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Article by DailyStocks_admin    (11-03-08 03:20 AM)

Filed with the SEC from Oct 16 to Oct 22:

PolyOne (POL)
Fine Capital Partners reported ownership of 5,360,500 shares (5.7%), after buying 2,807,300 from Aug. 27 through Oct. 16. at $4.27 to $8.20 a share.

BUSINESS OVERVIEW

Business Overview

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

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

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

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

Recent Developments

Sale of businesses and discontinued operations

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

Purchase of businesses

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

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

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

Polymer Industry Overview

Polymers are a class of organic materials that are generally 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 manufacturing the base resin. As a result, the cost of a base resin tends to move in tandem with the industry market prices for monomers and the cost of raw materials and energy used during production. Resin selling prices can move in tandem with costs, but are largely driven by supply and demand balances. Through our equity interest in SunBelt Chlor-Alkali 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 heat and pressure are applied. Thermoplastics offer versatility and a wide range of applications. The major types of thermoplastics include polyethylene, polyvinyl chloride, polypropylene, polystyrene, polyester and a range of specialized engineering resins. Each type of thermoplastic has unique qualities and characteristics that make it appropriate for use in a particular product.

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

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

PolyOne Segments

We operate within four reportable segments: Vinyl Business; International Color and Engineered Materials; PolyOne Distribution; and Resin and Intermediates. All Other is comprised of the remaining operating segments and includes North American Color and Additives, North American Engineered Materials, Producer Services and Specialty Inks and Polymer Systems operating segments. For more information about our segments, see Note R to the Consolidated Financial Statements, which is incorporated by reference into this Item 1.

Vinyl Business:

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

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

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

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

International Color and Engineered Materials:

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

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

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

Our International Color and Engineered Materials segment had sales to external customers of $610.9 million, with operating income of $26.6 million in 2007 and total assets of $424.4 million as of December 31, 2007.

PolyOne Distribution:

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

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

Resin and Intermediates:

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

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

All Other:

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

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

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

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

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

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

Our Specialty Inks and Polymer Systems operating segment provides custom-formulated liquid systems that meet a variety of customer needs and chemistries, including vinyl, natural rubber and latex, polyurethane and silicone. Our products and services are designed to meet the specific requirements of our customers’ applications by providing unique solutions to their market needs. Products also include proprietary fabric screen-printing inks, latexes, specialty additives and colorants. Specialty Inks and Polymer Systems serves diversified markets that include recreational and athletic apparel, construction, filtration, outdoor furniture and healthcare. We also have a 50% interest in BayOne, a joint venture between PolyOne and Bayer Corporation, which sells polyurethane systems into many of the same markets.

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

Competition

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

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

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

Raw Materials

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

Patents and Trademarks

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

Seasonality and Backlog

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

Working Capital Practices

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

Significant Customers

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

Research and Development

We have substantial technology development capabilities. Our efforts are largely devoted to developing new product formulations to satisfy defined market needs, providing quality technical services to evaluate alternative raw materials, assuring the continued success of our products for customer applications, providing technology to improve our products, processes and applications, and providing support to our manufacturing plants for cost reduction, productivity and quality improvement programs. We operate research and development centers that support our commercial development activities and manufacturing operations. These 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 that allow us to rapidly translate new technologies into new products.

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

Methods of Distribution

We sell products primarily through direct sales personnel, distributors, including our PolyOne Distribution segment, and commissioned sales agents. We primarily use truck carriers to transport our products to customers, although some customers pick up product at our operating facilities or warehouses. We also ship some of our manufactured products to customers by railroad cars.

Employees

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

Environmental, Health and Safety

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

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

Based on September 2007 court rulings (see Note N to the Consolidated Financial Statements) in the case of Westlake Vinyls, Inc. v. Goodrich Corporation, et al. and a settlement agreement related to the former Goodrich Corporation (now Westlake Vinyls, Inc.) Calvert City facility, we recorded a charge during 2007 of $15.6 million for past remediation costs payable to Goodrich Corporation. We also adjusted our environmental reserve for future remediation costs, a portion of which already related to the Calvert City site, resulting in an additional charge of $28.8 million in 2007.

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

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

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

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

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

The European business community (EU) has adopted REACH, a legislative act to cover Registration, Evaluation, Authorization and Restriction of Chemicals. The goal of this legislation, which became effective in June 2007, is to minimize risk to human health and to the environment. We have a global team of experts to provide our customers with compliance solutions to adapt to these regulations. As these regulations evolve, we will endeavor to remain in compliance with REACH. We have been notified by federal and state environmental agencies and by private parties that we may be a potentially responsible party (PRP) in connection with the investigation and remediation of a number of environmental waste disposal sites. While government agencies assert that PRPs are jointly and severally liable at these sites, in our experience, interim and final allocations of liability costs are generally made based on the relative contribution of waste. However, even when allocations of costs based on relative contribution of waste have been made, we cannot assure that our allocation will not increase if other PRPs do not pay their allocated share of these costs.

