale of materials that can cause contamination
or personal
injury if they are released into the environment or
workplace. Environmental laws may have a significant effect on
the costs of these activities involving raw materials, finished prod-
ucts and wastes. We may incur substantial costs, including fines,

damages, criminal or civil sanctions, remediation costs, or experi-
ence interruptions in our operations for violations of these laws.

Also, federal and state environmental statutes impose strict,
and under some circumstances, joint and several liability for the
cost of investigations and remedial actions on any company that
generated the waste, arranged for disposal of the waste, trans-
ported the waste to the disposal site or selected the disposal site,
as well as on the owners and operators of these sites. Any or all of
the responsible parties may be required to bear all of the costs of
clean up, regardless of fault or legality of the waste disposal or
ownership of the site, and may also be subject to liability for natural
resource damages. We have been notified by federal and state
environmental agencies and private parties that we may be a
potentially responsible party in connection with several sites. We
may incur substantial costs for some of these sites. It is possible
that we will be identified as a potentially responsible party at more
sites in the future, which could result in our being assessed sub-
stantial investigation or cleanup costs.

The European business community has adopted REACH, a
legislative act to cover Registration, Evaluation, Authorization and
Restriction of Chemicals. The goal of this legislation, which became
effective in June 2007, is to minimize risk to human health and to
the environment. We have a global team of experts to provide our
customers with compliance solutions to adapt to these regulations.
As these regulations evolve, we will endeavor to remain in compli-
ance with REACH.

We also conduct investigations and remediation at some of our
active and inactive facilities, and have assumed responsibility for
liabilities based on operations at sites formerly
environmental
owned or operated by our predecessors or by us.

We accrue costs for environmental matters that have been
identified when it is probable that these costs will be required and
when they can be reasonably estimated. However, accruals for
estimated costs, including, among other things, the ranges asso-
ciated with our accruals for future environmental compliance and
remediation, may be too low or we may not be able to quantify the
potential costs. We may be subject to additional environmental
liabilities or potential liabilities that have not been identified. We
expect that we will continue to be subject to increasingly stringent
environmental, health and safety laws and regulations. We antici-
pate that compliance with these laws and regulations will continue
to require capital expenditures and operating costs, which could
adversely affect our results of operations or financial condition.

Because our operations are conducted worldwide, they are
inherently affected by risk.

As noted above in Item 1. “Business,” we have extensive operations
outside of the United States. Revenue from these operations (prin-
cipally from Canada, Mexico, Europe and Asia) was 37% in 2007,
34% in 2006 and 33% in 2005 of our total revenue during these
periods. Long-lived assets of our foreign operations represented
34% in 2007, 32% in 2006 and 31% in 2005 of our total long-lived
assets.

P O L Y O N E C O R P O R A T I O N

International operations are subject to risks, which include, but

not limited to, the following:

Our results of operations may be adversely affected by the
results of operations of Sunbelt.

(cid:129) changes in local government regulations and policies, includ-
ing, but not limited to foreign currency exchange controls or
monetary policy; repatriation of earnings; expropriation of
property; duty or tariff restrictions; investment limitations;
and tax policies;

(cid:129) political and economic instability and disruptions, including
labor unrest, civil strife, acts of war, guerilla activities, insur-
rection and terrorism;

(cid:129) legislation that regulates the use of chemicals;

(cid:129) disadvantages of competing against companies from coun-
tries that are not subject to U.S. laws and regulations,
including the Foreign Corrupt Practices Act;

(cid:129) difficulties
operations;

staffing

and managing multi-national

(cid:129) limitations on our ability to enforce legal

rights and

remedies;

(cid:129) reduced protection of intellectual property rights; and

(cid:129) other risks arising out of foreign sovereignty over the areas

where our operations are conducted.

Any of these risks could have an adverse effect on our inter-
national operations by reducing the demand for our products or
reducing the prices at which we can sell our products, which could
result in an adverse effect on our business, financial condition or
results of operations. We may not be able to continue to operate in
compliance with applicable customs, currency exchange control
regulations, transfer pricing regulations or any other laws or regu-
lations that we may be subject to. In addition, these laws or reg-
ulations may be modified in the future, and we may not be able to
operate in compliance with those modifications.

We engage in acquisitions and joint ventures, and may encoun-
ter unexpected difficulties identifying, pricing or integrating
those businesses.

Attainment of PolyOne’s strategic plan objectives may require, in
part, strategic acquisitions or joint ventures intended to comple-
ment or expand the Company’s businesses globally or add product
technology that accelerates the Company’s specialization strategy,
or both. Success will depend on the Company’s ability to identify,
price and complete these transactions or arrangements, and inte-
grate the businesses acquired in these transactions as well as
develop satisfactor y working arrangements with the Company’s
strategic partners in the joint ventures. Unexpected difficulties in
completing and integrating acquisitions with the Company’s existing
operations, and in managing strategic investments could occur.
Furthermore, the Company may not realize the degree, or timing, of
benefits initially anticipated which could adversely affect the Com-
pany’s business and results of operations.

SunBelt is our largest equity investment. The earnings of this
partnership may be significantly affected by changes in the com-
modity cycle for hydrocarbon feedstocks and for chlor-alkali prod-
ucts. If the profitability of SunBelt is adversely affected, we may
receive less cash distributions from the partnership or we may be
required to make cash contributions to the partnership, either of
which could adversely affect our financial condition.

Natural gas, electricity, fuel and raw material costs, and other
external factors beyond our control, as well as downturns in the
home repair and remodeling and new home sectors of the econ-
omy, can cause wide fluctuations in our margins.

The cost of our natural gas, electricity, fuel and raw materials, and
other costs, may not correlate with changes in the prices we receive
for our products, either in the direction of the price change or in
absolute magnitude. Natural gas and raw materials costs represent
a substantial part of our manufacturing costs, and energy costs, in
particular electricity and fuel, represent a component of the costs to
manufacture building products. Most of the raw materials we use
are commodities and the price of each can fluctuate widely for a
variety of reasons, including changes in availability because of
major capacity additions or significant facility operating problems.
Other external factors beyond our control can cause volatility in raw
materials prices, demand for our products, product prices, sales
volumes and margins. These factors include general economic
conditions, the level of business activity in the industries that
use our products, competitors’ actions, international events and
circumstances, and governmental regulation in the United States
and abroad. These factors can also magnify the impact of economic
cycles on our business. While we attempt to pass through price
increases in energy costs and raw materials, we have been unsuc-
cessful in doing so in some circumstances in the past and there can
be no reassurance that we can do so in the future.

Additionally, our products used in building and construction
markets are impacted by changes in the North American home
repair and remodeling sectors, as well as the new construction
sector, which may be significantly affected by changes in economic
and other conditions such as gross domestic product levels,
employment levels, demographic trends and consumer confidence.
These factors can lower the demand for and pricing of our building
products, which could cause our net sales and net income to
decrease.

We face competition from other polymer and chemical compa-
nies, which could adversely affect our sales and financial
condition.

We actively compete with companies that produce the same or
similar products, and in some instances with companies that pro-
duce different products that are designed for the same end uses.
We encounter competition in price, delivery, service, performance,
product innovation, product recognition and quality, depending on
the product involved.

P O L Y O N E C O R P O R A T I O N

Because of the polymer and chemical industry consolidation,
our competitors may become larger, which could make them more
efficient, thereby reducing their cost of materials and permitting
them to be more price competitive. Increased size could also permit
them to operate in wider geographic areas and enhance their ability
to compete in other areas such as research and development and
customer service, which could also reduce our profitability.

We expect that our competitors will continue to develop and
introduce new and enhanced products, which could cause a decline
in the market acceptance of our products. In addition, our compet-
itors could cause a reduction in the selling prices of some of our
products as a result of intensified price competition. Competitive
pressures can also result in the loss of major customers. An inability
to compete successfully could have an adverse effect on our results
of operations, financial condition and cash flows.

We may also experience increased competition from compa-
nies that offer products based on alternative technologies and
processes that may be more competitive or better in price or
per formance, causing us to lose customers and result in a decline
in our sales volume and earnings.

Additionally, some of our customers may already be or may
become large enough to justify developing in-house production
capabilities. Any significant reduction in customer orders as a result
of a shift to in-house production could adversely affect our sales and
operating profits.

A major failure of our information systems could harm our
business.

We depend on integrated information systems to conduct our busi-
ness. We may experience operating problems with our information
systems as a result of system failures, viruses, computer “hackers”
or other causes. Any significant disruption or slowdown of our
systems could cause customers to cancel orders or cause standard
business processes to become ineffective, which could adversely
affect our results of operations.

Our business depends upon good relations with our employees.

We may experience difficulties in maintaining appropriate relations
with unions and employees in certain locations. About 4% of our
employees at continuing operations are represented by, or are in
negotiations to be represented by, labor unions. In addition, prob-
lems or changes affecting employees in certain locations may
affect relations with our employees at other locations. The risk of
labor disputes, work stoppages or other disruptions in production
could adversely affect us. If we cannot successfully negotiate or
renegotiate collective bargaining agreements or if the negotiations
take an excessive amount of time, there may be a heightened risk of
a prolonged work stoppage. Any work stoppage could have a mate-
rial adverse effect in the productivity and profitability of a manufac-
turing facility or in our operations as a whole.

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have no outstanding or unresolved comments from the staff of
the SEC.

P O L Y O N E C O R P O R A T I O N

ITEM 2. PROPERTIES

As of February 27, 2008, we operated facilities in the United States and internationally. Our corporate office is located in Avon Lake, Ohio. We
own substantially all of our facilities. During 2007, we made effective use of our productive capacity at our principal facilities. We believe that
the quality and production capacity of our facilities is sufficient to maintain our competitive position for the foreseeable future. Following are
the principal facilities of our segments:

International Color and
Engineered Materials

North American
Color and Additives

Vinyl Business

Commerce, California
Long Beach, California
Kennesaw, Georgia
Henry, Illinois
Terre Haute, Indiana
Louisville, Kentucky
Plaquemine, Louisiana
Sullivan, Missouri
Pedricktown, New Jersey
Avon Lake, Ohio
North Baltimore, Ohio
Pasadena, Texas
Sussex, Wisconsin
Niagara Falls, Ontario, Canada
Orangeville, Ontario, Canada
St. Remi de Napierville,

Quebec, Canada

Dongguan, China
Shenzhen, China
Cartagena, Colombia

(joint venture)
Bolton, England
Hyde, England
Widnes, England

Assesse, Belgium
Pudong (Shanghai), China
Shenzhen, China
Suzhou, China
Glostrup, Denmark
Cergy, France
Tossiat, France
Bendor f, Germany
Gaggenau, Germany
Melle, Germany
Gyor, Hungary
Kutno, Poland
Jurong, Singapore
Barbastro, Spain
Pamplona, Spain
Angered, Sweden
Bangkok, Thailand
Istanbul, Turkey

Producer Services
Dyersburg, Tennessee
Clinton, Tennessee
Seabrook, Texas

ITEM 3. LEGAL PROCEEDINGS

In addition to the matters regarding the environment described in
Item 1 under the heading “Environmental, Health and Safety,” we
are involved in various pending or threatened claims, lawsuits and
administrative proceedings, all arising from the ordinary course of
business concerning commercial, product liability, employment and
environmental matters that seek remedies or damages. We believe
that the probability is remote that losses in excess of the amounts
we have accrued could be materially adverse to our financial con-
dition, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY

HOLDERS

No matters were submitted to a vote of security holders during the
fourth quarter of 2007.

EXECUTIVE OFFICERS OF THE REGISTRANT

(Included pursuant to Instruction 3 to paragraph (b) of Item 401 of
Regulation S-K)

The following lists information, as of February 27, 2008, about
each of our executive officers, including his position with us as of
that date and other positions held for at least the past five years.
Executive officers are elected by our Board of Directors to serve one-
year terms.

Specialty Inks and
Polymer Systems

Commerce, California
Kennesaw, Georgia
St. Louis, Missouri
Massillon, Ohio
Sussex, Wisconsin
Melbourne, Australia
Shenzhen, China
Widnes, England

PolyOne Distribution
Livermore, California
Rancho Cucamonga, California
Denver, Colorado
Lemont, Illinois
Ayer, Massachusetts
Chester field Township,

Michigan

Eagan, Minnesota
Hazelwood, Missouri
Statesville, North Carolina
Massillon, Ohio
La Porte, Texas
Fife, Washington
Mississauga, Ontario, Canada

Glendale, Arizona
Suwanee, Georgia
Elk Grove Village, Illinois
St. Peters, Missouri
Norwalk, Ohio
Lehigh, Pennsylvania
Vonore, Tennessee
Toluca, Mexico

North American
Engineered Materials
Avon Lake, Ohio
Macedonia, Ohio
Dyersburg, Tennessee
Valleyfield, Quebec, Canada
GLS Corporation facilities:

McHenry, Illinois
Suzhou, China

Resin and Intermediates
SunBelt joint venture —
McIntosh, Alabama

Stephen D. Newlin
Age: 55

Chairman, President and Chief Executive Officer, February 2006 to
date. President – Industrial Sector of Ecolab Inc. (a global developer
and marketer of cleaning and sanitizing specialty chemicals, prod-
ucts and services) from 2003 to 2006. Mr. Newlin served as
President and a Director of Nalco Chemical Company (a manufac-
turer of specialty chemicals, services and systems) from 1998 to
2001 and was Chief Operating Officer and Vice Chairman from
2000 to 2001. Mr. Newlin serves on the Boards of Directors of
Black Hills Corporation and The Valspar Corporation.

Bernard P. Baert
Age: 58

Senior Vice President and General Manager, Colors and Engineered
Materials, Europe and Asia, May 2006 to date. Vice President and
General Manager, Colors and Engineered Materials, Europe and
Asia, September 2000, upon formation of PolyOne, to April 2006.
General Manager, Color Europe, M.A. Hanna Company, 1997 to
August 2000.

P O L Y O N E C O R P O R A T I O N

Michael E. Kahler
Age: 50

Rober t M. Rosenau
Age: 53

Senior Vice President, Commercial Development, May 2006 to
date. President, Process Technology Division, Alfa Laval Inc. (a
global provider of heat transfer, separation and fluid handling prod-
ucts and engineering solutions) from January 2004 to March 2006.
Group Vice President, Nalco Chemical Company (a manufacturer of
specialty chemicals, services and systems) from December 1999
to October 2002.

Thomas J. Kedrowski
Age: 49

Senior Vice President, Operations, September 2007 to date. Vice
President of Strategy and Process Improvement, H.B. Fuller Com-
pany (a global manufacturer and marketer of adhesives and spe-
cialty chemical products) from November 2005 to April 2007. Vice
President of Global Operations, H.B. Fuller Company from February
2002 to November 2005.

Michael L. Rademacher
Age: 57

Senior Vice President and General Manager, Distribution, May 2006
to date. Vice President and General Manager, PolyOne Distribution,
September 2000, upon formation of PolyOne, to April 2006. Senior
Vice President – Plastics Americas, M.A. Hanna Company, January
2000 to August 2000. Vice President and General Manager, Indus-
trial Chemical and Solvents Division, Ashland Chemical Company
(chemical manufacturing and distribution), 1998 to January 2000.

Senior Vice President and General Manager, Vinyl Business, May
2006 to date. Vice President and General Manager, Vinyl Business,
January 2003 to April 2006. General Manager, Extrusion Products,
September 2000 to December 2002. General Manager, Custom
Profile Compounds, The Geon Company, April 1998 to August 2000.

Kenneth M. Smith
Age: 53

Senior Vice President and Chief Information and Human Resources
Officer, May 2006 to date. Chief Human Resources Officer, January
2003 to date, and Vice President and Chief Information Officer,
September 2000, upon formation of PolyOne, to April 2006. Vice
President, Information Technology, The Geon Company, May 1999
to August 2000, and Chief Information Officer, August 1997 to May
1999.

W. David Wilson
Age: 54

Senior Vice President and Chief Financial Officer, May 2006 to date.
Vice President and Chief Financial Officer, September 2000, upon
formation of PolyOne, to April 2006. Vice President and Chief
Financial Officer, The Geon Company, May 1997 to August 2000.

P O L Y O N E C O R P O R A T I O N

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY

SECURITIES

The following table sets forth the range of the high and low sale prices for our common stock, $.01 par value per share, as reported by the
New York Stock Exchange, where the shares are traded under the symbol “POL,” for the periods indicated.

Common stock price:

High
Low

2007 Quarters

2006 Quarters

Fourth

Third

Second

First

Fourth

Third

Second

First

$8.60
$5.93

$9.29
$6.93

$7.59
$6.14

$7.76
$5.99

$8.76
$6.71

$9.18
$7.70

$9.89
$7.45

$9.88
$6.31

As of February 27, 2008, there were 2,662 holders of record of our common stock.

Effective with the first quarter of 2003, we suspended payment of our quarterly dividend. Future declarations of dividends on common
stock are at the discretion of the Board of Directors, and the declaration of any dividends will depend on, among other things, earnings,
capital requirements and our financial condition. The Board of Directors has not declared any dividends on common stock since 2003.
Additionally, the agreements that govern our receivables sale facility contain restrictions that could limit our ability to pay future dividends.

ITEM 6. SELECTED FINANCIAL DATA

(In millions, except per share data)

2007

2006

2005

2004

2003

Sales

$2,642.7

$2,622.4

$2,450.6

$2,267.7

$2,048.1

Operating income (loss)
Income (loss) before discontinued operations and change in method of

accounting

Discontinued operations

Net income (loss)

Basic and diluted earnings (loss) per common share:

Before discontinued operations and change in method of accounting
Discontinued operations

Basic and diluted earnings (loss) per common share

Dividends per common share

Total assets
Long-term debt, net of current portion

33.9

$ 190.6

$ 141.3

$ 129.1

(43.4)

11.4

$ 125.6

63.2

28.3

$ (134.8)

—

(2.7)

(15.3)

(4.1)

(144.7)

11.4

$ 122.9

47.9

24.2

$ (279.5)

0.12
—

1.36
(0.03)

0.69
(0.17)

0.31
(0.05)

(1.48)
(1.59)

0.12

1.33

0.52

0.26

(3.07)

— $

—

$1,583.0
$ 308.0

$1,780.8
$ 567.7

$1,695.3
$ 638.7

$1,753.1
$ 640.5

$1,878.5
$ 757.1

The selected financial data in the above table has been
restated to reflect the adoption of FSP AUG AIR-1 during the first
quarter of 2007. For more information, see Note C to the Consol-
idated Financial Statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Purpose of Management’s Discussion and Analysis (MD&A)

In August 2004, we sold our Elastomers and Per formance
Additives business. This business was previously reported as a
discontinued operation and is reflected as such in our historical
results.

The purpose of the following discussion is to provide relevant
information to investors so they can assess our financial condition
and results of operations by evaluating the amounts and certainty of
cash flows from our operations and from outside sources.

In February 2006, we sold 82% of our Engineered Films busi-
ness. This business was previously reported as discontinued oper-
ations and is reflected as such in our historical results. The retained
ownership of 18% is reported on the cost method of accounting and
is reflected in the financial statements as such.

The three principal objectives of MD&A are: to provide a nar-
rative explanation of financial statements that enables investors to
see our company through the eyes of management; to enhance
overall financial disclosure and provide the context within which
financial information should be analyzed; and to provide information
about the quality and potential variability of earnings and cash flows
so that investors can judge the likelihood that past per formance is
indicative of future per formance.

P O L Y O N E C O R P O R A T I O N

Business Overview

Restructuring initiatives and facility closures

We are a leading global provider of specialized polymer materials,
services and solutions with operations in thermoplastic com-
pounds, specialty polymer formulations, color and additive sys-
tems, thermoplastic resin distribution and specialty vinyl resins,
with equity investments in manufacturers of caustic soda and
chlorine, and PVC compound products and in a formulator of poly-
urethane compounds. Headquartered in Avon Lake, Ohio, with
2007 sales of $2.6 billion, we have manufacturing sites and dis-
tribution facilities in North America, Europe, Asia and Australia and
joint ventures in North America and South America. We currently
employ approximately 4,800 people and sell more than 35,000
different specialty and general purpose products to over 11,000
customers on 6 continents. We provide value to our customers
through our ability to link our knowledge of polymers and formulation
technology with our manufacturing and supply chain to provide an
essential link between large chemical producers (our raw material
suppliers) and designers, assemblers and processors of plastics
(our customers).

Recent Developments

Sale of businesses and discontinued operations

Unless otherwise noted, disclosures contained in this Annual
Repor t on Form 10-K relate to continuing operations. For more
information about our discontinued operations, see Note B to the
Consolidated Financial Statements.

Purchase of businesses

In January 2008, we acquired 100% of the outstanding capital stock
of GLS Corporation, a global provider of specialty thermoplastic
elastomer compounds for consumer, packaging and medical
applications.

In December 2007, we acquired the vinyl compounding busi-
ness and assets of Ngai Hing PlastChem Company Ltd. (NHPC), a
subsidiary of Ngai Hing Hong Company Limited for $3.3 million, net
of cash received.

In a transaction related to the sale of our interest in OxyVinyls,
in July 2007, we purchased the remaining 10% minority interest in
Powder Blends, LP for $11 million in cash.

During the third quarter of 2007, we announced the closure of two
manufacturing lines at our Avon Lake, Ohio facility. The transition
was completed in the fourth quarter of 2007 and resulted in
expenses related to employee separation and plant phaseout
charges of $0.9 million.

During 2007, we recognized and paid $0.4 million in employee
separation charges related to 33 employees involved in the restruc-
turing of our manufacturing facility in St. Peters, Missouri, part of
the North American Color and Additives operating segment.

In 2007, we recognized charges of $0.6 million related to three

executive severance agreements.

The closure and exit from the Company’s Commerce, California
facility was completed in the first quarter of 2007, resulting in
employee separation charges and plant phaseout charges of
$0.2 million.

Sale of assets

As part of our restructuring initiatives and cost reduction plans,
during 2007, we sold previously closed facilities and other assets
for proceeds of $6.3 million and collected $3.1 million in cash
related to assets sold in 2006.

Environmental remediation costs

In September 2007, we were informed of rulings by the United
States District Court for the Western District of Kentucky on several
pending motions in the case of Westlake Vinyls, Inc. v. Goodrich
Corporation, et al., which has been pending since 2003. The Court
held that we must pay the remediation costs at the former Goodrich
Corporation (now Westlake Vinyls, Inc.) Calvert City facility, together
with certain defense costs of Goodrich Corporation. The rulings also
provided that we can seek indemnification for contamination attrib-
utable to Westlake Vinyls. We recorded a charge of $15.6 million
and made payments, net of related receipts of $18.8 million, in
2007 for past remediation activities related to these Court rulings.
We also adjusted our environmental reserve for future remediation
costs, a portion of which already related to the Calvert City site,
resulting in a charge of $28.8 million in 2007. See Note N to the
Consolidated Financial Statements for additional information.

Results of Operations

Summary of Consolidated Results:

Aggregate sales increased 1% in 2007 compared to 2006. This
increase was primarily due to 9% sales growth in Asia, higher prices
driven by value adding selling activities of our commercial team to
offset higher raw material and energy costs, and the impact of
favorable exchange rates. Foreign exchange had a 2% favorable
effect on sales. Within All Other North American Engineered Mate-
rials, Producer Services and the Specialty Inks and Polymer Sys-
tems operating segments all registered sales growth in 2007
versus 2006, which offset a 16% decline in sales in the North

P O L Y O N E C O R P O R A T I O N

American Color and Additives business due mainly to the pruning of
low margin business. These items netted positively against the
$92.1 million, or 9%, decline in sales in our Vinyl Business segment,
mainly resulting from the slowdown in the residential construction
market, and the 3% decrease in year-over-year shipments.

Income before discontinued operations declined $114.2 mil-

lion in 2007, or $1.24 per share, compared to 2006.

Income from continuing operations before income taxes
declined $152.7 million in 2007 compared to 2006. A table show-
ing material items that comprise this decline is provided after the
following table which sets forth key financial information from our
statements of income for the years ended December 31, 2007,
2006 and 2005, respectively.

(In millions, except per share data)

2007

2006

2005

Sales

Operating income

Interest expense

Interest income

Premium on early

extinguishment of long-term
debt

Income (loss) before income
taxes and discontinued
operations

$2,642.7

$2,622.4

$2,450.6

33.9

(51.4)

4.5

190.6

(66.5)

3.4

141.3

(68.1)

1.9

(12.8)

(4.4)

—

Income (loss) before Income Taxes and Discontinued
Operations

The following table sets forth the components of the variance for the
years ended December 31, 2007 and 2006, respectively, as com-
pared to the same periods in the prior year:

Variances — Favorable (Unfavorable)

(In millions)

2007 versus 2006

2006 versus 2005

Operating segment performance:

Vinyl Business

$ (17.7)

$ 5.6

International Color and Engineered

Materials

PolyOne Distribution

Resin and Intermediates

All Other

Corporate and eliminations:

Write-down of certain assets of

equity affiliate(a)

Impairment of intangibles and

other investments(b)

Impairment of OxyVinyls equity

investment(c)

Future environmental remediation

(32.4)

$ 120.3

69.8

costs(d)

Income tax benefit (expense)

43.8

5.3

(6.6)

Income before discontinued

operations

Loss from discontinued

operations and loss on sale,
net of income taxes

11.4

125.6

63.2

—

(2.7)

(15.3)

Settlement of environmental costs

related to Calvert City(e)

Settlement of legal issues and

related reserves(f)

Employee separation and plant

phaseout

All other and eliminations

Net income

11.4

$ 122.9

47.9

Cost related to sale of OxyVinyls

Basic and diluted earnings

(loss) per common share:

Before discontinued

operations

0.12

1.36

0.69

Discontinued operations

—

(0.03)

(0.17)

Net income

0.12

1.33

0.52

equity investment

Gain on sale of assets

Total Corporate and eliminations

Change in operating income

Premium on early extinguishment

of debt(g)

Interest expense, net(h)

Other expense

Change in income (loss) from

continuing operations before
income taxes

5.3

2.9

(68.1)

12.3

(1.6)

(2.3)

(14.8)

(30.7)

(15.6)

(23.9)

(2.2)

0.7

(0.4)

(0.6)

(91.4)

(156.7)

(8.4)

16.2

(3.8)

5.8

(0.3)

11.0

4.6

22.9

0.2

—

(2.3)

—

14.5

5.5

(21.3)

—

3.1

22.6

49.3

(4.4)

3.1

2.5

$(152.7)

$ 50.5

(a) Our share of an asset write-down was recorded in the third quarter of
2007 against the carrying value of certain inventory, accounts
receivable and intangible assets at our equity affiliate in Colombia.
In 2005, we recognized a charge of $22.9 million related to the write-
down of a previously idled OxyVinyls facility.

(b) An impairment of the carrying value of certain patents and technol-
ogy agreements and investments of $2.5 million was recorded during
2007.

(c) Our 24% equity investment in OxyVinyls was adjusted at June 30,
2007 as the carrying value was higher than the fair value and the

P O L Y O N E C O R P O R A T I O N

decrease was determined to be an other than temporary decline in
value.

(d) Our accrual for costs related to future remediation at inactive or
formerly owned sites was adjusted based on a U.S. District Court’s
ruling on several motions in the case of Westlake Vinyls, Inc v.
Goodrich Corporation et al. and a settlement agreement entered
into in connection with the case, which require us to pay remediation
costs at the Calvert City facility.

(e) We recorded a $15.6 million expense for remediation costs and
certain legal costs as a result of the court ruling mentioned above in
note (d).

(f) The benefit of insurance, legal settlements and adjustments to
related reserves was a charge of $0.6 million in 2007 as compared
to a net benefit of $23.3 million during 2006.

(g) We repurchased all of our 10.625% senior notes through early
extinguishment, repurchasing $58.6 million and $241.4 million in
2006 and 2007, respectively, at a premium of $4.4 million and
$12.8 million, respectively.

(h) The early extinguishment of our 10.625% senior notes resulted in
lower interest during 2007 as compared to a year ago. Included in
interest expense was unamor tized deferred note issuance cost of
$0.8 million and $2.8 million during 2006 and 2007, respectively.

See the following operating segment discussion for a further
explanation of our segments’ operating results for the periods
shown in the preceding table.

Selected Operating Costs:

Selected operating costs, expressed as a percentage of sales, are
as follows:

investment in commercial resources and capabilities, partially off-
set by lower incentive, pension and post-retirement benefit costs.
Selling and administrative costs increased in 2006 compared to
2005 from higher share-based compensation and incentive costs
and increased investment in commercial resources and capabili-
ties, partially offset by a higher benefit in 2006 than 2005 from
legal and other related settlements.

Other Components of Income and Expense:

Following are discussions of significant components of income and
expense that are presented below the line “Operating income.”

Interest Expense — The decrease in interest expense from
year to year is largely the result of lower average borrowing levels.
Payment of maturing debt and voluntary repurchases of debt are the
main reasons for the continued decline in debt. Included in interest
expense in 2007 and 2006 were charges of $2.8 million and
$0.8 million, respectively, to write off deferred debt issuance costs
related to the early extinguishment of long-term debt.

We repurchased $100.0 million of our 10.625% senior notes in
June 2007 and repurchased the remaining $141.4 million of such
senior notes in August 2007. In the second and fourth quarters of
2006, we repurchased $15.0 million and $43.6 million, respec-
tively, of our 10.625% senior notes. The following table presents the
quarterly average of short- and long-term debt for the past three
years and the related interest expense:

2007

2006

2005

Short-term debt

(In millions)

2007

2006

2005

9.2

5.6

4.5

Cost of sales

88.4% 87.1% 88.0%

Current portion of long-term debt

20.5

12.5

35.2

Selling and administrative costs

9.1%

7.7%

7.5%

Long-term debt

441.7

610.8

639.5

Cost of Sales — These costs include raw materials, plant
conversion and distribution charges. As a percentage of sales,
these costs increased in 2007 compared to 2006 primarily due
to higher raw material costs not yet fully offset by price increases
largely associated with the Vinyl Business and as a result of envi-
ronmental remediation costs at inactive or formerly owned sites.
For the year ended December 31, 2007, environmental related
remediation costs were $48.8 million as compared to $2.5 million
in 2006 (See Recent Developments section). The increased envi-
ronmental remediation costs more than offset the declines in cost
of sales on a percent basis being realized from the implementation
of our specialization strategy. As a percentage of sales, these costs
declined in 2006 compared to 2005 primarily from the full year
effect of efforts to increase our selling prices to pass on higher raw
material, distribution and utility costs, as well as the effect of our
specialization strategy to increase new higher value business.

