United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2004

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

For the transition period from                 to                 .

Commission file number 1-16091

PolyOne Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code                (440) 930-1000

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

    Indicate by 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.  x 

    Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes x     No o

    The aggregate market value of the registrant’s outstanding voting common stock held by non-affiliates on June 30, 2004, determined using a per share closing price on that date of $7.44, as quoted on the New York Stock Exchange, was approximately $520,053,000.

    The number of shares of common stock outstanding as of March 1, 2005 was 91,783,872.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the definitive Proxy Statement to be filed on or about March 31, 2005 with respect to the 2005 Annual Meeting of Shareholders.

POLYONE CORPORATION

PART I

ITEM 1. BUSINESS

PolyOne Corporation is an international polymer services company with continuing operations in thermoplastic compounds, specialty polymer formulations, color and additive systems, and thermoplastic resin distribution. We also have equity investments in providers of polyvinyl chloride (PVC) resin and its intermediates. Headquartered in Avon Lake, Ohio, we have manufacturing sites in North America, Europe and Asia, and joint ventures in North America and South America. We provide value to our customers through our ability to link polymer technology and formulation know-how with our manufacturing and supply chain processes. For the fiscal year ended December 31, 2004, we had sales of $2.2 billion, approximately 22% of which were from markets outside North America.

     PolyOne was formed on August 31, 2000 from the consolidation of The Geon Company (Geon) and M.A. Hanna Company (Hanna).

     As described in Note B to the Consolidated Financial Statements for the fiscal year ended December 31, 2004, our Specialty Resins and Engineered Films businesses qualified for accounting as discontinued operations as of December 31, 2004. The Elastomers and Performance Additives business was sold in August 2004, and our Italian operating subsidiary, So.F.teR S.p.A. (Softer), was sold in December 2002. All historical financial information for these business operations has been accounted for as discontinued operations. Unless otherwise noted, disclosure in this annual report on Form 10-K relates to continuing operations.

Polymer Industry Overview

Polymers are a class of organic materials that are generally produced by converting natural gas or crude oil derivatives into monomers, 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 companies, 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 producing the base resin. Accordingly, the cost of a base resin moves in tandem with the prices of raw materials and energy used during production. Resin selling prices tend to move with costs and with supply and demand. Through our equity interests in Oxy Vinyls, LP (OxyVinyls) and SunBelt Chlor-Alkali Partnership (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 the application of heat and pressure. 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 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 numerous end-use products and in a variety of markets, including packaging, building and construction, transportation, furniture and furnishings, consumer and institutional products, electrical, adhesives, inks and coatings. Each category of thermoplastic resin has unique characteristics (such as flexibility, strength or durability) suitable for incorporation into a particular end-use product. The packaging industry, which is the largest consumer of plastics, requires plastics that can help keep food fresh and free of contamination, while providing a variety of options for product display and offering advantages in terms of weight, energy and user friendliness. In the building and construction industry, the second-largest consumer of plastics, plastic provides an economical and energy-efficient replacement for traditional materials in piping applications, siding, flooring, insulation, windows and doors, and a growing list of structural and interior or decorative uses. In the transportation industry, plastic has proved to be durable, lightweight and corrosion resistant while offering fuel savings, design flexibility and high performance to designers facing today’s complex transportation needs.

     Various additives are often combined with a base resin to bring greater versatility and performance to the base resin. These combinations are generally referred to as plastic compounds. Plastic compounds have advantages over metals, wood, rubber and other traditional materials, which advantages have resulted, and continue to result, in the replacement of these materials across a wide spectrum of applications ranging from automobile parts to construction materials. Plastic compounds offer relatively low cost, reduced weight and comparatively better performance. Plastics have a reputation for durability, aesthetics, ease of handling and recyclability. Our Performance Plastics segment, which accounts for approximately 72% of our total sales, is primarily comprised of compounded thermoplastics. In addition, our Distribution segment, which accounts for approximately 28% of our total sales, is a distributor of a wide range of thermoplastic resins and compounds.

PolyOne Segments

We operate within three segments: Performance Plastics, Distribution, and Resin and Intermediates. Additional information regarding our segments is discussed in Note S to the Consolidated Financial Statements and is incorporated herein by reference.

Performance Plastics:

Our Performance Plastics segment is a leading independent merchant compounder of plastics for manufacturers of plastic products throughout North America and Europe, with a growing presence in Asia. We engage in the proprietary compounding of thermoplastics to the performance requirements of manufacturers

POLYONE CORPORATION

of molded and extruded plastic products. In addition to compounds, we are a leading manufacturer of concentrates, masterbatches, liquid dispersions, dry colorants and additive masterbatches for use in compounding by our customers in the plastic industry. Our Formulator operations compound dispersion-grade PVC resins and other polymers, such as urethane polymers, with different additives to produce liquid or solid compounds for coating systems.

     For the fiscal year ended December 31, 2004, our Performance Plastics segment had sales of approximately $1.7 billion and operating income of $74.7 million.

     The Performance Plastics business is made up of the following product groups: Vinyl Compounds, North American Colors and Additives, North American Engineered Materials, International Colors and Engineered Materials, and Formulators.

     Vinyl Compounds - Vinyl, or PVC, is a highly versatile plastic. Vinyl is the only plastic that can be made thin and flexible enough for intravenous solution bags, yet rigid and tough enough for window frames and computer housings. Because of this versatility, vinyl has become one of the most widely used plastics, utilized in a wide range of applications. Our vinyl compounds combine PVC resins with a broad range of additives that offer product versatility, particularly when fire resistance, chemical resistance or weatherability is required. We believe we are the leading manufacturer of vinyl compounds in North America. In 2004, this product group accounted for approximately 42% of our Performance Plastics segment’s sales.

     North American Colors and Additives - Color and additive concentrates, or masterbatches, are plastic compounds that contain a high concentration of color pigments or additives dispersed in a polymer carrier medium and supplied in pellet, liquid, flake or powder form. Color masterbatches are designed for use with the base resin mix so that the correct color or additive performance is achieved. Additive masterbatches include a wide variety of products, but are commonly categorized by the function performed, such as UV stabilizers, slip/antiblock, antistat, blowing agents, antioxidants, lubricants and stabilizers.

     Our color and additive masterbatches provide flexibility to plastic processors who prefer to create multiple color effects or enhance the performance of their own base polymers. Our colors and additives for thermoplastics are used throughout the plastics industry, particularly in the outdoor decking, packaging, automotive, consumer, pipe, and wire and cable industries. Our colors and additives are also incorporated into end-use products such as stadium seating, toys, housewares, vinyl siding, pipe, food packaging and medical packaging. In 2004, this product group accounted for approximately 14% of our Performance Plastics segment’s sales.

     North American Engineered Materials - Our engineered materials consist of reinforced and filled plastic compounds and thermoplastic elastomer compounds. With our compounding expertise, we have the ability to expand the performance range and structural properties of traditional engineering-grade thermoplastic resins. We combine our knowledge of base polymers, lubricants, fillers and reinforcements as well as a wide range of functional additives to enable us to tailor our compounds to meet our customers’ unique application requirements. Our compounds incorporate commodity resins such as polyethylene and polypropylene; engineering resins such as nylon, polycarbonate and polyesters; and other high-performance resins.

     In addition, we have a broad product line of thermoplastic elastomer compounds, including thermoplastic olefins, thermoplastic vulcanizates and styrene block copolymers. In 2004, North American Engineered Materials accounted for approximately 7% of our Performance Plastics segment’s sales.

     International Colors and Engineered Materials - Colors, additives and engineered materials that are manufactured and sold throughout Europe and Asia accounted for approximately 27% of our Performance Plastics segment sales during 2004.

     Formulators - Formulator products consist primarily of liquid systems with a base resin of specialty PVC resin or natural rubber latex. We compound and manufacture proprietary PVC screen printing inks and powders, latex, specialty additives and colorants that meet the specific needs of our customers’ applications. Examples of applications for our formulator products include: inks for textiles in the consumer industry; armrests, headrests and oil filters in the automotive industry; coil coatings, sheet vinyl and carpet backing in the construction industry; and decals, coatings and tool handles for general industry. In 2004, the Formulators product group accounted for approximately 10% of our Performance Plastics segment’s sales.

Distribution:

We distribute to the North American market approximately 3,500 grades of engineering materials and commodity grade resins and compounds. This includes PolyOne-produced products from the Vinyl Compounds, Engineered Materials and Colors and Additives product groups. We purchase bulk quantities of base plastic resins, such as polycarbonate, polyethylene, polypropylene and polystyrene from approximately 18 major suppliers and resell it in truckload and less-than-truckload quantities to more than 5,100 customers throughout North America. These products are sold to custom molders and extruders who, in turn, convert them into plastic products sold to a number of different industries and end-use markets. In 2004, we sold approximately 650 million pounds of product from more than 30 stocking locations, including 10 repackaging plants, across North America.

     For the fiscal year ended December 31, 2004, our Distribution segment had sales of $606.3 million and operating income of $17.8 million.

POLYONE CORPORATION

Resin and Intermediates:

The results of our Resin and Intermediates segment are reported on an equity income basis and consist primarily of our 24% equity interest in OxyVinyls and our 50% equity interest in SunBelt. OxyVinyls is a partnership with Occidental Chemical Corporation, and SunBelt is a partnership with Olin Corporation. OxyVinyls is North America’s second-largest and the world’s third-largest producer of PVC resin. In 2004, OxyVinyls had capacity of approximately 4.5 billion pounds of PVC resin, 6.2 billion pounds of vinyl chloride monomer (an intermediate chemical in the production of PVC), 580 thousand tons of chlorine and 667 thousand tons of caustic soda, not including any capacity for chlorine and caustic soda at the idled Deer Park, Texas, chlor-alkali plant. The 6.2 billion pounds of vinyl chloride monomer capacity includes approximately 2.4 billion pounds owned by OxyMar. OxyMar is a partnership that is 50% owned by OxyVinyls. In 2004, SunBelt had capacity of approximately 290 thousand tons of chlorine and 320 thousand tons of caustic soda. Most of the chlorine manufactured at OxyVinyls and 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.