We also conduct investigations and remediation at several of our active and inactive facilities and have assumed responsibility for the resulting environmental liabilities from operations at sites formerly owned or operated by us or our predecessors. We believe that our potential continuing liability at these sites will not have a material adverse effect on our results of operations or financial position. In addition, we voluntarily initiate corrective and preventive environmental projects at our facilities. Based on current information and estimates prepared by our environmental engineers and consultants, we had reserves on our December 31, 2007 Consolidated Balance Sheet totaling $83.8 million to cover probable future environmental expenditures related to previously contaminated sites. This figure represents management’s best estimate of costs for probable remediation, based upon the information and 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 amount accrued at December 31, 2007. Such costs, if any, cannot be currently estimated. We may revise our estimate of this liability as new regulations or technologies are developed or additional information is obtained.

CEO BACKGROUND
J. Douglas Campbell
Director since 1993
Age — 66
Retired Chairman and Chief Executive Officer of ArrMaz Custom Chemicals, Inc., a specialty mining and asphalt additives and reagents producer. Mr. Campbell served in this capacity from December 2003 until the company was sold in July 2006. Mr. Campbell served as President and Chief Executive Officer and was a Director of Arcadian Corporation, a nitrogen chemicals and fertilizer manufacturer, from December 1992 until the company was sold in 1997.

Dr. Carol A. Cartwright
Director since 1994
Age — 66
Retired President of Kent State University, a public higher education institution. Dr. Cartwright served in this capacity from 1991 until her retirement in July 2006. Dr. Cartwright serves on the Boards of Directors of KeyCorp, FirstEnergy and The Davey Tree Expert Company.

Gale Duff-Bloom
Director since 1994
Age — 68
Retired President of Company Communications and Corporate Image of J.C. Penney Company, Inc., a major retailer. Ms. Duff-Bloom served in this capacity from June 1999 until her retirement in April 2000. From 1996 to June 1999, Ms. Duff-Bloom served as President of Marketing and Company Communications of J.C. Penney.

Richard H. Fearon
Director since 2004
Age — 52
Executive Vice President, Chief Financial and Planning Officer of Eaton Corporation, a global manufacturing company, since April 2002. Mr. Fearon served as a Partner of Willow Place Partners LLC from 2001 to 2002 and was the Senior Vice President Corporate Development for Transamerica Corporation from 1995 to 2000.

Robert A. Garda
Director since 1998
Age — 69
Retired Director of McKinsey & Company, Inc., a management consulting firm. Mr. Garda served in this capacity from 1978 to 1994. He served as an Executive-in- Residence of The Fuqua School of Business, Duke University, from 1997 to 2005, as an independent consultant from 1995 to 1997 and as President and Chief Executive Officer of Aladdin Industries from 1994 to 1995. Mr. Garda serves on the Boards of Directors of INTIGRAL, Inc. and Ryan Herco Flow Solutions.

Gordon D. Harnett
Director since 1997
Age — 65
Lead Director of our Board of Directors since July 18, 2007. Retired Chairman, President and Chief Executive Officer of Brush Engineered Materials Inc., an international supplier and producer of high performance engineered materials. Mr. Harnett served in this capacity from 1991 until his retirement in May 2006. Mr. Harnett serves on the Boards of Directors of The Lubrizol Corporation and EnPro Industries, Inc.

Edward J. Mooney
Director since 2006
Age — 66
Retired Chairman and Chief Executive Officer of Nalco Chemical Company, a specialty chemicals company. Mr. Mooney served in this capacity from 1994 to 2000. Mr. Mooney also served as Déléqué Général — North America, of Suez Lyonnaise des Eaux from 2000 to 2001, following its acquisition of Nalco. Mr. Mooney serves on the Boards of Directors of FMC Corporation, FMC Technologies, Inc., Northern Trust Corporation, Cabot Microelectronics Corporation and Commonwealth Edison Company (a wholly-owned subsidiary of Exelon Corporation).

Stephen D. Newlin
Director since 2006
Age — 55
Chairman, President and Chief Executive Officer of PolyOne since February 2006. Mr. Newlin served as President — Industrial Sector of Ecolab, Inc., a global developer and marketer of cleaning and sanitizing specialty chemicals, products and services from 2003 to 2006. Mr. Newlin served as President and a director of Nalco Chemical Company, a manufacturer of specialty chemicals, services and systems, from 1998 to 2001 and was Chief Operating Officer and Vice Chairman from 2000 to 2001. Mr. Newlin serves on the Boards of Directors of Black Hills Corporation and The Valspar Corporation.

