UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

POLYONE CORPORATION

Ohio		34-1730488
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)
33587 Walker Road, Avon Lake, Ohio		44012
(Address of principal executive offices)		(Zip Code)

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

Former name, former address and former fiscal year, in changed since last report: Not Applicable

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 þ No o

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

Large accelerated filer þ            Accelerated filer o            Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of outstanding shares of the registrant’s common stock, $0.01 par value, as of July 31, 2006 was 92,671,265.

 

 

EXPLANATORY NOTE

We are filing this Form 10-Q/A Amendment No. 1 (this Amendment) to amend and restate certain segment reporting and disclosure items and the financial statements that were included in our original Quarterly Report on Form 10-Q for the three months and six months ended June 30, 2006.

These changes are being made to reflect an increase in the number of our operating and reportable segments in response to comments from the Staff of the Securities and Exchange Commission in the course of its review of our Annual Report on Form 10-K for the year ended December 31, 2005.

We re-evaluated our operating segments and reportable segments under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131), and, as a result, we changed from three operating and reportable segments (Performance Plastics, PolyOne Distribution, and Resin and Intermediates) to nine operating and five reportable segments in 2006. Our new reportable segments are Vinyl Compounds, Specialty Resins, International Color and Engineered Materials, PolyOne Distribution, and Resin and Intermediates, as well as an All Other segment. All Other consists of our North American Color and Additives, North American Engineered Materials, Producer Services and Polymer Coating Systems operating segments, each of which does not meet the quantitative thresholds that would require separate disclosure as a reportable segment. Effective with the first quarter of 2006, Producer Services, a new operating segment, was formed from portions of the North American Color and Additives and the North American Engineered Materials operating segments. As a result, North American Color and Additives, which was reflected as a reportable segment in 2005, no longer meets, nor is expected to meet in 2006, the quantitative thresholds that would require separate disclosure as a reportable segment and is now included in the All Other segment. The 2005 historical information has been revised to provide a comparable basis to the 2006 segment presentation.

The changes in our operating and reportable segments had the related effect of increasing the number of our reporting units for the purpose of assessing goodwill impairment under SFAS No. 142, “Goodwill and Other Intangible Assets.” Under our previous segment reporting, we had three reporting units, but we now consider each of our operating segments to be an individual reporting unit.

As a result of this change in our reporting units, we reassessed goodwill impairment of the new reporting units as of December 31, 2003 (the effective date that our operating segments changed), and again as of July 1, 2004 and July 1, 2005. Under SFAS No. 142, goodwill of each reporting unit must be reviewed for impairment on at least an annual basis. The evaluations in 2004 and 2005 were performed as of July 1 of each year because we had previously chosen July 1 as our annual goodwill impairment testing date. These impairment reviews resulted in a noncash pre-tax and after-tax (after consideration of a tax valuation allowance) goodwill impairment charge of $28.3 million, or $0.31 per diluted share, for the year ended December 31, 2003, which reduced goodwill and shareholders’ equity by $28.3 million. The 2004 and 2005 annual impairment tests did not result in any further goodwill impairment.

As a result of this charge in 2003, we had goodwill of $287.0 million and total shareholders’ equity of $487.0 million at June 30, 2006, compared to goodwill of $315.3 million and total shareholders’ equity of $515.3 million as originally reported. As of December 31, 2005, we had goodwill of $287.0 million and total shareholders’ equity of $387.4 million, compared to goodwill of $315.3 million and total shareholders’ equity of $415.7 million as originally reported.

We also determined that a control deficiency regarding how we determined our operating and reportable segments under SFAS No. 131 and, as a result, our reporting units under SFAS No. 142, gave rise to these restatements, and that this constituted a material weakness in our internal control over financial reporting. Accordingly, we have re-evaluated our disclosure controls and procedures as of June 30, 2006 in light of this material weakness in our internal control over financial reporting. We have fully remediated this weakness as of the date of this Amendment. See Item 4 — Controls and Procedures in Part I of this Amendment for additional information.