Selling and Administrative — These costs generally include
selling, technology and general and administrative charges. Selling
and administrative costs increased 19% or $39.2 million in 2007 as
compared to 2006. In 2006, selling and administrative costs had a
$23.3 million benefit from insurance, legal settlements and adjust-
ments to related reserves. The remainder of the change in selling
to increased
and administrative expense was due mainly

Quarterly average

$471.4

$628.9

$679.2

Interest expense

$ 51.4

$ 66.5

$ 68.1

Premium on Early Extinguishment of Long-term Debt — Cash
expense from the repurchase of $241.4 million of our
10.625% senior notes in 2007 was $12.8 million. Cash expense
from the repurchase of $58.6 million of our 10.625% senior notes
in 2006 was $4.4 million.

Other Expense, Net — Finance costs associated with our
receivables sale facility, foreign currency gains and losses, retained
post-employment benefit costs from previously discontinued oper-
ations and other miscellaneous items are as follows:

(In millions)

Currency exchange loss

2007

2006

2005

$(5.0)

$(1.3)

$(0.1)

Foreign exchange contracts gain

0.7

1.1

0.6

Discount on sale of trade receivables

(2.0)

(1.9)

(5.5)

Retained post-employment benefit costs
related to previously discontinued
operations

Other income (expense), net

—

(0.3)

(0.7)

(1.3)

1.0

Other expense, net

$(6.6)

$(2.8)

$(5.3)

P O L Y O N E C O R P O R A T I O N

The decline in the discount on sale of trade receivables in 2006
compared to 2005 was primarily from the lower average balance of
receivables that were sold during 2006.

As required by generally accepted accounting principles in the
United States, the losses from discontinued operations, shown
below, do not include any depreciation or amortization expense.

Income Tax Benefit (Expense) — The income tax benefit
(expense) for 2007, 2006 and 2005, including the impact of the
sale of our interest in OxyVinyls and changes in the deferred tax
valuation allowance, is summarized as follows:

(In millions)

Sales:

Engineered Films

Pre-tax income from operations:

2006

2005

$ 9.6

$119.6

(In millions)

2007

2006

2005

Engineered Films

$ 0.4

0.5

Tax benefit (expense) prior to OxyVinyls

sale and valuation allowance

$12.3

$(54.2)

$(28.3)

Pre-tax charges to adjust net assets of businesses
held for sale to projected net sale proceeds:

Impact of sale of interest in OxyVinyls

31.5

—

Elastomers and Performance Additives

Valuation allowance

—

59.5

21.7

Engineered Films

—

(0.7)

(3.1)

(15.1)

(2.7)

(15.3)

Total tax benefit (expense)

$43.8

$ 5.3

$ (6.6)

In calculating the 2007 tax benefit prior to the impact of the
sale of OxyVinyls, the difference in rates of foreign subsidiaries was
the principal cause of the difference between the effective and
statutor y tax rate. Prior to the changes in the valuation allowance,
the effect of the repatriation of foreign dividends was the principal
cause of the difference between the effective and statutor y tax rate
for 2006 and 2005.

During the third quarter of 2007, as part of the sale of our 24%
interest in OxyVinyls, we recognized a deferred tax benefit of
$31.5 million that was related to the temporar y difference between
the tax basis and book basis of the investment.

In 2005, in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, “Accounting for Income
Taxes,” the valuation allowance was reduced $21.7 million for the
use of net operating loss carryforwards. In 2006, the valuation
allowance was reduced $44.3 million for the use of net operating
loss carryforwards and $15.4 million associated with changes in
accumulated other comprehensive income related to the pension
and post-retirement health care liabilities. In addition, in 2006, as a
result of the improved actual and projected earnings and the actual
and projected use of the deferred tax assets, it was determined that
it was more likely than not that the deferred tax assets would be
realized and we reversed the remaining $15.1 million of the valu-
ation allowance through the income statement. Income taxes in
2007 were recorded without regard to any domestic deferred tax
valuation allowance.

Income taxes for the years ended December 31, 2007, 2006
and 2005 include foreign, state and federal alternative minimum
tax. Income taxes are discussed in detail in Note P to the Consol-
idated Financial Statements.

Loss from Discontinued Operations, Net of Income Taxes —
Discontinued operations are discussed in detail in Note B to the
Consolidated Financial Statements. The loss from discontinued
operations included a pre-tax benefit of $0.2 million in 2005 for
employee separation and plant phaseout costs from restructuring
initiatives and closing certain manufacturing facilities of the Engi-
neered Films business.

Income tax expense (net of valuation allowance)

—

Loss from discontinued operations

$(2.7)

$ (15.3)

Segment Information:

Sales and Operating Income (Loss) — 2007 compared with
2006:

(In millions)

Sales:

2007

2006

Change

% Change

Vinyl Business

$ 933.0

$1,025.1

$ (92.1)

(9.0)%

International Color
and Engineered
Materials

PolyOne Distribution

All Other

Corporate and
eliminations

Operating income

(loss):

610.9

744.3

487.8

526.7

732.8

491.5

84.2

11.5

16.0%

1.6%

(3.7)

(0.8)%

(133.3)

(153.7)

20.4

13.3%

$2,642.7

$2,622.4

$ 20.3

0.8%

Vinyl Business

50.8

68.5

$ (17.7)

International Color
and Engineered
Materials

PolyOne Distribution

Resin and

Intermediates

All Other

Corporate and
eliminations

26.6

22.1

34.8

10.0

21.3

19.2

5.3

2.9

102.9

(2.3)

(68.1)

12.3

(110.4)

(19.0)

(91.4)

33.9

$ 190.6

$(156.7)

P O L Y O N E C O R P O R A T I O N

2007

2006

Change

Operating income (loss) as a

percentage of sales:

Vinyl Business

5.4% 6.7% (1.3)% points

International Color and Engineered

Materials

PolyOne Distribution

All Other

Total

4.4% 4.0%

0.4% points

3.0% 2.6%

0.4% points

2.1% (0.5)% 2.6% points

1.3% 7.3% (6.0)% points

A summar y of Corporate and eliminations is as follows:

(In millions)
Future environmental remediation costs(a)

Impairment of OxyVinyls equity

investment(b)

Settlement of environmental costs related

to Calvert City(c)

Impairment of intangibles and other

investments(d)

Employee separation and plant

phaseout(e)

Write-down of certain assets of equity

affiliate(f)

Cost related to sale of OxyVinyls equity

investment

Settlement of legal issues and related

reserves(g)

Gain on sale of assets(h)
All other and eliminations(i)

Year Ended

December 31,

2007

2006

$ (33.2)

$ (2.5)

(14.8)

(15.6)

—

(2.5)

(0.2)

(2.2)

(1.6)

(0.4)

(0.6)

2.5

—

23.3

3.1

(42.0)

(42.7)

Total Corporate and eliminations

$(110.4)

$(19.0)

(a) In 2007, our accrual for costs related to future remediation at
inactive or formerly owned sites was adjusted based on a U.S.
District Court’s ruling on several motions in the case of Westlake
Vinyls, Inc. v. Goodrich Corporation et al. and a settlement agreement
entered into in connection with the case, which require us to pay
remediation costs at the Calvert City, Kentucky facility.

(b) Our 24% equity investment in OxyVinyls was adjusted at June 30,
2007 as the carrying value was higher than the fair value and the
decrease was determined to be an other than temporary decline in
value.

(c) In the third quarter of 2007, we recorded $15.6 million for reme-
diation costs and certain legal costs related to the Calvert City
facility.

(d) An impairment of the carrying value of certain patents and technol-
ogy agreements and investments of $2.5 million was recorded during
2007.

(e) Severance, employee outplacement, external outplacement consult-
ing, lease termination, facility closing costs and the write-down of the
carrying value of plant and equipment resulting from restructuring
initiatives and executive separation agreements.

(f) Our share of an asset write-down was recorded in the third quarter of
2007 against the carrying value of certain inventory, accounts receiv-
able and intangible assets at our equity affiliate in Colombia.

(g) The benefit of insurance, legal settlements and adjustments to
related reserves was a charge of $0.6 million for 2007 as compared
to a net benefit of $23.3 million during the same period of 2006.
(h) The gains on sale of assets in 2007 and 2006 relate to the sale of

previously closed facilities and other assets.

(i) All other and eliminations is comprised of intersegment eliminations
and corporate general and administrative costs that are not allocated
to segments.

Effective with the first quarter of 2007, the results of opera-
tions for PolyOne’s business located in Singapore are managed and
reported under the Vinyl Business operating segment. Historically,
the results of this business were included in the International Color
and Engineered Materials operating segment. Prior period results of
operations for Singapore have been reclassified to conform to the
2007 presentation.

Effective with the fourth quarter of 2007, the former Polymer
Coating Systems operating segment was split into two reporting
units. The 50% interest in BayOne Urethane Systems, L.L.C., along
with the inks and specialty colorants businesses formed a new
operating segment, Specialty Inks and Polymer Systems, which is
included in All Other. The remaining plastisols and coated fabrics
businesses were subsumed into the Vinyl Business reportable
segment. Segment information for prior periods has been reclas-
sified to conform to the 2007 presentation.

Operating income is the primary financial measure that is
reported to the chief operating decision maker for purposes of
making decisions about allocating resources to the segment and
assessing its per formance. Operating income at the segment level
does not include: corporate general and administrative costs that
are not allocated to segments; intersegment sales and profit elim-
inations; charges related to specific strategic initiatives, such as
the consolidation of operations; restructuring activities, including
employee separation costs resulting from personnel reduction pro-
grams, plant closure and phaseout costs; executive separation
agreements; share-based compensation costs; asset impairments;
environmental remediation costs for facilities no longer owned or
closed in prior years; gains and losses on the divestiture of joint
ventures and equity investments; and certain other items that are
not included in the measure of segment profit or loss that is
reported to and reviewed by the chief operating decision maker.
These costs are included in “Corporate and eliminations.”

Vinyl Business

Vinyl Business sales were $933.0 million in 2007, $92.1 million or
9% lower than 2006. The primary driver was the slowdown in the
residential building and construction market, which affected
demand for vinyl windows, pipe and fittings products, PVC flooring
and appliances. Also, negatively affecting 2007 results was a
growing presence of imported products in the end markets that
use or that compete directly with our specialty resin product. Ship-
ments in 2007 were down 11% versus 2006.

Operating income in 2007 decreased $17.7 million or 26%
compared to 2006. The primar y drivers of this decline were weak

P O L Y O N E C O R P O R A T I O N

All Other

All Other includes the North American Color and Additives, North
American Engineered Materials, Producer Services and Specialty
Inks and Polymer Systems operating segments. Sales in aggregate
were down 1% from 2006 due mainly to a 16% decline in North
American Color and Additives’ sales resulting from the pruning of
unprofitable business and withdrawing from certain general pur-
pose oriented applications. North American Engineered Materials
sales grew 5% due to continued progress in capturing specialized
applications in the electrical / electronics and medical end markets,
as well as solid growth in wire and cable applications, where sales
were up 7%. Producer Services sales were up 9% compared to 2006
primarily reflecting the full year impact of the DH Compounding
acquisition which added $21.5 million of sales. Specialty Inks and
Polymer Systems’ sales grew 10% primarily due to the growth of our
global inks business.

Aggregate operating income was $10.0 million in 2007 com-
pared to a $2.3 million loss in 2006, an increase of $12.3 million.
North American Color and Additives operating income increased
$9.2 million due to a stronger product mix driven by the benefits of
improved commercial disciplines, the pruning of unprofitable busi-
ness and lower operating costs. Producer Services and Specialty
Inks and Polymer Systems operating income also improved signif-
icantly in 2007 as compared to 2006. Both businesses delivered
30% or better improvements in operating income. In Producer Ser-
vices, operating margins improved due to value added selling activ-
ities to enhance the profitability of the customer mix and the full year
impact of the DH Compounding acquisition. Specialty Inks and
Polymer Systems’ profitability was up more than 30% reflecting a
strong sales mix of Inks and Urethanes products.

residential construction demand and margin compression due to
the combination of downward pricing pressure in residential building
and construction end markets and higher raw material and energy
costs.

International Color and Engineered Materials

International Color and Engineered Materials 2007 sales increased
$84.2 million, or 16%, to $610.9 million due primarily to strong
growth in our Color and Additives businesses in Asia and Europe,
favorable foreign exchange and modest growth in specialty engi-
neered materials product lines in Europe. Asian sales across all
product platforms grew 9% while Europe demonstrated sales growth
of 6%. Favorable foreign exchange rates increased International
Color and Engineered Materials sales by $51.2 million, or 10%. In
Asia, colorant and additives sales grew 17%, particularly in specialty
packaging applications utilizing liquid color product technology. Our
Asian Engineered Materials business demonstrated sales growth of
3% in 2007 versus 2006 despite a second half 2007 slowdown in
the growth of the electrical / electronics market.

Operating income increased $5.3 million in 2007 as compared
to 2006. This 25% increase was driven by improved margins due to
greater penetration of specialty applications in the Asian and Euro-
pean Color and Additive businesses, higher margins due to product
mix improvements, value selling and price management and lower
conversion costs. Foreign exchange had a favorable impact on
operating income of $2.0 million.

PolyOne Distribution

Distribution sales increased $11.5 million, or 2%, as compared to
2006 due to relatively flat shipment volume combined with a 1.3%
increase in average selling prices. Increased demand in the health-
care and automotive end markets offset declines in the appliance
and building/construction sectors.

Operating income was $22.1 million, up 16% from 2006. This
increase was due to higher sales, expanded gross margins resulting
from a favorable sales mix and lower unit delivery costs. Selling and
general administrative costs were slightly lower due to lower bad
debt costs that offset higher investment in commercial resources.

Resin & Intermediates

2007 operating income declined 66%, or $68.1 million, versus
2006 as the slowdown in commercial and residential construction
markets and downward margin pressure from rising feedstock costs
severely impacted the results of OxyVinyls. In July 2007, we
divested our 24% interest in OxyVinyls, which in the second half
of 2006 contributed $18.4 million to segment earnings. SunBelt
earnings were $6.3 million lower in 2007 compared to 2006 due to
a 3% decline in sales that offset higher year-over-year ECU net-
backs, which were up slightly more than 1%.

P O L Y O N E C O R P O R A T I O N

Sales and Operating Income (Loss) — 2006 compared with
2005:

(In millions)

Sales:

2006

2005

Change

% Change

Vinyl Business

$1,025.1 $1,022.1 $

3.0

0.3%

International Color and
Engineered Materials

PolyOne Distribution

All Other

Corporate and
eliminations

526.7

732.8

491.5

465.4

679.2

435.0

61.3

53.6

56.5

13.2%

7.9%

13.0%

(153.7)

(151.1)

(2.6)

(1.7)%

$2,622.4 $2,450.6 $171.8

7.0%

Operating income (loss):

Vinyl Business

68.5 $

62.9 $

5.6

International Color and
Engineered Materials

PolyOne Distribution

Resin and Intermediates

All Other

Corporate and
eliminations

21.3

19.2

102.9

(2.3)

15.5

19.5

91.9

(6.9)

5.8

(0.3)

11.0

4.6

(19.0)

(41.6)

22.6

$ 190.6 $ 141.3 $ 49.3

2006

2005

Change

Operating income (loss) as a

percentage of sales:

Vinyl Business

6.7% 6.2%

0.5% points

International Color and Engineered

Materials

PolyOne Distribution

All Other

Total

4.0% 3.3%

0.7% points

2.6% 2.9% (0.3)% points

(0.5)% (1.6)% 1.1% points

7.3% 5.8%

1.5% points

A summar y of Corporate and eliminations is as follows:

(a) These charges represent environmental remediation costs for facil-
ities either no longer owned or closed in prior years including,
remediation costs and certain legal costs

(b) Impairments of community development and internet investments

were recorded during 2006 and 2005.

closed facilities.

(d) The benefit of insurance, legal settlements and adjustments to
related reserves were benefits of $23.3 million and $8.8 million
during 2006 and 2005, respectively.

(e) Employee separation charges of $2.5 million were recorded in 2005
related to the terms of a separation agreement between PolyOne
and Thomas A. Waltermire. Plant phaseout charges in 2005
included a $2.5 million loss on the sale of facilities and equipment
of previously idled operations.

(f) In 2005, we recognized a charge of $22.9 million related to the

write-down of a previously idled OxyVinyls facility.

(g) All other and eliminations is comprised of intersegment eliminations
and corporate general and administrative costs that are not allo-
cated to segments.

Year Ended

December 31,

Vinyl Business

(In millions)
Future environmental remediation costs(a)

2006

2005

$ (2.5)

$ (0.2)

Impairment of intangibles and other

investments(b)

Gain on sale of assets(c)

Settlement of legal issues and related

reserves(d)

Employee separation and plant

phaseout(e)

Write-down of certain assets of equity

affiliate(f)

All other and eliminations(g)

(0.2)

3.1

23.3

—

(42.7)

(0.4)

—

8.8

(5.5)

(22.9)

(21.4)

Total Corporate and eliminations

$(19.0)

$(41.6)

Sales were flat in 2006 compared to 2005 as higher average selling
prices offset 6% lower volume. Selling prices at the beginning of
2006 reflected the increases that we realized in the fourth quarter
of 2005. Volume was down as a result of slower building and
construction market demand in the second half of 2006 compared
with the unusually high demand in the second half of 2005 due to
the rebuilding activities that were created in the wake of Hurricanes
Katrina and Rita. Also negatively impacting 2006 volume was
greater competition from overseas suppliers who increased their
market share, largely in flooring applications, in the second half of
2005.

Operating income increased $5.6 million, or 9%, to $68.5 mil-
lion in 2006 as compared to 2005. Strong demand coupled with
intensified value selling activities and pricing actions to recover
rising energy and feedstock costs all contributed to expanding
margins.

P O L Y O N E C O R P O R A T I O N

International Color and Engineered Materials

Sales reached $526.7 million in 2006 which represented a 13%
increase over 2005. Sales in Asia grew 24% due to strong demand
for our products in the appliance and electrical and electronics end
markets, and 14% sales growth of our colorants and additives,
particularly into specialty packaging applications. European sales
were up 9% due to overall improvements in the economic environ-
ment in the Euro Zone, recapture of market share, penetration of
higher margin specialty markets, and favorable foreign exchange
impact which contributed approximately $4.8 million to the overall
sales increase.

Operating income increased $5.8 million, or 37% from 2005,
primarily as a result of a shift in mix to higher-margin products,
strong sales growth, and increased margins due to value added
selling activities. Differences in average currency exchange rates
did not materially impact earnings.

investments in commercial resources and the launch of new tech-
nology platforms, both of which contributed to a 19% increase in
sales versus 2005. Specialty Inks and Polymer Systems’s sales
increased 15% in 2006 compared to 2005 from increased sales of
higher-priced products such as inks and specialty colorants, the
introduction of new products, higher selling prices and continued
global growth. The remaining 50% interest in DH Compounding was
acquired in fourth quarter 2006 and had a modest impact on sales
growth.

Operating income in 2006 for All Other was ($2.3) million, but
this result was a $4.6 million improvement compared to 2005.
North American Color and Additives and North American Engineered
Materials demonstrated 20% and 33% improvements, respectively,
in operating income due to improved demand, aggressive margin
improvement actions related to value-added pricing and cost struc-
ture improvements.

Distribution

Impact of Inflation

Sales were $732.8 million in 2006, an increase of 8% versus 2005
led by an increase in selling prices and a 1% increase in shipment
volume. The increase in selling prices was driven by both passing
through increases from our supplier base and from a slight shift in
mix towards higher-priced engineered products. The small change in
volume was a result of gains from our National Account programs
more than offsetting softening demand in the Building and Con-
struction and Automotive markets in the second half of 2006.

Operating income decreased $0.3 million in 2006 due to
increased investment in commercial resources. Hurricanes Katrina
and Rita caused a surge in demand in 2005 that temporarily
increased selling prices and margins, both of which have returned
to normalized levels in 2006 as demand has softened.

Resin and Intermediates

Resin and Intermediates operating income increased $11.0 million,
or 12%, over 2005. OxyVinyls’ equity earnings increased $4.0 mil-
lion primarily due to higher industry average PVC resin and VCM
price spreads over raw material costs. SunBelt’s equity earnings
increased $6.6 million due to higher selling prices for chlorine and
caustic soda that were driven by strong demand.

Although inflation has slowed in recent years, we believe it remains
a factor in our economy and we continually seek ways to lessen its
impact. Toward that end, we deploy three primar y mitigating strat-
egies: a) within the context of competitive markets, we offset higher
raw material and energy costs by increasing the prices of our
products to customers over time; b) we are improving our ability
to sell higher valued specialized materials, services and solutions
to our customers where price is determined by value received by the
customer rather than by changes to cost inputs; and c) we are
implementing specific efficiency programs such as Lean Six Sigma,
energy conservation initiatives, and inventory and distribution cost
optimization programs, that are expected to lower our delivered cost
of product to customers, helping to negate portions of the detri-
mental effect of inflation.

Additionally, we use the last-in, first-out (LIFO) method of
accounting for 38% of our inventories and the first-in, first-out (FIFO)
or average cost method for the remainder. Under the LIFO method,
the cost of products sold that are reported in the financial state-
ments approximates current costs, providing a better match of
current period revenue and expenses. Charges to operations for
depreciation represent the allocation of historical costs incurred
over past years and are lower than if they were based on the current
cost of the productive capacity that is being consumed.

All Other

All Other includes the North American Color and Additives, North
American Engineered Materials, Producer Services and Specialty
Inks and Polymer Systems operating segments. Sales in aggregate
were $491.5 million in 2006, up 13% from 2005. All of the oper-
ating segments except for North American Color and Additives
achieved sales growth in excess of 15%. In 2006, demand gener-
ated from the rebuilding activities in the aftermath of the hurricanes
that impacted the US Gulf Coast drove strong improvements in year-
over-year sales for our wire & cable and general purpose pipe
products. In addition, we started to see positive results in our
North American Engineered Materials business from our

Critical Accounting Policies and Estimates

Significant accounting policies are described more fully in Note C to
the Consolidated Financial Statements. The preparation of financial
statements in conformity with generally accepted accounting prin-
ciples requires us to make estimates and assumptions about future
events that affect the amounts reported in our financial statements
and accompanying notes. We base our estimates on historical
experience and assumptions that we believe are reasonable under
the related facts and circumstances. The application of these crit-
ical accounting policies involves the exercise of judgment and use of
assumptions for future uncertainties. Accordingly, actual results

P O L Y O N E C O R P O R A T I O N

could differ significantly from these estimates. We believe that the
following discussion addresses our most critical accounting poli-
cies, which are those that are the most important to the portrayal of
our financial condition and results of operations and require our
most difficult, subjective and complex judgments.

Sales Discounts and Rebates — Sales discounts and rebates
are offered to certain customers to promote customer loyalty and to
encourage greater product sales. These programs provide custom-
ers with credits against their purchases if they attain pre-estab-
lished volumes or revenue milestones for a specific period. We
estimate the provision for rebates based on the specific terms of
each agreement at the time of shipment and an estimate of the
customer’s future achievement of the respective volume or revenue
milestones. The actual amounts earned can differ from these
estimates. In the past, the actual amounts earned by our customers
have not differed materially from our estimates.

Allowance for Doubtful Accounts — Allowances for doubtful
accounts are determined based on estimates of losses related to
customer receivable balances. In establishing the appropriate pro-
visions for customer receivable balances, we make assumptions
about their future collectibility. Our assumptions are based on an
individual assessment of each customer’s credit quality as well as
subjective factors and trends, including the aging of receivable
balances. We regularly analyze significant customer accounts and
record a specific reserve to reduce the related receivable to the
amount we reasonably believe is collectible when we become aware
of a customer’s inability to meet its financial obligations to us, such
as in the case of a bankruptcy filing or deterioration in the custom-
er’s operating results or financial position. We also record reserves
for all other customers based on a variety of factors, including the
length of time the receivables are past due, the financial health of
the customer, economic conditions and our historical experience. If
circumstances related to specific customers change, our estimates
of the collectibility of receivables may be adjusted further. In the
past, the actual losses incurred have differed from our estimates
primarily as a result of unforeseen bankruptcy filings by our
customers.

Environmental Accrued Liability — Based upon estimates
prepared by our environmental engineers and consultants, we have
$83.8 million accrued at December 31, 2007 to cover probable
future environmental remediation expenditures. We do not believe
that any of these matters, either individually or in the aggregate, will
have a material adverse effect on our capital expenditures, consol-
idated financial condition, results of operations or cash flow beyond
the amount accrued. This accrual represents our best estimate of
the remaining probable remediation costs based upon information
and technology currently available and our view of the most likely
remedy. Depending upon the results of future testing, the ultimate
remediation alternatives undertaken, changes in regulations, new
information, newly discovered conditions and other factors, it is
reasonably possible that we could incur additional costs in excess
of the amount accrued. However, such additional costs, if any,
cannot currently be estimated. Our estimate of this liability may
be revised as new regulations or technologies are developed or

additional information is obtained. Changes during the past five
years have primarily resulted from an increase in the estimate of
future remediation costs at existing sites and payments made each
year for remediation costs that were already accrued.

For more information about our environmental liabilities, see

Note N to the Consolidated Financial Statements.

Asbestos-Related Claims — We have been named in various
lawsuits involving multiple claimants and defendants for alleged
asbestos exposure in the past by, among others, workers and
contractors and their families at plants owned by us or our prede-
cessors, or on board ships owned or operated by us or our prede-
cessors. We have reserves totaling $0.2 million as of December 31,
2007 for asbestos-related claims that are probable and estimable.
We believe that the probability is remote that losses in excess of the
amounts we have accrued could be materially adverse to our finan-
cial condition, results of operations or cash flows. If the underlying
facts and circumstances change in the future, we will modify our
reserves, as appropriate. The amount of this accrual has not
materially changed over the past several years.

Restructuring-Related Accruals — Since PolyOne was formed
in 2000, we have recorded accruals for charges in connection with
restructuring our businesses, as well as integrating acquired busi-
nesses. These accruals include estimates related to employee
separation costs, the closure and/or consolidation of facilities,
contractual obligations and the value of assets such as property,
plant and equipment, and inventories. Actual amounts could differ
from the original estimates, and have differed in the past primarily
from differences between estimated and actual net proceeds
received upon the sale of property, plant and equipment.

Restructuring-related accruals are reviewed on a quarterly
basis and changes to these accruals are made when changes to
plans occur. Changes to restructuring plans for existing businesses
are recorded as employee separation and plant phaseout costs in
the period when the change occurs.

For more information about our restructuring activities, see

Note E to the Consolidated Financial Statements.

Goodwill — Under SFAS No. 142, “Goodwill and Other Intan-
gible Assets,” we are required to per form impairment tests of our
goodwill and intangible assets. These tests must be done at least
once a year, and more frequently if an event or circumstance
indicates that an impairment or a decline in value may have
occurred. We test for goodwill impairment on July 1 of each year.
The goodwill impairment test is a two-step process, which requires
us to make judgments about the assumptions that we use in the
calculation. The first step of the process consists of estimating the
fair value of each reporting unit based on a number of factors,
including projected future operating results and business plans,
economic projections, anticipated future cash flows, comparable
marketplace data from within a consistent industry grouping, and
the cost of capital. We compare these estimated fair values with
their carrying values, which includes the allocated goodwill. If the
estimated fair value is less than the carrying value, a second step is

P O L Y O N E C O R P O R A T I O N

per formed to compute the amount of the impairment by determining
an “implied fair value” of goodwill. The determination of a reporting
unit’s “implied fair value” of goodwill requires us to allocate the
estimated fair value of the reporting unit to the assets and liabilities
of the reporting unit. Any unallocated fair value represents the
“implied fair value” of goodwill, which is then compared to its
corresponding carrying value.

We cannot predict what future events might adversely affect
the reported value of our goodwill. These events include, but are not
limited to, strategic decisions made in response to economic com-
petitive conditions, the impact of the economic environment on our
customer base, or a material negative change in relationships with
significant customers.

For more information about our goodwill, see Note D to the

Consolidated Financial Statements.

Income Taxes — Estimates of full year taxable income are
used in the tax rate calculations for the legal entities and jurisdic-
tions in which we operate throughout the year and these estimates
may change during the year to reflect evolving facts and circum-
stances. During the year, we use judgment to estimate our income
for
the year. Because judgment is involved, the tax rate may
increase or decrease significantly in any period.

To determine income or loss for financial statement purposes,
we make estimates and judgments. These estimates and judg-
ments occur in the calculation of certain tax liabilities and in
determining the recoverability of deferred tax assets that result
from temporar y differences between the tax and financial state-
ment recognition of revenue and expense. SFAS No. 109, “Account-
ing for Income Taxes,” also requires us to reduce the deferred tax
assets by a valuation allowance if it is more likely than not that some
portion or all of the recorded deferred tax assets will not be realized
in future periods.

In the process of determining our ability to recover our deferred
tax assets, we consider all of the available positive and negative
evidence, including our past operating results, the existence of
cumulative losses in recent years and our forecast of future taxable
income. To estimate future taxable income we develop assumptions
including the amount of future state, federal and international pre-
tax income, the reversal of temporar y differences and the imple-
mentation of feasible and prudent tax planning strategies. These
assumptions require significant judgment to forecast future taxable
income and are consistent with the plans and estimates that we use
to manage our businesses.

In addition, the calculation of tax liabilities deals with uncer-
tainties in applying complex tax regulations in a large number of
jurisdictions. We recognize potential liabilities for anticipated tax
audit issues based on our estimate of the extent to which additional
taxes may be due. To the extent we prevail in matters for which
accruals have been established, or are required to pay amounts in
excess of recorded reserves, the effective tax rate in a given
financial statement period may be materially impacted.

For more information about our income taxes, see Note P to the

Consolidated Financial Statements.

Pensions and Post-retirement Benefits — Effective Decem-
ber 31, 2006, we adopted SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans, an
amendment of Financial Accounting Standards Board (FASB) State-
ments No. 87, 88, 106 and 132(R).” This statement requires
employers to recognize the over funded or under funded status of
defined benefit post-retirement plans in their balance sheets. The
over funded or under funded status is measured as the difference
between the fair value of plan assets and the benefit obligation of
the plans (the projected benefit obligation for pension plans and the
accumulated post-retirement benefit obligation for other post-retire-
ment plans). The change in the funded status of the plans must be
recognized in the year in which the change occurs through accumu-
lated other comprehensive income.