Farah M. Walters
Director since 1998
Age — 63
President and Chief Executive Officer of QualHealth, LLC, a healthcare consulting firm that designs healthcare delivery models, since 2005. From 1992 until her retirement in June 2002, Ms. Walters was the President and Chief Executive Officer of University Hospitals Health System and University Hospitals of Cleveland. Ms. Walters serves on the Board of Directors of Celanese Corporation.

MANAGEMENT DISCUSSION FROM LATEST 10K

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

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

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

Business Overview

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

Recent Developments

Sale of businesses and discontinued operations

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

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

Purchase of businesses

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

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

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

Restructuring initiatives and facility closures

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

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

In 2007, we recognized charges of $0.6 million related to three executive severance agreements.

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

Sale of assets

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

Environmental remediation costs

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

Results of Operations

Summary of Consolidated Results:

Aggregate sales increased 1% in 2007 compared to 2006. This increase was primarily due to 9% sales growth in Asia, higher prices driven by value adding selling activities of our commercial team to offset higher raw material and energy costs, and the impact of favorable exchange rates. Foreign exchange had a 2% favorable effect on sales. Within All Other North American Engineered Materials, Producer Services and the Specialty Inks and Polymer Systems operating segments all registered sales growth in 2007 versus 2006, which offset a 16% decline in sales in the North American Color and Additives business due mainly to the pruning of low margin business. These items netted positively against the $92.1 million, or 9%, decline in sales in our Vinyl Business segment, mainly resulting from the slowdown in the residential construction market, and the 3% decrease in year-over-year shipments.

Income before discontinued operations declined $114.2 million in 2007, or $1.24 per share, compared to 2006.

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

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

Selling and Administrative — These costs generally include selling, technology and general and administrative charges. Selling and administrative costs increased 19% or $39.2 million in 2007 as compared to 2006. In 2006, selling and administrative costs had a $23.3 million benefit from insurance, legal settlements and adjustments to related reserves. The remainder of the change in selling and administrative expense was due mainly to increased investment in commercial resources and capabilities, partially offset by lower incentive, pension and post-retirement benefit costs. Selling and administrative costs increased in 2006 compared to 2005 from higher share-based compensation and incentive costs and increased investment in commercial resources and capabilities, partially offset by a higher benefit in 2006 than 2005 from legal and other related settlements.

Other Components of Income and Expense:

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

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

We repurchased $100.0 million of our 10.625% senior notes in June 2007 and repurchased the remaining $141.4 million of such senior notes in August 2007. In the second and fourth quarters of 2006, we repurchased $15.0 million and $43.6 million, respectively, of our 10.625% senior notes.