For the convenience of the reader, this Amendment sets forth the entire Form 10-Q for the three months and six months ended June 30, 2006. However, this Amendment amends and restates only Items 1, 2 and 4 of Part I of the Form 10-Q. The other Items are not being amended. Except as described in this Explanatory Note, this Amendment does not modify or update the disclosures in our 2006 Form 10-Q for the three months and six months ended

June 30, 2006. Therefore, this Amendment does not reflect any other events that occurred after the original August 2, 2006 filing date of the Form 10-Q.

Forward-looking statements in this Amendment have also not been updated from our original Form 10-Q that we filed on August 2, 2006. For updated information, please see the reports that we have filed for subsequent periods.

Part I — Financial Information

Item 1. Financial Statements

PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Sales		$	686.4			$	620.4			$	1,361.0			$	1,232.2
Operating costs and expenses:
Cost of sales			592.7				538.7				1,176.3				1,072.0
Selling and administrative			49.9				47.8				99.2				94.9
Depreciation and amortization			14.3				12.4				28.6				24.9
Employee separation and plant phaseout			(0.2	)			0.4				(0.3	)			0.6
Environmental remediation at inactive sites			(2.3	)			—				(4.1	)			—
Income from equity affiliates and minority interest			(31.5	)			(32.1	)			(70.1	)			(58.1	)
Operating income			63.5				53.2				131.4				97.9
Interest expense			(16.8	)			(17.4	)			(33.4	)			(34.2	)
Interest income			0.8				0.4				1.3				0.9
Premium on early extinguishment of long-term debt			(1.2	)			—				(1.2	)			—
Other expense, net			(1.5	)			(0.8	)			(2.7	)			(1.6	)
Income before income taxes and discontinued operations			44.8				35.4				95.4				63.0
Income tax expense			(2.4	)			(2.4	)			(4.1	)			(5.0	)
Income before discontinued operations			42.4				33.0				91.3				58.0
Loss from discontinued operations, net of income taxes			—				(1.7	)			(2.1	)			(13.3	)
Net income		$	42.4			$	31.3			$	89.2			$	44.7
Earnings (loss) per common share:
Basic earnings (loss):
Before discontinued operations		$	0.46			$	0.36			$	0.99			$	0.63
Discontinued operations			—				(0.02	)			(0.02	)			(0.14	)
Basic earnings per share		$	0.46			$	0.34			$	0.97			$	0.49
Diluted earnings (loss):
Before discontinued operations		$	0.46			$	0.36			$	0.99			$	0.63
Discontinued operations			—				(0.02	)			(0.03	)			(0.14	)
Diluted earnings per share		$	0.46			$	0.34			$	0.96			$	0.49
Weighted average shares used to compute earnings per share:
Basic			92.4				91.8				92.2				91.8
Diluted			93.0				92.1				92.6				92.1
Dividends paid per share of common stock		$	—			$	—			$	—			$	—

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In millions)

		June 30,				December 31,
		2006				2005
		(restated)				(restated)
Assets
Current assets:
Cash and cash equivalents		$	75.0			$	32.8
Accounts receivable, net			379.9				320.5
Inventories			228.2				191.8
Deferred income tax assets			19.6				20.1
Other current assets			18.2				27.4
Discontinued operations			—				20.9
Total current assets			720.9				613.5
Property, net			423.0				436.0
Investment in equity affiliates			302.7				273.9
Goodwill			287.0				287.0
Other intangible assets, net			9.6				10.6
Other non-current assets			64.4				60.0
Discontinued operations			—				6.7
Total assets		$	1,807.6			$	1,687.7
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term bank debt		$	4.6			$	7.1
Accounts payable			277.3				232.6
Accrued expenses			84.9				82.4
Current portion of long-term debt			19.3				0.7
Discontinued operations			—				11.2
Total current liabilities			386.1				334.0
Long-term debt			603.7				638.7
Post-retirement benefits other than pensions			103.5				107.9
Other non-current liabilities, including pensions			221.4				214.3
Minority interest in consolidated subsidiaries			5.9				5.4
Total liabilities			1,320.6				1,300.3
Shareholders’ equity			487.0				387.4
Total liabilities and shareholders’ equity		$	1,807.6			$	1,687.7

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)