Prior to the adoption of SFAS No. 158, we accounted for our
defined benefit post-retirement plans under SFAS No. 87, “Employ-
ers Accounting for Pensions,” and SFAS No. 106, “Employers
Accounting for Postretirement Benefits Other Than Pensions.”
SFAS No. 87 required that a liability (minimum pension liability)
be recorded when the accumulated benefit obligation (ABO) liability
exceeded the fair value of plan assets. Any adjustment to this
liability was recorded as a non-cash charge to accumulated other
comprehensive income within shareholders equity. SFAS No. 106
required that the liability that was recorded should represent the
actuarial present value of all future benefits attributable to an
employee’s service rendered to date. Under both SFAS No. 87
and No. 106, any change in the funded status was not immediately
recognized. Instead, they were deferred and recognized ratably over
future periods. Upon adoption of SFAS No. 158, we recognized the
amounts of prior changes in the funded status of our post-retire-
ment benefit plans through accumulated other comprehensive
income. As a result, the net impact of accounting for SFAS No. 158
was an increase of $6.4 million on a pre-tax basis and a decrease of
$0.4 million on an after-tax basis to our accumulated other com-
prehensive loss. In addition, we recorded an adjustment of $2.7 mil-
lion to increase accumulated other comprehensive loss to record
our proportionate share of OxyVinyls’ adoption of SFAS No. 158.

The adoption of SFAS No. 158 had no impact on our consol-
idated statements of income for the year ended December 31,
2006 or for any prior period. Also, the adoption of SFAS No. 158 did
not affect any financial covenants contained in the agreements
governing our debt and our receivables sale facility and is not
expected to affect operating results in future periods.

We have several pension plans, of which only two continue to
accrue benefits for certain U.S. employees. These two plans gen-
erally provide benefit payments using a formula that is based upon
employee compensation and length of service. Length of service for
determining benefit payments was frozen as of December 31,
2002. All U.S. defined-benefit pension plans are closed to new
participants. Regarding our other subsidized post-employment

P O L Y O N E C O R P O R A T I O N

benefit plans, only certain employees hired prior to December 31,
1999 are eligible to participate.

Included in our results of operations are significant pension
and post-retirement benefit costs that we measure using actuarial
valuations. Inherent in these valuations are key assumptions,
including assumptions about discount rates and expected returns
on plan assets. These assumptions are updated at the beginning of
each fiscal year. We consider current market conditions, including
changes in interest
rates, when making these assumptions.
Changes in pension and post-retirement benefit costs may occur
in the future due to changes in these assumptions.

To develop our discount rate, we consider the yields of high-
quality, fixed-income investments with maturities that correspond to
the timing of our benefit obligations. To develop our expected return
on plan assets, we consider our historical long-term asset return
experience, the expected investment portfolio mix of plan assets
and an estimate of long-term investment returns. To develop our
expected portfolio mix of plan assets, we consider the duration of
the plan liabilities and give more weight to equity investments than
to fixed-income securities. Holding all other assumptions constant,
a 0.5 percentage point increase or decrease in the discount rate
would have increased or decreased our 2007 net pension and post-
retirement expense by approximately $1.9 million. Likewise, a
0.5 percentage point increase or decrease in the expected return
on plan assets would have increased or decreased our 2007 net
pension cost by approximately $1.9 million.

Market conditions and interest rates significantly affect the
value of future assets and liabilities of our pension and post-retire-
ment plans. It is difficult to predict these factors due to the volatility
of market conditions. Holding all other assumptions constant, a
0.5 percentage point increase or decrease in the discount rate
would have increased or decreased accumulated other comprehen-
sive income and the related pension and post-retirement liability by
approximately $27.0 million as of December 31, 2007.

The rate of increase in medical costs that we assume for the
next five years was held constant with prior years to reflect both our
actual experience and projected expectations. The health care cost
trend rate assumption has a significant effect on the amounts
reported. Holding all other assumptions constant, a 0.5 percentage
point increase or decrease in the health care cost trend rate would
have increased or decreased our 2007 net periodic benefit cost by
$0.2 million and our accumulated other comprehensive income and
the related post-retirement liability by approximately $3.0 million as
of December 31, 2007.

For more information about our pensions and post-retirement

benefits, see Note M to the Consolidated Financial Statements.

FASB Interpretation No. 48 — We adopted the provisions of
FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109, Accounting
for Income Taxes” (FIN 48), on January 1, 2007.

The net income tax assets recognized under FIN 48 did not
from the net assets recognized before adoption, and,

differ

therefore, we did not record a cumulative effect adjustment related
to the adoption of FIN 48. We are no longer subject to U.S. income
tax examinations for periods preceding 2004, and with limited
exceptions, for periods preceding 2002 for foreign, state and local
tax examinations.

As of December 31, 2007, we have a $6.0 million liability for
uncertain tax positions. This amount relates to items under exam-
ination by foreign tax authorities related to the valuation of assets.
We do not agree with the proposed adjustments and have appealed
the assessments. We do not anticipate that the disputes will be
resolved in the next twelve months.

During the third quarter of 2007, a foreign jurisdiction initiated
an audit related to transfer pricing and we accrued $1.0 million for
the payment of income tax and interest. The issue was resolved
during the fourth quarter of 2007 and we paid $0.3 million for
income taxes and $0.5 million for interest.

We recognize interest and penalties related to unrecognized
income tax benefits in the provision for income taxes. As of Decem-
ber 31, 2007, we have accrued $2.5 million of interest and
penalties.

A reconciliation of the beginning and ending amount of unrec-

ognized tax benefits is as follows:

(In millions)

Balance at January 1, 2007
Additions based on tax positions related to the current

year

Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements

Balance at December 31, 2007

Unrecognized

Tax Benefits

2007

$ 6.0

0.5
(0.2)
(0.3)

$ 6.0

FASB Staff Position AUG AIR-1 — In September 2006, the
FASB issued FASB Staff Position (FSP) AUG AIR-1, “Accounting for
Planned Major Maintenance Activities” (FSP AUG AIR-1). FSP AUG
AIR-1 prohibits the use of the accrue-in-advance method of account-
ing for planned major maintenance activities in annual and interim
financial reporting periods and is effective for the first fiscal year
beginning after December 15, 2006. OxyVinyls, a former equity
affiliate sold on July 6, 2007, adopted FSP AUG AIR-1 in the first
quarter of 2007, on a retrospective basis, and used the deferral
method of accounting for planned major maintenance for 2007.

The effect on OxyVinyls’ consolidated balance sheet at Janu-
ary 1, 2007 from adopting FSP AUG AIR-1 was an increase of
$38.3 million in other assets, a decrease of $12.3 million in
accrued liabilities, an increase of $4.2 million in minority interest
and an increase of $46.4 million in partners’ capital. Our propor-
tionate share of OxyVinyls’ operations was 24%.

The adoption of FSP AUG AIR-1 represents a change in account-
ing principle and, under the guidance of this principle, must be
applied retrospectively. Under these retrospective provisions, we

P O L Y O N E C O R P O R A T I O N

assets and nonfinancial liabilities, except those that are recognized
or disclosed at fair value in the financial statements on a recurring
basis to fiscal years beginning after November 15, 2008. We
adopted the non-deferred portion of SFAS No. 157 on January 1,
2008 and it did not have a material impact on our financial state-
ments. We are evaluating the effect that adoption of the deferred
portion of SFAS No. 157 will have on our financial statements in
2009, specifically in the areas of measuring fair value in business
combinations and goodwill impairment tests.

SFAS No. 159 — In February 2007,

the FASB issued
SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities,” which allows entities to voluntarily choose, at
specified election dates, to measure many financial assets and
liabilities at fair value. The election is made on an instrument-by-in-
strument basis and is irrevocable. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We do not believe
that the adoption of SFAS No. 159 will have a significant effect on
our financial statements.

SFAS No. 141 (revised) — In December 2007, the FASB
issued SFAS No. 141 (revised 2007), “Business Combinations,”
which establishes principles over the method entities use to rec-
ognize and measure assets acquired and liabilities assumed in a
business combination and enhances disclosures on business com-
binations. SFAS No. 141(R) is effective for business combinations
for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008.
We are evaluating the effect that adoption will have on our 2009
financial statements.

Cash Flows

The following discussion focuses on the material components of
cash flows from operating, investing and financing activities.

(In millions)

Cash flow summary

2007

2006

2005

Cash provided by operating activities

$ 67.2

$111.7

$ 63.7

Cash provided (used) by investing

activities

Cash used in financing activities

Effect of exchange rates on cash

Increase (decrease) in cash and

215.3

(275.9)

6.6

(16.8)

(63.4)

31.5

1.9

(24.2)

(43.7)

(4.2)

(1.6)

equivalents

$ 13.2

$ 33.4

$ (5.8)

have restated our historical financial statements to reflect the
change in accounting for planned major maintenance activities of
our former equity affiliate, OxyVinyls. For further discussion and
illustration of the changes made to our financial statements, refer
to Note C of the Consolidated Financial Statements.

Share-Based Compensation — Prior to January 1, 2006, as
provided under SFAS No. 123, we applied Accounting Principles
Board (APB) No. 25 and related interpretations to account for our
share-based compensation plans. Under APB No. 25, compensa-
tion expense was recognized for stock option grants if the exercise
price of the grant was below the fair value of the underlying stock at
the measurement date. On January 1, 2006, we adopted
SFAS No. 123(R), which requires us to recognize compensation
expense based on the fair value on the date of the grant. We are
using the modified prospective transition method, which does not
require prior period financial statements to be restated. The impact
on pre-tax earnings from adopting SFAS No. 123(R) for the year
ended December 31, 2006 was a charge of $2.5 million.

The option-pricing model that we used to value the stock
appreciation rights granted during 2007 and 2006 was a Monte
Carlo simulation method. Under this method, the fair value of
awards on the date of grant is an estimate and is affected by our
stock price, as well as assumptions regarding a number of highly
complex and subjective variables. Expected volatility was set at the
average of the six-year historical weekly volatility for our common
stock and the implied volatility rates for exchange-traded options.
The expected term of options that were granted was set equal to
halfway between the vesting and expiration dates for each grant.
Dividends were not included in this calculation because we do not
currently pay dividends. The risk-free rate of return for periods within
the contractual life of the option is based on U.S. Treasury rates in
effect at the time of the grant. Forfeitures were estimated at 3% per
year based on our historical experience.

For more information on the adoption and impact of
SFAS No. 123(R), see Note C and Note Q to the Consolidated
Financial Statements.

Contingencies — We are subject to various investigations,
claims and legal and administrative proceedings covering a wide
range of matters that arise in the ordinary course of business
activities. Any liability that may result from these proceedings that
we judge to be probable and estimable has been accrued. The
actual amounts resulting from these matters can differ from our
estimates.

New Accounting Pronouncements —

SFAS No. 157 — In September 2006,
the FASB issued
SFAS No. 157, “Fair Value Measurement,” which defines fair value,
establishes the framework for measuring fair value under U.S. gen-
erally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. In December 2007, The
FASB issued a proposed FASB Staff Position (FSP FAS 157-b) that
would delay the effective date of SFAS No. 157 for all nonfinancial

P O L Y O N E C O R P O R A T I O N

(In millions)

2007

2006

2005

Cash Flows from Operating Activities

Net income

$ 11.4

$ 122.9

$ 47.9

Depreciation and amortization

57.4

57.1

50.7

Loss on disposition of discontinued
businesses and related plant
phaseout charge

Charges for environmental

—

3.1

15.6

remediation, net of net payments

23.3

4.3

(9.6)

Deferred income tax provision

(benefit)

Premium on early extinguishment of

long-term debt

Stock compensation expense

Asset impairment charges

Companies carried at equity and

minority interest:

Impairment of investment in equity

affiliates

Income from equity affiliates and

(57.1)

(12.9)

2.0

12.8

4.3

2.5

4.4

4.5

0.2

—

(0.6)

0.4

Working capital management

Our working capital management focus is on three metrics that we
believe are the most critical to maximizing cash provided by oper-
ating activities. These three metrics measure the number of days of
sales in receivables (DSO), and the days of cost of goods sold in
inventories (DSI) and accounts payable (DSP). These metrics allow
us to understand total dollar changes in the three principal com-
ponents of working capital by isolating the effects of sales and
production levels in the business versus management’s efforts to
drive more efficient use of company funds.

The following table presents a comparison of our year-end
working capital metrics and the impact of changes in efficiency
and volume on accounts receivable, inventories and accounts
payable:

(In days)

Accounts receivable DSO

14.8

—

Inventories DSI

Accounts payable DSP

2007

2006

2005

54.5

39.5

53.1

42.2

49.8

37.6

(46.6)

(44.3)

(41.3)

minority interest

(42.5)

(112.0)

(79.9)

Distributions and distributions

received

Pension and postretirement

contributions

Change in assets and liabilities:

Increase (decrease) from working

37.6

97.7

67.4

(26.9)

(13.9)

(17.8)

capital

35.6

(33.8)

(1.3)

Increase (decrease) in sale of

accounts receivable

Accrued expenses and other

Net cash used by discontinued

operations

Net cash provided by operating

—

(6.0)

(7.9)

(1.9)

7.9

(20.8)

—

(0.1)

1.8

activities

$ 67.2

$ 111.7

$ 63.7

Year-end net days

47.4

51.0

46.1

Change in net days from prior year end

3.6

(4.9)

3.7

The 2007 year-end working capital metrics netted to a 3.6 day
improvement compared to 2006 as management’s actions to
reduce inventories due to a slower demand outlook and initiate
vendor terms management programs offset a DSO increase of
1.4 days as customers slowed payments in light of current trends
in the economy and credit market turmoil. The 2006 year-end
working capital metrics netted to an unfavorable increase of
4.9 days compared to 2005 due to slower collections and higher
inventories as compared to year-end 2005 when weather issues in
the U.S. Gulf Coast created an unusually favorable impact on col-
lections and inventories levels due to material shortages.

provided

Operating

Activities — Cash

operations
decreased by $44.5 million compared to 2006 due to lower oper-
ating earnings, lower earnings and distributions from equity affili-
ates, an increase in environmental remediation payments, and a
$57.1 million benefit in deferred income taxes principally related to
the OxyVinyls sale. Additionally, the impact of the change in working
capital was a $69.4 million improvement comparing 2007 versus
2006. A more comprehensive discussion of working capital
is
provided below.

(In millions)

Cash provided (used) by:

Accounts receivable

Inventories

Accounts payable

2007

2006

$ (8.9)

$ 23.0

26.7

17.8

(39.6)

(17.2)

$35.6

$(33.8)

Impact of change in net days

$18.7

$(21.0)

Impact of change in sales and production levels

16.9

(12.8)

$35.6

$(33.8)

In 2006, net cash provided by operations increased by
$48.0 million compared to 2005 primarily due to a significant
increase in operating earnings, higher cash distributions from
equity affiliates and lower accrued expenses. The change in oper-
ating earnings is discussed in Note R — Segments and at the
beginning of this section MD&A. Equity affiliate cash distributions
increased $30.3 million as our joint ventures in the chloro-vinyl
chain saw their businesses elevate to peak earnings.

From December 31, 2006 to December 31, 2007, $35.6 mil-
lion of cash was provided by a reduction in working capital invest-
ment due to lower year-end inventories, reflecting management
actions, and higher outstanding payables. In addition, inventories
were favorably impacted by a $9.9 million increase in our 2007 LIFO
reserve versus 2006, which is due to the inflation in the cost of raw
materials in 2007, and the impact of foreign exchange. The impact

P O L Y O N E C O R P O R A T I O N

of LIFO and foreign exchange are shown in the impact of change in
sales and production levels line item in the above table.

From December 31, 2005 to December 31, 2006, $33.8 mil-
lion of cash was consumed in working capital investment driven by
higher inventories and lower payables. Year-end 2005 demand was
significantly above typical seasonal levels and caused a larger than
expected reduction in inventories reflecting heightened customer
demand following the severe storms in the U.S. Gulf Coast. Con-
versely, at the end of 2006, demand softened resulting in relatively
higher year-end inventory levels. The decline in accounts payable
was due to lower purchases during December 2006. The year-over-
year change in LIFO was $14 million unfavorable.

(In millions)

2007

2006

2005

Cash Flows from Investing Activities

Capital expenditures

$ (43.4)

$(41.1)

$(32.1)

Business acquisitions and related
deposits, net of cash acquired

Proceeds from sale of assets

Proceeds from sale of investment in

(11.2)

9.4

(1.5)

8.7

(2.7)

12.3

equity affiliate

260.5

—

Proceeds from sale of discontinued

business, net

Net cash used by discontinued

operations

—

17.3

(0.2)

(1.7)

Net cash provided (used) by investing

activities

$215.3

$(16.8)

$(24.2)

Investing Activities — In 2007, we generated $215.3 million
from investing activities, primarily from the proceeds that we
received from the sale of our 24% interest in OxyVinyls. In a trans-
action related to the sale of our interest in OxyVinyls, we purchased
the remaining 10% minority interest in Powder Blends, LP. Capital
spending as a percentage of depreciation and amortization was
76%.

In 2006, we used $16.8 million for investing activities, prima-
rily for capital spending in support of manufacturing operations. This
use of cash was partially offset by the proceeds from the sale of our
Engineered Films business. Capital spending in 2006 as a percent-
age of depreciation and amortization was 72%.

In 2005, we used $24.2 million for investing activities, reflect-
ing capital spending in support of manufacturing operations, the
purchase of the remaining 16% of Star Color, a Thailand-based color
and additives business and the purchase of certain assets of
Novatec Plastics Corporation. Star Color is included in our Interna-
tional Color and Engineered Materials segment, and Novatec’s
assets are included in our Vinyl Business segment. This capital
spending was partially offset by proceeds that we received from the
sale of previously closed facilities. Capital spending as a percent-
age of depreciation and amortization was 63% in 2005.

(In millions)

2007

2006

2005

Cash Flows from Financing Activities

Change in short-term debt

(0.2)

$ (2.1)

$ 4.8

Repayment of long-term debt

(264.1)

(60.0)

(49.0)

Premium paid on early

extinguishment of long-term debt

(12.8)

(4.4)

—

Proceeds from exercise of stock

options

1.2

3.1

0.5

Net cash used by financing activities

$(275.9)

$(63.4)

$(43.7)

Financing Activities — Cash used by financing activities in
2007, 2006 and 2005 was primarily for the extinguishment of debt.

Discontinued Operations — Cash flows from discontinued
operations are presented separately on a single line in each section
of the Consolidated Statements of Cash Flows. The absence of
future cash flows from discontinued operations is not expected to
materially affect future liquidity and capital resources.

Balance Sheets

The following discussion focuses on material changes in bal-
ance sheet line items from December 31, 2006 to December 31,
2007 that are not discussed in the preceding “Cash Flows” section.

Pension benefits — The $42.5 million decrease in pension
benefits was a result of a higher discount rate at December 31,
2007 and strong asset per formance.

Other non-current liabilities — The increase of $12.1 million
was primarily due to an increase of $15.8 million in non-current
environmental reserves. The remaining decrease in other non-cur-
rent
less significant account
changes such as employment costs, insurance accruals and other
reserves.

liabilities is comprised of other

Capital Resources and Liquidity

Liquidity is defined as an enterprise’s ability to generate adequate
amounts of cash to meet both current and future needs. These
needs include paying obligations as they mature, maintaining pro-
duction capacity and providing for planned growth. Capital
resources are sources of funds other than those generated by
operations. We are not aware of any trends, demands, commit-
ments, events, or uncertainties that are reasonably likely to result
in our liquidity decreasing to the extent that it would have a material
adverse effect on our financial condition.

As of December 31, 2007, we had existing facilities to access
available capital resources (receivables sale facility, uncommitted
short-term credit lines and senior unsecured notes and debentures)
totaling $487.9 million. As of December 31, 2007, we had used
$336.7 million of these facilities, and $151.2 million was available
to be drawn while remaining in compliance with all covenants
associated with these facilities. As of December 31, 2007, we also
had a $79.4 million cash and cash equivalents balance that

P O L Y O N E C O R P O R A T I O N

exceeded our typical operating cash requirements of $35 million to
$40 million, adding to our available liquidity.

The following table summarizes our available and outstanding

facilities at December 31, 2007:

(In millions)

Outstanding

Available

Long-term debt, including current maturities

$330.6

$ —

Receivables sale facility

Short-term debt

—

6.1

151.2

—

$336.7

$151.2

Long-Term Debt — At December 31, 2007, long-term debt
totaled $330.6 million, with maturities ranging from 2008 to
2015. Current maturities of
long-term debt at December 31,
2007 were $22.6 million. During 2007, we repurchased $241.4 mil-
lion aggregate principal amount of our 10.625% senior notes due
2010 at a premium of $12.8 million. This premium is shown as a
separate line item in the Consolidated Statements of Income.
Unamortized deferred note issuance costs of $2.8 million were
expensed due to this repurchase and are included in interest
expense in the Consolidated Statements of Income. We also made
a payment of $20.0 million of aggregate principal amount of our
medium-term notes that matured during 2007. As part of our
purchase of DH Compounding during the fourth quarter 2006,
we issued a promissory note in the principal amount of $8.7 million,
payable in 36 equal installments at a rate of 6% per annum. During
2007, we made principal payments totaling $2.8 million on this
promissory note. For more information about our debt, see Note G
to the Consolidated Financial Statements.

Guarantee and Agreement — We decided not to renew our
revolving credit facility, and, accordingly, it expired on June 6, 2006.
To replace some of the features of this expired facility, we entered
into a definitive Guarantee and Agreement with Citicorp USA, Inc.,
on June 6, 2006. Under this Guarantee and Agreement, we guar-
antee the treasury management and banking services provided to
us and our subsidiaries, such as subsidiary borrowings, interest
rate swaps, foreign currency forwards, letters of credit, credit card
programs and bank overdrafts. This guarantee is secured by our
inventories located in the United States.

Credit Facility — On January 3, 2008, we entered into a credit
agreement with Citicorp USA, Inc., as administrative agent and as
issuing bank, and The Bank of New York, as paying agent. The credit
agreement provides for an unsecured revolving and letter of credit
facility with total commitments of up to $40 million. The credit
agreement expires on March 20, 2011.

Borrowings under the revolving credit facility are based on the
applicable LIBOR rate plus a fixed fee. On January 9, we borrowed
$40 million under the agreement and entered into a floating to fixed
interest rate swap to January 9, 2009 resulting in an effective
interest rate of 8.4%. The credit agreement contains covenants
that, among other things, restrict our ability to incur liens, and
various other customary provisions, including affirmative and neg-
ative covenants, and representations and warranties.

Receivables Sale Facility — The receivables sale facility was
amended in June 2007 to extend the maturity to June 2012 and to
among other things, modify certain financial covenants and reduce
the cost of utilizing the facility. In July 2007, the receivable sale
facility was amended to include up to $25.0 million of Canadian
receivables, which increased the facility size to $200.0 million. The
maximum proceeds that we may receive are limited to 85% of the
eligible domestic and Canadian accounts receivable sold. This
facility also makes up to $40.0 million available for issuing standby
letters of credit as a sub-limit within the $200.0 million facility, of
which $11.4 million was used at December 31, 2007.

The facility requires us to maintain a minimum fixed charge
coverage ratio (defined as Adjusted EBITDA less capital expendi-
tures, divided by interest expense and scheduled debt repayments
for the next four quarters) of at least 1 to 1 when availability under
the facility is $40.0 million or less. As of December 31, 2007, the
fixed charge coverage ratio was 1.4 to 1 and we had not sold any
accounts receivable, resulting in availability under the facility of
$151.2 million.

During January 2008, we sold $59.2 million of our undivided

interest in accounts receivable.

Of the capital resource facilities available to us as of Decem-
ber 31, 2007, the portion of the receivables sale facility that was
actually sold provided security for the transfer of ownership of these
receivables. Each indenture governing our senior unsecured notes
and debentures and our guarantee of the SunBelt notes allows a
specific level of secured debt, above which security must be pro-
vided on each indenture and our guarantee of the SunBelt notes.
The receivables sale facility and our guarantee of the SunBelt notes
are not considered debt under the covenants associated with our
senior unsecured notes and debentures. As of December 31, 2007,
we had not sold any accounts receivable and had guaranteed
$60.9 million of our SunBelt equity affiliate’s debt.

The following table summarizes our obligations under long-term
debt, operating leases, standby letters of credit, interest obliga-
tions, pension and post-retirement obligations, guarantees and
purchase obligations as of December 31, 2007:

Payment Due by Period

Less than

More than

(In millions)

Total

1 Year

1-3 Years 4-5 Years

5 Years

Contractual Obligations

Long-term debt

$330.6 $ 22.6 $ 40.3 $217.7 $ 50.0

Operating leases

Standby letters of credit
Interest obligations(1)

64.9

11.4

120.6

17.4

11.4

26.6

26.1

11.1

10.3

—

48.4

34.3

11.3

Pension and post-

retirement
obligations(2)

Guarantees

Purchase obligations

205.8

33.2

60.9

7.9

6.1

3.6

55.3

12.2

4.3

49.6

12.2

—

67.7

30.4

—

Total

$802.1 $120.9 $186.6 $324.9 $169.7

P O L Y O N E C O R P O R A T I O N

(1) Interest obligations are stated at the rate of interest that is defined
by the debt instrument and take into effect any impact of rate swap
agreements, assuming that the debt is paid at maturity.

(2) Pension and post-retirement obligations relate to our U.S. and inter-
national pension and other post-retirement plans. Based upon our
interpretation of the new pension regulations, there will be minimum
funding requirements in 2008 of approximately $18.2 million for our
U.S. qualified defined benefit pension plans. Obligations are based
on the plans’ current funded status and actuarial assumptions, and
include funding requirements projected to be made to our qualified
pension plans, projected benefit payments to participants in our
other post-employment benefit plans, and projected benefit pay-
ments to participants in our non-qualified pension plans through
2017.

We expect that profitable operations in 2008 will enable us to
maintain existing levels of available capital resources and meet our
cash requirements. Expected sources of cash in 2008 include net
income, additional borrowings under existing loan agreements,
cash distributions from equity affiliates and proceeds from the sale
of previously closed facilities and redundant assets. Expected uses
of cash in 2008 include interest expense and discounts on the sale
of accounts receivable, cash taxes, a contribution to a defined
benefit pension plan, debt retirements upon maturity, environmen-
tal remediation at inactive and formerly owned sites and capital
expenditures. Capital expenditures are currently estimated to be
between $50 and $60 million in 2008, primarily to support strategic
growth initiatives and manufacturing operations.

Based on current projections, we believe that we should be
able to continue to manage and control working capital, discretion-
ary spending and capital expenditures and that cash provided by
operating activities, along with available borrowing capacity under
our receivables sale facility, should allow us to maintain adequate
levels of available capital resources to fund our operations and
meet debt service and minimum pension funding requirements for
both the short- and long-term.

Related-Party Transactions

We purchase a substantial portion of our PVC resin and all of our
VCM raw materials under supply agreements with OxyVinyls. We
formerly held a 24% equity ownership in OxyVinyls. This ownership
was sold on July 6, 2007 after which we no longer report related
party transactions with OxyVinyls. Net amounts owed to OxyVinyls,
primarily for raw material purchases, totaled $17.3 million at
December 31, 2006. Our total purchases of raw materials from
OxyVinyls were $152 million during the six months ended June 30,
2007 and $369 million during the year ended December 31, 2006.

Off-Balance Sheet Arrangements

Receivables sale facility — We sell our accounts receivable to
PolyOne Funding Corporation (PFC), a wholly-owned, bankruptcy-
remote subsidiary. At December 31, 2007, accounts receivable
totaling $175.8 million were sold to PFC and, as a result, they are
reflected as a reduction of accounts receivable in our Consolidated
Balance Sheets. PFC in turn sells an undivided interest in these
accounts receivable to certain investors and realizes proceeds of up

to $200 million. The maximum proceeds that PFC may receive under
the facility is limited to 85% of the eligible accounts receivable sold
to PFC. At December 31, 2007, PFC had not sold any of its undivided
interests in accounts receivable. We retained an interest in the
$175.8 million of trade receivables sold by us to PFC. As a result,
this retained interest is included in accounts receivable on our
Consolidated Balance Sheet at December 31, 2007. We believe
that available funding under our receivables sale facility provides us
increased flexibility to manage working capital requirements and is
an important source of liquidity. For more information about our
receivables sale facility, see Note I to the Consolidated Financial
Statements.

Guarantee of indebtedness of others — As discussed in Note N
to the Consolidated Financial Statements, we guarantee $60.9 mil-
lion of unconsolidated equity affiliate debt of Sunbelt in connection
with the construction of a chlor-alkali facility in McIntosh, Alabama.
This debt guarantee matures in 2017.

Letters of credit — We maintain approximately $11.4 million
of letters of credit under the receivables sale facility. These letters
of credit are issued by the bank in favor of third parties and are
rate swap
mainly related to insurance claims and interest
agreements.

We have no other off-balance sheet arrangements as defined in

Item 303(a)(4)(ii) of Regulation S-K.

Outlook

Our 2008 outlook for global GDP calls for overall growth in 2008, but
down about 0.5% points from the 2007 level. In North America, our
outlook for 2008 GDP and industrial production growth is for a
steeper year-to-year decline compared to our global outlook. Our
outlooks for GDP and industrial production in North America
assume continued weakness and volatility in financial markets
as well as restrained demand growth from reduced consumer
and business confidence. The export outlook remains vibrant,
based on the co-factors of a weak dollar and the strong growth in
developing nations. Current U.S. leading indicators for manufactur-
ing and employment growth do not point toward a recession, but do
anticipate weakening conditions through early 2008.

PolyOne’s primary North American markets are expected to
remain in decline. The housing sector is expected to weaken further
with our 2008 projection for housing starts down to approximately
1 million units, or approximately 25% less than 2007 levels, and the
lowest level since 1991. Automobile and light truck sales are also
projected to decline moderately from 2007 levels to below 16 million
units and to the lowest level since 1997.

Eurozone economic activity is also expected to slow in 2008,
with our outlook for 2008 GDP growth down from 2007 levels.
Slower growth in the U.K., Germany and Spain are the leading
factors that will affect us, with France projecting only a slight decline
from 2007 levels largely as a result of consumer spending. Partially
counterbalancing the slowing in Western Europe, Eastern Europe

P O L Y O N E C O R P O R A T I O N

GDP growth, although decelerating, is projected to reach approxi-
mately 5%.

Industrial production growth in China is expected to remain
strong with growth of approximately 1.5 times GDP growth, even
though GDP is anticipated to decline moderately to a level slightly
below 10% from a rate of over 11% in 2007. India’s economy is
expected to continue robust expansion although GDP is expected to
decline slightly year-to-year. GDP growth in our other key Asian
markets is projected between 5% and 7%.

Oil and natural gas prices are not expected to decrease sub-
stantially during 2008, with prices continuing to be sensitive to
shocks and perceived or real supply volatility. Moreover, high energy
and hydrocarbon feedstock costs underpin anticipated year-over-
year increases in most chloro-vinyl raw materials. Ethylene and PVC
resin pricing are expected to increase compared to 2007. Addition-
ally, during 2008, significant PVC resin capacity is expected to
become operational as North American producers bring announced
expansion on line.