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

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

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

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

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

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

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
We are a leading global provider of specialized polymer materials, services and solutions with operations in thermoplastic compounds, specialty polymer formulations, color and additive systems, thermoplastic resin distribution and specialty vinyl resins, with equity investments in manufacturers of caustic soda and chlorine, and PVC compound products and in a formulator of polyurethane compounds. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites and distribution facilities in North America, Europe, Asia and Australia and joint ventures in North America and South America. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain to provide an essential link between large chemical producers (our raw material suppliers) and designers, assemblers and processors of plastics (our customers).
We operate within eight operating segments, five of which are reportable segments: Geon Performance Polymers, International Color and Engineered Materials, PolyOne Distribution, Specialty Engineered Materials and Resin and Intermediates. The All Other category contains three operating segments: North American Color and Additives, Producer Services and Specialty Inks and Polymer Systems. On March 20, 2008, we announced the Specialty Engineered Materials segment. This segment includes our thermoplastic elastomer (TPE) compounds product line in Europe and Asia (historically included in International Color and Engineered Materials), North American Engineered Materials (historically included in All Other) and GLS Corporation (GLS). As of April 15, 2008, the Vinyl Business segment has been re-branded to be Geon Performance Polymers. Prior period results of operations have been reclassified to conform to the 2008 presentation. We discuss the sales and operating income of our operating segments in the “Segment Information” section below. Also, see Note N to the Condensed Consolidated Financial Statements for further information regarding our reportable operating segments.
Purchase of business – In January 2008, we acquired 100% of the outstanding capital stock of GLS, a global provider of specialty thermoplastic elastomer compounds for consumer, packaging and medical applications. The acquisition resulted in $66.0 million of intangible assets and $43.8 million in goodwill. For more information on the GLS acquisition, see Note P to the Condensed Consolidated Financial Statements.
OxyVinyls Divestment – On July 6, 2007, we sold our 24% interest in Oxy Vinyls LP (OxyVinyls) for $260.5 million in cash. Proceeds from the sale were used for the redemption of the entire balance of our 10.625% senior notes as well as for the reduction of drawings on short-term facilities.
Outlook
We anticipate continued economic uncertainty as well as volatile raw material and energy costs. Based on early results, we anticipate second-quarter 2008 sales growth of approximately 6% to 8%, including organic sales growth in the low single digits, despite weak demand trends in the North American residential construction and automotive markets.
Geon Performance Polymers segment sales are expected to show sequential improvement from the first quarter of 2008, but decline 9% to 12% from the second quarter of 2007. International demand generally remains intact, although select pockets of softening are evident with customers who primarily export to North America.
Aggregate margin improvements for International Color and Engineered Materials, North America Color and Additives, Specialty Inks and Polymer Systems, Specialty Engineered Materials and PolyOne Distribution are expected to drive operating income growth in excess of second-quarter 2007 levels. Aggregate Geon Performance Polymers and Producer Services operating margin is projected to increase sequentially, but remain below the year-ago level due to continued weak end-market demand. Resin and Intermediates earnings are expected to be lower compared with second-quarter 2007 and first-quarter 2008 results, due to low incremental chlorine demand outweighing benefits from higher caustic pricing.
Based on these projections, we expect second-quarter 2008 earnings to increase sequentially versus first-quarter 2008 results.
Based upon current North American demand levels, we have modified our full-year 2008 sales growth estimate to 7% to 10%, from the prior estimate of 10% to 12%. We continue to anticipate positive year-over-year earnings growth in 2008; however, the distribution of quarterly earnings is expected to be more heavily weighted toward the second half of the year.
Results of Operations
Summary of Consolidated Results:
Aggregate sales increased 8.5% in the first quarter of 2008 as compared to the same period in 2007. Sales from the recently acquired GLS business accounted for 5% of this increase. The remainder of the increase was due to sales increases in the International Color and Engineered Materials and PolyOne Distribution segments and the favorable impact from foreign exchange which accounted for 5% of the overall increase, partially offset by a 4% decline in Geon Performance Polymers sales, due mainly to the depressed residential construction market.
Net income declined $0.9 million in the first quarter of 2008, or $0.01 per share, compared to the same period in 2007. Income from continuing operations before income taxes declined $1.5 million in the first quarter of 2008 as compared to the same period in 2007. A table showing material items that comprise this decline is provided after the following table, which sets forth key financial information from our statements of income for the quarters ended March 31, 2008 and 2007, respectively.

Income before Income Taxes
The following table sets forth the components of the variance for the three months ended March 31, 2008 as compared to the same period in the prior year:

Cost of Sales – These costs include raw materials, plant conversion, distribution and environmental remediation charges. These costs increased in the first quarter of 2008 as compared to the same period in 2007 as a result of higher raw material costs not yet fully offset by price increases largely associated with the Geon Performance Polymers business and those other businesses impacted by the slowdown in the building and construction market. Included in cost of sales is the $1.6 million recognition of inventory step-up associated with the GLS acquisition.
Selling and Administrative – These costs generally include selling, technology and administrative functions and corporate and general expenses. Selling and administrative costs increased $8.4 million, or 14%, for the three months ended March 31, 2008 compared to the same period in 2007. The change in selling and administrative expense was due mainly to an increase in selling and administrative costs associated with the acquisition of GLS of $3.8 million, the impact of foreign exchange of $2.2 million and increased investment in commercial resources and capabilities.
Other Components of Income and Expense
Discussions of significant components of income and expense that are presented below the line “Operating income” in the Condensed Consolidated Statements of Income are provided below.

Interest expense – The decrease in interest expense of $6.1 million for the three months ended March 31, 2008 as compared to the same period in 2007 was due primarily to the repurchase of $241.4 million of our 10.625% senior notes.

Geon Performance Polymers
Geon Performance Polymers sales were $10.1 million, or 4%, lower than the first quarter of 2007. The business was primarily impacted by the slowdown in the building and construction end markets, consistent with recent quarters. Our Asian vinyl compounding business, with the acquisition of Ngai Hing Plastchem Company Ltd. in the fourth quarter of 2007, demonstrated a 45% increase in revenue over the comparable period in the previous year.
Operating income decreased 65% from the first quarter of 2007. This decrease was primarily due to significantly lower volumes and, to a lesser degree, margin compression between raw material costs and selling prices.
International Color and Engineered Materials
International Color and Engineered Materials first quarter 2008 sales increased $21.2 million, or 15%, due to continuing double digit growth in our Asian Color and Additives business, favorable foreign exchange and modest growth in the Engineered Materials businesses in Europe and Asia. Favorable foreign exchange rates increased sales by $19.3 million, or 13%. Asian sales across all product platforms grew 19%, including the impact of foreign exchange. This increase was driven by our Color and Additives business, which grew sales 31% due to an improved mix of specialty applications utilizing our liquid color and additives product technologies, and 8% sales growth in our Asian Engineered Materials business despite unfavorable conditions in electrical and electronics markets, primarily due to lower export demand to North America.
Operating income increased $1.8 million, or 30%, in the first quarter of 2008 compared to the first quarter of 2007. This increase was primarily due to improved margins due to greater penetration of specialty applications in the packaging, wire and cable and automotive end markets and to improved product mix based on new specialty additive products. Value selling, cost management actions and exiting lower profitability business also contributed to the margin increase. Foreign exchange had a favorable impact on operating income of $1.0 million.