		Six Months Ended
		June 30,
		2006				2005
						(revised -
						see note C)
Operating Activities
Net income		$	89.2			$	44.7
Adjustments to reconcile net income to net cash provided by operating activities:
Employee separation and plant phaseout charge (benefit)			(0.3	)			0.6
Cash payments for employee separation and plant phaseout			(1.2	)			(1.9	)
Environmental remediation insurance benefit, net of charges at inactive sites			(4.1	)			—
Environmental remediation insurance receipts, net of (spending) at inactive sites			4.9				(9.9	)
Depreciation and amortization			28.6				24.9
Premium on early extinguishment of long term debt			1.2				—
Loss on disposition of discontinued businesses and related plant phaseout charge			2.3				11.6
Companies carried at equity and minority interest:
Income from equity affiliates and minority interest			(70.1	)			(58.1	)
Dividends and distributions received			42.2				19.2
Provision for deferred income taxes			0.5				0.9
Change in assets and liabilities:
Accounts receivable			(43.4	)			(53.2	)
Inventories			(16.4	)			(9.4	)
Accounts payable			31.7				16.3
Increase (decrease) in sale of accounts receivable			(7.9	)			38.6
Accrued expenses and other			(10.9	)			(17.9	)
Net cash (used) provided by discontinued operations			2.9				4.7
Net cash provided by operating activities			49.2				11.1
Investing Activities
Capital expenditures			(15.5	)			(18.0	)
Business acquisitions, net of cash received			—				(2.7	)
Proceeds from sale of assets			7.2				8.4
Proceeds from sale of discontinued business, net			17.3				—
Net cash used by discontinued operations			(0.2	)			(0.7	)
Net cash provided (used) by investing activities			8.8				(13.0	)
Financing Activities
Change in short-term debt			(2.4	)			1.0
Repayment of long-term debt			(17.0	)			(1.5	)
Proceeds from exercise of stock options			2.8				0.3
Net cash used by financing activities			(16.6	)			(0.2	)
Effect of exchange rate changes on cash			0.8				(1.8	)
Increase (decrease) in cash and cash equivalents			42.2				(3.9	)
Cash and cash equivalents at beginning of period			32.8				38.6
Cash and cash equivalents at end of period		$	75.0			$	34.7

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(Dollars in millions, shares in thousands)

						Common																				Common				Accumulated
						Shares												Additional				Retained				Stock Held				Other
		Common				Held in								Common				Paid-In				Earnings				in				Comprehensive
		Shares				Treasury				Total				Stock				Capital				(Deficit)				Treasury				Income
										(restated)												(restated)
Balance January 1, 2005			122,192				30,480			$	352.1			$	1.2			$	1,067.2			$	(237.2	)		$	(339.0	)		$	(140.1	)
Comprehensive income:
Net income											13.4												13.4
Translation adjustment											(5.3	)																			(5.3	)
Total comprehensive income											8.1
Stock-based compensation and benefits							(98	)			1.0								(0.2	)							0.9				0.3
Balance March 31, 2005			122,192				30,382			$	361.2			$	1.2			$	1,067.0			$	(223.8	)		$	(338.1	)		$	(145.1	)
Comprehensive income:
Net income											31.3												31.3
Translation adjustment											(6.0	)																			(6.0	)
Total comprehensive income											25.3
Stock-based compensation and benefits							(36	)			(0.9	)							(0.2	)							0.2				(0.9	)
Balance June 30, 2005			122,192				30,346			$	385.6			$	1.2			$	1,066.8			$	(192.5	)		$	(337.9	)		$	(152.0	)
Balance January 1, 2006			122,192				30,255			$	387.4			$	1.2			$	1,066.4			$	(190.3	)		$	(337.1	)		$	(152.8	)
Comprehensive income:
Net income											46.8												46.8
Translation adjustment											0.9																				0.9
Total comprehensive Income											47.7
Stock-based compensation and benefits							(550	)			3.1								(0.2	)							4.0				(0.7	)
Balance March 31, 2006			122,192				29,705			$	438.2			$	1.2			$	1,066.2			$	(143.5	)		$	(333.1	)		$	(152.6	)
Comprehensive income:
Net income											42.4												42.4
Translation adjustment											5.2																				5.2
Total comprehensive Income											47.6
Stock-based compensation and benefits							(163	)			1.2								(0.3	)							1.5
Balance June 30, 2006			122,192				29,542			$	487.0			$	1.2			$	1,065.9			$	(101.1	)		$	(331.6	)		$	(147.4	)

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Annual Report on Form 10-K/A for the year ended December 31, 2005 of PolyOne Corporation.