In summary, the economy is expected to affect PolyOne in
several significant ways during 2008. Softness in North American
construction, particularly residential, and automotive will affect
products and services sold into those markets for most if not all
of 2008. Continued strong growth is expected for our operations in
Asia, especially China and India, and also for emerging markets for
our materials and services. Relatively strong growth in our opera-
tions in Eastern Europe should continue. Western European mar-
kets will experience lower growth rates due to the strong euro and
high energy costs. Globally, growth markets such as electronics and
medical and new eco-friendly solutions through metal replacement
or new biopolymer materials will be targeted and pursued
aggressively.

We anticipate 2008 total Company sales growth in the range of
10% to 12%, including sales from our recent GLS and NHPC acqui-
sitions, despite the likelihood of incremental degradation in the
North American residential construction market. While near term
economic conditions should remain challenging, we expect full-year
earnings growth in 2008. Growth in our non-vinyl businesses, oper-
ating improvements and lower interest expense underpin current
expectations. Beyond the broader economic conditions, raw mate-
rial and energy costs remain a fluid dynamic that clearly could
impact the magnitude and direction of our preliminary viewpoint.

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

In this Annual Report on Form 10-K, statements that are not
reported financial results or other historical information are “for-
ward-looking statements” within the meaning of the Private Secu-
rities Litigation Reform Act of 1995. Forward-looking statements
give current expectations or forecasts of future events and are not
guarantees of future per formance. They are based on manage-
ment’s expectations that involve a number of business risks and
uncertainties, any of which could cause actual results to differ
materially from those expressed in or implied by the forward-looking
statements. You can identify these statements by the fact that they

In particular,

do not relate strictly to historic or current facts. They use words such
as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”
“believe” and other words and terms of similar meaning in connec-
tion with any discussion of future operating or financial per for-
mance and/or sales.
these include statements
relating to future actions; prospective changes in raw material
costs, product pricing or product demand; future per formance;
results of current and anticipated market conditions and market
strategies; sales efforts; expenses; the outcome of contingencies
such as legal proceedings; and financial results. Factors that could
cause actual results to differ materially include, but are not limited
to:

(cid:129) the effect on foreign operations of currency fluctuations,
tariffs, nationalization, exchange controls, limitations on
foreign investment in local businesses and other political,
economic and regulatory risks;

(cid:129) changes in polymer consumption growth rates within the
U.S., Europe or Asia or other countries where PolyOne con-
ducts business;

(cid:129) changes in global industry capacity or in the rate at which
anticipated changes in industry capacity come online in the
polyvinyl chloride (PVC), chlor-alkali, vinyl chloride monomer
(VCM) or other industries in which PolyOne participates;

(cid:129) fluctuations in raw material prices, quality and supply and in
energy prices and supply, in particular fluctuations outside
the normal range of industry cycles;

(cid:129) production outages or material costs associated with sched-

uled or unscheduled maintenance programs;

(cid:129) the cost of compliance with environmental laws and regula-
tions, including any increased cost of complying with new or
revised laws and regulations;

(cid:129) unanticipated developments that could occur with respect to
contingencies such as litigation and environmental matters,
including any developments that would require any increase
in our costs and/or reserves for such contingencies;

(cid:129) an inability to achieve or delays in achieving or achievement
of less than the anticipated financial benefit from initiatives
related to cost reductions and employee productivity goals;

(cid:129) an inability to raise or sustain prices for products or services;

(cid:129) an inability to maintain appropriate relations with unions and
employees in certain locations in order to avoid business
disruptions;

(cid:129) any change in any agreements with product suppliers to
PolyOne Distribution that prohibits PolyOne from continuing
to distribute a supplier’s products to customers;

(cid:129) the successful integration of acquired businesses, including

GLS Corporation;

P O L Y O N E C O R P O R A T I O N

(cid:129) the possibility that the degradation in the North American
is more severe than

residential construction market
anticipated;

(cid:129) other factors affecting our business beyond our control,
including, without limitation, changes in the general econ-
omy, changes in interest rates and changes in the rate of
inflation; and

(cid:129) other factors described in this Annual Repor t on Form 10-K

under Item 1A, “Risk Factors.”

We cannot guarantee that any forward-looking statement will
be realized, although we believe we have been prudent in our plans
and assumptions. Achievement of future results is subject to risks,
uncertainties and inaccurate assumptions. Should known or
unknown risks or uncertainties materialize, or should underlying
assumptions prove inaccurate, actual results could vary materially
from those anticipated, estimated or projected. Investors should
bear this in mind as they consider forward-looking statements. We
undertake no obligation to publicly update forward-looking state-
ments, whether as a result of new information, future events or
otherwise, except as otherwise required by law. You are advised,
however, to consult any further disclosures we make on related
subjects in our reports on Forms 10-Q, 8-K and 10-K furnished to
the SEC. You should understand that it is not possible to predict or
identify all risk factors. Consequently, you should not consider any
such list to be a complete set of all potential risks or uncertainties.

P O L Y O N E C O R P O R A T I O N

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES

MANAGEMENT’S REPORT

The management of PolyOne Corporation is responsible for prepar-
ing the consolidated financial statements and disclosures included
in this Annual Report on Form 10-K. The financial statements and
disclosures included in this Annual Repor t fairly present in all
material respects the financial position, results of operations,
shareholders’ equity and cash flows of PolyOne Corporation as of
and for the year ended December 31, 2007.

Management is responsible for establishing and maintaining
disclosure controls and procedures designed to ensure that the
information required to be disclosed by the company is captured
and reported in a timely manner. Management has evaluated the
design and operation of the company’s disclosure controls and
procedures at December 31, 2007 and found them to be effective.

financial

Internal control over

Management is also responsible for establishing and main-
taining a system of internal control over financial reporting that is
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles.
reporting
includes policies and procedures that provide reasonable assur-
ance that: PolyOne Corporation’s accounting records accurately and
fairly reflect the transactions and dispositions of the assets of the
company; unauthorized or improper acquisition, use or disposal of
company assets will be prevented or timely detected; the compa-
ny’s transactions are properly recorded and reported to permit the
preparation of the company’s financial statements in conformity
with generally accepted accounting principles; and the company’s
receipts and expenditures are made only in accordance with autho-
rizations of management and the board of directors of the company.

financial

Management has assessed the effectiveness of PolyOne’s
internal control over
reporting as of December 31,
2007 and has prepared Management’s Annual Report On Internal
Control Over Financial Reporting contained on page 64 of this
Annual Repor t. This report concludes that internal control over
financial reporting is effective and that no material weaknesses
were identified.

/s/ STEPHEN D. NEWLIN

/s/ W. DAVID WILSON

Stephen D. Newlin
Chairman, President and
Chief Executive Officer

W. David Wilson
Senior Vice President
and Chief Financial Officer

February 27, 2008

ABOUT MARKET RISK

We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in interest rates
on debt obligations and foreign currency exchange rates, that could
impact our financial condition, results of operations and cash flows.
We manage our exposure to these and other market risks through
regular operating and financing activities, including the use of
derivative financial instruments. We intend to use these derivative
financial instruments as risk management tools and not for spec-
ulative investment purposes.

Interest rate exposure — We periodically enter into interest
rate swap agreements that modify our exposure to interest rate risk
by converting some of our fixed-rate obligations to floating rates. At
December 31, 2007, we maintained interest rate swap agreements
on five of our fixed-rate obligations in the aggregate amount of
$80.0 million with a net fair value liability of $1.7 million. At
December 31, 2006, we maintained interest rate swap agreements
on six of our fixed-rate obligations in the aggregate amount of
$100.0 million with a net fair value liability of $5.1 million. The
weighted-average interest rate for these agreements was 8.8% at
December 31, 2007 and 9.3% at December 31, 2006. During
January 2008, four of these interest rate swap agreements in
the aggregate amount of $70.0 million were unwound. There were
no material changes in the market risk that we faced during 2007.
For more information about our interest rate exposure, see Note C
to the Consolidated Financial Statements.

Foreign currency exposure — We enter into intercompany lend-
ing transactions that are denominated in various foreign currencies
and are subject to financial exposure from foreign exchange rate
movement from the date a loan is recorded to the date it is settled or
revalued. To mitigate this risk, we enter into foreign exchange con-
tracts. Gains and losses on these contracts generally offset gains or
losses on the assets and liabilities being hedged, and are recorded
as other income or expense in the Consolidated Statements of
Income. We do not hold or issue financial instruments for trading
purposes. For more information about our foreign currency exposure,
see Note T to the Consolidated Financial Statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Financial Statement
Schedule

Management’s Report
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:

Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
Notes to Consolidated Financial Statements

Financial Statement Schedules:

Schedule II — Valuation and Qualifying Accounts

Page

32
33

34
35
36
37
38-63

P O L Y O N E C O R P O R A T I O N

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders PolyOne Corporation

We have audited PolyOne Corporation’s internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO crite-
ria). PolyOne Corporation’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying “Management’s Annual Report on Internal Control over
Financial Reporting” which is included in Item 9A. Our responsibility is to
express an opinion on the company’s internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and per form the audit to obtain rea-
sonable assurance about whether effective internal control over finan-
cial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and per forming such other pro-
cedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

financial

A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
reporting
principles. A company’s internal control over
includes those policies and procedures that: (1) pertain to the main-
tenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detec-
tion of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, PolyOne Corporation maintained, in all material
financial reporting as of

respects, effective internal control over
December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the con-
solidated balance sheets of PolyOne Corporation and subsidiaries as of
December 31, 2007, and 2006, and the related consolidated state-
ments of income, shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2007 of PolyOne Cor-
poration and our report dated February 27, 2008 expressed an unqual-
ified opinion thereon.

/s/ ERNST & YOUNG LLP

Cleveland, Ohio
February 27, 2008

To the Board of Directors and Shareholders PolyOne Corporation
We have audited the accompanying consolidated balance sheets of
PolyOne Corporation and subsidiaries as of December 31, 2007 and
2006, and the related consolidated statements of income, sharehold-
ers’ equity, and cash flows for each of the three years in the period
ended December 31, 2007. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2). These financial
statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. The financial
statements of Oxy Vinyls, LP (a limited partnership in which the Com-
pany had a 24% interest) have been audited by other auditors whose
report has been furnished to us, and our opinion on the consolidated
financial statements, insofar as it relates to 2006 and 2005 amounts
included for Oxy Vinyls, LP, is based solely on the report of the other
auditors.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and per form the audit to obtain rea-
sonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other audi-
tors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PolyOne Cor-
poration and subsidiaries at December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed in Note C to the consolidated financial statements,
the Company adopted SFAS No. 123(R), “Share-Based Payment”
applying the modified prospective transition method effective Janu-
ary 1, 2006. As discussed in Note C to the consolidated financial
statements, the Company adopted the provisions of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postre-
tirement Plans, an amendment of FASB Statements No. 87, 88, 106
and 132(R)” effective December 31, 2006.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), PolyOne
Corporation’s internal control over financial reporting as of Decem-
ber 31, 2007, based on criteria established in Internal Control-Inte-
grated Framework
the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated Feb-
ruary 27, 2008 expressed an unqualified opinion thereon.

issued by

/s/ ERNST & YOUNG LLP

Cleveland, Ohio
February 27, 2008

P O L Y O N E C O R P O R A T I O N

Consolidated Statements of Income

(In millions, except per share data)

Sales

Operating costs and expenses:

Cost of sales

Selling and administrative

Depreciation and amortization

Income from equity affiliates and minority interest

Operating income

Interest expense

Interest income

Premium on early extinguishment of long-term debt

Other expense, net

Income (loss) before income taxes and discontinued operations

Income tax benefit (expense)

Income before discontinued operations

Loss from discontinued operations and loss on sale, net of income taxes

Year Ended December 31,

2007

2006

2005

$2,642.7

$2,622.4

$2,450.6

2,337.3

2,284.1

2,155.7

241.8

57.4

27.7

33.9

(51.4)

4.5

(12.8)

(6.6)

(32.4)

43.8

11.4

—

202.6

57.1

112.0

190.6

(66.5)

3.4

(4.4)

(2.8)

120.3

5.3

125.6

(2.7)

182.8

50.7

79.9

141.3

(68.1)

1.9

—

(5.3)

69.8

(6.6)

63.2

(15.3)

Net income

11.4

$ 122.9

47.9

Basic and diluted earnings (loss) per common share:

Before discontinued operations

Discontinued operations

Basic and diluted earnings per common share

Weighted average shares used to compute earnings per common share:

Basic

Diluted

0.12

1.36

0.69

—

(0.03)

(0.17)

0.12

1.33

0.52

92.8

93.1

92.4

92.8

91.9

92.0

Dividends declared per share of common stock

— $

—

See Notes to Consolidated Financial Statements.

P O L Y O N E C O R P O R A T I O N

Consolidated Balance Sheets

(In millions, except per share data)

ASSETS

Current assets

Cash and cash equivalents

Accounts receivable (less allowance of $4.8 in 2007 and $5.9 in 2006)

Inventories

Deferred income tax assets

Other current assets

Total current assets

Property, net

Investment in equity affiliates

Goodwill

Other intangible assets, net

Deferred income tax assets

Other non-current assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Short-term debt

Accounts payable, including amounts payable to related party (see Note N)

Accrued expenses

Current portion of long-term debt

Total current liabilities

Long-term debt

Post-retirement benefits other than pensions

Pension benefits

Other non-current liabilities

Minority interest in consolidated subsidiaries

Total liabilities

Commitments and Contingencies (see Note N)

Shareholders’ equity

Preferred stock, 40.0 shares authorized, no shares issued

Common stock, $0.01 par, 400.0 shares authorized, 122.2 shares issued in 2007 and 2006

Additional paid-in capital

Retained deficit

Common stock held in treasury, 29.1 shares in 2007 and 29.4 shares in 2006

Accumulated other comprehensive loss

Total shareholders’ equity

Total liabilities and shareholders’ equity

See Notes to Consolidated Financial Statements.

December 31,

2007

2006

79.4

66.2

340.8

223.4

20.4

19.8

683.8

449.7

19.9

288.8

6.7

69.9

64.2

316.4

240.8

18.1

27.8

669.3

442.4

287.2

287.0

9.4

21.1

64.4

$1,583.0

$1,780.8

6.1

5.2

250.5

221.0

94.4

22.6

373.6

308.0

81.6

82.6

87.5

0.3

93.1

22.5

341.8

567.7

83.6

125.1

75.4

5.5

933.6

1,199.1

—

1.2

—

1.2

1,065.0

1,065.7

(48.5)

(59.9)

(319.7)

(326.2)

(48.6)

(99.1)

649.4

581.7

$1,583.0

$1,780.8

P O L Y O N E C O R P O R A T I O N

Consolidated Statements of Cash Flows

(In millions)

Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
Loss on disposition of discontinued businesses and related plant phaseout charge
Charges for environmental remediation
Cash receipts (payments) for environmental remediation, net of insurance recoveries
Deferred income tax provision (benefit)
Premium on early extinguishment of long-term debt
Stock compensation expense (benefit)
Asset impairment charges
Companies carried at equity and minority interest:

Impairment of investment in equity affiliate
Income from equity affiliates
Dividends and distributions received

Contributions to pensions and other postretirement plans
Changes in assets and liabilities:

Accounts receivable
Inventories
Accounts payable
Increase (decrease) in sale of accounts receivable
Accrued expenses and other

Net cash provided (used) by discontinued operations

Net cash provided by operating activities
Investing activities
Capital expenditures
Business acquisitions and related deposits, net of cash acquired
Proceeds from sale of discontinued business, net
Proceeds from sale of assets
Proceeds from sale of investment in equity affiliate
Net cash used by discontinued operations

Net cash provided (used) by investing activities
Financing activities
Change in short-term debt
Repayment of long-term debt
Premium on early extinguishment of long-term debt
Proceeds from the exercise of stock options

Net cash used by financing activities
Effect of exchange rate changes on cash

Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

See Notes to Consolidated Financial Statements.

Year Ended December 31,

2007

2006

2005

$ 11.4

$ 122.9

$ 47.9

57.4
—
48.8
(25.5)
(57.1)
12.8
4.3
2.5

14.8
(42.5)
37.6
(26.9)

(8.9)
26.7
17.8
—
(6.0)
—

57.1
3.1
2.5
1.8
(12.9)
4.4
4.5
0.2

—
(112.0)
97.7
(13.9)

23.0
(39.6)
(17.2)
(7.9)
(1.9)
(0.1)

50.7
15.6
0.2
(9.8)
2.0
—
(0.6)
0.4

—
(79.9)
67.4
(17.8)

(23.6)
9.3
13.0
7.9
(20.8)
1.8

67.2

111.7

63.7

(43.4)
(11.2)
—
9.4
260.5
—

(41.1)
(1.5)
17.3
8.7
—
(0.2)

(32.1)
(2.7)
—
12.3
—
(1.7)

215.3

(16.8)

(24.2)

(0.2)
(264.1)
(12.8)
1.2

(275.9)
6.6

13.2
66.2

(2.1)
(60.0)
(4.4)
3.1

(63.4)
1.9

33.4
32.8

4.8
(49.0)
—
0.5

(43.7)
(1.6)

(5.8)
38.6

$ 79.4

$ 66.2

$ 32.8

P O L Y O N E C O R P O R A T I O N

Consolidated Statements of Shareholders’ Equity

(In millions, except per share data;

shares in thousands)

Balance January 1, 2005
Cumulative effect of adoption of FSP AUG AIR-1 as of

January 1, 2005

Comprehensive income:

Net income
Translation adjustment
Adjustment of minimum pension liability, net of tax

benefit of $1.0

Total comprehensive income
Stock-based compensation and benefits and exercise of

options

Common Shares

Shareholders’ Equity

Accumulated

Common

Additional

Retained

Common

Other

Common

Shares Held

Common

Paid-in

Earnings

Stock Held

Comprehensive

in Treasury

Total

Stock

Capital

(Deficit)

in Treasury

Income (Loss)

122,192 30,480 $352.1 $1.2 $1,067.2 $(237.2) $(339.0)

$(140.1)

6.5

47.9
(9.3)

(2.4)

36.2

6.5

47.9

(9.3)

(2.4)

(225)

0.1

(0.8)

1.9

(1.0)

Balance December 31, 2005

122,192 30,255 $394.9 $1.2 $1,066.4 $(182.8) $(337.1)

$(152.8)

Comprehensive income:

Net income
Translation adjustment
Adjustment of minimum pension liability, net of tax

expense of $0.3

Total comprehensive income
Adjustment to initially apply SFAS No. 158, net of tax

benefit of $6.8

Stock-based compensation and benefits and exercise of

options

Balance December 31, 2006

Comprehensive income:

Net income
Translation adjustment
Adjustments related to SFAS No. 158:

Prior service credit recognized during year, net of tax of

$1.9

Net actuarial gain occurring during year, net of tax

benefit of $12.2

Total comprehensive income
Stock-based compensation and benefits and exercise of

options

122.9

122.9
12.1

44.6

179.6

(2.3)

(871)

9.5

(0.7)

10.9

12.1

44.6

(2.3)

(0.7)

122,192 29,384 $581.7 $1.2 $1,065.7 $ (59.9) $(326.2)

$ (99.1)

11.4
28.3

(4.0)

26.2

61.9

11.4

28.3

(4.0)

26.2

(325)

5.8

(0.7)

6.5

—

Balance December 31, 2007

122,192 29,059 $649.4 $1.2 $1,065.0 $ (48.5) $(319.7)

$ (48.6)

See Notes to Consolidated Financial Statements.

P O L Y O N E C O R P O R A T I O N

Notes to Consolidated Financial Statements

Note A. DESCRIPTION OF BUSINESS

PolyOne Corporation (PolyOne or Company) is an international poly-
mer services company with operations in thermoplastic com-
formulations, color and additive
pounds, specialty polymer
systems, thermoplastic resin distribution and specialty polyvinyl
chloride (PVC) resins. PolyOne also has equity investments in man-
ufacturers of caustic soda and chlorine, and PVC compound prod-
ucts and in a formulator of polyurethane compounds.

PolyOne’s operations are located primarily in the United States,
Europe, Canada, Asia and Mexico. PolyOne operations are reflected
in four reportable segments: Vinyl Business, International Color and
Engineered Materials, PolyOne Distribution and Resin and Interme-
diates. All Other is comprised of the remaining operating segments
and includes North American Color and Additives, North American
Engineered Materials, Producer Services and Specialty Inks and
Polymer Systems. See Note R for more information.

In February 2006, PolyOne sold 82% of its Engineered Films
business for $26.7 million. This business is presented in discon-
tinued operations in these financial statements. PolyOne maintains
an 18% ownership interest in this business, which is reflected in the
2007 financial statements on the cost basis of accounting.

In October 2006, PolyOne purchased the remaining 50% of its
equity investment in DH Compounding Company from a wholly-
owned subsidiary of The Dow Chemical Company for $10.2 million.
DH Compounding Company is consolidated in the Consolidated
Balance Sheet as of December 31, 2006, and the results of oper-
ations are included in the Consolidated Statement of Income begin-
ning October 1, 2006. DH Compounding is included in the Producer
Services operating segment.

In July 2007, PolyOne sold its 24% interest in Oxy Vinyls LP
(OxyVinyls) for $261 million in cash. In a related transaction,
PolyOne purchased the remaining 10% minority interest in Powder
Blends, LP for $11 million in cash.

In December 2007, PolyOne completed the acquisition of the
vinyl compounding business and assets of Ngai Hing PlastChem
Company Ltd. (NHPC), a subsidiary of Ngai Hing Hong Company
Limited, a publicly-held company listed on the Hong Kong stock
exchange, for $3.3 million, net of cash received.

In January 2008, PolyOne acquired 100% of the outstanding
capital stock of GLS Corporation, a global provider of specialty
thermoplastic elastomer compounds for consumer, packaging
and medical applications. See Note U “Subsequent Event” for more
information.

Unless otherwise noted, disclosures contained in these finan-

cial statements relate to continuing operations.

Note B. DISCONTINUED OPERATIONS

In October 2003, PolyOne announced that its future focus would be
on its global plastics compounding, color and additive masterbatch

and PolyOne Distribution businesses to improve profitability and
strengthen its balance sheet because management believed these
businesses have the strongest market synergies and potential for
long-term success. Consequently, the Elastomers and Per formance
Additives, Engineered Films and Specialty Resins businesses were
targeted for divestment. In December 2003, PolyOne’s board of
directors authorized management to complete and execute plans to
sell these businesses. As a result, these businesses qualified for
accounting treatment as discontinued operations as of Decem-
ber 31, 2003 under Statement of Financial Accounting Standards
(SFAS) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.”

In December 2005, PolyOne announced that the Specialty
Resins divestment process was unlikely to result in a sale of the
business at acceptable terms. As a result, its financial results were
reclassified from discontinued operations to continuing operations.
No adjustments to the carrying value were required when it was
reclassified to continuing operations.

During 2005, PolyOne recorded additional charges of
$15.1 million to further reduce the net assets held for sale of
the Engineered Films business to reflect its net realizable value
based upon current estimates.

In February 2006, PolyOne sold 82% of the Engineered Films
business to an investor group consisting of members of the oper-
ating segment’s management team and Matrix Films, LLC for gross
proceeds of $26.7 million before associated fees and costs. A cash
payment of $20.5 million was received on the closing date and the
remaining $6.2 million was in the form of a five-year note from the
buyer. PolyOne retained an 18% ownership interest in the company.
Under EITF 03-13, “Applying the Conditions in Paragraph 42 of
Financial Accounting Standards Board (FASB) Statement No. 144
in Determining Whether to Report Discontinued Operations,” when
a business is sold with a retained interest, the cost method of
accounting is appropriate if the disposal group qualifies as a com-
ponent of an entity, the selling entity has no significant influence or
continuing involvement in the new entity, and the operations and
cash flows of the business being sold will be eliminated from the
ongoing operations of the company selling it. The Engineered Films
business qualified as a component of an entity and PolyOne will
have no significant influence or continuing involvement in the new
entity. Activities that would be considered continuing cash flows
(consisting of warehousing services and short-term transitional
services) amount to less than one percent of the new entity’s
corresponding costs, and for that reason are not considered sig-
nificant. The operations and cash flows of the business being sold
will be eliminated from the ongoing operations of PolyOne. PolyOne
also considered the provisions of FASB Interpretation No. 46, “Con-
solidation of Variable Interest Entities,” and determined that the
new entity is not a variable interest entity subject to consolidation.
As a result, the retained minority interest investment in the Engi-
neered Films business is reported on the cost method of
accounting.

P O L Y O N E C O R P O R A T I O N

During 2006, PolyOne recognized charges of $3.1 million to
adjust the carrying value of the net assets of the Engineered Films
Business to the net proceeds received, to recognize costs that were
not able to be recognized until the business was sold due to the
contingent nature of the costs, and for costs related to the pension
benefits of the business.

The following table summarizes the results of discontinued
operations. As required by generally accepted accounting principles
in the United States, the results of discontinued operations, as
presented below, do not include any depreciation or amortization
expense.

(In millions)

Sales:

2006

2005

Engineered Films

$ 9.6

$119.6

Pre-tax income from operations:

Engineered Films

$ 0.4

0.5

Pre-tax loss on disposition of businesses:

Elastomers and Performance Additives

Engineered Films

Income tax expense, net of valuation allowance

—

(3.1)

(2.7)

—

(0.7)

(15.1)

(15.3)

—

Loss from discontinued operations

$(2.7)

$ (15.3)

Note C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation — The Consolidated
Financial Statements include the accounts of PolyOne and its sub-
sidiaries. All majority-owned affiliates over which PolyOne has con-
trol are consolidated. Investments in affiliates and joint ventures in
which PolyOne’s ownership is 50% or less, or in which PolyOne does
not have control but has the ability to exercise significant influence
over operating and financial policies, are accounted for under the
equity method. Intercompany transactions are eliminated. Transac-
tions with related parties, including joint ventures, are in the ordi-
nary course of business.

Cash and Cash Equivalents — PolyOne considers all highly
liquid investments purchased with a maturity of less than three
months to be cash equivalents. Cash equivalents are stated at cost,
which approximates fair value.

Allowance for Doubtful Accounts — PolyOne evaluates the
collectibility of trade receivables based on a combination of factors.
PolyOne regularly analyzes significant customer accounts and, when
PolyOne becomes aware of a specific customer’s inability to meet
its financial obligations to PolyOne, such as in the case of a bank-
ruptcy filing or deterioration in the customer’s operating results or
financial position, PolyOne records a specific reserve for bad debt to
reduce the related receivable to the amount PolyOne reasonably
believes is collectible. PolyOne also records bad debt reserves for
all other customers based on a variety of factors including the length
of time the receivables are past due, the financial health of the
customer, economic conditions and historical experience. If circum-
stances related to specific customers change, PolyOne’s estimates
of the recoverability of receivables could be adjusted further.

Concentrations of Credit Risk — Financial instruments that
subject PolyOne to potential credit risk are trade accounts receiv-
able, foreign exchange contracts and interest rate swap agree-
ments. Concentration of credit risk for trade accounts receivable
is limited due to the large number of customers constituting Poly-
One’s customer base and their distribution among many industries
and geographic locations. PolyOne is exposed to credit risk with
respect to forward foreign exchange contracts and interest rate
swap agreements in the event of non-per formance by the counter-
parties to these financial instruments. Management believes that
the risk of incurring material losses related to this credit risk is
remote. PolyOne does not require collateral to support the financial
position of its credit risks.

Sale of Accounts Receivable — PolyOne follows the provisions
of SFAS No. 140, “Accounting for Transfers and Servicing of Finan-
cial Assets and Extinguishment of Liabilities.” As a result, trade
accounts receivable that are sold are removed from the balance
sheet at the time of sale.

Inventories — Inventories are stated at the lower of cost or
market. Approximately 38% and 45% of PolyOne’s inventories at
December 31, 2007 and 2006 are valued using the last-in, first-out
(LIFO) cost method. Inventories not valued by the LIFO method are
valued using the first-in, first-out (FIFO) or average cost method.

Property and Depreciation — Property, plant and equipment is
recorded at cost, net of depreciation and amortization that is
computed using the straight-line method over the estimated useful
life of the assets, which ranges from three to 15 years for machinery
and equipment and up to 40 years for buildings. Computer software
is amortized over periods not exceeding ten years. Property, plant
and equipment is generally depreciated on accelerated methods for
income tax purposes. Depreciation and amortization expense are
excluded from cost of goods sold and presented separately in the
Consolidated Statements of Income. Repair and maintenance costs
are expensed as incurred.

required

Impairment

Long-Lived Assets — As

by
SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” PolyOne reviews long-lived assets for impair-
ment when circumstances indicate that the carrying value of an
asset may not be recoverable. For assets that are to be held and
used, an impairment charge is recognized when the estimated
undiscounted future cash flows associated with the asset or group
of assets are less than their carrying value. If an impairment exists,
an adjustment is made to write the asset down to its fair value, and
a loss is recorded for the difference between the carrying value and
the fair value. Fair values are determined based on quoted market
values, discounted cash flows, internal appraisals or external
appraisals, as applicable. Assets to be disposed of are carried at
the lower of their carrying value or estimated net realizable value.

Goodwill and Other

Intangible Assets — Goodwill

is the
excess of the purchase price paid over the fair value of the net
assets of the acquired business. Goodwill is subject to annual
impairment testing and the Company has selected July 1 as the
impairment testing date. Other intangible assets, which
annual

P O L Y O N E C O R P O R A T I O N

consist primarily of non-contractual customer relationships, sales
contracts, patents and technology, are amortized over their esti-
mated useful lives. The remaining lives range from three to 13 years.

Derivative Financial Instruments — SFAS No. 133, “Account-
ing for Derivative Instruments and Hedging Activities,” requires that
all derivative financial instruments, such as foreign exchange con-
tracts and interest rate swap agreements, be recognized in the
financial statements and measured at fair value, regardless of the
purpose or intent in holding them. Changes in the fair value of
derivative financial instruments are recognized in the period when
the change occurs in either net income or shareholders’ equity (as a
component of accumulated other comprehensive income or loss),
the derivative is being used to hedge
depending on whether
changes in fair value or cash flows. PolyOne’s interest rate swaps
qualify as fair value hedges in accordance with SFAS No. 133.

PolyOne is exposed to foreign currency changes and interest
rate fluctuations in the normal course of business. PolyOne has
established policies and procedures that manage these exposures
through the use of financial instruments. By policy, PolyOne does
not enter
trading purposes or
speculation.

into these instruments for

PolyOne enters into foreign currency exchange forward con-
tracts with major financial institutions to reduce the effect of fluc-
tuating exchange rates, primarily on foreign currency inter-company
lending transactions. These contracts are not treated as hedges
and, as a result, are marked to market, with the resulting gains and
losses recognized as other income or expense in the Consolidated
Statements of Income. Realized gains and losses on these con-
tracts offset the foreign exchange gains and losses on the under-
lying transactions. PolyOne’s forward contracts have original
maturities of one year or less.