PolyOne Distribution
PolyOne Distribution sales increased $16.7 million, or 9%, as compared to the first quarter of 2007 driven by a 9% increase in average selling prices that were realized due to rising material and energy costs. An increased investment in commercial resources coupled with a national accounts program, and a strong pipeline of new sales opportunities in various markets all contributed favorably to the sales growth, helping to offset lower demand from our existing customer base due to weakening North American market conditions.
Operating income was $5.5 million, up 20% from the first quarter of 2007. This increase was largely due to a stronger sales mix and to higher gross margins.
Specialty Engineered Materials
Sales increased $32.1 million, or 99%, in the first quarter of 2008 as compared to the first quarter of 2007 primarily due to $33.0 million of sales from GLS, which was acquired in January 2008, slightly offset by lower organic sales for the first quarter of 2008, due to weak demand in the building and construction and automotive markets as well as exiting low margin business. Segment gross margins expanded through mix improvements and accelerated penetration of specialty applications. The impact of foreign exchange was immaterial.
Operating income was up $3.8 million in the first quarter of 2008 as compared to the first quarter of 2007, primarily driven by the GLS acquisition. Additionally, achieving an improved mix of specialty applications and the exiting of lower profitability business also contributed to the year-over-year income improvement.
Resin & Intermediates
First quarter 2008 operating income increased $1.6 million, or 37%, compared to the first quarter of 2007. In July 2007, we divested our 24% interest in OxyVinyls, which in the first quarter of 2007 lost $1.3 million.
SunBelt earnings were $0.2 million higher in the first quarter of 2008 compared to the first quarter of 2007 despite volumes being 4% lower. Year-over-year ECU netbacks were up approximately 17% on the strength of caustic pricing. Demand for caustic remained strong, but chlorine demand declined compared to the same period a year ago due to weak downstream PVC resin and polyurethane market conditions primarily attributable to depressed construction end markets.
All Other
All Other includes the North American Color and Additives, Producer Services and Specialty Inks and Polymer Systems operating segments. Sales in aggregate were down 5% from first quarter 2007 due mainly to a 4% decline in North American Color and Additives sales and a 9% decline in Producer Services sales. Producer Services sales were down reflecting declines in traditionally cyclical markets.
Operating income improved by $2.5 million, or 167%, in the first quarter of 2008 compared to the first quarter of 2007 despite the revenue decline. North American Color and Additives accounted for the majority of this improvement due to benefits realized from improved commercial disciplines, pruning low margin business and tight operating cost control. Specialty Inks and Polymer Systems operating income improved by 40% in the first quarter of 2008 as compared to the first quarter of 2007, resulting from an improved mix of inks and urethane products and improved value-added selling discipline.


CONF CALL

Steve Newlin

Well, thanks [D’Wanda], and thank you to everyone who is joining us on the call this morning. I really welcome the opportunity to speak to you today about the recent performance of PolyOne, as well as, our expectations for the balance of this year.

And here with me today is our new CFO, Bob Patterson. Prior to joining PolyOne, Bob was vice president and treasurer for Novelis. That is an $11 billion manufacturer of aluminum rolled products. And prior to that he held a number of financial leadership positions with SPX Corporation.

Bob joined PolyOne almost three months ago and he has quickly immersed himself in the business. He is already contributing to our transformation strategy, and I am very pleased to have him with us at the company, as well as, here today for his first conference call with our shareholders and analysts.

Before I hand the call over the Bob to review the results of our operations for the quarter, I want to take this opportunity to thank our former CFO Dave Wilson, who, as you know, is retiring from PolyOne later this month. Dave was with PolyOne and its predecessor companies for over 30 years, and has been a tireless partner to me during my tenure. Dave, thanks for your years of service and contributions, your unwavering dedication and commitment to PolyOne and for ensuring a really smooth transition with Bob, and I know I speak on behalf of everyone at PolyOne when I say we are going to miss you and we wish you and Bonnie many years of happiness and health.

With that I will turn the call over to Bob.

Bob Patterson

Thanks, Steve. It is hard to believe that three months have already passed. As you know I have been diligently working to fill Dave's shoes, and I too would like to thank him for going out of his way to help me during my transition, and I wish Dave well in his retirement.

Before I being, let my preface my comments by saying that unless other times are specifically stated or referenced throughout the call, we will be comparing the results of operations for the second quarter of 2008 with the second quarter of 2007. I am pleased to report that we are continuing to show progress with our transformational strategy despite a challenging economic environment.