     In addition to providing us with a secure and high-quality supply of PVC resin, our Resin and Intermediates segment provides us with backward integration through our ownership position and contractual arrangements. First, our supply of PVC resin from OxyVinyls is at competitive prices based on a long-term supply contract. Second, our equity investment in OxyVinyls provides a natural hedge against a portion of increased raw material prices, to the extent that OxyVinyls is able to pass on increased raw material costs to its other customers. Finally, the equity position in chlorine and caustic soda through OxyVinyls and SunBelt provides economic integration to the chlorine chain.

     For the fiscal year ended December 31, 2004, our Resin and Intermediates segment had operating income of $49.2 million. We also received $52.5 million of cash from dividends, distributions and returns on capital from all of our Resin and Intermediates segment equity affiliates.

Competition

The production of compounded plastics and the manufacture of custom and proprietary formulated color and additives systems for the plastics industry is highly competitive, with product quality, service and price to customers being the principal factors affecting competition. We believe that we are the leading independent compounder of plastics in North America and Europe with a growing presence in Asia, and one of the leading producers of custom and proprietary formulated color and additive masterbatch systems in the United States, Europe and Asia.

     The distribution of polymer resin is highly competitive, with product quality, service and price to customers being the principal factors affecting competition. In thermoplastic resin and compound distribution, we believe that we are the second-largest independent thermoplastic resin distributor in North America. We compete against Ashland Distribution, a division of Ashland Inc., which is the largest independent resin distributor in North America, and other smaller regional distributors. Growth in the thermoplastic resin and compound distribution market correlates directly with growth in the market for base polymer resins.

Raw Materials

In our Performance Plastics segment, the primary raw materials are PVC resin, polyolefin resins, other resins, plasticizers, inorganic and organic pigments, and other various chemicals, all of which are in adequate supply. We are a party to long-term supply contracts with OxyVinyls, under which the majority of our PVC resin is and will be supplied. These contracts have initial terms that will expire in 2013, with provisions for renewal after the initial contract term. We believe these contracts should assure availability of PVC resin, technical development and support, and competitively priced PVC resin. We further believe that the pricing under these contracts provides PVC resins to us at a competitive cost.

Patents and Trademarks

We own numerous patents and trademarks, which are important because they protect our inventions and product names against infringement by others and, as a result, enhance our position in the marketplace. The patents vary in duration up to 20 years, and the trademarks have an indefinite life based upon continued use.

Research and Development

We have developed substantial research and development capability. Our efforts are devoted to (1) developing new products to satisfy defined market needs, (2) providing quality technical services to assure the continued success of our products for our customers’ applications, (3) providing technology for improvements to our products, processes and applications, and (4) providing support to our manufacturing plants for cost reduction, productivity and quality improvement programs. We operate research and development centers that support our compounding and specialty resins operations. These facilities are equipped with state-of-the-art analytical, synthesis, polymer characterization and testing equipment, along with pilot plants and polymer compounding operations that simulate specific production processes for rapid translation of new technology into new products.

     We invested $15.6 million in 2004, $18.5 million in 2003 and $15.9 million in 2002 for product research and product development. In 2005, we expect investments for product research and development to increase slightly over 2004 levels.

POLYONE CORPORATION

Methods of Distribution

Our Performance Plastics and Distribution segments sell products primarily through direct sales personnel. The Performance Plastics segment supplements direct sales personnel with distributors, including our Distribution segment, and commissioned sales agents for various products and geographic areas. Our products are transported to customers primarily by truck carriers, with some customer product pick-ups at our operating facilities or warehouses for both of these segments. In addition, Performance Plastics ships products to some customers by railroad cars.

Employees

As of December 31, 2004, we had approximately 4,304 employees associated with our continuing operations. In addition, approximately 929 employees were associated with our discontinued operations.

Environmental, Health and Safety

We are subject to various environmental laws and regulations concerning: the production, use and sale of chemicals, emissions into the air, discharges into waterways and other releases of materials into the environment; the generation, handling, storage, transportation, treatment and disposal of waste material; or otherwise relating to the protection of the environment. 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 we conduct periodic internal and external regulatory audits at our plants to identify and categorize potential environmental exposures, including compliance issues and actions to address them. This effort requires process or operational modifications and the installation of pollution control devices and cleanups. We believe we are in material compliance with all applicable requirements. We incurred environmental expense of $10.3 million in 2004, $4.1 million in 2003 and $3.5 million in 2002. We increased our reserves in 2004 to reflect a reduction in expected insurance recoveries for groundwater remediation costs at a site that we no longer own, and also to recognize an increase over previous cost estimates for a remedial action work plan at an inactive site that required state and federal approval that was received during the third quarter of 2004.

     We believe that compliance with current governmental regulations at all levels will not have a material adverse effect on our 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 cannot assure that we will not 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 concerning the use and disposal of plastic materials. Widespread adoption of these laws and regulations, along with public perception, may have an adverse impact on plastic materials. Although many of our major markets are in durable, longer-life applications that could reduce the impact of any such environmental regulation, we cannot assure that more stringent regulation of the use and disposal of plastics would not have an adverse effect on our business.

     We have been notified by federal and state environmental agencies and by private parties that we may be a potentially responsible party in connection with the investigation and remediation of several environmental waste disposal sites. While government agencies assert that potentially responsible parties 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 contribution of waste. Where such allocations of costs based on relative contribution of waste have been made, however, we cannot assure that our allocation will not be increased due to the failure of other relevant third parties to pay their share of these costs.

     In addition, we conduct investigations and remediation at several of our active and inactive facilities, and we have assumed responsibility for environmental liabilities based on pre-1993 operations at sites formerly owned or operated by us or our predecessors. We believe that our potential continuing liability with respect to such sites will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition, we voluntarily initiate corrective and preventive environmental projects at our operations. Based on current information and estimates prepared by our environmental engineers and consultants, at December 31, 2004, we had accruals on our Consolidated Balance Sheet totaling $64.5 million to cover probable future environmental expenditures relating to previously contaminated sites. This figure represents management’s best estimate of costs for probable remediation, based upon information and technology 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 accrued amount at December 31, 2004. Such costs, if any, cannot be currently estimated. Our estimate of the liability may be revised as new regulations or technologies are developed or additional information is obtained.

POLYONE CORPORATION

International Operations

Information regarding our international operations is included in Note S to the Consolidated Financial Statements and is incorporated herein by reference.

Available Information

Our Internet address is www.polyone.com. We make available free of charge on our Internet Web site 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 as soon as reasonably practicable after we electronically file such material with or furnish it to the Securities and Exchange Commission (SEC). These reports are also available on the SEC’s Internet Web site at www.sec.gov.

ITEM 2. PROPERTIES

As of December 31, 2004, our company, which is headquartered in Avon Lake, Ohio, operated facilities in the United States and internationally. We own substantially all of our facilities. During 2004, we made effective use of our productive capacity at our principal facilities. We believe that the quality and productive capacity of our facilities are sufficient to maintain our competitive position for the foreseeable future. Following are the principal facilities of our segments:

Continuing Operations

Performance Plastics Facilities:

Distribution Facilities:

Lemont, Illinois

Ayer, Massachusetts

Massillon, Ohio

Rancho Cucamonga, California

Statesville, North Carolina

Denver, Colorado

Chesterfield Township, Michigan

Eagan, Minnesota

Hazelwood, Missouri

Grand Prairie, Texas

Mississauga, Ontario, Canada

Resin and Intermediates Facilities:

OxyVinyls joint venture - various locations in North America

SunBelt joint venture - McIntosh, Alabama

Discontinued Operations

Specialty Resins Facilities:

Henry, Illinois

Pedricktown, New Jersey

Engineered Films Facilities:

Lebanon, Pennsylvania

Winchester, Virginia

POLYONE CORPORATION

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. In addition, we have been named in several lawsuits involving multiple claimants and defendants relating to alleged asbestos exposure in the past by, among others, workers and their families at plants owned by us or our predecessors or on board ships owned or operated by us or our predecessors. For further information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Accounting Policies and Estimates – Asbestos-Related Claims.” We believe that any liability that may be finally determined should not have a material adverse effect on our financial condition, taken as a whole, results of operations or cash flows.

SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2004.

EXECUTIVE OFFICERS OF THE COMPANY

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

The following table lists information, as of March 1, 2005, about each executive officer of our company, including his or her position with us as of that date and other positions held by him or her for at least the past five years. Executive officers are elected by our Board of Directors to serve one-year terms.

V. Lance Mitchell

Age: 45

Group Vice President, January 2003 to date. Group Vice President, Plastic Compounds and Colors, September 2000 to January 2003. Vice President and General Manager, Compounds, The Geon Company, May 1997 to August 2000.

Michael L. Rademacher

Age: 54

Vice President and General Manager, Distribution, September 2000 to date. Senior Vice President - Plastics Americas, M.A. Hanna Company, January 2000 to August 2000. Vice President and General Manager, Industrial Chemical and Solvents Division, Ashland Chemical Company (chemical manufacturing and distribution), 1998 to January 2000.

Robert M. Rosenau

Age: 50

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

Wendy C. Shiba

Age: 54

Chief Legal Officer, November 2001 to date, and Vice President and Secretary, December 2001 to date. Vice President, Bowater Incorporated (pulp and paper), 1997 to November 2001, and Secretary and Assistant General Counsel, 1993 to November 2001.

Kenneth M. Smith

Age: 50

Chief Human Resources Officer, January 2003 to date, and Vice President and Chief Information Officer, September 2000 to date. Vice President, Information Technology, The Geon Company, May 1999 to August 2000, and Chief Information Officer, August 1997 to May 1999.