Operating results for the three-month and six-month periods ended June 30, 2006 are not necessarily indicative of the results that may be attained in subsequent quarters or for the year ending December 31, 2006.

PolyOne sold 82% of its Engineered Films business in February 2006. Since the fourth quarter of 2003, it has been treated as a discontinued operation. As a result, all historical information included in this quarterly report for this business is presented as a discontinued operation. Unless otherwise noted, the disclosures in these financial statements pertain to PolyOne’s continuing operations.

In December 2005, PolyOne announced that the Specialty Resins divestment process was unlikely to result in a sale of the business at acceptable terms. As a result, its financial results were reclassified from discontinued operations to continuing operations for all historic periods presented.

Note B — Restatement

The Company has revised the number of its operating and reportable segments as determined under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” in response to comments from the Staff of the Securities and Exchange Commission in the course of its review of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The Company’s historical presentation of segment information that was included in the Company’s Form 10-Q for the three and six month periods ended June 30, 2006, as originally filed, consisted of three operating and reportable segments: Performance Plastics, PolyOne Distribution, and Resin and Intermediates. The Company’s restated presentation in 2006 consists of nine operating and five reportable segments. The reportable segments are Vinyl Compounds, Specialty Resins, International Color and Engineered Materials, PolyOne Distribution, and Resin and Intermediates, as well as an All Other segment. The All Other segment includes the North American Color and Additives, North American Engineered Materials, Producer Services and Polymer Coating Systems operating segments, each of which does not meet, nor is expected to meet in 2006, the quantitative thresholds that would require separate disclosure as a reportable segment. The amounts in Note O — Segment Information reflect this restatement. Effective with the first quarter of 2006, Producer Services, a new operating segment, was formed from portions of the North American Color and Additives and the North American Engineered Materials operating segments. As a result, North American Color and Additives, which was reflected as a reportable segment in 2005, no longer meets, nor is expected to meet in 2006, the quantitative thresholds that would require separate disclosure as a reportable segment and is now included in the All Other segment. The 2005 historical information has been revised to provide a comparable basis to the 2006 segment presentation.

These changes in operating and reportable segments had the related effect of increasing the number of reporting units for the purpose of assessing goodwill impairment under SFAS No. 142, “Goodwill and Other Intangible Assets.” PolyOne’s evaluation of goodwill historically included the three reporting units with goodwill: Plastic Colors and Compounds, Polymer Coating Systems and PolyOne Distribution. As a result of the change in PolyOne’s segments, each operating segment was considered to be a reporting unit, of which six had a goodwill balance at December 31, 2003. These six reporting units were Vinyl Compounds, North American Color and Additives, North American Engineered Materials, International Color and Engineered Materials, Polymer Coating Systems and PolyOne Distribution.

The Company performed goodwill impairment reviews of the revised reporting units as of December 31, 2003 (the effective date that the operating segments changed), and again as of July 1, 2004 and July 1, 2005. These impairment reviews resulted in a pre-tax and after-tax (after consideration of a tax valuation allowance) noncash goodwill impairment charge of $28.3 million, or $0.31 per diluted share, for the year ended December 31, 2003, which reduced goodwill and shareholders’ equity by $28.3 million.

As a result of this charge, the Consolidated Balance Sheets at June 30, 2006 reflect goodwill of $287.0 million, total shareholders’ equity of $487.0 million and total assets of $1,807.6 million compared to goodwill of $315.3 million, total shareholders’ equity of $515.3 million and total assets of $1,835.9 million as originally reported. As of December 31, 2005, goodwill was $287.0 million, total shareholders’ equity was $387.4 million and total assets were $1,687.7 million compared to goodwill of $315.3 million, total shareholders’ equity of $415.7 million and total assets of $1,716.0 million as originally reported.