For the second quarter of 2008, consolidated sales increased 8.6% to $748 million, including the benefit of acquisition growth and foreign exchange. Net income was 8.8 million or $0.09 per diluted share for the second quarter of 2008 compared with a loss of $5.4 million or $0.06 per diluted share for the same period a year ago. Excluding special items from both periods, we reported $0.12 per share in the second quarter of 2008, compared to $0.10 per share in the second quarter of last year.

This earnings improvement was driven by our Specialty platform businesses, which reported a nearly 70% increase in operating income resulting from our specialization strategy. Combined with lower corporate costs and interest expense, we were able to overcome the decline in the performance products and solutions segment resulting primarily from continued weak demand in North America housing, construction and automotive markets.

Our earnings improvement is not an inconsequential accomplishment, and I would like to provide some further highlights of our specialty business performance. First, I would like to remind everyone that our specialty platform is comprised of three operating segments, Specialty Engineered Materials, International Color and Engineered Materials, and Specialty Color, Additives and Inks. A reconciliation of the Specialty platforms measures of performance has been provided in our earnings release today, and is posted on our website.

In total, Specialty platform sales increased 24% to $300 million reflecting the benefit of the acquisition of GLS, as well as, favorable foreign exchange. Operating income increased nearly 70% from $10.1 million to $17.1 million, and now represents 45% of total segment operating income.

On an organic basis, and excluding the benefits of foreign exchange, Specialty platform sales were essentially flat year-over-year. However, operating income increased 20% or just over 2 million on the same basis. This last point clearly illustrates our focus on innovation, calling unprofitable business, improving sales mix and accelerating new business gains and higher margin sustainable businesses. A great example of this is our expansion into the healthcare market, which Steve will speak to you shortly.

Within the Specialty platform, our international color and engineered materials segment sales increased 14.5% to $172 million, and operating income increased 33% to $10.4 million. Importantly, operating income increased nearly 20% on an organic basis due to our continued focus on exiting unprofitable business and benefiting from growth in sales of our low-smoke halogen-free products.

The remainder of the Specialty Platform, organic operating income improvement was driven by our Specialty Color Additives and Ink segment which is benefiting from new account generation and a more profitable sales mix. GLS had another solid quarter performance and added $3.7 million of operating income. GLS continues to meet our expectations in highly attractive markets, and the integration is drawing better than expected, thanks to their leadership team support.

Another performance highlight is our distribution platform, which increased revenues 9.5% to $208 million for the second quarter of 2008. Operating income increased 7.7% to $7 million, eclipsing the previous record of 6.5 million, set in the second quarter of 2007. What is particularly impressive about this is that we believe we are gaining market share as North American demand has generally declined year-over-year. Our focus on in heightened investment in commercial initiatives and resources has allowed us to expand our presence in new higher-margin markets such as healthcare and consumer, which has more than offset declines in automotive and appliance markets. Our third platform, performance products and solutions, which no longer includes the resin and intermediate segment continues to be challenged by weak demand tied to the current economic environment, and escalating raw material costs.

For the second quarter of 2008, revenues declined 6.8% to 274 million, and operating income declined by $13.3 million to $5.3 million. This includes 1 million of charges taken for specific customer claims which were resolved during the quarter, and that we do not expect to recur. On the surface, these numbers are disappointing. However, we believe that they reflect better-than-expected performance given our housing and automotive market challenges confronting this business.

Housing starts for 2008 are expected to approximate 950,000 units compared to 1.4 million in 2007 and down considerably from the high of 2.1 million units started in 2005. In addition, the automotive market is continuing to see reduced production forecasts, from 16.1 million units last year to a revised forecast of 14.5 million this year, the lowest level since 1992. That being said, new business closers are better than they have ever been, and that this has allowed us to offset some of the market-driven demand decline. Led by Rob Rosenau and his team, we are positioning this business to grow by embracing our commercial and operational excellence initiatives.

We sometimes forget to highlight their efforts because of the market dynamics that overshadow them. We want to remind our investors, customers and suppliers that ours is the premier brand in this business and Performance Products and Solutions is one of our strategic platforms. It is a core business, and we are committed to its success. I would now like to comment on our financial position.

Last year we used the proceeds from the divestiture of our investment in Oxy Vinyls to pay off our 10-5/8 senior notes, allowing us to reduce interest expense by approximately $7 million per quarter. While we increased borrowings this year to fund the acquisition of GLS, total interest expense for the quarter was $4 million less then the prior year, excluding special items, and we remain confident that GLS will be accretive in 2008.

Current borrowing availability under our receivables security facility is approximately $143 million, and we have $60 million of cash on our balance sheet. We believe that our financial profile has never been stronger, and we have adequate liquidity and future cash flow to fund seasonal working capital requirements and strategic investments, including opportunistic all-time acquisitions.