Thomas A. Waltermire

Age: 55

President and Chief Executive Officer, November 2003 to date. Chairman of the Board, President and Chief Executive Officer, September 2000 to November 2003. Chairman, The Geon Company, August 1999 to August 2000, and Chief Executive Officer and President, May 1999 to August 2000. President and Chief Operating Officer, The Geon Company, February 1998 to May 1999.

W. David Wilson

Age: 51

Vice President and Chief Financial Officer, September 2000 to date. Vice President and Chief Financial Officer, The Geon Company, May 1997 to August 2000.

POLYONE CORPORATION

PART II

(a) Market for Registrant’s Common Equity

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.

As of March 1, 2005, there were approximately 3,122 holders of record of our company’s common stock.

     Effective with the first quarter of 2003, we suspended payment of our quarterly dividend. Future declarations of dividends on common stock will be at the discretion of the Board of Directors, and the declaration of any dividends will depend upon, among other things, earnings, capital requirements and our company’s financial condition. The Board of Directors does not anticipate paying any dividends on common stock in the foreseeable future. Additionally, the indenture governing our 10.625% senior notes due in 2010, and the agreements governing our revolving credit facility and our receivables sale facility, contain restrictions that limit our ability to pay dividends.

(c) Issuer Purchases of Equity Securities

POLYONE CORPORATION

ITEM 6. SELECTED FINANCIAL DATA

     As of December 31, 2004, our Specialty Resins and Engineered Films businesses qualified for accounting treatment as discontinued operations. As a result, all of the historical operating results have been reported separately as discontinued operations. On August 5, 2004, we sold our Elastomers and Performance Additives business unit. This operating unit had been previously reported as a discontinued operation and is appropriately reflected as such in the historical results. In December 2002, we acquired Transcolor and sold our 70% ownership interest in Softer. All the historical operating results of Softer have been reported separately as a discontinued operation. Because PolyOne was formed on August 31, 2000, our financial data reflected in the above table for 2000 includes eight months of The Geon Company and four months of PolyOne Corporation.

Overview

PolyOne Corporation is an international polymer services company with continuing operations in thermoplastic compounds, specialty polymer formulations, color and additive systems and thermoplastic resin distribution. We also have equity investments in providers of PVC resin and its intermediaries. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites in North America, Europe and Asia, and joint ventures in North America, South America and Asia. We provide value to our customers through our ability to link polymer technology and formulation know-how with our manufacturing and supply chain processes.

     Discontinued Operations – As of December 31, 2004, our Specialty Resins and Engineered Films businesses qualified for accounting treatment as discontinued operations. As a result, all historical financial information of these businesses (revenues, costs and expenses, assets and liabilities and cash flows) has been reported separately as “discontinued operations.” Specialty Resins and Engineered Films were previously included in our Performance Plastics segment. In August 2004, we sold our Elastomers and Performance Additives business and in December 2002, we sold our 70% interest in Softer, an Italian compounder of thermoplastic materials. As a result, all historical financial information of these businesses has also been reported separately as discontinued operations. The Elastomers and Performance Additives business was previously reported as a separate segment and Softer was previously included in the Performance Plastics segment.

     For more information regarding discontinued operations, including a discussion of the facts and circumstances leading to the decisions to divest these businesses, please see Note B to our Consolidated Financial Statements.

     Restructuring and Consolidation Activities – Since our formation in 2000, we have undertaken several restructuring initiatives to improve profitability and, as a result, we have incurred various employee separation and plant phaseout costs.

     Employee separation costs include salary continuation benefits, medical coverage and outplacement assistance and are based upon a formula that takes into account each individual employee’s base compensation level and length of service. We maintain an employee severance plan that provides specific benefits to all employees (except those employed under collective bargaining agreements) who lose their jobs due to reduction in workforce or job elimination initiatives or from closing manufacturing facilities. Collective bargaining employees are covered under the terms of the specific agreement under which they are employed. The amount is

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determined separately for each affected employee and is recognized at the date the employee is notified if the actual 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 actual termination date if the termination date is more than 60 days after the notification date. Of the 1,108 employees identified during 2003 and 40 employees identified in 2001 to be terminated, all had been terminated at December 31, 2004.

     Plant phaseout costs include the impairment of buildings, land, manufacturing equipment and office equipment at manufacturing facilities, and the resulting write-down of the carrying value of these assets to fair value, which represents our best estimate of the net proceeds to be received for the assets to be sold or scrapped, less cost to sell. 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 continuing operations are reflected in the Condensed Consolidated Statement of Operations on the line “Employee separation and plant phaseout.” Plant phaseout costs associated with discontinued operations are reflected in the Condensed Consolidated Statement of Operations on the line “Income (loss) from discontinued operations, net of income taxes.” Plant phaseout costs for continuing operations relate to the Performance Plastics segment, and plant phaseout costs for discontinued operations relate to the Engineered Films business, formerly included in the Performance Plastics segment, and the Elastomers and Performance Additives business, which was previously reported as a separate segment. For further information, please refer to Note F to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.

     2004 Charges. Operating income for 2004 includes a $1.4 million benefit relative to employee separation and plant phaseout costs as a result of adjusting estimated remaining liabilities associated with restructuring initiatives announced in prior years. Income from discontinued operations for the same period was reduced by $7.5 million on a pre-tax basis for employee separation and plant phaseout costs from the announcement in the fourth quarter of 2003 and closure in the first quarter of 2004 of one of our Engineered Films manufacturing facilities and two of our Elastomers and Performance Additives manufacturing facilities. This reduction was partially offset by a gain from the sale of a previously closed Elastomers and Performance Additives manufacturing facility located in Tillsonburg, Ontario. We will retain the liabilities for employee separation and plant phaseout costs for the businesses reported as discontinued operations upon the sale of these businesses and, as a result, they are included in this discussion. All employees who were affected by the restructuring initiatives announced in prior years had been terminated as of December 31, 2004. The remaining employee separation costs accrued at December 31, 2004 totaling $1.8 million are expected to be paid out through the second quarter of 2005. The remaining plant phaseout cash closure costs accrued at December 31, 2004, which primarily represent lease commitments totaling $1.5 million, are expected to be paid out through the first quarter of 2007.

     2003 Charges. Operating income for 2003 was reduced by $35.1 million for employee separation and plant phaseout costs resulting from a January 2003 announcement to reduce approximately 400 staff personnel, a June 2003 decision to close the Fort Worth, Texas color additives plant, and the adjustment of remaining liabilities associated with restructuring initiatives announced in prior years. During the third quarter of 2003, we also closed two leased Ohio administrative offices and a portion of the Mexico Distribution business, and reduced manufacturing personnel in the North American plastics businesses. Charges of $26.4 million were included in discontinued operations resulting primarily from decisions to close an Engineered Films plant and two Elastomers and Performance Additives plants.

     2002 Charges. During 2002, employee separation and plant phaseout charges of $1.1 million were recorded for costs associated with the consolidation of certain activities related to our Formulators operations in the Performance Plastics segment. The costs were for employee separation, which consisted of severance and other employee benefits. All 43 employees affected were terminated in 2002.

     For further detail, see Note F to the Consolidated Financial Statements and, for a breakdown of these charges by segment, see Note S to the Consolidated Financial Statements.

     Status of Pension Plans – Our pension plans were under-funded by a total of $126.2 million at December 31, 2004 and $156.4 million at December 31, 2003. Funded status as defined in this discussion is computed by subtracting end-of-year plan assets from the end-of-year accumulated benefit obligation. Contributing to the improved 2004 funded status was a $65 million voluntary pension contribution. As a result, we expect total pension expense in 2005 to be approximately $12 million, approximately $3 million lower than in 2004. We also anticipate no minimum funding requirements for the U.S. qualified defined benefit plans in 2005 or 2006 as a result of this voluntary contribution.

     At December 31, 2004, our minimum pension liability for our qualified defined-benefit pension plans was $133.5 million. This amount is reflected on the line “Other non-current liabilities including pensions” in the Consolidated Balance Sheets. This balance will decrease in future periods if interest rates increase, investment results improve or contributions to these plans cause the pension plans to return to fully-funded status.

     Outlook – Based on the pace of business at the end of 2004 and early 2005, as well as the fact that U.S. industrial production has continued the positive trajectory that began in August 2003, we anticipate that North American market conditions in 2005 should remain favorable. We anticipate strengthening seasonal

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demand in the first half of 2005 compared with the second half of 2004, and we anticipate a recurrence of year-over-year demand growth during the second half of 2005.

     Markets. Despite slowly rising interest rates, housing starts are projected to remain strong. North American automobile and light truck build rates did slow in late 2004, particularly among the “Big Three” domestic manufacturers. Projections are that 2005 builds should be similar to 2004. Building materials and automotive applications represent approximately 25% and 9%, respectively, of our annual sales.

     Geographies. Our view is that real plastics growth in North America should trend up in 2005 in a range of 2% to 4% compared with 4% to 6% per year of average annual growth in the 1990s. This trend of slower demand growth is principally a result of the loss of manufacturing in North America and the maturation of some larger markets.

     In late 2004, Europe experienced a slowing in demand, which was attributed to high energy costs and the strong euro. For PolyOne, this slowing was most pronounced in Germany and France. Our current view is that plastics demand should grow comparable with the level experienced in 2004.

     Asian business slowed slightly in late 2004, but expectations are for a robust 2005. Markets for plastics are expected to grow 5% to 8%, with China pacing the demand at 10% to 15%, including plastics growth approaching 20% in southern China. We are building a manufacturing facility in southern China in an effort to capture market position and take advantage of the region’s particularly strong growth.