From time to time, PolyOne also enters into interest rate swap
agreements that modify the exposure to interest risk by converting
fixed-rate debt to a floating rate. The interest rate swap and instru-
ment being hedged are marked to market in the balance sheet. The
net effect on PolyOne’s operating results is that interest expense on
the portion of fixed-rate debt being hedged is recorded based on the
variable rate that is stated within the swap agreement. No other
cash payments are made unless the contract is terminated prior to
its maturity. In this case, the amount paid or received at settlement
is established by agreement at the time of termination and usually
represents the net present value, at current rates of interest, of the
remaining obligations to exchange payments under the terms of the
contract. Any gains or losses incurred upon the early termination of
interest rate swap contracts are deferred within the hedged item
and recognized over the remaining life of the contract. See Note T
for more information.

Revenue Recognition — Revenue is recognized when title and
the risks and rewards of ownership of the product is transferred to
the customer, usually at the Company’s shipping point or when the
service is per formed.

Shipping and Handling Costs — Shipping and handling costs

are included in cost of sales.

Equity Affiliates — PolyOne accounts for its investments in
equity affiliates under Accounting Principles Board (APB) Opinion
No. 18, “The Equity Method of Accounting for Investments in Com-
mon Stock.” PolyOne recognizes its proportionate share of the
income of equity affiliates. Losses of equity affiliates are recognized
to the extent of PolyOne’s investment, advances, financial guaran-
tees and other commitments to provide financial support to the
investee. Any losses in excess of this amount are deferred and
reduce the amount of future earnings of the equity investee recog-
nized by PolyOne. At December 31, 2007 and 2006, there were no
deferred losses related to equity investees.

PolyOne recognizes impairment losses in the value of invest-
ments that management judges to be other than temporar y. See
Note F for more information.

Environmental Costs — PolyOne expenses costs that are
associated with managing hazardous substances and pollution in
ongoing operations on a current basis. Costs associated with the
remediation of environmental contamination are accrued when it
becomes probable that a liability has been incurred and PolyOne’s
proportionate share of the amount can be reasonably estimated.

Research and Development Expense — Research and devel-
opment costs, which were $21.6 million in 2007, $20.3 million in
2006 and $19.5 million in 2005, are charged to expense as
incurred.

Income Taxes — Deferred tax liabilities and assets are deter-
mined based upon the differences between the financial reporting
and tax basis of assets and liabilities, and are measured using the
tax rate and laws currently in effect.

Comprehensive Income — Accumulated other comprehensive

loss at December 31, 2007 and 2006 are as follows:

(In millions)

2007

2006

Foreign currency translation adjustments

$ 20.3

$ (8.0)

Employee post-retirement benefit plans

(68.9)

(91.1)

$(48.6)

$(99.1)

Foreign Currency Translation — Revenues and expenses are
translated at average currency exchange rates during the related
period. Assets and liabilities of foreign subsidiaries and equity
investees are translated using the exchange rate at the end of
the period. PolyOne’s share of the resulting translation adjustment
is recorded as accumulated other comprehensive income or loss in
shareholders’ equity. Gains and losses resulting from foreign cur-
rency transactions, including intercompany transactions that are
not considered permanent investments, are included in net income.

Marketable Securities — Marketable securities are classified
as available for sale and are presented at current market value. Net
unrealized gains and losses on marketable securities available for
sale are reflected in accumulated other comprehensive income or
loss in shareholders’ equity.

P O L Y O N E C O R P O R A T I O N

Share-Based Compensation — As of December 31, 2007,
PolyOne had one active share-based employee compensation plan,
which is described more fully in Note Q. Prior to January 1, 2006,
PolyOne accounted for share-based compensation under the pro-
visions of Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees” (APB No. 25). Under
APB No. 25, compensation cost for stock options was measured as
the excess, if any, of the quoted market price of PolyOne common
stock at the date of the grant over the amount an option holder must
pay to acquire the common stock. Compensation cost for stock
appreciation rights (SARs) was recognized upon vesting as the
amount by which the quoted market value of the shares of PolyOne
common stock covered by the grant exceeded the SARs specified
value. On January 1, 2006, PolyOne adopted SFAS No. 123(revised
2004), “Share-Based Payment,” using the modified prospective
transition method. SFAS No. 123(R) requires the Company to esti-
mate the fair value of share-based awards on the date of grant using
an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the
requisite service periods in the Consolidated Statements of
Income. Under the modified prospective transition method, com-
pensation cost recognized during the year ended December 31,
2006 includes (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of, January 1, 2006, based on
the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, plus (b) compensation cost for all
share-based payments granted on or subsequent to January 1,
2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). In accordance with the
modified prospective transition method, the Consolidated Financial
Statements for prior periods have not been restated to reflect, nor
do they include, the impact of SFAS No. 123(R). Total share-based
compensation cost for the years ended December 31, 2007 and
2006, respectively, was $4.3 million and $4.5 million pre-tax.

The adoption of SFAS No. 123(R) on January 1, 2006 resulted
in compensation cost for the year ended December 31, 2006 of
$2.5 million on a pre-tax basis, or $0.03 per diluted share, more
than what it would have been under APB No. 25.

SFAS No. 123(R) requires that the benefits of tax deductions in
excess of compensation cost recognized be reported as a financing
cash flow, rather than as an operating cash flow as was previously
required. This requirement reduces net operating cash flows and
increases net financing cash flows.

valuation models use highly subjective assumptions,
expected share price volatility.

including

(In millions, except per share data)

Net income, as reported

Year Ended

December 31,

2005

$47.9

Add: Total share-based employee compensation

(benefit) included in reported net income, net of tax

(0.6)

Deduct: Total share-based employee compensation
expense determined under the fair value-based
method for all awards, net of tax

Pro forma net income

Net earnings per share:

Basic and diluted — as reported

Basic and diluted — pro forma

(4.1)

$43.2

$0.52

$0.47

SFAS No. 158 — On December 31, 2006,

the Company
adopted SFAS No. 158, “Employer’s Accounting for Defined Benefit
Pension and Other Postretirement Plans — an Amendment of FASB
Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires
an employer that is a business entity and sponsors one or more
single employer benefit plans to (1) recognize the funded status of
the benefit in its statement of financial position, (2) recognize as a
component of other comprehensive income, net of tax, the gains or
losses and prior service costs or credits that arise during the period
but are not recognized as components of net periodic benefit cost,
(3) measure defined benefit plan assets and obligations as of the
date of the employer’s fiscal year end statement of financial posi-
tion and (4) disclose additional information in the notes to financial
statements about certain effects on net periodic benefit costs for
the next fiscal year that arise from delayed recognition of gains or
losses, prior service costs or credits, and transition assets or
obligations. The adoption of SFAS No. 158 resulted in an increase
of $6.4 million on a pre-tax basis and a $0.4 million decrease on an
after-tax basis on the Company’s accumulated other comprehen-
sive loss. PolyOne also recorded an adjustment of $2.7 million to
increase accumulated other comprehensive loss to record its pro-
portionate share of OxyVinyls’ adoption of SFAS No. 158. The
adoption of SFAS No. 158 had no effect on the Company’s com-
pliance with the financial covenants contained in the agreements
governing its debt and its receivables sales facility, and is not
expected to affect the Company’s operating results in future
periods.

New Accounting Pronouncements —

The following table illustrates the effect on net income and
earnings per share as if PolyOne had applied the fair value recog-
nition provisions of SFAS No. 123 to share-based employee com-
pensation using the fair value estimate computed by the Black-
Scholes-Mer ton option-pricing model for the year ended Decem-
ber 31, 2005. The Black-Scholes-Mer ton option-pricing model was
developed to estimate the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option

FASB Interpretation No. 48 — PolyOne adopted the provisions of
FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109, Accounting
for Income Taxes” (FIN 48) on January 1, 2007.

The net income tax assets recognized under FIN 48 did not
differ from the net assets recognized before adoption, and, there-
fore, the Company did not record a cumulative effect adjustment
related to the adoption of FIN 48.

P O L Y O N E C O R P O R A T I O N

PolyOne is no longer subject to U.S. income tax examinations
for periods preceding 2004, and with limited exceptions, for periods
preceding 2002 for foreign, state and local tax examinations.

As of December 31, 2007, PolyOne has a $6.0 million liability
for uncertain tax positions. This amount relates to items under
examination by foreign tax authorities related to the valuation of
assets. PolyOne does not agree with the proposed adjustments and
has appealed the assessments. PolyOne does not anticipate that
the disputes will be resolved in the next twelve months.

During the third quarter of 2007, a foreign jurisdiction initiated
an audit related to transfer pricing and the Company accrued
$1.0 million for the payment of income tax and interest. The issue
was resolved during the fourth quarter of 2007 and the Company
paid $0.3 million for income taxes and $0.5 million for interest.

PolyOne recognizes interest and penalties related to unrecog-
nized income tax benefits in the provision for income taxes. As of
December 31, 2007, PolyOne has accrued $2.5 million of interest
and penalties.

A reconciliation of the beginning and ending amount of unrec-

ognized tax benefits is as follows:

FASB Staff Position AUG AIR-1 — In September 2006, the

FASB issued FASB Staff Position (FSP) AUG AIR-1, “Accounting for
Planned Major Maintenance Activities” (FSP AUG AIR-1). FSP AUG
AIR-1 prohibits the use of the accrue-in-advance method of
accounting for planned major maintenance activities in annual and
interim financial reporting periods and is effective for the first fiscal
year beginning after December 15, 2006. OxyVinyls adopted FSP
AUG AIR-1 in the first quarter of 2007, on a retrospective basis, and
is now using the deferral method of accounting for planned major
maintenance. The effect on OxyVinyls’ consolidated balance sheet
at January 1, 2007 from adopting FSP AUG AIR-1 was an increase of
$38.3 million in other assets, a decrease of $12.3 million in
accrued liabilities, an increase of $4.2 million in minority interest
and an increase of $46.4 million in partners’ capital. PolyOne’s
proportionate share of its former equity investment in OxyVinyls’
operations was 24%.

The adoption of FSP AUG AIR-1 represents a change in account-
ing principle and, under the guidance of this principle, must be
applied retrospectively. Under these retrospective provisions, Poly-
One has restated its historical financial statements to reflect the
change in accounting for planned major maintenance activities of its
former equity affiliate. The following tables illustrate the retrospec-
tive changes in PolyOne’s respective financial statements:

(In millions)

Balance at January 1, 2007

Additions based on tax positions related to the

current year

Additions for tax positions of prior years

Reductions for tax positions of prior years

Settlements

Balance at December 31, 2007

Unrecognized Tax

Benefits

2007

$ 6.0

0.5

(0.2)

(0.3)

$ 6.0

Consolidated Statements of Income

Year Ended December 31, 2006

Year Ended December 31, 2005

(In millions, except per share data)

As Originally Filed

Adjustment

Restated

As Originally Filed

Adjustment

Restated

Income from equity affiliates and minority interest

$111.6

$ 0.4

$112.0

$78.9

$ 1.0

$79.9

Income tax benefit (expense)

Income before discontinued operations

Net income

Basic and diluted earnings per common share

Before discontinued operations

Basic and diluted earnings per share

6.0

125.9

123.2

$ 1.36

1.33

(0.7)

(0.3)

5.3

125.6

122.9

(6.6)

62.2

46.9

—

1.0

(6.6)

63.2

47.9

$ —

$ 1.36

—

1.33

$0.68

0.51

$0.01

$0.69

0.01

0.52

Consolidated Balance Sheets

(In millions)

Investment in equity affiliates

Deferred income tax assets

Total assets

Retained deficit

Shareholders’ equity

P O L Y O N E C O R P O R A T I O N

December 31, 2006

As Originally Filed

Adjustment

Restated

$ 276.1

$11.1

$ 287.2

25.0

1,773.6

(67.1)

574.5

(3.9)

7.2

21.1

1,780.8

(59.9)

581.7

The cumulative effect of the adoption of FSP AUG AIR-1 as of January 1, 2005 is a reduction to retained deficit and an increase to

shareholders’ equity of $6.5 million.

Consolidated Statements of Cash Flows

(In millions)

Net income

Income from equity affiliates and minority interest

Provision (benefit) for deferred income taxes

Year Ended December 31, 2006

Year Ended December 31, 2005

As Originally Filed

Adjustment

Restated

As Originally Filed

Adjustment

Restated

$ 123.2

$(0.3)

$ 122.9

(111.6)

(13.6)

(0.4)

0.7

(112.0)

(12.9)

$ 46.9

(78.9)

$ 1.0

$ 47.9

(1.0)

(79.9)

Statement of Financial Accounting Standards No. 157 — In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurement,” which defines fair value, establishes the framework
for measuring fair value under U.S. generally accepted accounting
principles and expands disclosures about fair value measure-
ments. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In December 2007, the FASB issued a pro-
posed FASB Staff Position (FSP FAS 157-b) that would delay the
effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial
liabilities, except those that are recognized or dis-
closed at fair value in the financial statements on a recurring basis
to fiscal years beginning after November 15, 2008. The Company
adopted the non-deferred portion of SFAS No. 157 on January 1,
2008 and it did not have a material impact on the Company’s
financial statements. The Company is evaluating the effect that
adoption of the deferred portion of SFAS No. 157 will have on our
financial statements in 2009, specifically in the areas of measuring
fair value in business combinations and goodwill impairment tests.

SFAS No. 159 — In February 2007,

the FASB issued
SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities,” which allows entities to voluntarily choose, at
specified election dates, to measure many financial assets and
liabilities at fair value. The election is made on an instrument-by-in-
strument basis and is irrevocable. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. SFAS No. 159 will
have no impact on the Company’s financial statements.

SFAS No. 141 (revised 2007) — In December 2007, the FASB
issued SFAS No. 141 (revised 2007), “Business Combinations,”
which establishes principles over the method entities use to rec-
ognize and measure assets acquired and liabilities assumed in a
business combination and enhances disclosures on business com-
binations. SFAS No. 141(R) is effective for business combinations
for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008.
The Company is evaluating the effect that adoption will have on its
2009 financial statements.

Use of Estimates — The preparation of consolidated financial
statements in conformity with generally accepted accounting prin-
ciples requires management to make extensive use of estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts
revenues and expenses during these periods. Significant
of

estimates in these Consolidated Financial Statements include
sales discounts and rebates, restructuring charges, allowances
for doubtful accounts, estimates of future cash flows associated
with assets, asset impairments, useful lives for depreciation and
amortization, loss contingencies, net realizable value of invento-
ries, environmental and asbestos-related liabilities, income taxes
and tax valuation reserves, goodwill and the determination of dis-
count and other rate assumptions used to determine pension and
post-retirement employee benefit expenses. Actual results could
differ from these estimates.

Reclassification — Certain amounts for 2006 and 2005 have
been reclassified to conform to the 2007 presentation. During
2007, PolyOne changed its reportable segments. As a result,
PolyOne’s segment disclosures for 2006 and 2005 have been
restated to conform with the changes made in 2007.

Note D. GOODWILL AND INTANGIBLE ASSETS

There were no changes in the carrying amount of goodwill, other
than for new acquisitions, during the years ended December 31,
2007 and 2006.

As of December 31, 2007, PolyOne had $288.8 million of
goodwill that resulted from acquiring businesses. SFAS No. 142
requires that goodwill and intangible assets with indefinite lives be
tested for impairment at least once a year. Carrying values are
compared with fair values, and when the carrying value exceeds the
fair value, the carrying value of the impaired asset is reduced to its
fair value. PolyOne has elected July 1 as its annual assessment
date.

Goodwill as of December 31, 2007 and 2006, by operating

segment, was as follows:

(In millions)

Vinyl Business

International Color and Engineered

Materials

Specialty Inks and Polymer Systems

PolyOne Distribution

Total

December 31,

2006

2007

$181.4

$179.6

72.0

33.8

1.6

72.0

33.8

1.6

$288.8

$287.0

PolyOne uses a combination of two valuation methods, a mar-
ket approach and an income approach, to estimate the fair value of
its reporting units. Absent an indication of fair value from a potential

P O L Y O N E C O R P O R A T I O N

buyer or similar specific transactions, the Company believes that
the use of these two methods provides reasonable estimates of a
reporting unit’s fair value. Fair value computed by these two meth-
ods is arrived at using a number of factors, including projected
future operating results and business plans, economic projections,
anticipated future cash flows, comparable marketplace data within
a consistent industry grouping, and the cost of capital. There are
inherent uncertainties, however, related to these factors and to
management’s judgment in applying them to this analysis. None-
theless, management believes that the combination of these two
methods provides a reasonable approach to estimate the fair value
of PolyOne’s reporting units. Assumptions for sales, earnings and
cash flows for each reporting unit were consistent between these
two methods.

The market approach estimates fair value by applying sales,
earnings and cash flow multiples (derived from comparable publicly-
traded companies with similar investment characteristics of the
to the reporting unit’s operating per formance
reporting unit)
adjusted for non-recurring items. Management believes that this
approach is appropriate because it provides a fair value estimate
using multiples from entities with operations and economic char-
acteristics comparable to PolyOne’s reporting units. The key esti-
mates and assumptions that are used to determine fair value under
this approach include trailing twelve- and thirty-six month results
and a control premium applied to the market multiples to adjust the
enterprise value upward for a 100% ownership interest, where
applicable.

The income approach is based on projected future debt-free
cash flow that is discounted to present value using factors that
consider the timing and risk of the future cash flows. Management
believes that this approach is appropriate because it provides a fair
value estimate based upon the reporting unit’s expected long-term
operating and cash flow per formance. This approach also mitigates
most of the impact of cyclical downturns that occur in the reporting
unit’s industry. The income approach is based on a reporting unit’s
five-year to ten-year projection of operating results and cash flows
that is discounted using a weighted-average cost of capital. The
projection is based upon management’s best estimates of pro-
jected economic and market conditions over the related period
including growth rates, estimates of future expected changes in
operating margins and cash expenditures. Other significant esti-
mates and assumptions include terminal value growth rates, ter-
minal value margin rates, future capital expenditures and changes
in future working capital requirements based on management
projections.

SFAS No. 142 requires that this assessment be per formed at
the “reporting unit” level. At July 1, 2007, PolyOne had three
reporting units, consistent with PolyOne’s operating segments, that
had a significant amount of goodwill: Vinyl Compounds, Interna-
tional Color and Engineered Materials, and Polymer Coating Sys-
tems. Under the provisions of SFAS No. 142, these three reporting
units were tested for impairment as of July 1, 2007. The average fair
values of the market approach and income approach exceeded the
carrying value of Vinyl Business, International Color and Engineered

Materials, and Polymer Coating Systems by 52%, 8% and 24%,
respectively, as of July 1, 2007.

As a result of the reorganization of the Company’s segments
discussed further in Notes A and R, on October 1, 2007, PolyOne
had four reporting units that had a significant amount of goodwill:
Vinyl Compounds, Specialty Coatings, International Color and Engi-
neered Materials and Specialty Inks and Polymer Systems. PolyOne
per formed an interim assessment of goodwill on the two new
reporting units — Specialty Coatings and Specialty Inks and Poly-
mer Systems. The average fair values of the market approach and
income approach exceeded the carrying value of Specialty Coatings
and Specialty Inks and Polymer Systems by 17% and 31%, respec-
tively, as of October 1, 2007.

Even though PolyOne determined that there was no additional
goodwill impairment as of the July 1, 2007 annual assessment nor
as of the October 1, 2007 interim assessment, the future occur-
rence of a potential indicator of impairment, such as a significant
adverse change in legal factors or business climate, an adverse
action or assessment by a regulator, unanticipated competition, a
material negative change in relationships with significant custom-
ers, strategic decisions made in response to economic or compet-
itive conditions, loss of key personnel or a more-likely-than-not
expectation that a reporting unit or a significant portion of a report-
ing unit will be sold or disposed of, would require an interim assess-
ment for some or all of the reporting units prior to the next required
annual assessment on July 1, 2008.

Information regarding other intangible assets follows:

As of December 31, 2007

Acquisition

Accumulated

Currency

Cost

Amortization

Translation

Net

(In millions)

Non-contractual

customer relationships

$ 8.6

Sales contract

11.4

$ (6.7)

(10.0)

Patents, technology and

other

Total

4.7

(2.7)

$24.7

$(19.4)

$ —

—

1.4

$1.4

$1.9

1.4

3.4

$6.7

As of December 31, 2006

Acquisition

Accumulated

Currency

Cost

Amortization

Translation

Net

(In millions)

Non-contractual

customer relationships

$ 8.6

$ (6.1)

Sales contract

Patents, technology and

other

Total

9.6

8.0

(9.1)

(2.9)

$26.2

$(18.1)

$ —

—

1.3

$1.3

$2.5

0.5

6.4

$9.4

There were no indefinite-lived intangible assets as of Decem-

ber 31, 2007 and 2006.

Amortization of other intangible assets was $2.1 million for the
year ended December 31, 2007, $2.1 million for the year ended
the year ended
December 31, 2006 and $2.7 million for

P O L Y O N E C O R P O R A T I O N

December 31, 2005. Amortization expense for each of the next five
years is expected to be approximately $1.5 million per year.

operations are reflected on the line “Corporate and eliminations” in
Note R, “Segment Information.”

The carrying values of intangible assets and other investments
are adjusted to fair value based on estimated net future cash flows
as a result of an evaluation done each year end, or more often when
indicators of impairment exist. During 2007, an impairment charge
of $2.5 million was recorded against the carrying value of certain
patents and technology agreements and is included in “Selling and
administrative” in the Consolidated Statements of Income. No
impairment charges were recorded in 2006 or 2005.

Note E. EMPLOYEE SEPARATION AND PLANT PHASEOUT

2005 Activity — Employee separation and plant phaseout
costs for 2005 were $5.5 million of which $3.6 million and $1.9 mil-
lion was included in Costs of sales and Selling and administrative in
the Consolidated Statements of Income, respectively.

Operating income includes a $2.5 million charge to be paid
pursuant to the terms of an October 6, 2005 separation agreement
(2005 Separation Agreement) between PolyOne and Thomas A.
Waltermire as the President, Chief Executive Officer and a Director.
The amounts accrued at December 31, 2005 are expected to be
paid out through 2008.

Since the formation of PolyOne in 2000, management has under-
taken several restructuring initiatives to improve profitability and, as
a result, PolyOne has incurred employee separation and plant
phaseout costs.

The $2.5 million loss on the sale of facilities and equipment of
previously idled operations reflects the amount in excess of the
estimate at December 31, 2004 when the carrying value of these
assets was reduced to estimated future net proceeds.

Employee separation costs include salary continuation bene-
fits, medical coverage and outplacement assistance and are based
on a formula that takes into account each individual employee’s
base compensation and length of service. These costs are recorded
in the Consolidated Statements of Income on the lines “Cost of
sales” and “Selling and administrative.” PolyOne maintains a sev-
erance plan that provides specific benefits to all employees (except
those who are employed under collective bargaining agreements)
who lose their jobs due to reduction in workforce or job elimination
initiatives, or from closing manufacturing facilities. Collective bar-
gaining employees are covered under the terms of each specific
agreement. The amount
is determined separately for each
employee and is recognized at the date the employee is notified
if the expected termination date will be within 60 days of notification
or is accrued on a straight-line basis over the period from the
notification date to the expected termination date if the termination
date is more than 60 days after the notification date.

Plant phaseout costs include the impairment of property, plant
and equipment at manufacturing facilities, and the resulting write-
down of the carrying value of these assets to fair value, which
represents management’s best estimate of the net proceeds to be
received for the assets to be sold or scrapped, less any costs to
sell. These costs are recorded in the Consolidated Statements of
Income on the lines “Cost of sales” and “Selling and administra-
tive.” Plant phaseout costs also include cash facility closing costs
and lease termination costs. Assets transferred to other PolyOne
facilities are transferred at net book value.

Plant phaseout costs associated with discontinued operations
are included in the Consolidated Statements of Income on the line
“Loss from discontinued operations and loss on sale, net of income
taxes.” Plant phaseout costs for continuing operations relate to the
Vinyl Business, North American Color and Additives, and North
American Engineered Materials operating segments, and for dis-
continued operations relate to the Engineered Films and the Elas-
tomers and Per formance Additives businesses. Employee
separation and plant phaseout costs associated with continuing

Operating income was also reduced by $0.5 million from the
November 2005 announcement to close the Company’s Manches-
ter, England plastic color additives facility by the end of the first
quarter of 2006. Of the 44 employees affected by the facility
closing, 22 were terminated by December 31, 2005. An additional
charge of $0.6 million for employee separation was recognized in
2006 as the plant phaseout was completed.

Loss from discontinued operations reflects a $0.2 million ben-
efit relative to employee separation costs as a result of adjusting
estimates when the activities were completed.

2006 Activity — Cost of sales includes a $0.5 million charge
related to the November 2006 announcement to move the latex
product manufacturing business located at the Company’s Com-
merce, California facility to its Massillon, Ohio location to better
serve customers. The six employees affected by this relocation
were terminated by February 28, 2007.

Cost of sales also includes an additional $0.6 million charge to
complete the separation of the 22 remaining employees from the
November 2005 announcement to close the Manchester, England
color additives facility.

Fully offsetting these charges was a net gain of $1.1 million,
$0.9 million of which was included in Cost of sales and $0.2 million
in Selling and administrative, from the sale of facilities that were
previously identified as part of the Company’s plant phaseout
activities.

During 2006, the Company paid $1.2 million under the 2005

Separation Agreement.

2007 Activity — Employee separation and plant phaseout
costs for 2007 were $2.2 million of which $1.4 million and $0.8 mil-
lion was included in Costs of sales and Selling and administrative in
the Consolidated Statements of Income, respectively.

During 2007, the Company recognized and paid $0.4 million in
employee separation charges related to 33 employees involved in

P O L Y O N E C O R P O R A T I O N

the restructuring of its manufacturing facility in St. Peters, Missouri,
part of the North American Color and Additives operating segment.

The closure and exit from the Company’s Commerce, California
facility was completed in the first quarter of 2007, during which the
Company paid $0.1 million in employee separation charges and
$0.1 million in plant phase-out costs.

During 2007, charges related to three executive severance
agreements in the amount of $0.6 million were recognized. During
2007, the Company paid $0.9 million for executive severance.
Accrued executive severance costs at December 31, 2007 are
$1.0 million and are expected to be paid over the next 12 months.

In September 2007, PolyOne announced the closure of two
manufacturing lines at its Avon Lake, Ohio facility. Non-cash charges
of $0.5 million were recorded to adjust the carrying value of certain
assets to their net realizable value. In addition, during the third
quarter of 2007, severance costs of $0.4 million for seven employ-
ees at the Avon Lake and other facilities were recorded of which
$0.1 million were paid in 2007 and the remaining $0.3 million of
costs are expected to be paid over the next 12 months.

In addition, during 2007, $0.3 million of other non-cash
charges were incurred as the Company adjusted previous carrying
values of assets held for sale.

Note F. FINANCIAL INFORMATION OF EQUITY AFFILIATES

On July 6, 2007, PolyOne sold its 24% interest in OxyVinyls, a
manufacturer and marketer of PVC resins, for cash proceeds of
$261 million.

The following table presents OxyVinyls’ summarized financial

results for the periods indicated:

Summarized balance sheet as of December 31:

(In millions)

Current assets

Non-current assets

Total assets

Current liabilities

Non-current liabilities

Total liabilities

Partnership capital

2006

$ 382.4

1,293.1

1,675.5

238.8

294.5

533.3

$1,142.2

OxyVinyls’ income during 2005 includes a charge for
the
impairment of a previously idled chlor-alkali facility, of which Poly-
One’s share was $22.9 million.

The Company recorded an impairment of $14.8 million on its
OxyVinyls investment during the second quarter of 2007 due to an
other than temporar y decline in value. It is included in the Income
from equity affiliates and minority interest caption in the Consoli-
dated Statement of Income. The impairment is not reflected in the
equity affiliate earnings above because it is excluded as a measure
of segment operating income or loss that is reported to and
reviewed by the chief operating decision maker (See Note R —
Segment Information).

SunBelt Chlor-Alkali Partnership (SunBelt) is the most signifi-
cant of PolyOne’s equity investments and is reported within the
Resin and Intermediates segment. PolyOne owns 50% of SunBelt.
The remaining 50% of SunBelt is owned by Olin SunBelt Inc., a
wholly owned subsidiary of the Olin Corporation.

Summarized financial information for SunBelt follows:

(In millions)

SunBelt:

Net sales

Operating income

2007

2006

2005

$180.6

$186.7

$167.0

$ 91.3

$104.3

$ 92.2

SunBelt

$ 82.0

$ 94.6

$ 81.3

PolyOne’s ownership of SunBelt

50%

Earnings of equity affiliate recorded

by PolyOne

$ 41.0

$ 47.3

$ 40.7

Summarized balance sheet as of December 31:

Six Months Ended

June 30,

2007

2006

2005

Partnership income as reported by

Operating income

11.6

$ 274.8

$ 200.3

$1,107.4

$2,476.0

$2,502.0

(2.0)

$ 246.2

$ 134.0

24%

(0.5)

59.1

32.2

(In millions)

Current assets

Non-current assets

Total assets

Current liabilities

Non-current liabilities

Total liabilities

2007

2006

$ 27.8

$ 25.1

109.6

137.4

21.0

109.7

130.7

113.7

138.8

22.1

121.9

144.0

0.3

0.6

(0.2)

59.7

32.8

Partnership interest (deficit)

6.7

$ (5.2)

OxyVinyls purchases chlorine from SunBelt under an agree-
ment that expires in 2094. The agreement requires OxyVinyls to
purchase all of the chlorine that is produced by SunBelt up to a
maximum of 250,000 tons per year at market price, less a dis-
from SunBelt were
count. OxyVinyls’

chlorine purchases

(In millions)

OxyVinyls:

Net sales

Partnership income

(loss) as reported by
OxyVinyls

PolyOne’s ownership of

OxyVinyls

PolyOne’s proportionate
share of OxyVinyls’
earnings (loss)

Amortization of the

difference between
PolyOne’s investment
and its underlying
share of OxyVinyls’
equity

Earnings (loss) of equity
affiliate recorded by
PolyOne

P O L Y O N E C O R P O R A T I O N

$33.9 million in 2007 through its disposition date of July 6, 2007
and $72.2 million for the year ended December 31, 2006.