I would now like to turn the call over to Steve, who will discuss our strategic transformation progress

Steve Newlin

Bob, thanks. I would like to begin by thanking the PolyOne leadership team and all of our employees for delivering a strong quarter. It has been two years since I joined the company; we began our journey of value creation. And during this time we focused on transforming the company from a commodity-based compounder to a premier global provider for value-added specialized polymer materials, services and solutions. I am convinced that our transformation process is working, and there is no better evidence than our results for the second quarter.

Today, we are facing the most challenging economic headwinds that this generation has ever seen, including unprecedented increase in raw material and energy costs, coupled with demand declines in our key markets, such as housing, construction and automotive. Yet we were able to report earnings growth for our shareholders. Our specialization strategy has led us to move our business mix away from commodities toward higher margin sustainable businesses, and as Bob mentioned earlier, a great example of this is our expanded market presence in healthcare.

During the first half of 2008, our healthcare customer revenues increased approximately 25% over the prior year. On an annualized basis, sales from this market are approaching a $180 million, and that is an increase of almost 60% from 2006.

Our active sales projects in this market have increased by over $80 million since the end of last year, and our efforts to globalize the new healthcare business team allow us to build strong momentum with new programs and technologies that are focused on metal and lead replacements, medical device innovations and an ability to reduce medical product costs associated with surface preparation.

We have invested in and lifted the skills of our global sales force to be more effective at pricing, selling and capturing value. But what I really like most about our success in the healthcare industry is that it illustrates our focus on winning new business in key markets, and that is a key element of our commercial excellence strategy. Through the first half of 2008, our company-wide new business closes have outpaced reported lost business by approximately $250 million. More importantly, within the specialty platform, this new business is generating gross margins that meet our objective of exceeding 25%.

One of the reasons we have been successful in growing new business has been the rate of new product introductions. Our vitality index, and you have heard us speak on this often, has increased to 17% of sales versus 13% in 2007. And that is a direct result of advancements in research and development, as well as, improved sales force training. We are teaching our sales force to understand customers' needs, and go beyond our current product portfolio in addressing them.

As a follow-up to the key new program launches we completed in 2007, we are seeing stronger business unit revenue projections. Our new product pipeline is showing promise with a number of opportunities being developed on platform technologies that we believe will be important for our future. Let me give you a specific example that was highlighted recently in plastics technology magazine, where we demonstrated heat resistance improvements in compounded PLA, which is Polylactic acid. That is a biopolymer, which has inherent heat resistance deficiency. We were very much encouraged by this development because it could well lead to more durable uses of polymer versus the disposable applications that today we are involved with.

Last week, the House of Senate passed an amendment to implement a ban on select phthalate plasticizers in products intended for sale of toys or childcare articles for children under 12 years of age. PolyOne has been developing solutions that provide options to comply with either legislative or market driven demands for alternatives to materials using phthalate plasticizers.

Our Performance Products and Solutions segment have the formulation experience and capability to deliver plastisol formulations to our customers in a manner compliant with the legislation currently in place or proposed. In the past, this approach was not seen as valued by some of our customers due to its inherently higher costs. However, this is changing with the impact of the current legislative initiatives.

In our Specialty Color Additives and Inks segment, an ongoing program is continuing to develop phthalate free alternatives under our trade name, Epic. This line has been growing due to an increased worldwide demand for non-phthalate inks for garments driven by the desire for major brands to be viewed as progressive with respect to these issues. In anticipation of the growth of non-phthalate demand, the Epic product line is under expansion to include a wider range of products.

And earlier this week, you probably saw, we issued a press release to announce an exclusive license agreement with Battelle for a series of bio-based plasticizer technology patents. This technology involves the manufacture of plasticizers from bio-based sources, such as soybean oils. So, I hope you can see we are taking a lot of steps to proactively identify unique renewable alternatives for customers who are looking for specialized solutions.

Earlier, Bob mentioned that International Color and Engineered Materials second quarter operating income increased organically by 20% over the same period a year ago. This has been led by our low-smoke halogen free product sales, which have increased almost 30% during the first half of 2008. Let me remind you that this product is making headwinds in new markets because it is an eco-friendly solution for flame-retardant applications. I would also like to add that operating income from our Europe Engineered Materials business increased five-fold to $1.4 million as a result of improved sales mix and ongoing pruning of unprofitable business.

Finally, on the topic of globalization, we recently announced that we will be opening a new manufacturing site and color lab in India, the world's fastest growing plastics market. This is an important milestone on our globalization strategy, and also reflects our drive for specialization. Construction at the facility is expected to begin later this year, with operations scheduled to commence in the middle of 2009. We also announced the opening of a new office in Japan to specifically target gaining specifications with Japanese OEMs and polymer processors. Both of these initiatives will be led by Dr. Willie Chien, our vice president and general manager of Asia.