     Margins. Oil- and natural gas-derived hydrocarbon feedstock pricing is expected to be higher on average in 2005 compared with 2004. As a result, price trends for key raw materials are expected to continue to pressure margins in 2005. In particular, the costs of chlorine, ethylene and PVC resin are projected to increase, pressuring margins in our downstream Vinyl Compounds and Specialty Resins businesses. We experienced a significant increase in raw material costs in late 2004. We estimate that our purchased raw material cost increases in 2005 could exceed $125 million. To offset this margin reduction, we continue the effort we began in late 2004 to raise product prices, though there can be no assurances that we will be successful in raising prices.

     Our Resin and Intermediates segment, on the other hand, should benefit in 2005 from the price trends associated with PVC resin, chlorine and caustic soda and, as a result, we expect earnings to increase in this segment over 2004 levels.

     The resulting pressure on our margins should be offset by the full-year benefit of 2004 cost reduction and restructuring initiatives, new initiatives in 2005 to continue simplifying processes and eliminate non-value-added work, ongoing raw material savings programs and selling price increases.

     Market share. Management will focus in 2005 on strengthening our market positions. We are targeting market share gains by helping customers be more competitive on a global basis, expanding our international presence, commercializing new technologies and offering our customers distinct service advantages.

Results of Operations

Consolidated Results:

     Expenses (benefits) included in operating income (loss) above that are separately presented on the Consolidated Statements of Operations:

     Year-to-year changes in sales and operating income (loss) are discussed within the “Segment Information” section that follows. Segments are also discussed in detail in Note S to the Consolidated Financial Statements.

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     Cost of Sales - Cost of goods sold, as a percentage of sales, was 85.0% in 2004, 84.7% in 2003 and 83.7% in 2002. These increases were primarily driven by raw material and energy cost increases that were not entirely offset by manufacturing cost reduction initiatives and selling price increases.

     Selling and Administrative - Selling and administrative costs, as a percentage of sales, were 9.3% in 2004, 12.3% in 2003 and 14.0% in 2002. These decreases resulted from administrative restructuring and productivity improvement initiatives to simplify processes and eliminate non-value added work.

     Employee Separation and Plant Phaseout - Charges for severance, employee outplacement, external outplacement consulting, facility closing and the write-down of plant and equipment carrying values to net realizable value resulting from restructuring initiatives. The majority of these charges relate to cost reduction and productivity initiatives undertaken in 2003 that eliminated approximately 800 full time administrative and manufacturing positions and closed a manufacturing facility in Texas, two leased administrative offices in Ohio and a portion of the Mexico Distribution business. Results for 2004 reflect a net benefit of $1.4 million from adjusting our estimate of the remaining liabilities during the year. These initiatives were substantially complete as of December 31, 2004. These charges are discussed in detail in Note F to the Consolidated Financial Statements.

     Asset Impairments - Charges to adjust the carrying values of intangible assets and other investments to the present value of estimated net future cash flows resulting from an evaluation we do each year end, or more often when indicators of impairment exist. During both 2004 and 2003, events and circumstances indicated impairment of certain intangible assets and investments existed. In the fourth quarter of 2004, we wrote down the value of a customer contract by $3.3 million, based upon analyses and forecasts completed during the fourth quarter indicating that revenues and profitability from this contract would decline in the future due to changes in our customer’s end-market demand. This contract was originally valued and recorded as an intangible asset when PolyOne was formed in 2000. The remaining 2004 impairment charges totaling $0.5 million were recorded to adjust the year-end carrying value of an Internet investment by $0.2 million and two community development investments by $0.3 million to their estimated realizable future cash flows.

     In 2003, we wrote down the value of customer lists associated with our Color and Engineered Materials businesses by $4.3 million in light of the lack of profitability of these businesses. These customer lists were originally valued and recorded as intangible assets when PolyOne was formed in 2000. We also wrote down the carrying value of an Internet investment by $1.6 million and a note receivable by $1.4 million in 2003 to adjust year-end carrying values to their estimated realizable future cash flows. We also wrote off $0.7 million for an investment in product technology that was determined not to be marketable. These charges are non-cash and will not result in future cash expenditures.

     Environmental Remediation at Inactive Sites - Environmental remediation costs for manufacturing facilities that we either no longer own or we closed in prior years. We increased our reserves in 2004 to reflect a reduction in expected recoveries from an insurance company whose policies now only service remaining liabilities for groundwater remediation costs at a site that we no longer own and also to recognize an increase over previous cost estimates for a remedial action work plan at an inactive site that required state and federal approval that was received during the third quarter of 2004.

     Loss on Sale of Assets - Loss recorded upon the sale of the assets of our European vinyl compounding business in 2003 and the sale of the assets of our European Melos rubber granulates operations in 2004.

     Loss on Divestiture of Equity Investment - This 2002 charge is comprised of a $1.5 million loss on the sale of our 37.4% investment in the PVC compound operations of Australian Vinyls Corporation and a $3.6 million loss on the sale of our equity investment in Techmer PM, LLC.

     Interest Expense - Interest expense in 2004 was $5.5 million, or 8% higher than in 2003 due primarily to higher average levels of short- and long-term debt outstanding in 2004 than in 2003. Interest expense in 2003 was $24.2 million, or 57% higher than in 2002, also due to higher average borrowings in 2003 than in 2002. Higher average debt levels are primarily the result of our issuance of $300 million of 10.625% unsecured senior notes in the second quarter of 2003. Total short-term and long-term debt (both current and long-term portions) at December 31, 2002 was $583.9 million. Total debt grew to $854.3 million by June 30, 2003 from the issuance of the senior notes discussed above. This total amount was reduced to $784.5 million by December 31, 2003 and remained close to that level through the first half of 2004, declining slightly to $780.9 million at June 30, 2004. By the end of 2004, however, this total amount declined to $692.1 million.

     Other Expense, Net - Finance costs associated with the receivables sale facility, foreign currency gains and losses, retained post-employment benefit costs from previously discontinued operations, premiums paid in connection with the repurchase of senior notes

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maturing in the third quarter of 2004 and other miscellaneous items.

     Income Tax (Expense) Benefit - Income taxes are discussed in detail in Note Q to the Consolidated Financial Statements. Income tax expense in 2004 and 2003 was related to foreign earnings, except for $0.4 million for state income taxes in 2004. A tax benefit was not recorded on domestic losses in 2004 and 2003 due to uncertainty as to whether we will fully realize the net deferred tax assets that were generated by domestic losses. We intend to maintain a valuation allowance until positive evidence exists that it is more likely than not that these assets will be realized. Tax expense in 2002 reflected a tax benefit on the domestic pre-tax loss and tax expense on foreign pre-tax earnings. The combined effective tax rate was 42.2% and 14.8% for the years ended December 31, 2004 and 2003, respectively, and a benefit of 43.1% for the year ended December 31, 2002.

     Income (Loss) from Discontinued Operations, Net of Income Taxes - Discontinued operations are discussed in detail in Note B to the Consolidated Financial Statements. Income (loss) from discontinued operations included pre-tax charges of $21.3 million in 2004 and $130.5 million in 2003 to adjust the net assets held for sale of these businesses to reflect management’s best estimate of projected net sale proceeds. Also included in income (loss) from discontinued operations are pre-tax charges of $7.5 million in 2004 and $26.4 million in 2003 for employee separation and plant phaseout costs primarily related to the closures of the Burlington, New Jersey, Wynne, Arkansas and DeForest, Wisconsin manufacturing plants of the Engineered Films and Elastomers and Performance Additives businesses. We also sold our 70% ownership interest in Softer in 2002.

     The following table, which is included in Note B to the Consolidated Financial Statements, summarizes the results of discontinued operations. In restating the operating results of the discontinued operations for 2003 and 2002, indirect costs previously allocated to the Elastomers and Performance Additives, Specialty Resins and Engineered Films businesses that were or are expected to be retained upon disposal of these businesses were reallocated to the continuing segments. In addition, as required by generally accepted accounting principles in the United States, 2004 results of discontinued operations do not include any depreciation or amortization expense.

     Cumulative Effect of a Change in Accounting, Net of Income Taxes - We adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” in the first quarter of 2002 and, as a result, we stopped amortizing all goodwill and indefinite-lived intangible assets. During the first quarter of 2002, we also completed the required transitional review for goodwill impairment. This review indicated that goodwill from the 1999 acquisition of our Engineered Films business was impaired, and as a result, we recognized a pre-tax charge of $54.7 million ($53.7 million after a tax benefit of $1.0 million) as a cumulative effect of a change in accounting principle.

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Segment Information:

2004 Compared with 2003:

     Performance Plastics 2004 sales increased 9% while shipment volume increased 3% from 2003. Following is a breakdown of 2004 sales by primary product group, along with percentage changes from 2003 in sales and shipment volume:

     Vinyl Compounds volume was up 9% from 2003 from stronger demand in the wire and cable, construction and telecommunications markets. Higher average selling prices, resulting from efforts to offset raw material cost increases, helped bring the sales increase to 12% compared with 2003. North American Colors and Additives volume was up 23% from 2003 from stronger demand in extrusion profile applications, higher contract compounding volume and a new application for outdoor decking. Lower selling prices for contract compounding, due to raw materials generally being supplied by the customer, combined with lower average selling prices in the extrusion profile market, resulted in a sales increase of 12% compared with 2003. North American Engineered Materials volume was down 10% from 2003, while sales increased 3%. Volume declined as a result of softer demand in toll compounding applications for the automotive market. Sales increased due to a higher-priced mix of proprietary and customer-tolled products for automotive and telecommunication applications. International Colors and Engineered Materials volume was down 9% from 2003, primarily from the sale of the Melos rubber granulates operations in June 2004. Excluding Melos, volume was up 12% from 2003, reflecting stronger demand in both Asia and Europe. Favorable currency exchange rates increased sales by $35.2 million, driving the 8% increase in sales from 2003. Formulators’ volume was down 3% from 2003. Lower plastisol and powder volumes, primarily from lower shipments for automotive applications on models that have been phased out, were partially offset by higher volumes in inks. Sales increased 2% from 2003 from the resulting change in product mix, combined with higher average selling prices resulting from efforts to offset raw material cost increases.