On October 1, 2006, PolyOne purchased the remaining 50%
interest in DH Compounding Company from a subsidiary of The Dow
Chemical Company. DH Compounding Company is now fully consol-
idated in the financial statements of PolyOne. Prior to the acquisi-
tion of DH Compounding Company, it was accounted for as an equity
affiliate and was reflected in All Other together with BayOne Ure-
thane Systems, L.L.C equity affiliate (owned 50% and included in
the Specialty Inks and Polymer Systems operating segment). The
Vinyl Business operating segment includes the Geon/Polimeros
Andinos equity affiliate (owned 50%).

Combined summarized financial information for these equity
affiliates follows. The amounts shown represent the entire opera-
tions of these businesses. DH Compounding is included in the
following table up to the time of its consolidation into PolyOne on
October 1, 2006. An asset write-down of $1.6 million was recorded
in the third quarter of 2007 against the carrying value of certain
inventory, accounts receivable and intangible assets of our Geon/
Polimeros equity affiliate in Colombia. The impairment is not
reflected in the following equity affiliate earnings because it is
excluded as a measure of segment operating income or loss that
is reported to and reviewed by the chief operating decision maker
(See Note R — Segment Information).

(In millions)

Net sales

Operating income

Net income

2007

2006

$116.8

$122.9

8.1

6.5

$ 12.0

$ 10.7

(In millions)

2007

2006

Summarized balance sheet as of December 31:

Current assets

Non-current assets

Total assets

Current liabilities

Non-current liabilities

Total liabilities

$ 37.0

$ 30.7

14.6

14.0

$ 51.6

$ 44.7

$ 32.2

$ 28.7

3.1

2.7

$ 35.3

$ 31.4

Note G. FINANCING ARRANGEMENTS

Long-term debt at December 31 consisted of the following:

(In millions)

10.625% senior notes due 2010

8.875% senior notes due 2012

7.500% debentures due 2015

2007

2006

$ — $241.4

199.2

199.1

50.0

Medium-term notes — interest rates from 6.52%

to 7.16% with a weighted average rate of
6.76% and 6.83% at December 31, 2007 and
2006, respectively — due between 2008 and
2011

6.0% promissory note due in equal monthly

installments through 2009

Total long-term debt

Less current portion

76.1

91.7

5.3

8.0

$330.6

$590.2

22.6

22.5

Total long-term debt, net of current portion

$308.0

$567.7

Aggregate maturities of long-term debt for the next five years
are: 2008 — $22.6 million; 2009 — $21.5 million; 2010 —
$18.8 million; 2011 — $18.5 million; 2012 — $199.2 million;
and thereafter — $50.0 million.

During 2006, PolyOne issued a promissory note in the principal
amount of $8.7 million, payable in 36 equal installments at a rate of
6% per annum. This promissory note resulted from the purchase of
the remaining 50% interest in DH Compounding Company. For
further discussion of this purchase, see Note A.

principal

amounts

aggregate

During 2007 and 2006, PolyOne repurchased $241.4 million
and $58.6 million
its
10.625% senior notes at premiums of $12.8 million and $4.4 mil-
lion, respectively. The premium is shown as a separate line item in
the Consolidated Statements of Income. Unamortized deferred
note issuance costs of $2.8 million and $0.8 million were expensed
due to this repurchase and are included in interest expense in the
Consolidated Statements of Income in 2007 and 2006, respec-
tively. Also, during 2007 and 2006, $20.0 million and $0.7 million
of aggregate principal amount of PolyOne’s medium-term notes
became due and were paid, respectively.

As of December 31, 2007, PolyOne’s secured borrowings were
not at levels that would trigger the security provisions of the inden-
tures governing its senior notes and debentures and its guarantee
of the SunBelt notes. See Note N.

Guarantee Agreement — PolyOne decided not to renew its
revolving credit facility, and, accordingly, it expired on June 6,
2006. To replace some of the features of this expired facility,
PolyOne entered into a definitive Guarantee and Agreement with
Citicorp USA, Inc. on June 6, 2006. Under this Guarantee and
Agreement, PolyOne guarantees the treasury management and
banking services provided to it and its subsidiaries, such as sub-
sidiary borrowings, interest rate swaps, foreign currency forwards,
letters of credit, credit card programs and bank overdrafts. This
guarantee is secured by PolyOne’s inventories located in the United
States.

P O L Y O N E C O R P O R A T I O N

subsidiary. PFC, in turn, may sell an undivided interest in these
accounts receivable to certain investors. As of December 31, 2007,
$151.2 million was available. The receivables sale facility was
amended in June 2007 to extend the maturity of the facility to June
2012 and to, among other things, modify certain financial cove-
nants and reduce the cost of utilizing the facility. In July 2007, the
Company entered into a Canadian receivables purchase agreement
which increased the facility by $25.0 million to $200.0 million.

At December 31, 2007 and 2006, accounts receivable totaling
$175.8 million and $161.6 million, respectively, were sold by
PolyOne to PFC. The maximum proceeds that PFC may receive under
the facility is limited to 85% of the eligible accounts receivable that
are sold to PFC. At December 31, 2007 and December 31, 2006
its undivided interests in accounts
PFC had not sold any of
receivable.

PolyOne retained an interest in the difference between the
amount of trade receivables sold by PolyOne to PFC and the undi-
vided interest sold by PFC as of December 31, 2007 and 2006. As a
result, the interest retained by PolyOne is $175.8 million and
$161.6 million and is included in accounts receivable on the Con-
solidated Balance Sheets at December 31, 2007 and 2006,
respectively.

The receivables sale facility also makes up to $40.0 million
available for the issuance of standby letters of credit as a sub-limit
within the $200.0 million limit under the facility, of which $11.4 mil-
lion was used at December 31, 2007. Continued availability of the
receivables sale facility depends upon compliance with a fixed
charge coverage ratio covenant related primarily to operating per-
formance that is set forth in the related agreements. As of Decem-
ber 31, 2007, PolyOne was in compliance with these covenants.

PolyOne receives the remaining proceeds from collection of the
receivables after a deduction for the aggregate yield payable on the
undivided interests in the receivables sold by PFC, a servicer’s fee,
an unused commitment fee (between 0.25% and 0.50%, depending
upon the amount of the unused portion of the facility), fees for any
outstanding letters of credit, and an administration and monitoring
fee ($150,000 per annum).

PolyOne also services the underlying accounts receivable and
receives a service fee of 1% per annum on the average daily amount
of the outstanding interests in its receivables. The net discount and
other costs of the receivables sale facility are included in other
expense, net in the Consolidated Statements of Income.

The weighted-average interest rate on short-term borrowings
was 6.0% at December 31, 2007 and 4.9% at December 31, 2006.
Total
interest paid on long-term and short-term borrowings was
$45.7 million in 2007, $62.2 million in 2006 and $63.5 million
in 2005.

PolyOne is exposed to market risk from changes in interest
rates on debt obligations. PolyOne periodically enters into interest
rate swap agreements that modify its exposure to interest rate risk
by converting fixed-rate obligations to floating rates. At Decem-
ber 31, 2007, PolyOne maintained interest rate swap agreements
on five of its fixed-rate obligations in the aggregate amount of
$80.0 million with a net fair value liability of $1.7 million. At
December 31, 2006, PolyOne maintained interest rate swap agree-
ments on six of its fixed-rate obligations in the aggregate amount of
$100.0 million with a net fair value liability of $5.1 million. The
weighted-average interest rate for these agreements was 8.8% at
December 31, 2007 and 9.3% at December 31, 2006. During
January 2008, four of these interest rate swap agreements in
the aggregate amount of $70.0 million were unwound.

The following table shows the interest rate impact of the swap

agreements during 2007 and 2006:

Effective

Interest Rate

during 2007

during 2006

9.5%

—

8.8%

$80.0 million of medium-term notes with a
weighted-average interest rate of 6.76%

$100.0 million of medium-term notes with

a weighted-average interest rate of
6.83%

Note H. LEASING ARRANGEMENTS

PolyOne leases certain manufacturing facilities, warehouse space,
machinery and equipment, automobiles and railcars under operat-
ing leases. Rent expense was $20.9 million in 2007, $20.5 million
in 2006 and $19.3 million in 2005.

Future minimum lease payments under non-cancelable oper-
ating leases with initial lease terms longer than one year at Decem-
ber 31, 2007 were as follows: 2008 — $17.4 million; 2009 —
$14.3 million; 2010 — $11.8 million; 2011 — $6.4 million;
2012 — $4.7 million; and thereafter — $10.3 million.

Note I. SALE OF ACCOUNTS RECEIVABLE

Accounts receivable at December 31 consist of the following:

(In millions)

Trade accounts receivable

Retained interest in securitized accounts

receivable

Allowance for doubtful accounts

2007

2006

$169.8

$160.7

175.8

161.6

(4.8)

(5.9)

$340.8

$316.4

Under the terms of its receivables sale facility, PolyOne may
sell up to $200.0 million of its accounts receivable to PolyOne
Funding Corporation (PFC), a wholly owned, bankruptcy-remote

P O L Y O N E C O R P O R A T I O N

PolyOne also sponsors several unfunded defined-benefit post-
retirement plans that provide subsidized health care and life insur-
ance benefits to certain retirees and a closed group of eligible
employees. As of April 1, 2006, all post-retirement health care
plans are contributor y. Retiree contributions are adjusted periodi-
cally, and these plans contain other cost-sharing features such as a
maximum cap on the Company’s cost, deductibles and cost shar-
ing. Life insurance plans are generally non-contributor y. Only certain
employees hired prior to December 31, 1999 are eligible to par-
ticipate in the Company’s subsidized post-retirement health care
and life insurance plans.

PolyOne uses December 31 as the measurement date for all of
its plans. Effective December 31, 2007, PolyOne adopted the RP-
2000 projected by scale AA to 2008 mortality table to better
estimate the future liabilities under its defined-benefit pension
plans.

As discussed in Note C, the Company adopted the provisions of
SFAS No. 158 as of December 31, 2006 and, accordingly, recog-
nized an increase of $6.4 million on a pre-tax basis and a decrease
of $0.4 million on an after-tax basis to its accumulated other
comprehensive loss for the unfunded status of its pension and
post-retirement health care benefit plans. In addition, PolyOne
recorded an adjustment of $2.7 million to increase accumulated
other comprehensive loss to record its proportionate share of
OxyVinyls’ adoption of SFAS No. 158. The Company also recognized
the prior service cost and net actuarial gains and losses of these
plans in accumulated other comprehensive income. Future changes
to the funded status of these plans will be recognized through
accumulated other comprehensive income (AOCI) in the year the
change occurs.

Note J. INVENTORIES

Components of inventories are as follows:

(In millions)

At FIFO or average cost, which
approximates current cost:

December 31,

2007

2006

Finished products and in process

$169.5

$165.4

Raw materials and supplies

Reserve to reduce certain inventories

to LIFO cost basis

100.1

269.6

111.7

277.1

(46.2)

(36.3)

$223.4

$240.8

Note K. PROPERTY

(In millions)

December 31,

2007

2006

Land and land improvements

40.3

39.8

Buildings

Machinery and equipment

Less accumulated depreciation and

amortization

271.8

903.6

263.2

854.9

1,215.7

1,157.9

(766.0)

(715.5)

$ 449.7

$ 442.4

Depreciation expense was $55.3 million in 2007, $55.0 million

in 2006 and $48.0 million in 2005.

Note L. OTHER BALANCE SHEET LIABILITIES

Accrued Expenses

Non-current Liabilities

December 31,

(In millions)

2007

2006

2007

2006

Employment costs

$46.4

$49.5

$13.1

$12.7

Environmental

Taxes

Post-retirement benefits

Interest

Pension

Employee separation and plant

phaseout

Insurance accruals

Other

13.5

2.8

9.9

3.6

4.7

1.3

0.3

11.9

5.0

7.6

9.3

6.9

4.5

1.5

0.1

8.7

70.3

54.5

—

2.1

2.0

—

1.7

6.5

$94.4

$93.1

$87.5

$75.4

Note M. EMPLOYEE BENEFIT PLANS

PolyOne has several pension plans, of which only two continue to
accrue benefits for certain U.S. employees. These two plans gen-
erally provide benefit payments using a formula that is based upon
employee compensation and length of service. Length of service for
determining benefit payments was frozen as of December 31,
2002. All U.S. defined-benefit pension plans were closed to new
participants as of December 31, 1999.

P O L Y O N E C O R P O R A T I O N

The following table illustrates the impact of the adoption of SFAS No. 158 on a pre-tax basis at December 31, 2006:

(In millions)

Before application of SFAS No. 158:
Assets

Prepaid cost

Intangible assets

Deferred income taxes

Liabilities and shareholders’ equity

Liability for pension benefits

AOCI

Total shareholders’ equity

Adjustments:
Assets

Prepaid cost

Intangible assets

Deferred income taxes

Liabilities and shareholders’ equity

Liability for pension benefits

AOCI

Change in AOCI related to adoption of SFAS No. 158 of equity affiliate

Total shareholders’ equity

After application of SFAS No. 158:
Assets

Prepaid cost

Intangible assets

Deferred income taxes

Liabilities and shareholders’ equity

Liability for pension benefits

AOCI

Change in AOCI related to adoption of SFAS No. 158 of equity affiliate

Total shareholders’ equity

Pension

Health Care

Benefits

$ 61.6

$ —

0.1

35.2

—

32.3

167.5

109.6

(124.4)

—

$ (60.9)

$ —

(0.1)

0.6

—

6.2

(37.9)

(23.1)

—

(23.1)

(16.7)

16.7

(2.7)

14.0

0.7

—

35.8

$ —

—

38.5

129.6

(147.5)

—

(147.5)

92.9

16.7

(2.7)

14.0

P O L Y O N E C O R P O R A T I O N

The following tables present the change in benefit obligation, change in plan assets and components of funded status for defined-benefit

pension and post-retirement health care benefit plans. Actuarial assumptions that were used are also included.

(In millions)

Change in benefit obligation:

Projected benefit obligation — beginning of year

Service cost

Interest cost

Participant contributions

Benefits paid

Plan amendments/settlements

Change in discount rate and other

Projected benefit obligation — end of year

Projected salary increases

Accumulated benefit obligation

Change in plan assets:

Plan assets — beginning of year

Actual return on plan assets

Company contributions

Plan participants’ contributions

Benefits paid

Other

Plan assets — end of year

Under-funded status at end of year

Pension Benefits

Health Care Benefits

2007

2006

2007

2006

$514.9

$ 536.6

$ 92.9

$102.6

1.1

30.1

—

1.1

29.4

—

0.4

5.2

5.6

0.4

5.1

6.3

(36.8)

(36.5)

(12.1)

(14.9)

0.1

1.1

(22.3)

(16.8)

—

(0.5)

—

(6.6)

$487.1

$ 514.9

$ 91.5

$ 92.9

18.0

23.0

—

$469.1

$ 491.9

$ 91.5

$ 92.9

$386.0

$ 370.0

$ — $ —

30.9

20.4

—

46.2

5.3

—

6.5

5.6

—

8.6

6.3

(36.8)

(36.5)

(12.1)

(14.9)

0.8

1.0

—

$401.3

$ 386.0

$ — $ —

$ (85.8)

$(128.9)

$(91.5)

$ (92.9)

Plan assets of $401.3 million and $386.0 million at December 31, 2007 and 2006, respectively, relate to PolyOne’s funded pension
plans that have an accumulated benefit obligation (ABO) of $428.7 million and $443.3 million at December 31, 2007 and 2006,
respectively. As of December 31, 2007 and 2006, PolyOne is 90% and 83% funded, respectively, in regards to these plans and their
respective projected benefit obligation.

Amounts included in the Consolidated Balance Sheets are as follows:

(In millions)

Other non-current assets

Current liabilities

Long-term liabilities

Amounts recognized in AOCI:

(In millions)

Net loss

Prior service credit

Equity affiliate

Pension Benefits

Health Care Benefits

2007

$ 1.5

$ 4.7

$82.6

2006

0.7

4.5

$125.1

2007

$ —

$ 9.9

$81.6

2006

$ —

$ 9.3

$83.6

Pension Benefits

Health Care Benefits

2007

$115.3

(0.5)

—

2006

$148.1

(0.6)

—

2007

$ 22.2

(36.0)

—

2006

$ 25.1

(41.8)

2.7

$114.8

$147.5

$(13.8)

$(14.0)

P O L Y O N E C O R P O R A T I O N

Change in AOCI under SFAS No. 158:

(In millions)

AOCI in prior year

Prior service credit recognized during year

Net loss recognized during the year

Net loss occurring in the year

Decrease prior to SFAS No. 158

Increase (decrease) due to adoption of SFAS No. 158

Increase due to Equity affiliate’s adoption of SFAS No. 158

Decrease related to sale of sale of equity affiliate

Other adjustments

AOCI in current year

Pension Benefits

Health Care Benefits

2007

$147.5

0.1

(9.9)

(22.9)

—

2006

$169.0

2007

$(14.0)

2006

$ —

—

(44.9)

23.1

—

0.3

5.8

(1.7)

(1.5)

—

(2.7)

0.3

—

(16.7)

2.7

—

$114.8

$147.5

$(13.8)

$(14.0)

As of December 31, 2007 and 2006, PolyOne had plans with a projected benefit obligation and an accumulated benefit obligation in

excess of the related plan assets. Information for these plans follows:

(In millions)

Projected benefit obligation

Accumulated benefit obligation

Fair value of plan assets

Weighted-average assumptions used to determine benefit obligation at December 31:

Discount rate

Rate of compensation increase

Assumed health care cost trend rates at December 31:

Health care cost trend rate assumed for next year

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

Year that the rate reaches the ultimate trend rate

Pension Benefits

Health Care Benefits

2007

2006

2007

2006

$471.1

$512.8

$91.5

$92.9

453.2

383.8

490.0

383.3

91.5

92.9

—

Pension Benefits

Health Care Benefits

2007

2006

2005

2007

2006

2005

6.78% 6.07% 5.66% 6.61% 6.02% 5.56%

3.5%

—

10%

11%

— 5.00% 5.25% 5.25%

— 2015

2013

2012

Assumed health care cost trend rates have an effect on the amounts reported for the health care plans. A one percentage point change

in assumed health care cost trend rates would have the following impact:

(In millions)

Effect on total of service and interest cost

Effect on post-retirement benefit obligation

One Percentage

Point Increase

Point Decrease

$0.4

6.6

$(0.3)

(5.5)

An expected return on plan assets of 8.5% will be used to calculate the 2008 pension expense. The expected long-term return rate on
pension assets was determined after considering the historical experience of long-term asset returns by asset category, the expected
investment portfolio mix by category of asset and estimated future long-term investment returns.

P O L Y O N E C O R P O R A T I O N

The following table summarizes the components of net period benefit cost that was recognized during each of the years in the three-year

period ended December 31, 2007. Actuarial assumptions that were used are also included.

(Dollars in millions)

Components of net periodic benefit costs:

Service cost

Interest cost

Expected return on plan assets

Amortization of net loss

Curtailment and settlement charges

Amortization of prior service credit

Weighted-average assumptions used to determine net periodic benefit cost for the years

ended December 31:

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

Assumed health care cost trend rates at December 31:

Health care cost trend rate assumed for next year

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

Year that the rate reaches the ultimate trend rate

Pension Benefits

Health Care Benefits

2007

2006

2005

2007

2006

2005

$ 1.1

$ 1.3

$ 0.4

30.1

29.4

28.9

(31.8)

(30.2)

(31.7)

9.6

0.3

(0.1)

13.3

13.0

—

0.4

—

5.2

—

1.7

—

5.1

—

1.6

—

5.9

—

1.2

—

(5.8)

(4.5)

$ 9.2

$ 13.6

$ 11.9

$ 1.5

$ 1.3

$ 3.0

Pension Benefits

Health Care Benefits

2007

2006

2005

2007

2006

2005

6.07% 5.66% 5.58% 6.02% 5.56% 5.43%

8.50% 8.50% 8.75%

3.5%

—

10%

— 5.25% 5.25% 5.25%

— 2013

2012

2011

The amortization amounts expected to be recognized during

PolyOne’s weighted-average asset allocations at December 31,

the year ended December 31, 2008 are as follows:

2007 and 2006 were as follows:

(In millions)

Pension Benefits

Health Care Benefits

Amount of net prior service credit

Amount of net loss

$(0.1)

$ 6.0

$(5.7)

$ 1.3

PolyOne’s pension asset investment strategy is to diversify the
asset portfolio among and within asset categories to enhance the
portfolio’s risk-adjusted return. PolyOne’s expected portfolio asset
mix also considers the duration of plan liabilities and historical and
expected returns of the asset investments. PolyOne’s pension
asset investment allocation guidelines are to invest 40% to 75%
in equity securities, 15% to 40% in debt securities (including cash
equivalents) and 8% to 22% in alternative investments. These
alternative investments include funds of multiple asset investment
strategies and funds of hedge funds. PolyOne adjusts its invest-
ment allocations during the year through re-balancing the portfolio
as the Company makes contributions to the pension assets and
determines which investment classes should be liquidated to fund
pension obligations.

Asset Category

Equity securities

Debt securities

Other

Plan Assets at

December 31,

2007

2006

64%

62%

100%

The estimated future benefit payments for PolyOne’s pension

and health care plans are as follows:

(In millions)

2008

2009

2010

2011

2012

2013 through 2017

Medicare

Pension

Health Care

Part D

Benefits

Subsidy

$ 35.8

$ 9.9

$1.6

36.2

36.8

36.5

36.8

192.8

10.1

10.0

45.6

1.7

1.8

7.9

The Company currently estimates that 2008 employer contri-
butions will be $23.3 million to all qualified and nonqualified pen-
sion plans and $9.9 million to all health care benefit plans. The
Company anticipates that it will make a payment of approximately
$18.2 million to its U.S. qualified defined-benefit plans in 2008.
This amount is included in the total estimate of $23.3 million to all
of the Company’s qualified and non-qualified pension plans.

P O L Y O N E C O R P O R A T I O N

PolyOne sponsors a voluntary retirement savings plan (RSP).
the provisions of this plan, eligible employees receive
Under
defined Company contributions of 2% of their eligible earnings plus
they are eligible for Company matching contributions based on the
first 6% of their eligible earnings contributed to the plan. In addition,
PolyOne may make discretionary contributions to this plan for eli-
gible employees based on a specific percentage of each employee’s
compensation.

Based on these same Court rulings and the settlement agree-
ment, PolyOne adjusted its environmental reserve for future reme-
diation costs, a portion of which already related to the Calvert City
site, resulting in a charge of $28.8 million in 2007. The confidential
settlement agreement provides a mechanism to allocate future
remediation costs at the Calvert City facility to Westlake Vinyls,
Inc. PolyOne will adjust its environmental reserve in the future,
consistent with any such future allocation of costs.

Following are PolyOne’s contributions to the RSP:

(In millions)

Retirement savings match

Defined retirement benefit

2007

2006

2005

$ 5.7

$ 5.4

$5.1

4.9

4.7

4.8

$10.6

$10.1

$9.9

Note N. COMMITMENTS AND RELATED-PARTY INFORMATION

Environmental — PolyOne has been notified by federal and state
environmental agencies and by private parties that it may be a
potentially responsible party (PRP) in connection with the investi-
gation and remediation of a number of environmental waste dis-
posal sites. While government agencies frequently assert that PRPs
are jointly and severally liable at these sites, in PolyOne’s experi-
ence, interim and final allocations of liability costs are generally
made based on the relative contribution of waste. PolyOne believes
that its potential continuing liability with respect to these sites will
not have a material adverse effect on its consolidated financial
position, results of operations or cash flows. In addition, PolyOne
initiates corrective and preventive environmental projects of its own
to ensure safe and lawful activities at its operations. PolyOne
believes that compliance with current governmental regulations
at all levels will not have a material adverse effect on its financial
condition.

In September 2007, PolyOne was informed of rulings by the
United States District Court for the Western District of Kentucky on
several pending motions in the case of Westlake Vinyls, Inc. v. Goo-
drich Corporation, et al., which has been pending since 2003. The
Court held that third-party defendant PolyOne must pay the reme-
diation costs at the former Goodrich Corporation (now Westlake
Vinyls, Inc.) Calvert City facility, together with certain defense costs
of Goodrich Corporation. The rulings also provided that PolyOne can
seek indemnification for contamination attributable to Westlake
Vinyls.

The environmental obligation at the site arose as a result of an
agreement by PolyOne’s predecessor, The Geon Company, at the
time of its spin-off from Goodrich Corporation in 1993, to indemnify
Goodrich Corporation for environmental costs at the site. Neither
PolyOne nor The Geon Company ever owned or operated the facility.
Following the Court rulings, the parties to the litigation entered into
settlement negotiations and agreed to settle all claims regarding
past environmental costs incurred at the site. Subject to applicable
insurance recoveries, PolyOne recorded a charge of $15.6 million
and made payments, net of related receipts of $18.8 million, in
2007 for past remediation activities related to these Court rulings.

Based on estimates prepared by its environmental engineers
and consultants, PolyOne had accruals, totaling $83.8 million at
December 31, 2007 and $59.5 million at December 31, 2006 to
cover probable future environmental expenditures relating to pre-
viously contaminated sites. These accruals are included in
“Accrued expenses” and “Other non-current liabilities” on the Con-
solidated Balance Sheets. The accrual represents PolyOne’s best
estimate of the remaining probable remediation costs, based upon
information and technology that is currently available and PolyOne’s
view of the most likely remedy. Depending upon the results of future
testing, the ultimate remediation alternatives undertaken, changes
in regulations, new information, newly discovered conditions and
other factors, it is reasonably possible that PolyOne could incur
additional costs in excess of the accrued amount at December 31,
2007. However, such additional costs, if any, cannot be currently
estimated. PolyOne’s estimate of this liability may be revised as
new regulations or technologies are developed or additional infor-
mation is obtained. These remediation costs are expected to be
paid over the next 30 years. Including the $15.6 million charge
related to the settlement agreement and the $28.8 million reserve
adjustment discussed above, for 2007, 2006 and 2005, PolyOne
incurred environmental expense of $48.8 million, $2.5 million and
$0.2 million, respectively, of which $48.8 million in 2007, $2.5 mil-
lion in 2006 and $0.9 million in 2005 related to inactive or formerly
owned sites. Environmental expense is presented net of insurance
recoveries of $8.1 million in 2006 and $2.2 million in 2005 and is
included in “Cost of sales” on the Consolidated Statements of
Income. There were no insurance recoveries during 2007. The
insurance recoveries all relate to inactive or formerly owned sites.

Guarantees — PolyOne guarantees $60.9 million of SunBelt’s
outstanding senior secured notes in connection with the construc-
tion of a chlor-alkali facility in McIntosh, Alabama. This debt matures
in 2017.

Related-Party Transactions — PolyOne purchases a substan-
tial portion of its PVC resin and all of its vinyl chloride monomer
(VCM) raw materials under supply agreements with OxyVinyls. Poly-
One has also entered into various service agreements with Oxy-
Vinyls. PolyOne sold its 24% equity interest in OxyVinyls on July 6,
2007. Net amounts owed to OxyVinyls, primarily for raw material
purchases, totaled $17.3 million at December 31, 2006 and
$28.0 million at December 31, 2005. Purchases of raw materials
from OxyVinyls were $368 million during 2005 and $369 million
during 2006 and $152 million for the six months ended June 30,
2007.

P O L Y O N E C O R P O R A T I O N

Note O. OTHER EXPENSE, NET

(In millions)

Currency exchange loss

2007

2006

2005

$(5.0)

$(1.3)

$(0.1)

Foreign exchange contracts gain

0.7

1.1

0.6

Discount on sale of trade receivables

(2.0)

(1.9)

(5.5)

Retained post-employment benefit cost
related to discontinued operations

Other income (expense), net

—

(0.3)

(0.7)

(1.3)

1.0

$(6.6)

$(2.8)

$(5.3)

Note P. INCOME TAXES

Income (loss) before income taxes and discontinued opera-

tions consists of the following:

(In millions)

Domestic

Foreign

2007

2006

2005

$(57.7)

$101.9

$53.6

25.3

18.4

16.2

$(32.4)

$120.3

$69.8

A summar y of income tax benefit (expense) follows:

During the third quarter of 2007, as part of the sale of the 24%
interest in OxyVinyls, the Company recognized a deferred tax benefit
of $31.5 million that was related to the temporar y difference
between the tax basis and book basis of the investment.

Components of PolyOne’s deferred tax liabilities and assets at

December 31, 2007 and 2006 were as follows:

2007

2006

2005

(In millions)

Deferred tax liabilities:

2007

2006

Tax over book depreciation

$ 40.8

$ 45.9

(In millions)

Current:

Federal

State

Foreign

Total current

Deferred:

Federal

State

Foreign

Total deferred

$ (3.3)

$ (2.5)

$(0.3)

(3.2)

(6.8)

(2.2)

(2.9)

(0.7)

(3.6)

$(13.3)

$ (7.6)

$(4.6)

$ 55.3

$13.5

$ —

2.6

(0.8)

1.6

—

(2.2)

(2.0)

$ 57.1

$12.9

$(2.0)

Total tax benefit (expense)

$ 43.8

$ 5.3

$(6.6)

Our effective tax rate was a benefit of 135.2%, a benefit of
4.4% and a provision of 9.5% for the years ended December 31,
2007, 2006 and 2005, respectively. The following table provides a
reconciliation of our income tax benefit (provision) at the statutor y
federal rate to our actual income tax benefit (provision) for the years
ended December 31, 2007, 2006 and 2005.

Federal statutor y income tax rate

35.0% (35.0)% (35.0)%

State tax, net of federal benefit

(1.2)

(0.7)

2007

2006

2005

Provision for repatriation of foreign

earnings

Differences in rates of foreign operations

Other, net

—

4.9

(8.7)

(2.0)

1.2

0.1

(0.7)

(1.4)

(3.0)

38.0% (45.1)% (40.6)%

Impact from sale of interest in OxyVinyls

97.2

—

Valuation allowance

Effective income tax rate

— 49.5

31.1

135.2%

4.4%

(9.5)%

Intangibles

Equity investments

Other, net

5.6

1.9

8.9

5.0

122.0

7.3

Total deferred tax liabilities

$ 57.2

$180.2

Deferred tax assets:

Post-retirement benefits other than pensions

$ 36.5

$ 38.5

Employment cost and pension

Environmental

Net operating loss carryforward

State taxes

Alternative minimum tax credit carryforward

Foreign net operating losses and tax credit

carryforward

Other, net

Total deferred tax assets

Tax valuation allowance

Net deferred tax assets

26.8

28.9

23.2

3.3

12.2

2.4

16.6

39.9

20.8

94.1

1.6

8.5

1.4

16.0

$149.9

$220.8

(2.4)

(1.4)

$ 90.3

$ 39.2

PolyOne provided for U.S. federal and foreign withholding tax on
$22.0 million, or 9%, of foreign subsidiaries’ undistributed earnings
as of December 31, 2007. Undistributed earnings for which no
federal or foreign withholding tax has been provided are intended to
be reinvested indefinitely and it is not practicable to estimate the
amount of additional taxes that may be payable upon distribution.