As I said before, the specialty platform is becoming the growth engine of this company, but we are embracing the pillars of change in all our businesses. Our PolyOne distribution business delivered stellar performance this quarter under the leadership of Mike Rademacher and his team, and we believe our distribution, operating margins can improve to 45% return on sales with continued focus on commercial and operational excellence.

We have now reached a point where on-time delivery exceed 95%, and we have been taking market share in new industries such as healthcare and consumer products, which has allowed us to offset declines in the housing and automotive markets. Our sellers are equipped with tools to help our customers improve their profitability by reducing customers’ total operating cost. When we combine these solutions with new and innovative product and services we create customer loyalty and everybody wins, and that has never been more important than it is today.

Our specialty focus has allowed to weather an incredibly difficult market. However, as a result of the current economic conditions, and as a part of our operational excellence strategy devised before the economic turbulence, we recently announced our plans to reduce manufacturing capacity and re-align assets in North America. We believe that there has historically been excess capacity in this industry, and while decisions like this are never easy, this capacity reduction is needed to improve our near-term operating efficiency while advancing our longer-term strategic position.

I think it's really important to know this was not a knee-jerk reaction to a difficult market environment. Rather it's the culmination of a very in-depth, thorough and thoughtful review of our entire operation. Our ultimate decision was driven foremost by our concern for our customers and employees at a time when we are confident we can execute these actions without disruption to product quality, delivery or service. You heard me say before, we are not on a volume hunt at PolyOne. Too much capacity is not only wasteful, it drives poor business decisions leading to unprofitable, unattractive markets or customers. The dynamic nature of a targeted end market focus continues to shift our own mix, which requires manufacturing agility and flexibility. PolyOne's realignment reaffirms our commitment to creating value for employees, customers and shareholders.

And with that, I would like do hand the call back over to Bob to review the details of the realignment as well as comment on the outlook for the balance of the year. Bob?

Bob Patterson

Thanks, Steve. Over the next nine months we will close certain production facilities including seven in North America and one in the United Kingdom resulting in a net reduction of approximately 150 positions. Production at the effected facilities as well as several manufacturing lines will be moved to a limited number of the Company's more than 30 remaining plants. As a result of these actions, we expect to incur one-time charges of approximately $31 million, of which approximately $18 million are expected to be non-cash. These one-time charges will include costs related to severances and asset write-downs, which will be included in our financial results over the next three quarters.

We expect these actions to generate pre-tax savings of approximately $17 million or $0.12 per share on an after-tax basis.

These actions are part of our previously disclosed operational excellence target of $50 million in cumulative identified supply chain savings by 2011. We expect no disruption of service due to the company's focus on improved product quality, delivery systems and inventory management. In fact, we plan to invest approximately $12 million in additional capital expenditures at our remaining locations to support these changes and our ongoing customer requirements.

In our earnings release today, we outlined the key elements of our outlook for the balance of the year as follows. We anticipate continued economic uncertainty as well as continued raw material and energy cost pressure. While second half 2008 revenues are expected to grow approximately 15%, including GLS, compared to the second half of 2007, these afore-mentioned factors are expected to put downward pressure on earnings primarily in the Performance Products and Solutions segment.

Operating margin improvements in the Specialty and PolyOne Distribution platforms are expected to drive operating income growth for these platforms compared to third quarter 2007 levels. Third quarter operating income in the Performance Products and Solutions segment is projected to increase sequentially from the second quarter of this year, but remain below the year-ago level due to raw material cost inflation and continued weak end market demand. Resin and Intermediates operating income for the third quarter of 2008 is expected to approximate second quarter levels this year. Based on these projections, we expect full-year 2008 earnings before special items to exceed prior-year earnings before special items.

Now I would like to hand the call back do Steve for some final remarks.

Steve Newlin

Okay. Thanks, Bob. Let me just summarize by saying that for the year we expect to deliver earnings growth. I believe this would be a significant accomplishment given the challenging economic environment that we face in key end markets.

I would like to once again thank the PolyOne leadership team and all PolyOne employees. Their commitment and dedication have allowed us to improve earnings and drive shareholder value. Year-to-date, PolyOne's share price has increased roughly 25% while the S&P 500 has declined about 12%. And I believe that our share price can continue to advance at an accelerated pace as a result of the successful execution of our strategy.

If you were inside this organization, you would clearly see that PolyOne is a dramatically different company than it was two years ago. While we still have plenty of room to improve on all fronts of our transformational evolution, we are not waiting for the US economy to turn around to create value for our shareholders. We are winning new business and improving our margins everyday by providing our customers with new and innovative products, services and solutions.

And with that, I will turn the call back to the operator to open the line for questions. D’Wanda?

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