     Performance Plastics operating income improved $71.0 million from 2003. In the third quarter of 2004, we recorded a $3.8 million year-to-date pre-tax benefit in the Performance Plastics segment from adjustments to our pension and post-retirement benefit plan accruals, as discussed below in “Other”. Operating income in 2004 also included a $1.8 million benefit from adjusting our estimate of the remaining liabilities of employee separation and plant phaseout costs during the year, a $3.3 million asset impairment charge to reduce the carrying value of intangible assets to their estimated realizable future cash flows and a $5.9 million loss on the sale of the Melos rubber granulates operations. Operating income in 2003 included a $24.6 million charge for employee separation and plant phaseout costs and a $5.0 million asset impairment charge to reduce the carrying value of intangible assets to their estimated realizable future cash flows. Favorable currency translation added approximately $3.1 million to 2004 earnings compared with 2003. The remainder of the improvement in operating income was driven by higher sales combined with lower costs that resulted from manufacturing, selling and administrative restructuring and cost initiatives. Raw material cost increases generally outpaced our ability to raise prices in 2004.

     Distribution sales were up 15% and volume was up 9% from 2003. Volume improvements were the result of stronger demand for PolyOne-produced products, third-party commodity resins and the acquisition of the North American business of ResinDirect, a subsidiary of Louis Dreyfus Energy Services, in January 2004. These increases were partially offset by volume declines in Mexico that resulted from us exiting a portion of the business during the first half of 2003 and subsequently exporting from the United States.

     Excluding 2003 shipment volume from the Mexican operation for comparability, volume rose 15% in 2004 from 2003. The sales increase outpaced the volume increase due to higher selling prices from our suppliers that we passed on to our customers.

     Distribution operating income improved $12.0 million from 2003. The main drivers were increased volumes in the United States

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and Canada, combined with cost savings resulting from restructuring initiatives and closing the Mexican Distribution operation in 2003. Operating income in 2003 also included a $1.6 million charge for employee separation and plant phaseout costs.

     Resin and Intermediates operating income improved $28.4 million from 2003. The main driver was higher OxyVinyls earnings of $25.8 million primarily due to favorable supply and demand dynamics that drove improved operating margins for polyvinyl chloride (PVC) and vinyl chloride monomer (VCM). SunBelt’s equity earnings contribution increased $2.3 million primarily from increased volume and higher margins on chlorine and caustic soda sales. Results in 2004 also include a $4.5 million charge for environmental remediation at inactive or formerly owned sites, and results in 2003 include a $1.4 million asset impairment charge.

     “Other” consists primarily of corporate governance costs that are not allocated to segments and inter-segment sales and profit eliminations. Results in 2004 include a $0.4 million charge for employee separation and plant phaseout costs, a $0.5 million asset impairment charge and an $8.7 million charge for environmental remediation at inactive sites. Results in 2003 include an $8.9 million charge for employee separation and plant phaseout costs, a $1.6 million asset impairment charge, a $2.7 million charge for environmental remediation at inactive sites and a $0.3 million loss on the sale of assets. The remainder of the $12.2 million improvement in 2004 was due to lower corporate general and administrative costs than in 2003 and the elimination of $1.2 million less pre-tax intercompany profit in the Distribution segment’s inventories related to PolyOne-produced products.

     In the third quarter of 2004, we recorded a $6.5 million year-to-date pre-tax benefit from adjustments to our pension and post-retirement benefit plan accruals, $3.8 million of which is reflected in the Performance Plastics segment and $2.7 million of which is reflected in the Other segment. As discussed in Note N to the Consolidated Financial Statements, on December 8, 2003, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Act). On May 19, 2004, the Financial Accounting Standards Board (FASB) issued Financial Staff Position (FSP) Number 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”. The FSP, which was effective for the first interim or annual period beginning after June 15, 2004, provides guidance on accounting for the effects of the Medicare Act for employers that sponsor post-retirement health care plans that provide prescription drug benefits. As a result, we recorded a $0.8 million pre-tax benefit in the third quarter and a $0.7 million pre-tax benefit in the fourth quarter of 2004. In the third quarter we recorded a $2.4 million year-to-date pre-tax benefit as a result of adjusting our post-retirement benefit plan accruals to reflect current plan amendments and actuarial gains. We also recorded a $3.3 million year-to-date pre-tax benefit as a result of adjusting our defined-benefit pension plan accruals to reflect the effect of current year workforce reduction initiatives combined with other actuarial gains. As a result, fourth quarter 2004 pre-tax earnings were positively impacted by a total of $2.2 million, bringing the total pre-tax benefit in 2004 to $8.7 million.

2003 Compared with 2002:

     Performance Plastics sales in 2003 increased 5%, while shipment volume decreased 1% from 2002. Following is a breakdown of 2003 sales by primary product group, along with percentage changes from 2002 in sales and shipment volume:

     The Vinyl Compounds volume decline of 3% resulted primarily from slower demand in the wire and cable, custom profile and packaging markets. Higher average selling prices, the result of efforts to recapture raw material cost increases, helped offset the volume decline, bringing sales to 1% above 2002 levels. Although Colors and Additives volume was flat compared with the prior year, sales declined 5% as a result of a shift in product mix toward more general-purpose products. Engineered Materials volume and sales were down 9% and 5%, respectively, from lower demand in

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automotive end-market applications combined with a key customer taking its compounding production back in-house. International Colors and Engineered Materials volume was up 16% primarily from stronger demand in Asia, combined with the acquisition of Transcolor, a Spanish color concentrates producer, in early 2003. Sales increased 27%, positively impacted by $50.7 million of favorable currency exchange rates and an additional $45.0 million from the Transcolor acquisition. Formulators volume and sales declines of 7% and 4%, respectively, resulted primarily from the contribution of the former urethanes product line to the 50% BayOne equity joint venture formed in June 2003 for which PolyOne no longer separately reports sales, combined with a key customer having lost share in its end market.

     Performance Plastics operating income declined $24.8 million in 2003 from 2002. Operating income in 2003 included a $24.6 million charge for employee separation and plant phaseout costs and a $5.0 million asset impairment charge to reduce the carrying value of intangible assets to their estimated realizable future cash flows. Operating income in 2002 included a $1.1 million charge for employee separation and plant phaseout costs. Favorable currency translation added approximately $5.4 million to 2003 earnings compared with 2002. The remainder of the improvement in 2003 operating income was from lower costs as a result of manufacturing, selling and administrative restructuring initiatives, partially offset by slightly lower volume combined with higher raw material costs that were not fully recovered by higher selling prices.

     Distribution sales were up 2%, though volume declined 5% from 2002. The volume decline was driven primarily by volume declines in Mexico from us exiting a portion of the business during the first half of 2003 and subsequently exporting from the United States. Sales were up 6% in the United States and Canada due to stronger demand for engineering resins and PolyOne-produced vinyl compounds.

     Distribution operating income improved $1.5 million from 2002 as a result of increased sales in the United States and Canada combined with cost savings resulting from the closing of a significant portion of the Mexico Distribution operations in 2003. Operating income in 2003 also included a $1.6 million charge for employee separation and plant phaseout costs.

     Resin and Intermediates operating income improved $20.2 million from 2002. The main driver was higher SunBelt earnings of $15.0 million, driven by higher average industry selling prices for chlorine and caustic soda. OxyVinyls earnings also increased $1.0 million from 2002. Results in 2003 include a $1.4 million asset impairment charge, and in 2002 include a $1.5 million loss on the sale of our 37.4% investment in the PVC compound operations of Australian Vinyls Corporation.

     “Other” results in 2003 include an $8.9 million charge for employee separation and plant phaseout costs, a $1.6 million asset impairment charge, a $2.7 million charge for environmental remediation at inactive sites and a $0.3 million loss on the sale of assets. Results in 2002 include a $1.5 million charge for environmental remediation at inactive sites. The remainder of the change in 2003 from 2002 was due to lower unallocated corporate general and administrative costs than in 2003 and the elimination of $1.1 million less pre-tax intercompany profit in the Distribution segment’s inventories related to PolyOne-produced products.

Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates, judgments and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements. We evaluate the accounting policies and estimates used to prepare financial statements on an ongoing basis. We base our estimates on historical experience and assumptions believed to be reasonable under the related facts and circumstances. In preparing these financial statements, we have made our best estimates and judgments, and have documented the principal underlying assumptions for these estimates and judgments regarding certain amounts included in the financial statements related to the accounting policies and estimates described in the following text. The application of these critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. For additional information regarding our accounting policies, see Note C to the Consolidated Financial Statements.

     Environmental Accrued Liability - We have accrued $64.5 million to cover future environmental remediation expenditures, and believe that none of these matters, either individually or in the aggregate, will have a material adverse effect on our capital expenditures, consolidated financial condition, results of operations or cash flow beyond the amounts accrued. This accrual represents our best estimate of the remaining probable remediation costs based upon information and technology currently available. Our estimate of this liability may be revised as new regulations or technologies are developed or additional information is obtained. We increased our reserves in 2004 to reflect a reduction in expected recoveries from an insurance company for groundwater remediation costs at a site that we no longer own, and also to recognize an increase over previous cost estimates for a remedial action work plan at an inactive site that required state and federal approval that was received during the third quarter of 2004.