PolyOne paid income taxes, net of refunds, of $18.3 million in
2007, $9.0 million in 2006 and $10.2 million in 2005. PolyOne has
a U.S. net operating loss carryforward of $66.3 million, of which
$65.7 million will expire in 2024. In addition, PolyOne has an

P O L Y O N E C O R P O R A T I O N

alternative minimum tax credit carryforward of $12.2 million that
has no expiration date.

NOTE Q. SHARE-BASED COMPENSATION

Share-based compensation cost is based on the value of the por-
tion of share-based payment awards that are ultimately expected to
vest during the period. Share-based compensation cost recognized
in the Company’s Consolidated Statements of Income for the years
ended December 31, 2007 and 2006 includes (a) compensation
cost for share-based payment awards granted prior to, but not yet
vested, as of January 1, 2006 based on the grant date fair value
estimated in accordance with the pro forma provisions of
SFAS No. 123, plus (b) compensation cost for share-based payment
awards granted on or subsequent to January 1, 2006 based on the
grant date fair value estimated in accordance with the provision of
SFAS No. 123(R). Because share-based compensation expense
recognized in the Consolidated Statement of Income for the years
ended December 31, 2007 and 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated for feitures.
SFAS No. 123(R) requires that for feitures be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual
for feitures differ from those estimates. In the Company’s pro forma
information that was required under SFAS No. 123 for the year
ended December 31, 2005, the Company accounted for for feitures
as they occurred.

PolyOne has one active share-based compensation plan, which
is described below. The pre-tax compensation cost that was recog-
nized for the years ended December 31, 2007 and 2006 was
$4.3 million and $4.5 million, respectively. For the year ended
December 31, 2005, PolyOne recognized a benefit of $0.6 million.
This compensation cost or benefit is included in selling and admin-
istrative expenses in the Consolidated Statements of Income.

2005 Equity and Performance Incentive Plan

In May 2005, PolyOne’s shareholders approved the PolyOne Cor-
poration 2005 Equity and Per formance Incentive Plan (2005 EPIP).
All future grants and awards to PolyOne employees will be issued
only from this plan until there are no shares remaining under the
plan. As a result, all previous equity-based plans were frozen in May
2005. The 2005 EPIP provides for the award of a broad variety of
including non-qualified
share-based compensation alternatives,
stock options, incentive stock options, restricted stock, restricted
stock units, per formance shares, per formance units and stock
appreciation rights (SARs). Five million shares of common stock

Expected volatility

Expected dividends

Expected term (in years)

Risk-free rate

Value of SARs granted

have been reserved for grants and awards under the 2005 EPIP. It is
anticipated that all share-based grants and awards that are earned
and exercised will be issued from shares of PolyOne common stock
that are held in treasury.

Stock Appreciation Rights

During 2007, the Compensation and Governance Committee of the
Company’s Board of Directors authorized the issuance of
1,626,900 SARs. The awards were approved and communicated
as follows:

Date of issuance

March 8, 2007 May 10, 2007 September 10, 2007 October 4, 2007

Number of SARs

1,536,900

20,000

Grant date stock price

6.585 $

7.250 $

60,000

7.675 $

10,000

7.555

Expiration date

March 8, 2014 May 10, 2014 September 10, 2014 October 4, 2014

Vesting is based on a service period of one year and the
achievement of certain stock price targets. This condition is con-
sidered a market-based measure under SFAS No. 123(R) and is
considered in determining the grant’s fair value. This fair value is
not subsequently revised for actual market price achievement, but
rather is a fixed expense subject only to service-related for feitures.
The awards vest in one-third increments based on stock price
achievement (for a minimum of three consecutive trading days)
of $7.24, $7.90 and $8.56 per share, but may not be exercised
earlier than one year from the date of the grant. At December 31,
2007, these awards have reached the $8.56 stock price achieve-
ment target. The SARs have a seven-year exercise period.

The option pricing model used by PolyOne to value the SARs
granted during 2007 was a Monte Carlo simulation method. Under
this method, the fair value of awards on the date of grant is an
estimate and is affected by the Company’s stock price, as well as by
assumptions regarding a number of highly complex and subjective
variables that are presented in the following table. Expected vola-
tility was determined by the average of the six-year historical weekly
volatility for PolyOne’s common stock and the implied volatility rates
for exchange-traded options. The expected term of options granted
was set equal to the midpoint between the vesting and expiration
dates for each grant. Dividends were not included in this calculation
because PolyOne does not currently pay dividends. The risk-free rate
of return for periods within the contractual life of the option is based
on U.S. Treasury rates that were in effect at the time of the grant.
For feitures were estimated at 3% per year based on PolyOne’s
historical experience. Following is a summary of the assumptions
related to the SAR grants issued during 2007, 2006 and 2005:

2007

44.1%

—

2006

44.0%

—

2005

42.0%

—

4.0 — 4.4

3.7 — 4.3

5.2 — 5.5

3.88% — 4.30%

4.26% — 4.91%

3.8%

$2.68 — $3.05

$2.63 — $3.82

$4.05 — $4.31

During 2006, the Compensation and Governance Committee authorized the issuance of 1,141,000 SARs. The SARs will be settled in
shares of PolyOne common stock and vest in one-third increments based on stock price achievement of $7.50, $8.50 and $10.00 per share,

P O L Y O N E C O R P O R A T I O N

but may not be exercised earlier than one year from the date of grant. At December 31, 2007, these awards have reached the $8.50 stock
price achievement target. The SARs have seven-year exercise periods that expire in 2013.

A summary of SAR activity under the 2005 EPIP as of December 31, 2007 and during 2007 is presented below:

Stock Appreciation Rights

Outstanding at January 1, 2007

Granted

Exercised

Forfeited or expired

Outstanding at December 31, 2007

Vested and exercisable at December 31, 2007

Weighted-Average

Intrinsic

Aggregate

Weighted-Average

Remaining

Value

(in thousands)

Exercise Price

Contractual Term

(In millions)

1,640

1,627

(70)

(206)

2,991

899

$7.90

6.64

6.50

7.17

$7.30

$7.98

5.36 years

4.52 years

$—

The weighted-average grant date fair value of SARs granted during 2007 was $2.74. SARs granted during 2006 had a weighted-average
grant date fair value of $2.99. SARs granted during 2005 amounted to 474,300, had a weighted-average grant date fair value of $4.18 and
were valued using the Black-Scholes- Merton valuation method. The total intrinsic value of SARs that were exercised during 2007, 2006 and
2005 was $0.1 million, $1.5 million and $0.2 million, respectively.

As of December 31, 2007, there was $0.8 million of total unrecognized compensation cost related to SARs that is expected to be

recognized over a period of nine months.

Stock Options

PolyOne’s incentive stock plans provide for the award or grant of options to purchase shares of PolyOne common stock. Options granted
generally become exercisable at the rate of 35% after one year, 70% after two years and 100% after three years. The term of each option
cannot extend beyond 10 years from the date of grant. All options are granted at 100% or greater of market value on the date of the grant.
PolyOne also has a stock option plan for non-employee directors under which options are granted.

A summary of option activity as of December 31, 2007 and changes during 2007 is presented below:

Stock Options

Outstanding at January 1, 2007

Granted

Exercised

Forfeited or expired

Outstanding, vested and exercisable at December 31, 2007

The total intrinsic value of stock options that were exercised
during 2007, 2006 and 2005 was $0.2 million, $0.9 million and
$0.1 million, respectively.

Cash received during 2007, 2006 and 2005 from the exercise
of stock options was $1.2 million, $3.1 million and $0.5 million,
respectively.

Performance Shares

In January 2005, the Compensation and Governance Committee
authorized the issuance of per formance shares to selected exec-
utives and other key employees. The per formance shares vest only
to the extent that management goals for cash flow, return on
invested capital, and the level of earnings before interest, taxes,
depreciation and amortization in relation to debt are achieved for
the period commencing January 1, 2005 and ending December 31,

Weighted-Average

Intrinsic

Aggregate

Weighted-Average

Remaining

Value

(in thousands)

Exercise Price

Contractual Term

(In millions)

7,385

—

(196)

(1,036)

6,153

$11.47

—

6.00

14.31

$11.17

1.61 years

$0.3

2007. The fair value of each per formance share is equal to the
grant date market price.

At December 31, 2007, there were 388,500 per formance
share awards outstanding with a weighted-average grant date fair
value of $8.94 per share. As a result of adjustments to per formance
forecasts and for feitures, no net compensation expense was rec-
ognized on these awards for the year ended December 31, 2007.
During 2006, compensation cost of $1.0 million was recognized for
these awards.

Restricted Stock Awards

On February 21, 2006, PolyOne issued 200,000 shares of
restricted stock as part of the compensation package for its new
Chief Executive Officer. In addition, 20,000 and 19,600 shares of
restricted stock were issued to other executives during 2006 and

P O L Y O N E C O R P O R A T I O N

2007, respectively. The value of the restricted shares was estab-
lished using the market price of PolyOne’s common stock on the
date of the grant. Compensation expense is being recorded on a
straight-line basis over the three-year cliff vesting period of the
restricted stock. As of December 31, 2007, all 239,600 shares
remain unvested with a weighted-average grant date fair value of
$8.66 per share and a weighted-average remaining contractual
term of 16 months. Compensation expense recorded during
2007 and 2006 was $0.7 million and $0.5 million, respectively.
Unrecognized compensation cost for restricted stock awards at
December 31, 2007 was $0.9 million. No shares of restricted
stock were issued in 2005.

Note R. SEGMENT INFORMATION

A segment is a component of an enterprise whose operating results
are regularly reviewed by the enterprise’s chief operating decision
maker to make decisions about resources to be allocated to the
segment and assess its per formance, and for which discrete finan-
cial information is available. PolyOne determines and discloses its
segments in accordance with SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information,” which defines
how to determine segments.

The Company’s historical presentation of segment information
consisted of six reportable segments: Vinyl Compounds, Specialty
Resins, North American Color and Additives, International Color and
Engineered Materials, PolyOne Distribution, Resin and Intermedi-
ates, and “All Other” operating segments (All Other). All Other
consisted of the North American Engineered Materials and Polymer
Coating Systems operating segments. Effective with the first quar-
ter of 2006, Producer Services, a new operating segment, was
formed from portions of the North American Color and Additives and
the North American Engineered Materials operating segments. As a
result, North American Color and Additives no longer meets the
quantitative thresholds that would require separate disclosure as a
reportable segment and is included in All Other. Producer Services
also does not meet the quantitative thresholds as defined in
SFAS No. 131 and is also included in All Other. During the fourth
quarter of 2006, PolyOne changed its management structure, which
resulted in the Specialty Resins reportable segment being sub-
sumed into the Vinyl Compounds reportable segment to create a
new operating and reportable segment, Vinyl Business.

As of January 1, 2007, PolyOne’s vinyl operations located in
Singapore are managed and reported within the Vinyl Business
operating segment. Historically, the results of this operation were
included in the International Color and Engineered Materials oper-
ating segment. Prior period results of operations have been reclas-
sified to conform to the 2007 presentation.

Effective with the fourth quarter of 2007, the former Polymer
Coating Systems operating segment was split into two units. The
50% interest in BayOne Urethane Systems, L.L.C., along with the
inks and specialty colorants businesses formed a new operating
segment, Specialty Inks and Polymer Systems, which is included in
All Other. The remaining plastisols and coated fabrics businesses

were subsumed into the Vinyl Business reportable segment. Seg-
ment information for prior periods has been reclassified to conform
to the 2007 presentation.

Effective December 31, 2007, all disclosures reflect four
reportable segments: Vinyl Business, International Color and Engi-
neered Materials, PolyOne Distribution, and Resin and Intermedi-
ates. Additionally, the operating segments that do not meet the
threshold for separate disclosure as reportable segments are
reported in All Other. Segment information for prior periods has
been restated to conform to the 2007 presentation.

Operating income is the primary measure that is reported to
the chief operating decision maker for purposes of making deci-
sions about allocating resources to the segment and assessing its
per formance. Operating income at the segment level does not
include: corporate general and administrative costs that are not
allocated to segments; intersegment sales and profit eliminations;
charges related to specific strategic initiatives such as the consol-
idation of operations; restructuring activities, including employee
separation costs resulting from personnel reduction programs,
plant closure and phaseout costs; executive separation agree-
ments; share-based compensation costs; asset impairments; envi-
ronmental remediation costs for facilities no longer owned or closed
in prior years; gains and losses on the divestiture of joint ventures
and equity investments; and certain other items that are not
included in the measure of segment profit or loss that is reported
to and reviewed by the chief operating decision maker. These costs
are included in “Corporate and eliminations.”

Segment assets are primarily customer receivables, invento-
ries, net property, plant and equipment, and goodwill. Intersegment
sales are generally accounted for at prices that approximate those
for similar transactions with unaffiliated customers. Corporate and
eliminations includes cash, sales of accounts receivable, retained
assets and liabilities of discontinued operations, and other unallo-
cated corporate assets and liabilities. The accounting policies of
each segment are consistent with those described in Note C. Fol-
lowing is a description of each of the Company’s four reportable
segments and All Other.

Vinyl Business — The Vinyl Business operating segment is a
global leader offering an array of products and services for vinyl
coating, molding and extrusion processors. Product offerings
include rigid, flexible and dry blend vinyl compounds; industry-lead-
ing dispersion, blending and specialty suspension grade vinyl res-
ins; and specialty coating materials based largely on vinyl. These
products are sold to a wide variety of manufacturers of plastic parts
and consumer-oriented products. The Vinyl Business offers a wide
range of services to the customer base utilizing these products, to
meet the ever changing needs of the Company’s multi-market cus-
tomer base. These services include materials testing and compo-
nent analysis, custom compound development, colorant and
additive services, design assistance, structural analyses, process
simulations, and extruder screw design.

P O L Y O N E C O R P O R A T I O N

Much of the revenue and income for the Vinyl Business is
generated in North America. However, production and sales in Asia
and Europe constitute a minor but growing part of this segment. In
addition, PolyOne owns 50% of a joint venture producing and mar-
keting vinyl compounds in Latin America.

Vinyl is one of the most widely used plastics, utilized in a wide
range of applications in building and construction, wire and cable,
consumer and recreation markets, automotive, packaging and
healthcare. Vinyl resin can be combined with a broad range of
additives, resulting in per formance versatility, particularly when fire
resistance, chemical resistance or weatherability is required. The
Vinyl Business is well-positioned to meet the stringent quality,
service and innovation requirements of this diverse and highly
competitive marketplace.

International Color and Engineered Materials — The Interna-
tional Color and Engineered Materials operating segment combines
the strong regional heritage of the Company’s color and additive
masterbatches and engineered materials operations to create glo-
bal capabilities with plants, sales and service facilities located
throughout Europe and Asia.

PolyOne operates 13 facilities in Europe (Belgium, Denmark,
France, Germany, Hungary, Poland, Spain, Sweden and Turkey) and
5 facilities in Asia (China, Singapore and Thailand).

Working in conjunction with North American Color and Additives
and North American Engineered Materials segments, the Company
provides solutions that meet international customers’ demands for
both global and local manufacturing, service and technical support.

PolyOne Distribution — The PolyOne Distribution operating seg-
ment distributes more than 3,500 grades of engineering and com-
modity grade resins including PolyOne-produced compounds to the
North American market. These products are sold to over 5,000
custom injection molders and extruders who, in turn, convert them
into plastic parts that are sold to end-users in a wide range of
industries. Representing over 20 major suppliers, PolyOne Distri-
bution offers customers a broad product portfolio, just-in-time deliv-
ery from multiple stocking locations and local technical support.

Resin and Intermediates — The results of our Resin and Inter-
mediates operating segment are reported on the equity method.
This segment consists almost entirely of the Company’s 50% equity
interest in SunBelt and the former 24% equity interest in OxyVinyls,
through its disposition date of July 6, 2007. SunBelt, a producer of
chlorine and caustic soda, is a partnership with Olin Corporation.
OxyVinyls, a producer of PVC resins, vinyl chloride monomer (VCM),
and chlorine and caustic soda, was a partnership with Occidental
Chemical Corporation. In 2007, SunBelt had production capacity of
approximately 320 thousand tons of chlorine and 358 thousand
tons of caustic soda. Most of the chlorine manufactured by SunBelt
is consumed by OxyVinyls to produce PVC resin. Caustic soda is sold
on the merchant market to customers in the pulp and paper,
chemical, construction and consumer products industries.

All Other — All Other includes North American Color and Addi-
tives, North American Engineered Materials, Producer Services and

Specialty Inks and Polymer Systems operating segments. A descrip-
tion of these operating segments follows.

North American Color and Additives — The North American
Color and Additives operating segment is a leading provider of
specialized colorants and additive concentrates that offer an inno-
vative array of colors, special effects and per formance-enhancing
and eco-friendly solutions. The segment’s color masterbatches
contain a high concentration of color pigments and/or additives
that are dispersed in a polymer carrier medium and are sold in
pellet, liquid, flake or powder form. When combined with non pre-
colored base resins, the colorants help customers achieve a wide
array of specialized colors and effects targeted at the demands of
today’s highly design-oriented consumer and industrial end mar-
kets. North American Color and Additive masterbatches encompass
a wide variety of per formance enhancing characteristics and are
commonly categorized by the function that they per form, such as UV
stabilization, anti-static, chemical blowing, antioxidant and lubricant
and processing enhancement.

Colorant and additives masterbatches are used in most types
of plastics manufacturing processes, including injection molding,
extrusion, sheet, film, rotational molding and blow molding through-
out the plastics industry, particularly in packaging, automotive,
consumer, outdoor decking, pipe, and wire and cable markets. They
are also incorporated into such end-use products as stadium seat-
ing, toys, housewares, vinyl siding, pipe, food packaging and med-
ical packaging.

North American Engineered Materials — The North American
Engineered Materials operating segment is a leading provider of
custom plastic compounding services and solutions for processors
of thermoplastic materials across a wide variety of markets and end-
use applications including applications currently employing tradi-
tional materials such as metal. The North American Engineered
Materials’ product portfolio, one of the broadest in the industry,
includes standard and custom formulated high-per formance poly-
mer compounds that are manufactured using a full range of ther-
moplastic compounds and elastomers, which are then combined
with advanced polymer additive, reinforcement, filler and colorant
and biomaterial technologies.

The depth of North American Engineered Materials’ compound-
ing expertise helps expand the per formance range and structural
properties of traditional engineering-grade thermoplastic resins to
meet the unique per formance requirements of the segment’s cus-
tomers. Product development and application reach is further
enhanced by the capabilities of the North American Engineered
Materials’ Solutions Center, which produces and evaluates proto-
type and sample parts to help assess end-use per formance and
guide product development. The segment’s manufacturing capabil-
ities, which include a new facility located in Avon Lake, Ohio, are
targeted at meeting customers’ demand for speed, flexibility and
critical quality.

Producer Services — The Producer Services operating seg-
ment offers custom compounding services to resin producers
and processors that design and develop their own compound

P O L Y O N E C O R P O R A T I O N

recipes. Producer Services also offers a complete product line of
custom black masterbatch products for use in the pressure pipe
industry. Customers often require high quality, cost effective and
confidential services. As a strategic and integrated supply chain
partner, Producer Services offers resin producers a method to
develop custom products for niche markets by using PolyOne’s
compounding expertise and multiple manufacturing platforms.

Specialty Inks and Polymer Systems — The Specialty Inks and
Polymer Systems operating segment provides custom-formulated
liquid systems that meet a variety of customer needs and

Financial information by reportable segment is as follows:

chemistries, including vinyl, natural rubber and latex, polyurethane,
and silicone. The products and services are designed to meet the
specific requirements of customers’ applications by providing
unique solutions to their market needs. Products also include
proprietar y fabric screen-printing inks, latexes, specialty additives
and colorants. Specialty Inks and Polymer Systems serves diver-
sified markets that include recreational and athletic apparel, con-
struction, filtration, outdoor furniture, and healthcare. PolyOne also
has a 50% interest in BayOne, a joint venture between PolyOne and
Bayer Corporation, which sells polyurethane systems into many of
the same markets.

Year Ended December 31, 2007

Sales to External

Operating

Depreciation and

Capital

(in millions)

Vinyl Business

International Color and Engineered

Materials

PolyOne Distribution

Resin and Intermediates

All Other

Corporate and eliminations

Total

(in millions)

Vinyl Business

International Color and Engineered

Materials

PolyOne Distribution

Resin and Intermediates

All Other

Corporate and eliminations

Total

(in millions)

Vinyl Business

International Color and Engineered

Materials

PolyOne Distribution

Resin and Intermediates

All Other

Corporate and eliminations

Total

Assets

Total

Assets

Total

Assets

Customers

Intersegment Sales

Total Sales

Income (Loss)

Amortization

Expenditures

$ 833.0

$ 100.0

$ 933.0

$ 50.8

$19.2

$ 6.0

$ 467.3

610.9

739.6

—

459.2

—

4.7

—

28.6

(133.3)

610.9

744.3

—

487.8

26.6

22.1

34.8

10.0

(133.3)

(110.4)

14.9

1.7

0.2

16.7

4.7

20.3

0.1

—

12.1

4.9

424.4

175.2

15.6

296.5

204.0

$2,642.7

—

$2,642.7

$ 33.9

$57.4

$43.4

$1,583.0

Customers

Intersegment Sales

Total Sales

Income (Loss)

Amortization

Expenditures

$ 907.9

$ 117.2

$1,025.1

$ 68.5

$18.9

$ 5.6

$ 475.9

526.7

724.1

—

463.7

—

8.7

—

27.8

(153.7)

526.7

732.8

21.3

19.2

—

102.9

491.5

(153.7)

(2.3)

(19.0)

13.7

1.5

0.2

17.7

5.1

13.6

0.3

—

17.3

4.3

377.0

164.6

282.0

313.6

167.7

$2,622.4

—

$2,622.4

$190.6

$57.1

$41.1

$1,780.8

Customers

Intersegment Sales

Total Sales

Income (Loss)

Amortization

Expenditures

$ 908.2

$ 113.9

$1,022.1

$ 62.9

$15.5

$ 6.1

$ 503.4

465.4

672.0

—

405.0

—

7.2

—

30.0

(151.1)

465.4

679.2

—

435.0

(151.1)

15.5

19.5

91.9

(6.9)

(41.6)

13.1

1.3

0.2

18.4

2.2

12.6

0.3

—

7.2

5.9

330.7

178.8

270.7

289.4

122.3

$2,450.6

—

$2,450.6

$141.3

$50.7

$32.1

$1,695.3

Year Ended December 31, 2006

Sales to External

Operating

Depreciation and

Capital

Year Ended December 31, 2005

Sales to External

Operating

Depreciation and

Capital

In October 2006, PolyOne purchased the remaining 50% of its
equity investment in DH Compounding Company from a wholly-
owned subsidiary of The Dow Chemical Company for $10.2 million.
DH Compounding Company is consolidated in the Consolidated
Balance Sheets as of December 31, 2007 and 2006, and the
results of operations were included in the Consolidated Statements
of Income beginning October 1, 2006. DH Compounding is included
in our Producer Services operating segment.

The Vinyl Business segment includes Geon/Polimeros Andinos
equity affiliate (owned 50%). For 2007, All Other includes earnings
of BayOne Urethane Systems, L.L.C equity affiliate (owned 50% by
Specialty Inks and Polymer Systems). For 2006, All Other includes
earnings of DH Compounding Company equity affiliate (owned 50%
by Producer Services) for the nine months ended September 30,
2006 and BayOne Urethane Systems, L.L.C equity affiliate (owned
50% by Specialty Inks and Polymer Systems). For 2005, All Other
includes DH Compounding Company equity affiliate (owned 50% by

P O L Y O N E C O R P O R A T I O N

Producer Services) and BayOne Urethane Systems, L.L.C equity
affiliate (owned 50% by Specialty Inks and Polymer Systems).

Earnings of equity affiliates are included in the related seg-
ment’s operating income and the investment in equity affiliates is

included in the related segment’s assets. Amounts related to equity
affiliates included in the segment information, excluding amounts
related to losses on divestitures of equity investments, are as
follows:

(in millions)

Earnings of equity affiliates:

Producer Services

Specialty Inks and Polymer Systems
Vinyl Business

Resin and Intermediates

Subtotal
Minority interest

Corporate and eliminations

Total

Investment in equity affiliates:

Producer Services

Specialty Inks and Polymer Systems
Vinyl Business

Resin and Intermediates

Total

2007

2006

2005

$ — $

3.3
0.6

40.8

44.7
(0.2)

(16.8)

1.5

3.5
0.9

107.0

112.9
(0.8)

2.1

3.3
1.1

96.3

102.8
—

(0.1)

(22.9)

$ 27.7

$112.0

$ 79.9

$ — $ —

2.2
13.2

4.5

1.5
14.2

271.5

$ 19.9

$287.2

PolyOne’s sales are primarily to customers in the United States, Europe, Canada and Asia, and the majority of its assets are located in
these same geographic areas. Following is a summar y of sales and long-lived assets based on the geographic areas where the sales
originated and where the assets are located:

(in millions)

Net sales:

United States

Europe

Canada
Asia

Other

Long-lived assets:

United States
Europe

Canada

Asia
Other

Note S. WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE

(in millions)

Weighted-average shares — basic:

Weighted-average shares outstanding

Less unearned portion of restricted stock awards included in outstanding shares

Weighted-average shares — diluted:

Weighted-average shares outstanding — basic

Plus dilutive impact of stock options and stock awards

2007

2006

2005

$1,670.9

$1,743.6

$1,648.0

513.7

291.7
152.5

13.9

442.6

287.6
135.7

12.9

404.4

283.2
101.5

13.5

$ 582.3
189.7

$ 563.3
169.9

$ 545.1
158.9

73.0

31.4
2.9

62.1

26.3
2.7

63.4

23.5
2.7

2007

2006

2005

93.0

92.5

91.9

0.2

0.1

—

92.8

92.4

91.9

92.8

92.4

91.9

0.3

0.4

0.1

93.1

92.8

92.0

Basic earnings per common share is computed as net income
available to common shareholders divided by the weighted average
basic shares outstanding. Diluted earnings per common share is

computed as net income available to common shareholders divided
by the weighted average diluted shares outstanding.

Outstanding stock options with exercise prices greater that the
average price of the common shares are anti-dilutive and are not

P O L Y O N E C O R P O R A T I O N

included in the computation of diluted earnings per share. The
number of anti-dilutive options and awards was 6.4 million, 7.4 mil-
lion and 8.9 million at December 31, 2007, 2006 and 2005,
respectively.

assets and liabilities being hedged and are recorded as other

income or expense in the Consolidated Statements of Income.

PolyOne does not hold or issue financial instruments for trading

purposes.

Note T. FINANCIAL INSTRUMENTS

PolyOne enters into intercompany lending transactions denomi-
nated in various foreign currencies and is subject to financial
exposure from foreign exchange rate movement from the date a
loan is recorded to the date it is settled or revalued. To mitigate this
risk, PolyOne enters into foreign exchange contracts. Gains and
losses on these contracts generally offset gains or losses on the

The following table summarizes the contractual amounts of

PolyOne’s foreign exchange contracts at December 31, 2007 and

2006. Foreign currency amounts are translated at exchange rates

as of December 31, 2007 and 2006, respectively. The “Buy”

amounts represent the U.S. dollar equivalent of commitments to

purchase foreign currencies, and the “Sell” amounts represent the

U.S. dollar equivalent of commitments to sell foreign currencies.

Currency (In millions)

U.S. dollar

Euro

Canadian dollar

December 31, 2007

December 31, 2006

Buy

Sell

Buy

$92.7

$ — $83.9

—

95.0

—

0.6

21.7

Sell

$22.7

85.2

—

PolyOne used the following methods and assumptions to estimate the fair value of financial instruments:

Cash and cash equivalents — The carrying amounts approximate fair value.

Short and long-term debt — The carrying amounts of PolyOne’s short-term borrowings approximate fair value. The fair value of
PolyOne’s senior notes, debentures and medium-term notes is based on quoted market prices. The carrying amount of PolyOne’s borrowings
under its variable-interest rate revolving credit agreements and other long-term borrowings approximates fair value.

Foreign exchange contracts — The fair value of short-term foreign exchange contracts is based on exchange rates at December 31,

2007.

Interest rate swaps — The fair value of interest rate swap agreements, obtained from the respective financial institutions, is based on
current rates of interest and is computed as the net present value of the remaining exchange obligations under the terms of the contract.

The carrying amounts and fair values of PolyOne’s financial instruments at December 31, 2007 and 2006 are as follows:

(In millions)

Cash and cash equivalents

Long-term debt

10.625% senior notes

7.500% debentures

8.875% senior notes

Medium-term notes

Other borrowings

Foreign exchange contracts

Interest rate swaps

2007

2006

Carrying

Amount

Fair

Value

Carrying

Amount

Fair

Value

$ 79.4

$ 66.2

—

50.0

—

241.4

255.9

42.5

50.0

43.8

199.2

203.0

199.1

199.5

76.1

5.3

(2.3)

(1.7)

76.7

5.3

(2.3)

(1.7)

91.7

8.0

(1.7)

(5.1)

95.0

8.1

(1.7)

(5.1)

Note U. SUBSEQUENT EVENTS

On January 2, 2008, PolyOne acquired 100% of the outstanding
capital stock of GLS Corporation (GLS), a global provider of specialty
thermoplastic elastomer compounds for consumer, packaging and
medical applications. GLS is headquar tered in McHenry, Illinois,
employs approximately 200 employees and has manufacturing
facilities in Illinois and Suzhou, China. The acquisition complements
PolyOne’s global engineered materials business portfolio and accel-
erates the Company’s shift to specialization. As a result of the
acquisition, PolyOne expects to offer customers enhanced

technologies, a broader range of products, services and solutions
and expanded access to specialized high-growth markets. The
acquisition will be accounted for in the first quarter of 2008 using

the purchase method in accordance with SFAS No. 141, “Business
Combinations.” Accordingly, the net assets will be recorded at their
estimated fair values, and operating results will be included in the
Company’s North American Engineered Materials operating seg-
ment and its results of operations from the date of acquisition. The
purchase price will be allocated on a preliminary basis using infor-
mation currently available. A preliminary allocation of the purchase

P O L Y O N E C O R P O R A T I O N

price to the assets and liabilities acquired will be completed during
the first quarter of 2008, as the Company obtains more information
regarding asset valuations, liabilities assumed and preliminary
estimates of fair values made at the date of purchase.

On January 3, 2008, the Company entered into a credit agree-
ment with Citicorp USA, Inc., as administrative agent and as issuing
bank, and The Bank of New York, as paying agent. The credit
agreement provides for an unsecured revolving and letter of credit
facility with total commitments of up to $40 million. The credit
agreement expires on March 20, 2011.