     For additional information regarding our environmental accrued liability, see Note O 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 predecessors or on board ships owned or operated by us or our predecessors. We have established reserves of approximately $2 million as of

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December 31, 2004 for asbestos-related claims that are probable and estimable. We believe the probability is remote that losses in excess of the amounts we have accrued could be material to our financial condition, results of operations, or liquidity. This belief is based upon our ongoing assessment of the strengths and weaknesses of the specific claims and our defenses and insurance coverages available with respect to these claims, as well as the probability and expected magnitude of reasonably anticipated future asbestos-related claims. Our assessment includes: whether the pleadings allege exposure to asbestos, asbestos-containing products or premises exposure; the severity of the plaintiffs’ alleged injuries from exposure to asbestos or asbestos-containing products and the length and certainty of exposure on our premises, to the extent disclosed in the pleadings or identified through discovery; whether the named defendant related to us manufactured or sold asbestos-containing products; the outcomes of cases recently resolved; and the historical pattern of the number of claims. If the underlying facts and circumstances change in the future, we will modify our reserves, as appropriate.

     Restructuring-Related Accruals - Specific accruals have been recorded in connection with restructuring our businesses, as well as the integration of acquired businesses. These accruals include estimates principally related to employee separation costs, the closure and/or consolidation of facilities, contractual obligations and the valuation of certain assets including property, plant and equipment, and inventories. Actual amounts could differ from the original estimates.

     Restructuring-related accruals are reviewed on a quarterly basis and changes to plans are appropriately recognized when identified. Changes to plans associated with the restructuring of existing businesses are generally recognized as employee separation and plant phaseout costs in the period the change occurs. Under EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” changes to plans associated with the integration of an acquired business are recognized as an adjustment to the acquired business’ original purchase price (goodwill) if recorded within one year of the acquisition. After one year, a reduction of goodwill is recorded if the actual costs incurred are less than the original reserve. More than one year subsequent to an acquisition, if the actual costs incurred exceed the original reserve, the excess is recognized as an employee separation and plant phaseout cost. For additional discussion, please refer to Notes E and F to the Consolidated Financial Statements.

     Equity Investment - Equity investments are accounted for by the equity method, under which we recognize our proportionate share of each investment’s net income or loss in our consolidated statement of operations on the line “Income from equity affiliates and minority interest,” and the carrying cost of each investment on the consolidated balance sheets on the line “Investment in equity affiliates.”

     Goodwill - As of December 31, 2004, we had $321.0 million of goodwill that resulted from having acquired businesses. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment on at least an annual basis since 2002. Prior to 2002, goodwill was amortized to expense. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment, or decline in value, may have occurred. In making these impairment assessments, we compare the fair value of each of our reporting units with that reporting unit’s carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. We have selected July 1 as our annual impairment testing date.

     We use a combination of two valuation methods, a market approach and an income approach, to estimate the fair value of our reporting units. Absent fair value from a potential buyer or similar specific transactions, we believe the use of these two methods provides reasonable estimates of a reporting unit’s fair value. Fair value computed by these two methods is arrived at using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, marketplace data of comparable companies or near comparable companies from within a consistent industry grouping, and cost of capital. There are inherent uncertainties, however, related to these factors and to management’s judgment in applying them to this analysis. Nonetheless, we believe the combination of these two methods provides a reasonable approach to estimate the fair value of our reporting units. No assumptions or estimates differed between these two methods as of any valuation date for each reporting unit.

     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 reporting unit) to the reporting unit’s operating performance adjusted for non-recurring items. We believe this approach is appropriate because it provides a fair value estimate using multiples from entities with operations and economic characteristics comparable to our reporting units. The key estimates and assumptions used in determining fair value under this approach include projected future results and a control premium applied to the market multiples to adjust the enterprise value upward for a 100% ownership interest, where applicable. Projected results for the next 12 months are used due to the forward-looking nature of the market-related multiples. Projected future results are based upon our best estimates, which take into account projected economic and market conditions and the reporting unit’s business plans.

     The income approach is based on projected future debt-free cash flow that is discounted to present value using discount factors that consider the timing and risk of the future cash flows. We believe this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term oper-

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ating and cash flow performance. 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-to-10 year projection of operating results and cash flows that is discounted using a weighted-average cost of capital calculated for the reporting unit’s industry. The projection is based upon our best estimates of projected economic and market conditions over the five-to-10 year period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions used for this cash flow model include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements based on projected management plans.

     During the third quarter of 2004, we completed the required “phase one” goodwill impairment assessment and determined that goodwill was not impaired as of July 1, 2004. The average fair values of the market approach and income approach exceeded the carrying value by 74% for the Plastic Compounds and Colors reporting unit and by 9% for the Formulators reporting unit. Using the lowest fair value determined by these two methods would have resulted in a fair value that exceeded the carrying value by 58% for the Plastic Compounds and Colors reporting unit and by 7% for the Formulators reporting unit. While we determined that there was no additional goodwill impairment as of the annual assessment on July 1, 2004, the future occurrence 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, loss of key personnel or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, would require us to perform another assessment prior to the next required annual assessment in 2005. These types of events and the resulting analysis could result in future additional charges against earnings to reflect goodwill write-offs or other asset impairments. Any future goodwill impairment would not impact our required financial ratios under the receivables sale facility and the revolving credit facility. However, available borrowings under the revolving credit facility would effectively be reduced by 10% of any after-tax impairment write-off.

     The key assumptions used to prepare the July 1, 2004 valuations under the income approach for the Plastic Compounds and Colors reporting unit were a long-term sales growth rate of 3.0%, working capital to sales ratio of 8.5% and weighted average cost of capital of 13.0%. For the Formulators reporting unit, the key assumptions were a long-term sales growth rate of 3.0%, working capital to sales ratio of 10.8% and weighted average cost of capital of 15.0%. The key assumptions used to prepare the July 1, 2004 valuations under the market approach for each reporting unit were multiples of next year projected sales, earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted to reflect differences between the reporting units and the comparable companies for effectiveness in asset utilization, total asset return, financial leverage and risk. For the Plastic Compounds and Colors reporting unit, the key assumptions were a multiple of sales of 0.7, a multiple of EBITDA of 9.6 and a multiple of EBIT of 15.8. For the Formulators reporting unit, key assumptions were a multiple of sales of 0.7, a multiple of EBITDA of 6.3 and a multiple of EBIT of 7.6.

     We also determined that goodwill was not impaired for the Plastic Compounds and Colors reporting unit and the Formulators reporting unit as of the interim assessment performed as of December 31, 2003 and the annual assessment performed as of July 1, 2003. We did, however, recognize impairment charges in 2003 and 2004 relative to businesses classified as discontinued operations to reduce the net assets of these businesses held for sale to their estimated future net proceeds. For details regarding these charges, see Note B to the Consolidated Financial Statements.

     Income Taxes - Estimates of full year taxable income of the various legal entities and jurisdictions are used in the tax rate calculation, which change throughout the year. Management uses judgment to estimate the income for the year. Because judgment is involved, there is risk that the tax rate may significantly increase or decrease in any period.

     In determining income (loss) for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. SFAS No. 109, “Accounting for Income Taxes,” also requires that the deferred tax assets be reduced 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 evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future state, federal and international pre-tax income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

     As a result, we have computed a valuation allowance of $95.5 million, and we intend to maintain it until it is more likely than not that the related deferred tax assets will be realized. Income tax expense recorded in the future will be reduced to the extent of offsetting decreases in the valuation allowance. Realizing our remaining deferred tax assets is primarily dependent upon our ability to execute certain feasible and prudent tax planning strategies. Any reduction in estimated future taxable income including, but not limited to, any future restructuring activities may require that we

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record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the related period and could have a significant impact on future earnings.

     In addition, the calculation of tax liabilities involves dealing with uncertainties in applying complex tax regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based upon our estimate of whether, and the extent to which, additional taxes will be due. To the extent we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of recorded reserves, the effective tax rate in a given financial statement period may be materially impacted.

     Pensions and Post-retirement Benefits - Included in our results of operations are significant pension and post-retirement benefit costs, which are measured 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 are required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in pension and post-retirement benefit costs may occur in the future due to changes in these assumptions. Our net pension and post-retirement benefit cost was approximately $23 million, $36 million and $25 million during fiscal 2004, 2003 and 2002, respectively, excluding the impact of restructuring actions. The decrease in net pension and post-retirement expense during fiscal 2004 was primarily a result of better than expected return on pension assets, actuarial experience gains, cessation of Medicare Part B premium reimbursements provided through the retiree medical plan for certain participants, and recognition of the federal subsidy related to providing prescription drug benefits to Medicare eligible retirees under the Medicare Act.

     To develop our discount rate, we considered the available yields on high-quality, fixed-income investments with maturities corresponding to our benefit obligations. To develop our expected return on plan assets, we considered 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 considered the duration of the plan liabilities and gave more weight to equity positions, including both public and private 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 decreased or increased the fiscal 2004 net pension and post-retirement expense by approximately $1.6 million. Likewise, a 0.5 percentage point increase or decrease in the expected return on plan assets would have increased or decreased the fiscal 2004 net pension cost by approximately $1.5 million.

     Market conditions and interest rates significantly affect the future assets and liabilities of our pension and post-retirement plans. It is difficult to predict these factors due to highly volatile market conditions. Holding all other assumptions constant, a 0.5 percentage point decrease or increase in the discount rate would have increased or decreased the minimum pension liability by approximately $25 million as of December 31, 2004.

     The rate of increase in medical costs assumed for the next five years was held constant with prior years to reflect both actual experience and projected expectations. The health care cost trend rate assumption has a significant effect on the amounts reported. Only certain employees hired prior to December 31, 1999 are eligible to participate in our company’s subsidized post-retirement plan.

     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, and any liability judged to be probable and estimable, has been accrued. Any potential liability not accrued is not currently expected to have a material adverse effect on our future financial position, results of operations or cash flows.

     Stock Options Granted to Employees - On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Statement 123(R) will require all share-based payments to employees to be recognized in the income statement based on their fair value rather than as a pro-forma disclosure. We are required to adopt Statement 123(R) no later than July 1, 2005.

Cash Flows

     Individual line items that comprise cash flows from operating, investing and financing activities are set forth in the Consolidated Statement of Cash Flows. The discussion below centers upon the main drivers of changes in cash flows from operating, investing and financing activities.

     Operating Activities - Cash used by operating activities in 2004 was $124.4 million less than in 2003. Depreciation and amortization in 2004 was consistent with 2003 levels. More cash was provided in 2004 from improved earnings, lower cash payments required under employee separation and plant phaseout programs and higher distributions of cash received from equity affiliates. More cash was used in 2004 for voluntary contributions to defined benefit voluntary pension plans. Accounts receivable

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increased in 2004, primarily from increased business activity levels and a decrease of $70.7 million in the amount of receivables sold under the receivables sale facility, partially offset by improved average collection periods for receivables. Inventory levels were consistent at the end of 2004 compared with 2003 even though business activity levels were higher, reflecting improved inventory turnover efficiency. Accounts payable increased in 2004 primarily from higher business activity levels, with similar average payment periods.

     Cash used by operating activities in 2003 was $111.2 million greater than in 2002. Depreciation and amortization in 2003 was consistent with 2002 levels. Less cash was provided in 2003 from lower earnings and lower distributions of cash received from equity affiliates. More cash was used in 2003 from higher cash payments required under employee separation and plant phaseout programs. Accounts receivable levels were consistent at the end of 2003 compared with 2002, reflecting consistent collection periods and levels of business activity. Inventory levels declined in 2003 primarily from improved inventory turnover efficiency, and accounts payable levels declined primarily from lower average payment periods.

     Investing Activities - Cash provided by investing activities in 2004 was $124.8 million more than in 2003. The primary driver was cash received from the sale of the Elastomers and Performance Additives business in August 2004. Capital expenditures in both 2004 and 2003 were primarily in support of current manufacturing operations, and were slightly lower in 2004. We also spent less cash in 2004 for business acquisitions. In 2004 we purchased the North American distribution business of ResinDirect LLC, which is included in our Distribution segment, and in 2003 we made the final payment due on our December 2002 acquisition of Transformacion de Pigmentos Y Colorantes, S.A., which is included in our Performance Plastics segment. We also received more cash in 2004 from the sale of assets. In 2004 we sold our European Melos rubber granulates operations, and in 2003 we sold our 51% interest in Techmer PM, LLC. Both businesses were formerly included in our Performance Plastics segment.

     Cash used by investing activities in 2003 was $55.6 million less than in 2002. The primary driver was lower capital expenditures, which were primarily in support of current manufacturing operations. We also received more cash in 2003 from the sale of assets. As previously mentioned, we sold our 51% interest in Techmer in 2003. In 2002, we sold our 70% interest in Softer.

     Financing Activities - Cash used for financing activities in 2004 was $283.1 million more than in 2003, primarily from the net repayment of $93.7 million of short-term and long-term debt in 2004, compared with net borrowings of short-term and long-term debt in 2003 totaling $206.6 million. Borrowings in 2003 primarily resulted from the issuance of $300 million of 10.625% unsecured notes, partially offset by the maturity of $87.8 million of 9.375% senior notes. We also paid $15.0 million for debt issuance costs in 2003.

     Cash provided by financing activities in 2003 was $57.5 million more than in 2002 due to higher short and long-term debt borrowings in 2003 as described above. In 2002, we issued $200 million of 8.875% senior notes. In addition, we paid dividends in 2002. No dividends have been paid since 2002.

     Discontinued Operations - Cash provided by discontinued operations in 2004 was $20.4 million more than in 2003, primarily from improved earnings which were driven by higher sales and lower costs as a result of restructuring initiatives and by not reflecting depreciation or amortization expense in 2004 as required by generally accepted accounting principles as applied to discontinued operations.

     Cash provided by discontinued operations in 2003 was $24.1 million less than in 2002, primarily from reduced earnings resulting from lower sales levels combined with higher material costs that were not fully recaptured in selling price increases.

Capital Resources and Liquidity

     As of December 31, 2004, we had existing facilities to access available capital resources (receivables sale facility, secured revolving credit facility, uncommitted short-term credit lines and senior unsecured notes and debentures) totaling approximately $827.9 million. As of December 31, 2004, we had utilized $692.1 million of these facilities, and approximately $135.8 million was available to be drawn while remaining in compliance with all facilities. The following table summarizes available and outstanding facilities at December 31, 2004:

     On May 6, 2003, we completed a debt refinancing. The refinancing provided liquidity and the funds to repay senior debt that matured in September 2003 and to support normal operations and fund restructuring initiatives intended to improve earnings. As part of this comprehensive refinancing, we issued $300 million of 10.625% unsecured senior notes, entered into a new three-year $225 million receivables sale facility and amended and restated the revolving credit facility. The 10.625% unsecured senior notes rank equally with all other senior unsecured indebtedness. Proceeds from the issuance of the senior notes were used to repay the senior notes that matured in September 2003, to pay off the borrowings on the revolving credit facility and to pay down the amounts borrowed under the receivables sale facility. The new receivables sale facility replaced the former receivables sale facility. The security that had

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been extended in February 2003 to senior notes and debentures and our guarantee of the SunBelt notes ended as part of the debt refinancing. Security was granted under the terms of the 2003 amended and restated revolving credit agreement. As of December 31, 2004, our secured borrowings were not at levels that would trigger the security on the indentures governing our notes and debentures or our guarantee of the SunBelt notes.

     We had guaranteed $42.3 million of OxyVinyls’ borrowings from Occidental Petroleum Corporation when OxyVinyls was formed, and this guarantee ended on June 30, 2003.

     Long-Term Debt - At December 31, 2004, we had long-term debt of $689.8 million, with maturities ranging from 2005 to 2015. See Note H to the Consolidated Financial Statements for further information about our debt. Current maturities of long-term debt at December 31, 2004 were $49.3 million.

     Revolving Credit Facility - During the third quarter of 2004, we amended our revolving credit facility to reduce the facility borrowing capacity from $50 million to $30 million to better align facility capacity with our needs for credit following the sale of the Elastomers and Performance Additives business. Also, we would have had limited access to amounts above $30 million without triggering the security provisions of the indentures governing our senior unsecured notes and debentures and our guarantee of the SunBelt notes, as discussed below. No amendments were made to any financial covenants. The revolving credit facility has a three-year term with an inception date of May  6, 2003. The maximum amount that may be borrowed under the revolving credit facility is limited to 95% of the amount that may be borrowed and secured without triggering the security provisions of the indentures governing the existing senior unsecured notes and debentures and our guarantee of the SunBelt notes. The revolving credit facility was further amended on September 25, 2003 to limit any additional borrowings under the facility unless, after giving effect to the borrowing, the interest coverage ratio as defined and calculated under the agreement would not be less than 1 and the borrowed debt-to-adjusted EBITDA ratio as defined and calculated under the agreement would not be more than 4.75. The revolving credit facility makes available up to $30.0 million for the issuance of standby letters of credit. Obligations under the revolving credit facility are secured by substantially all of our company’s domestic intellectual property and inventory and some of our domestic real property.

     As of December 31, 2004, we had no amounts outstanding under the revolving credit facility, although the facility served as a back-up facility for $16.3 million of outstanding letters of credit, and for $1.8 million of loan guarantees related to our 50% Colombian equity joint venture.

     Our revolving credit facility requires us to, among other things, maintain certain interest coverage and borrowed debt-to-adjusted EBITDA earnings ratios. Further, the financing arrangements limit payments for purposes such as capital expenditures, acquisitions and dividends. On September 25, 2003, the required financial ratios in the financing arrangements were amended.

     The following table summarizes the current defined financial covenant ratios for the fourth quarter of 2004 and each quarter in 2005 under the revolving credit facility:

     Receivables Sale Facility - As a result of the sale of our Elastomers and Performance Additives business in August 2004, we amended our receivables sale facility during the third quarter of 2004 to reduce the amount of eligible receivables available to be sold from $225 million to $175 million, as discussed in Note J to the Consolidated Financial Statements. As a result, under the terms of our amended receivables sale facility we are allowed to sell accounts receivable and realize proceeds of up to $175 million. However, the maximum amount of proceeds that may be received is limited to 85% of the amount of eligible domestic accounts receivable sold. The receivables sale facility also makes available up to $50.0 million for the issuance of standby letters of credit, of which $6.0 million was used at December 31, 2004. The receivables sale facility does not contain any credit ratings provision that would allow the purchasers of the accounts receivable to terminate the facility if our senior debt ratings fell below specified levels. The amount of eligible receivables available to be sold under the receivables sale facility will be impacted by the divestment of any or all of the businesses currently held for sale because each of these businesses has accounts receivable that were sold under the receivables sale facility.

     On September 25, 2003, we amended the receivables sale facility to adjust interest coverage ratio requirements. The interest coverage ratio requirements is 2.00 to 1 for the first quarter 2005, 2.25 to 1 for the second quarter 2005, and 2.5 to 1 thereafter.

     Of the capital resource facilities available to us as of December 31, 2004, the portion of the receivables sale facility that was actually sold provided security in connection with the transfer of ownership of these receivables. Each indenture governing our senior unsecured notes and debentures and our guarantee of the SunBelt notes allows for a specific level of secured debt, above which security must be provided on each indenture and the guarantee of the SunBelt notes. The receivables sale facility does not

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constitute debt under the covenants associated with the senior unsecured notes and debentures. As of December 31, 2004, no accounts receivable were sold, and we had guaranteed unconsolidated equity affiliate debt of $79.2 million of SunBelt. As of December 31, 2003, we sold accounts receivable of $70.7 million and had guaranteed $85.3 million of SunBelt debt.