Note V. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Borrowings under the revolving credit facility are based on the
applicable LIBOR rate plus a fixed fee. On January 9, the Company
borrowed $40 million under the agreement and entered into a
floating to fixed interest rate swap to January 9, 2009 resulting
in an effective interest rate of 8.4%. The credit agreement contains
covenants that, among other things, restrict the Company’s ability
to incur liens, and various other customary provisions, including
affirmative and negative covenants, and representations and
warranties.

2007 Quarters

2006 Quarters

(In millions, except per share data)

Fourth

Third

Second

First

Fourth

Third

Second

First

Sales

$631.3

$664.8

$688.8

$657.8

$595.2

$666.2

$686.4

$674.6

Operating costs and expenses, net

612.7

688.4

676.4

631.3

572.6

629.8

622.8

606.6

Operating income

Income (loss) before discontinued operations

Loss from discontinued operations

Net income (loss)
Basic and diluted earnings (loss) per share:(1)

Before discontinued operations

18.6

(23.6)

7.1

—

7.1

2.3

—

2.3

12.4

(5.4)

—

(5.4)

26.5

7.4

—

7.4

22.6

14.5

(0.6)

13.9

36.4

19.6

—

19.6

63.6

42.5

—

42.5

68.0

49.0

(2.1)

46.9

$ 0.08

$ 0.02

$ (0.06)

$ 0.08

$ 0.16

$ 0.21

$ 0.46

$ 0.53

Net income (loss)

$ 0.08

$ 0.02

$ (0.06)

$ 0.08

$ 0.15

$ 0.21

$ 0.46

$ 0.51

(1) Per share amounts for the quarter and the full year have been computed separately. The sum of the quarterly amounts may not equal the annual

amounts presented because of differences in the average shares outstanding during each period.

P O L Y O N E C O R P O R A T I O N

SCHEDULE II

POLYONE CORPORATION AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In millions)

Year ended December 31, 2007

Reserves for doubtful accounts

Accrued liabilities for environmental matters

Year ended December 31, 2006

Reserves for doubtful accounts

Accrued liabilities for environmental matters

Year ended December 31, 2005

Reserves for doubtful accounts

Accrued liabilities for environmental matters

Balance at
Beginning
of Period

Charged to
Costs
and Expenses

Charged
to Other
Accounts(C)

Other Deductions

Balance at End of
Period

$ 5.9

$59.5

$ 6.4

$55.2

$ 8.0

$64.5

$ 1.9

$48.8

$ 3.3

$ 2.5

$ 2.8

$ 0.2

$0.3

$1.0

$ —

$0.3

$ (3.3)(A)
$(25.5)(B)

$ ( 3.8)(A)
$ 1.8(B)

$ (4.4)(A)
$ (9.8)(B)

$ 4.8

$83.8

$ 5.9

$59.5

$ 6.4

$55.2

Notes:
(A) Accounts written off.
(B) Cash payments during the year, net of insurance recoveries.
(C) Translation adjustments.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUN-
TANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure controls and procedures

PolyOne’s management, with the participation of the Chief Execu-
tive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the design and operation of PolyOne’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of Decem-
ber 31, 2007. Based on this evaluation, the Chief Executive Officer
and the Chief Financial Officer have concluded that such disclosure
controls and procedures are effective as of December 31, 2007.

Management’s annual report on internal control over financial
reporting

The following report is provided by management in respect of
PolyOne’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934):

1. PolyOne’s management is responsible for establishing and
maintaining adequate internal control over financial reporting.

2. PolyOne’s management has used the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) framework to
evaluate the effectiveness of internal control over financial
reporting. Management believes that the COSO framework is

P O L Y O N E C O R P O R A T I O N

a suitable framework for its evaluation of financial reporting
because it is free from bias, permits reasonably consistent
qualitative and quantitative measurements of PolyOne’s internal
control over financial reporting, is sufficiently complete so that
those relevant factors that would alter a conclusion about the
effectiveness of PolyOne’s internal control over financial report-
ing are not omitted and is relevant to an evaluation of internal
control over financial reporting.

3. Management has assessed the effectiveness of PolyOne’s
internal control over financial reporting as of December 31,
2007 and has concluded that such internal control over financial
reporting is effective. There were no material weaknesses in
internal
by
financial
management.

identified

reporting

control

over

4. Ernst & Young LLP, who audited the consolidated financial state-
ments of PolyOne for the year ended December 31, 2007, also
issued an attestation report on PolyOne’s internal control over
financial reporting under Auditing Standard No. 5 of the Public
Company Accounting Oversight Board. This attestation report is
set forth on page 32 of this Annual Report on Form 10-K and
incorporated by reference into this Item 9A.

Changes in internal control over financial reporting

There were no changes in the Company’s internal control over
financial reporting that occurred during the quarter ended Decem-
ber 31, 2007 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPO-

RATE GOVERNANCE

The information regarding PolyOne’s directors, including the iden-
tification of the audit committee and the audit committee financial
expert, is incorporated by reference to the information contained in
PolyOne’s Proxy Statement with respect to the 2008 Annual Meet-
ing of Shareholders (2008 Proxy Statement). Information concern-
ing executive officers is contained in Part I of this Annual Report
under the heading “Executive Officers of the Registrant.”

The information regarding Section 16(a) beneficial ownership
reporting compliance is incorporated by reference to the material
under the heading “Section 16(a) Beneficial Ownership Reporting
Compliance” in PolyOne’s 2008 Proxy Statement.

The information regarding any changes in procedures by which
shareholders may recommend nominees to PolyOne’s Board of
Directors is incorporated by reference to the information contained
in PolyOne’s 2008 Proxy Statement.

PolyOne has adopted a code of ethics that applies to its
principal executive officer, principal financial officer and principal
accounting officer. PolyOne’s code of ethics is posted under the
Investor Relations tab of its website at www.polyone.com. Poly-
One will post any amendments to, or waivers of, its code of ethics
that apply to its principal executive officer, principal financial officer
and principal accounting officer on its website.

ITEM 11. EXECUTIVE COMPENSATION

The information regarding executive officer and director compen-
sation is incorporated by reference to the information contained in
PolyOne’s 2008 Proxy Statement.

The information regarding compensation committee interlocks
and insider participation and the compensation committee report is
incorporated by reference to the information contained in PolyOne’s
2008 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL

OWNERS AND MANAGEMENT AND RELATED SHARE-
HOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSAC-
TIONS, AND DIRECTOR INDEPENDENCE

The information regarding certain relationships and related trans-
actions and director independence is incorporated by reference to
the information contained in PolyOne’s 2008 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding fees paid to and services provided by Poly-
One’s independent registered public accounting firm during the
fiscal years ended December 31, 2007 and 2006 and the pre-
approval policies and procedures of the audit committee is incor-
porated by reference to the information contained in PolyOne’s
2008 Proxy Statement.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements:

The following consolidated financial statements of PolyOne

Corporation are included in Item 8:

Consolidated Statements of

Income for

the years ended

December 31, 2007, 2006 and 2005

Consolidated Balance Sheets at December 31, 2007 and

2006

Consolidated Statements of Cash Flows for the years ended

December 31, 2007, 2006 and 2005

Consolidated Statements of Shareholders’ Equity for the years

ended December 31, 2007, 2006 and 2005

Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules:

The following financial statements of subsidiaries not consol-
idated and 50% or less owned entities, as required by Item 15(c) are
incorporated by reference to Exhibits 99.1 and 99.2 to this Annual
Repor t on Form 10-K:

Consolidated financial statements of Oxy Vinyls, LP as of
June 30, 2007 and for the six month period ended June 30,
2007 and each of the years in the two year period ended
December 31, 2006.

Consolidated financial statements of SunBelt Chlor-Alkali Part-
nership as of December 31, 2007 and for each of the years
in the three year period then ended.

The following consolidated financial statement schedule of PolyOne
Corporation is included in Item 8:

The information regarding security ownership of certain beneficial
owners and management and securities authorized for issuance
under PolyOne’s equity compensation plans is incorporated by
reference to the information contained in PolyOne’s 2008 Proxy
Statement.

Schedule II — Valuation and Qualifying Accounts

All other schedules for which provision is made in the appli-
cable accounting regulation of the SEC are not required under the
related instructions or are inapplicable and, therefore, omitted.

P O L Y O N E C O R P O R A T I O N

(a)(3) Exhibits.

Exhibit No.

Exhibit Description

3.1

3.2

3.3

4.1

4.2

4.3

10.1+

10.2+

10.3+

10.4+

10.5+

10.6+

10.7+

10.8+

10.9+

Articles of Incorporation (incorporated by reference to Exhibit 3.I to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, SEC File No. 1-16091)

Amendment to the Second Article of the Articles of Incorporation, as filed with the Ohio Secretary of State, November 25, 2003
(incorporated by reference to Exhibit 3.1a to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003,
SEC File No. 1-16091)

Regulations (incorporated by reference to Exhibit 3.II to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2000, SEC File No. 1-16091)

Indenture, dated as of December 1, 1995, between the Company and NBD Bank, as trustee (incorporated by reference to Exhibit 4.3 to The
Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)

Indenture, dated as of April 23, 2002, between the Company and The Bank of New York, as trustee, governing the Company’s
8.875% Senior Notes due May 15, 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on
Form S-4, Registration Statement No. 333-87472, filed on May 2, 2002)

Long-Term Incentive Plan, as amended and restated as of March 1, 2000 (incorporated by reference to Exhibit A to M.A. Hanna Company’s
Definitive Proxy Statement filed on March 24, 2000, SEC File No. 1-05222)

Form of Award Agreement for Per formance Shares (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on January 11, 2005, SEC File No. 1-16091)

Form of Award Agreement for Stock Appreciation Rights (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on January 11, 2005, SEC File No. 1-16091)

1998 Interim Stock Award Incentive Plan, as amended and restated through August 31, 2000 (incorporated by reference to Exhibit 10.4 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-16091)

1999 Incentive Stock Plan, as amended and restated through August 31, 2000 (incorporated by reference to Exhibit 10.5 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-16091)

2000 Stock Incentive Plan (incorporated by reference to Annex D to Amendment No. 3 to The Geon Company’s Registration Statement on
Form S-4, Registration Statement No. 333-37344, filed on July 28, 2000)

Amended and Restated Benefit Restoration Plan (Section 401(a)(17))

Strategic Improvement Incentive Plan (incorporated by reference to Exhibit 10.9b to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, SEC File No. 1-16091)

10.10+ Senior Executive Annual Incentive Plan, effective January 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current

Report on Form 8-K filed on May 24, 2005, SEC File No. 1-16091)

10.11+

2005 Equity and Performance Incentive Plan (amended and restated by the Board as of July 21, 2005) (incorporated by reference to
Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, SEC File No. 1-16091)

10.12+

Amended and Restated Deferred Compensation Plan for Non-Employee Directors

10.13+

Form of Management Continuity Agreement

10.14+ Schedule of Executives with Management Continuity Agreements

10.15+

Amended and Restated PolyOne Supplemental Retirement Benefit Plan

10.16+ Separation Agreement Term Sheet between the Company and Thomas A. Waltermire, dated October 6, 2005 (incorporated by reference to

Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 11, 2005, SEC File No. 1-16091)

10.17+ Separation Agreement between the Company and Thomas A. Waltermire, dated December 21, 2005 (incorporated by reference to

Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 21, 2005, SEC File No. 1-16091)

10.18+

Amended and Restated Letter Agreement between the Company and Stephen D. Newlin, originally effective as of February 13, 2006

10.19+

Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on July 5, 2006, SEC File No. 1-16091)

10.20+

Amended and Restated PolyOne Corporation Executive Severance Plan

10.21

10.22

Second Amended and Restated Security Agreement, dated as of June 6, 2006, between the Company, as grantor, and U.S. Bank
Trust National Association, as collateral trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on June 8, 2006, SEC File No. 1-16091)

P O L Y O N E C O R P O R A T I O N

Exhibit No.

Exhibit Description

10.23

10.24

10.25

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38

10.39

10.40+

10.41+

10.42

10.43

Amended and Restated Collateral Trust Agreement, dated as of June 6, 2006, between the Company, as grantor, and U.S. Bank
Trust National Association, as collateral trustee (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on June 8, 2006, SEC File No. 1-16091)

Amended and Restated Intercreditor Agreement, dated as of June 6, 2006, between the Company, as grantor; Citicorp USA, Inc., as
receivables and bank agent; U.S. Bank Trust National Association, as collateral trustee; PolyOne Funding Corporation (incorporated by
reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 8, 2006, SEC File No. 1-16091)

Amended and Restated Plant Services Agreement, between the Company and the B.F. Goodrich Company (incorporated by reference to
Exhibit 10.13 to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)

Assumption of Liabilities and Indemnification Agreement, dated March 1, 1993, amended and restated by Amended and Restated
Assumption of Liabilities and Indemnification Agreement, dated April 27, 1993 (incorporated by reference to Exhibit 10.14 to The Geon
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)

Partnership Agreement, by and between 1997 Chloralkali Venture, Inc. and Olin Sunbelt, Inc. (incorporated by reference to Exhibit 10(A) to
The Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File No. 1-11804)

Amendment to Partnership Agreement between Olin Sunbelt, Inc. and 1997 Chloralkali Venture, Inc., addition of §5.03 (incorporated by
reference to Exhibit 10.16b to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File
No. 1-11804)

Amendment to Partnership Agreement between Olin Sunbelt, Inc. and 1997 Chloralkali Venture, Inc., addition of §1.12 (incorporated by
reference to Exhibit 10.16c to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File
No. 1-11804)

Unconditional and Continuing Guaranty, between the Company and Olin Corporation and Sunbelt Chlor Alkali Partnership (incorporated by
reference to Exhibit 10(C) to The Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File
No. 1-11804)

Guarantee by the Company in Favor of Sunbelt Chlor Alkali Partnership of the Guaranteed Secure Senior Notes due 2017, dated
December 22, 1997 (incorporated by reference to Exhibit 10.20 to The Geon Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, SEC File No. 1-11804)

First Amended and Restated Limited Partnership Agreement of Oxy Vinyls, LP (incorporated by reference to Exhibit 10.2 to The Geon
Company’s Current Report on Form 8-K filed on May 13, 1999, SEC File No. 1-11804)

Asset Contribution Agreement — PVC Partnership (Geon) (incorporated by reference to Exhibit 10.3 to The Geon Company’s Current
Report on Form 8-K filed on May 13, 1999, SEC File No. 1-11804)

Parent Agreement (Oxy Vinyls, LP) (incorporated by reference to Exhibit 10.4 to The Geon Company’s Current Report on Form 8-K filed on
May 13, 1999, SEC File No. 1-11804)

Parent Agreement (PVC Powder Blends, LP) and Business Opportunity Agreement (incorporated by reference to Exhibit 10.5 to The Geon
Company’s Current Report on Form 8-K filed on May 13, 1999, SEC File No. 1-11804)

Form of Award Agreement for Stock-Settled Stock Appreciation Rights (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, SEC File No. 1-16091)

Form of Award Agreement for Performance Units (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2007, SEC File No. 1-16091)

Second Amended and Restated Receivables Purchase Agreement, dated as of June 26, 2007, among PolyOne Funding Corporation, as
seller; the Company, as servicer; the banks and other financial institutions party thereto, as purchasers; Citicorp USA, Inc., as agent; and
National City Business Credit, Inc., as syndication agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)

10.44

Second Amended and Restated Receivables Sale Agreement, dated as of June 26, 2007, among the Company, as seller and as servicer,
and PolyOne Funding Corporation, as buyer (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007, SEC File No. 1-16091)

P O L Y O N E C O R P O R A T I O N

Exhibit No.

Exhibit Description

10.45

10.46

10.47

21.1

23.1

23.2

23.3

31.1

31.2

32.1

32.2

99.1

99.2

Canadian Receivables Purchase Agreement, dated as of July 13, 2007, among PolyOne Funding Canada Corporation, as seller; the
Company, as servicer; the banks and other financial institutions party thereto, as purchasers; Citicorp USA, Inc., as agent; and National
City Business Credit, Inc., as syndication agent (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007, SEC File No. 1-16091)

Canadian Receivables Sale Agreement, dated as of July 13, 2007, among PolyOne Canada Inc., as seller; PolyOne Funding Canada
Corporation, as buyer; and the Company, as servicer (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)

Credit Agreement, dated January 3, 2008, by and among PolyOne Corporation, the lenders party thereto, Citicorp USA, Inc., as
administrative agent and as issuing bank, and The Bank of New York, as paying agent (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed on January 3, 2008, SEC File No. 1-16091)

Subsidiaries of the Company

Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP

Consent of Independent Registered Public Accounting Firm — KPMG LLP

Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP

Certification of Stephen D. Newlin, Chairman, President and Chief Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of W. David Wilson, Senior Vice President and Chief Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by Stephen D.
Newlin, Chairman, President and Chief Executive Officer

Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by W. David
Wilson, Senior Vice President and Chief Financial Officer

Audited Financial Statements of Oxy Vinyls, LP

Audited Financial Statements of SunBelt Chlor Alkali Partnership

Indicates management contract or compensatory plan, contract or arrangement in which one or more directors or executive officers of the
Registrant may be participants

P O L Y O N E C O R P O R A T I O N

Pursuant to the requirements of Section 13 or 15(d) 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.

SIGNATURES

February 29, 2008

POLYONE CORPORATION

By: /s/ W. DAVID WILSON

W. David Wilson
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on

behalf of the Registrant and in the capacities indicated and on the dates indicated.

Signature

Title

Date

/s/ STEPHEN D. NEWLIN

Stephen D. Newlin

/s/ W. DAVID WILSON

W. David Wilson

/s/ J. DOUGLAS CAMPBELL

J. Douglas Campbell

/s/ CAROL A. CARTWRIGHT

Carol A. Cartwright

/s/ GALE DUFF-BLOOM

Gale Duff-Bloom

/s/ RICHARD H. FEARON

Richard H. Fearon

/s/ ROBERT A. GARDA

Robert A. Garda

/s/ GORDON D. HARNETT

Gordon D. Harnett

/s/ EDWARD J. MOONEY

Edward J. Mooney

/s/ FARAH M. WALTERS

Farah M. Walters

Chairman, President, Chief Executive Officer and Director
(Principal Executive Officer)

February 27, 2008

Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

February 27, 2008

Director

February 27, 2008

P O L Y O N E C O R P O R A T I O N

Exhibit No.

Exhibit Description

EXHIBIT INDEX

3.1

3.2

3.3

4.1

4.2

4.3

10.1+

10.2+

10.3+

10.4+

10.5+

10.6+

10.7+

10.8+
10.9+

10.10+

10.11+

Articles of Incorporation (incorporated by reference to Exhibit 3.I to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, SEC File No. 1-16091)

Regulations (incorporated by reference to Exhibit 3.II to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, SEC File No. 1-16091)

Indenture, dated as of December 1, 1995, between the Company and NBD Bank, as trustee (incorporated by reference to Exhibit 4.3 to
The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)

Form of Indenture between the Company and NBD Bank, as trustee, governing the Company’s Medium Term Notes (incorporated by
reference to Exhibit 4.1 to M.A. Hanna Company’s Registration Statement on Form S-3, Registration Statement No. 333-05763, filed on
June 12, 1996)
Indenture, dated as of April 23, 2002, between the Company and The Bank of New York, as trustee, governing the Company’s
8.875% Senior Notes due May 15, 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-4,
Registration Statement No. 333-87472, filed on May 2, 2002)
Long-Term Incentive Plan, as amended and restated as of March 1, 2000 (incorporated by reference to Exhibit A to M.A. Hanna
Company’s Definitive Proxy Statement filed on March 24, 2000, SEC File No. 1-05222)

Form of Award Agreement for Per formance Shares (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on January 11, 2005, SEC File No. 1-16091)
Form of Award Agreement for Stock Appreciation Rights (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on January 11, 2005, SEC File No. 1-16091)

1995 Incentive Stock Plan, as amended and restated through August 31, 2000 (incorporated by reference to Exhibit 10.3 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-16091)
1998 Interim Stock Award Incentive Plan, as amended and restated through August 31, 2000 (incorporated by reference to Exhibit 10.4
to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-16091)

Amended and Restated Benefit Restoration Plan (Section 401(a)(17))
Strategic Improvement Incentive Plan (incorporated by reference to Exhibit 10.9b to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, SEC File No. 1-16091)

Senior Executive Annual Incentive Plan, effective January 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on May 24, 2005, SEC File No. 1-16091)

2005 Equity and Per formance Incentive Plan (amended and restated by the Board as of July 21, 2005) (incorporated by reference to
Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, SEC File No. 1-16091)

10.12+
10.13+

Amended and Restated Deferred Compensation Plan for Non-Employee Directors
Form of Management Continuity Agreement

10.14+

Schedule of Executives with Management Continuity Agreements

10.15+
10.16+

10.17+

Amended and Restated PolyOne Supplemental Retirement Benefit Plan
Separation Agreement Term Sheet between the Company and Thomas A. Waltermire, dated October 6, 2005 (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 11, 2005, SEC File No. 1-16091)

Separation Agreement between the Company and Thomas A. Waltermire, dated December 21, 2005 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 21, 2005, SEC File No. 1-16091)

10.18+

Amended and Restated Letter Agreement between the Company and Stephen D. Newlin, originally effective as of February 13, 2006

10.19+

10.20+

10.21

10.22

10.23

10.24

Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on July 5, 2006, SEC File No. 1-16091)
Amended and Restated PolyOne Corporation Executive Severance Plan

Guarantee and Agreement, dated as of June 6, 2006, between the Company, as guarantor, and the beneficiary banks party thereto
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 8, 2006, SEC File No. 1-16091)
Second Amended and Restated Security Agreement, dated as of June 6, 2006, between the Company, as grantor, and U.S. Bank
Trust National Association, as collateral trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on June 8, 2006, SEC File No. 1-16091)

P O L Y O N E C O R P O R A T I O N

Exhibit No.

Exhibit Description

10.25

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38

10.39

10.40+

10.41+

10.42

10.43

10.44

10.45

10.46

10.47

21.1
23.1

23.2

Amended and Restated Instrument Guaranty, dated as of December 19, 1996 (incorporated by reference to Exhibit 10.12 to The Geon
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Amended and Restated Plant Services Agreement, between the Company and the B.F. Goodrich Company (incorporated by reference to
Exhibit 10.13 to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)

Partnership Agreement, by and between 1997 Chloralkali Venture, Inc. and Olin Sunbelt, Inc. (incorporated by reference to Exhibit 10(A)
to The Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File No. 1-11804)

Chlorine Sales Agreement, between Sunbelt Chlor Alkali Partnership and the Company (incorporated by reference to Exhibit 10(B) to The
Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File No. 1-11804)
Unconditional and Continuing Guaranty, between the Company and Olin Corporation and Sunbelt Chlor Alkali Partnership (incorporated by
reference to Exhibit 10(C) to The Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File
No. 1-11804)

Master Transaction Agreement between the Company and Occidental Chemical Corporation, dated December 22, 1998 (incorporated by
reference to Annex B to The Geon Company’s Special Meeting Proxy Statement filed on March 30, 1999, SEC File No. 1-11804)
First Amended and Restated Limited Partnership Agreement of Oxy Vinyls, LP (incorporated by reference to Exhibit 10.2 to The Geon
Company’s Current Report on Form 8-K filed on May 13, 1999, SEC File No. 1-11804)

Asset Contribution Agreement — PVC Partnership (Geon) (incorporated by reference to Exhibit 10.3 to The Geon Company’s Current
Report on Form 8-K filed on May 13, 1999, SEC File No. 1-11804)

Parent Agreement (Oxy Vinyls, LP) (incorporated by reference to Exhibit 10.4 to The Geon Company’s Current Report on Form 8-K filed on
May 13, 1999, SEC File No. 1-11804)

Stock Purchase Agreement among O’Sullivan Films Holding Corporation, O’Sullivan Management, LLC, and Matrix Films, LLC, dated as of
February 15, 2006 (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, SEC File No. 1-16091)
Form of Award Agreement for Stock-Settled Stock Appreciation Rights (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, SEC File No. 1-16091)

Form of Award Agreement for Performance Units (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2007, SEC File No. 1-16091)

Sale and Agreement, by and among PolyOne Corporation, Occidental Chemical Corporation, and their representative affiliates party
thereto, dated as of July 6, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2007, SEC File No. 1-16091)
Second Amended and Restated Receivables Purchase Agreement, dated as of June 26, 2007, among PolyOne Funding Corporation, as
seller; the Company, as servicer; the banks and other financial institutions party thereto, as purchasers; Citicorp USA, Inc., as agent; and
National City Business Credit, Inc., as syndication agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)
Second Amended and Restated Receivables Sale Agreement, dated as of June 26, 2007, among the Company, as seller and as servicer,
and PolyOne Funding Corporation, as buyer (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007, SEC File No. 1-16091)
Canadian Receivables Purchase Agreement, dated as of July 13, 2007, among PolyOne Funding Canada Corporation, as seller; the
Company, as servicer; the banks and other financial institutions party thereto, as purchasers; Citicorp USA, Inc., as agent; and National
City Business Credit, Inc., as syndication agent (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)
Canadian Receivables Sale Agreement, dated as of July 13, 2007, among PolyOne Canada Inc., as seller; PolyOne Funding Canada
Corporation, as buyer; and the Company, as servicer (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)

Credit Agreement, dated January 3, 2008, by and among PolyOne Corporation, the lenders party thereto, Citicorp USA, Inc., as
administrative agent and as issuing bank, and The Bank of New York, as paying agent (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on January 3, 2008, SEC File No. 1-16091)

Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP

Consent of Independent Registered Public Accounting Firm — KPMG LLP

P O L Y O N E C O R P O R A T I O N

Exhibit No.

Exhibit Description

23.3

31.1

31.2

32.1

32.2

99.1

99.2

Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP

Certification of Stephen D. Newlin, Chairman, President and Chief Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of W. David Wilson, Senior Vice President and Chief Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by Stephen D.
Newlin, Chairman, President and Chief Executive Officer

Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by W. David
Wilson, Senior Vice President and Chief Financial Officer
Audited Financial Statements of Oxy Vinyls, LP

Audited Financial Statements of SunBelt Chlor Alkali Partnership

Indicates management contract or compensatory plan, contract or arrangement in which one or more directors or executive officers of the
Registrant may be participants

P O L Y O N E C O R P O R A T I O N

Exhibit 31.1

I, Stephen D. Newlin, certify that:

1. I have reviewed this Annual Report on Form 10-K of PolyOne Corporation;

CERTIFICATION

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons per forming the equivalent
functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s

internal control over financial reporting.

February 29, 2008

/s/ Stephen D. Newlin

Stephen D. Newlin
Chairman, President and Chief Executive Officer

P O L Y O N E C O R P O R A T I O N

Exhibit 31.2

I, W. David Wilson, certify that:

1. I have reviewed this Annual Report on Form 10-K of PolyOne Corporation;

CERTIFICATION

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s

internal control over financial reporting.

/s/ W. David Wilson

W. David Wilson
Senior Vice President and Chief Financial Officer

February 29, 2008

P O L Y O N E C O R P O R A T I O N

This Page Intentionally Left Blank

P O L Y O N E C O R P O R A T I O N

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-CV3

EXECUTIVES AND OFFICERS

Stephen D. Newlin
Chairman, President and Chief Executive Officer

Bernard Baert
Senior Vice President and General Manager,
Color and Engineered Materials – Europe and Asia

Michael E. Kahler
Senior Vice President,
Commercial Development

Michael L. Rademacher
Senior Vice President and General Manager,
Distribution

Thomas J. Kedrowski
Senior Vice President, Operations

John L. Rastetter
Treasurer

Patrick F. Burke
Vice President and General Manager,
Producer Services

Daniel L. Kickel
Vice President and General Manager,
Specialty Coatings and Resins

Robert M. Rosenau
Senior Vice President and General Manager,
Vinyl Business

Dr. Cecil C. Chappelow
Vice President, Research and Innovation,
and Chief Innovation Officer

Lisa K. Kunkle
Vice President, General Counsel
and Secretary

Kenneth M. Smith
Senior Vice President, Chief Information
and Human Resources Officer

Dr. Willie Chien
Vice President and General Manager,
Color and Engineered Materials – Asia

Craig M. Nikrant
Vice President and General Manager,
Specialty Engineered Materials

John V. Van Hulle
Vice President and General Manager,
North American Color and Additives

W. David Wilson
Senior Vice President and Chief Financial Officer

Standing, left to right: Robert A. Garda, Farah M. Walters, Stephen D. Newlin, Edward J. Mooney, Dr. Carol A. Cartwright, J. Douglas Campbell.

Seated, left to right: Gale Duff-Bloom, Gordon D. Harnett, Richard H. Fearon.

BOARD OF DIRECTORS

Stephen D. Newlin
Chairman, President and Chief Executive Ofﬁ cer,
PolyOne Corporation
Committees: 3, 4

J. Douglas Campbell
Retired Chairman and Chief Executive Ofﬁ cer,
ArrMaz Custom Chemicals, Inc. –
specialty mining and asphalt additives and
reagents producer
Committees: 2, 3, 4*

Dr. Carol A. Cartwright
Retired President,
Kent State University –
a public higher education institution
Committees: 1, 2

Gale Duff-Bloom
Retired President,
Company Communications and Corporate Image,
J.C. Penney Company, Inc. –
a major retailer
Committees: 2, 3, 4

Gordon D. Harnett
Lead Director
Retired Chairman and Chief Executive Ofﬁ cer,
Brush Engineered Materials Inc. –
a supplier and producer of engineered materials
Committees: 1, 2*

Richard H. Fearon
Executive Vice President and Chief Financial
and Planning Ofﬁ cer,
Eaton Corporation –
a global manufacturing company
Committees: 1*, 2

Robert A. Garda
Retired Director,
McKinsey & Company, Inc. –
a management consulting ﬁ rm
Committees: 1, 2

Edward J. Mooney
Retired Chairman and Chief Executive Ofﬁ cer,
Nalco Chemical Company –
a specialty chemicals company
Committees: 2, 3*, 4

Farah M. Walters
President and Chief Executive Ofﬁ cer,
QualHealth, LLC –
a healthcare consulting ﬁ rm that designs
healthcare delivery models
Committees: 2, 4

C O M M I T T E E S

1 Audit
2 Compensation and Governance
3 Environmental, Health and Safety
4 Financial Policy

* Denotes Chairperson

VARN

100

C M Y K
PANTONE617
TINTEDVARN

367-9008 POL07AR.indd
TR: 8.375" x 10.875"
BL: 8.625" x 11.125"

REMAY 75774
Digital/IAM

Asset No. 75774-CV4

www.polyone.com

VARN

100