     The following table summarizes our obligations under long-term debt, operating leases, standby letters of credit, interest obligations, pension and post-retirement obligations, guarantees and purchase obligations as of December 31, 2004:

     Profitable operations in 2005 will be important to maintain the existing levels of available capital resources. Expected sources of cash in 2005 include net income, borrowings under existing loan agreements and the expected sale of the remaining discontinued operations. Expected uses of cash in 2005 include approximately $49.3 million of long-term debt that matures during the year, interest expense and discount on sale of accounts receivable totaling approximately $67 million, cash taxes, spending for previously announced restructuring initiatives in progress as of December 31, 2004 totaling approximately $2 million, and capital expenditures. Capital expenditures are currently estimated between $40 million and $45 million, primarily in support of manufacturing operations. We may also repurchase or retire additional long-term debt in 2005 as part of our overall strategy to reduce debt. Percentage changes in the levels of accounts receivable, inventories and accounts payable are expected to approximate the corresponding expected percentage increase in sales.

     A timing difference between cash contributions to qualified defined benefit pension plans and the expense for these plans is reflected in our Consolidated Statement of Operations. In 2004, cash contributions to qualified defined benefit pension plans totaled approximately $68.9 million, while the expense for these plans reflected in the Consolidated Statement of Operations totaled approximately $11.4 million.

     Our 2004 contribution of approximately $68.9 million to our qualified defined benefit pension plans exceeded the 2004 required minimum funding of approximately $3.9 million. Based on the voluntary payment of $65 million we made during 2004 for qualified defined benefit plans, no additional required minimum funding is anticipated in 2005 or 2006 for the U.S. qualified defined benefit pension plans. Pension contributions are reflected on the line “Accrued expenses and other” in the Consolidated Statement of Cash Flows.

     Based on current projections, we believe that we should be able to continue to manage and control working capital, discretionary spending and capital expenditures, and that cash flow generated from operations, along with the borrowing capacity under the revised revolving credit facility and new receivables sale facility, should be adequate to fund operations and to meet debt service requirements.

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 “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. They are based on management’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 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 connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions; prospective changes in raw material costs, product pricing or product demand; future performance or 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:

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     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 statements, whether as a result of new information, future events or otherwise. 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.

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We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates 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 such derivative financial instruments as risk management tools and not for speculative investment purposes.

     Interest rate exposure - We periodically enter into interest rate swap agreements that convert fixed-rate obligations to floating rates. During July 2003, we terminated all outstanding interest rate swap agreements at a cash cost of $2.6 million. We then immediately entered into new interest rate swap agreements on seven fixed-rate obligations in the aggregate amount of $120.0 million. These exchange agreements are perfectly effective as defined by SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities.” On September 3, 2004, we terminated one of the seven outstanding interest rate swap agreements at a cash cost of $0.3 million. At December 31, 2004, the six outstanding agreements had a net fair market value obligation of negative $3.6 million and the weighted-average interest rate for these six agreements was 6.112%. At December 31, 2003, these seven agreements had a net fair value obligation of negative $3.7 million and the weighted-average interest rate for these seven agreements was 5.239%. At December 31, 2002, there were no interest rate swap agreements in place.

     Foreign currency exposure - We enter into intercompany lending transactions denominated in various foreign currencies and are subject to financial exposure from foreign exchange rate movement between the date a loan is recorded and the date it is settled or revalued. To mitigate this risk, we enter into foreign exchange contracts. 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. We do not hold or issue financial instruments for trading purposes. For additional information regarding foreign currency exchange risk, refer to Note U to the Consolidated Financial Statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Financial Statement Schedule

Management’s Report

The management of PolyOne Corporation is responsible for the preparation of the consolidated financial statements and disclosures included in this annual report. The financial statements and disclosures included in this annual report 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, 2004.

     Management is responsible for establishing and maintaining disclosure controls and procedures designed to ensure that 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, 2004, and found them to be effective.

     Management is also responsible for establishing and maintaining 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. Internal control over financial reporting includes the policies and procedures that provide reasonable assurance 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 company’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 authorizations of management and the board of directors of the company.

     Management has assessed the effectiveness of PolyOne’s internal control over financial reporting at December 31, 2004, and has prepared Management’s Annual Report On Internal Control Over Financial Reporting contained on page 55 of this annual report. This report concludes that internal control over financial reporting is effective and that no material weaknesses have been identified.

     Ernst & Young, who audited the consolidated financial statements of PolyOne Corporation as of and for the year ended December 31, 2004, have also audited management’s assessment of internal control over financial reporting and issued an audit report on that audit.

February 22, 2005

POLYONE CORPORATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of PolyOne Corporation

We have audited management’s assessment, included in Item 9A,“Controls and Procedures — Management’s Annual Report on Internal Control over Financial Reporting,” that PolyOne Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). PolyOne Corporation’s management is responsible for establishing and maintaining a system of internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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 perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control over financial reporting, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     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 principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance 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 detection 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, management’s assessment that PolyOne Corporation maintained effective internal control over financial reporting as of December 31, 2004 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, PolyOne Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PolyOne Corporation and subsidiaries as of December 31, 2004, and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 and our report dated February 22, 2005 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG

February 22, 2005

Cleveland, Ohio

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of PolyOne Corporation

We have audited the consolidated balance sheets of PolyOne Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 Company has a 24% interest) as of and for the year ended December 31, 2004 and 2003 have been audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to 2004 and 2003 data for Oxy Vinyls, LP is based solely on their report.

     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 perform the audit to obtain reasonable 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 provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PolyOne Corporation and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statements, taken as a whole, present fairly in all material respects the information set forth therein.

     As discussed in Note D to the consolidated financial statements, Goodwill and Other Intangible Assets, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets effective January 1, 2002.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2005 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG

February 22, 2005

Cleveland, Ohio

POLYONE CORPORATION

Consolidated Statements of Operations

See Notes to Consolidated Financial Statements.

POLYONE CORPORATION

Consolidated Balance Sheets

See Notes to Consolidated Financial Statements.

POLYONE CORPORATION

Consolidated Statements of Cash Flows

See Notes to Consolidated Financial Statements.

POLYONE CORPORATION

Consolidated Statements of Shareholders’ Equity

See Notes to Consolidated Financial Statements.

POLYONE CORPORATION

Notes to Consolidated Financial Statements

PolyOne Corporation (PolyOne or Company) is an international polymer services company with continuing operations in thermoplastic compounds, specialty polymer formulations, color and additive systems, and thermoplastic resin distribution. PolyOne also has equity investments in providers of PVC resin and its intermediates. PolyOne was formed on August 31, 2000, as a result of the consolidation of The Geon Company (Geon) and M.A. Hanna Company (Hanna) (see Note E).

     PolyOne’s operations are located primarily in the United States, Europe, Canada, Asia and Mexico. PolyOne operates in three segments: Performance Plastics, Distribution, and Resin and Intermediates. See Note S for further information on PolyOne’s segments.

     As described in Note B, PolyOne’s Specialty Resin and Engineered Films businesses qualified for accounting as discontinued operations as of December 31, 2004. PolyOne’s Elastomers and Performance Additives business was sold in August 2004, and its Italian operating subsidiary, So.F.teR S.p.A. (Softer), was sold in December 2002. All historical financial information for these business operations has been restated as discontinued operations. Unless otherwise noted, disclosure herein pertains to PolyOne’s continuing operations.

In October 2003, PolyOne announced that its future focus would be on its global Plastics Compounding, Color & Additive Masterbatch and Distribution businesses as part of a drive to improve profitability and strengthen its balance sheet because management believes these businesses have the strongest market synergies and potential for long-term success. Consequently, the Elastomers and Performance 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. The Elastomers and Performance Additives business was a reportable segment and the Specialty Resins and Engineered Films businesses were included in the Performance Plastics segment.

     As a result, these businesses qualified for accounting treatment as discontinued operations as of December 31, 2003 under Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, 2003 and 2002 revenues, costs and expenses, assets and liabilities, and cash flows of these businesses were segregated in the Consolidated Statements of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash Flows.

     The net assets held for sale of these businesses were written down to their projected net sale proceeds at December 31, 2003. These charges totaled $92.6 million for the Elastomers and Performance Additives business and $37.9 million for the Engineered Films and Specialty Resins businesses and were included in “Income (loss) from discontinued operations and loss on sale, net of income taxes” in the Consolidated Statement of Operations for the year ended December 31, 2003.

     In August 2004, PolyOne sold the Elastomers and Performance Additives business to an entity formed by an investor group led by Lion Chemical Capital, LLC and ACI Capital Co., Inc. for gross proceeds of approximately $120 million before associated fees and costs. A cash payment of $106 million was made on the closing date and the remaining $14 million was in the form of a six-year note from the buyer. Consequently, PolyOne recognized a $17.0 million non-cash pre-tax charge to adjust the net asset carrying value of the Elastomers and Performance Additives business on the date of sale to the net proceeds received. In the fourth quarter of 2004, PolyOne also recorded a $4.3 million charge to adjust the net assets held for sale of the Engineered Films and Specialty Resins businesses to reflect management’s best estimate of projected net sale proceeds. This charge is included in “Income (loss) from discontinued operations and loss on sale, net of income taxes” in the Consolidated Statement of Operations for the year ended December 31, 2004.

     The carrying amounts of the major classes of assets and liabilities of the Engineered Films and Specialty Resins businesses of $68.1 million at December 31, 2004 are reflected in “Discontinued operations” in the Consolidated Balance Sheets. Management expects to complete the sale of these businesses in 2005.

     PolyOne also sold its 70% ownership interest in Softer in December 2002.

     The following table summarizes the results of discontinued operations. In restating the operating results of the discontinued operations for 2003 and 2002, indirect costs previously allocated to the Elastomers and Performance Additives, Specialty Resins and Engineered Films businesses that were or are expected to be retained upon disposal of these businesses are now included in the continuing businesses operating results. These costs, totaling $17.9 million in 2003 and $22.6 million in 2002, were allocated to the continuing segments as follows: Performance Plastics 40%, Distribution 12% and Other 48%. In addition, as required by generally accepted accounting principles in the United States, 2004

POLYONE CORPORATION

results of discontinued operations do not include any depreciation or amortization expense.