The Consolidated Statements of Shareholders’ Equity at June 30, 2006 reflect a retained deficit and total equity of $101.1 million and $487.0 million, respectively, compared to $72.8 million and $515.3 million, respectively, as originally reported. At January 1, 2006, the retained deficit and total equity are $190.3 million and $387.4 million, respectively, compared to $162.0 million and $415.7 million, respectively, as originally reported. At June 30, 2005, the retained deficit and total equity are $192.5 million and $385.6 million, respectively, compared to $164.2 million and $413.9 million, respectively, as originally reported. At March 31, 2005, the retained deficit and total equity are $223.8 million and $361.2 million, respectively, compared to $195.5 million and $389.5 million, respectively, as originally reported. At January 1, 2005, the retained deficit and total equity are $237.2 million and $352.1 million, respectively, compared to $208.9 million and $380.4 million, respectively, as originally reported.

For more information regarding goodwill, see Note E.

Note C — Discontinued Operations

PolyOne sold 82% of its Engineered Films business in February 2006 to an investor group consisting of members of the business unit’s management team and Matrix Films, LLC for gross proceeds of $26.7 million before associated fees and costs. A cash payment of $20.5 million was received on the closing date and the remaining $6.2 million was in the form of a five-year note from the buyer. PolyOne retained an 18% ownership interest in the company. Under Emerging Issues Task Force (EITF) 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations,” when a business is sold with a retained interest, the cost method of accounting is appropriate if the disposal group qualifies as a component of an entity, the selling entity has no significant influence or continuing involvement in the new entity, and the operations and cash flows of the business being sold will be eliminated from the ongoing operations of the company selling it. The Engineered Films business qualified as a component of an entity, and PolyOne has no significant influence or continuing involvement in the new entity. Activities that would be considered continuing cash flows (consisting of warehousing and short-term transitional services) amount to less than one

percent of the new entity’s corresponding costs and, therefore, are not considered significant. The operations and cash flows of the business sold have been eliminated from the financial statements of the ongoing operations of PolyOne. PolyOne also considered the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities,” and determined that the new entity is not a variable interest entity subject to consolidation. As a result, the retained minority interest investment in the Engineered Films business is reported on the cost method of accounting.

Included in the results of the first six months of 2006 was a pre-tax charge of $2.3 million to adjust the net assets of the Engineered Films business to the net proceeds that were received and to recognize costs that were not able to be recognized until the Engineered Films business was sold due to the contingent nature of these costs, as required by generally accepted accounting principles. For the six-month period ended June 30, 2005, a pre-tax charge of $10.9 million was recorded to adjust the net assets of the Engineered Films business to the projected net proceeds to be received from the sale.
The following table summarizes the results for businesses that were reported as discontinued operations for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In millions)		2006				2005				2006				2005
Sales		$	—			$	31.1			$	9.6			$	61.1
Pre-tax income (loss) from operations		$	—			$	(1.7	)		$	0.2			$	(1.7	)
Pre-tax loss on disposition of business			—				—				(2.3	)			(11.6	)
Income tax expense (net of valuation allowance)			—				—				—				—
Loss from discontinued operations		$	—			$	(1.7	)		$	(2.1	)		$	(13.3	)

Note D — Accounting Policies

Share-Based Compensation — As of June 30, 2006, PolyOne has one active share-based employee compensation plan, which is described more fully in Note I to the Condensed Consolidated Financial Statements. Prior to January 1, 2006, PolyOne accounted for share-based compensation under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). Under APB No. 25, compensation cost for stock options was measured as the excess, if any, of the quoted market price of PolyOne common stock at the date of the grant over the amount an option holder must pay to acquire the common stock. Compensation cost for stock appreciation rights (SARs) was recognized upon vesting as the amount by which the quoted market value of the shares of PolyOne common stock covered by the grant exceeded the SARs specified value.

On January 1, 2006, PolyOne adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment” (SFAS No. 123(R)), using the modified prospective transition method. SFAS No. 123(R) requires the Company to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations. Under the modified prospective transition method, compensation cost recognized during the three-month and six-month periods ended June 30, 2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, plus (b) compensation cost

for all share-based payments granted on or subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Condensed Consolidated Financial Statements as of and for the three-month and six-month periods ended June 30, 2006 reflect the impact of SFAS No. 123(R). In accordance with the modified prospective transition method, the Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). Total share-based compensation cost for the three-month and six-month periods ended June 30, 2006 was $0.8 million and $2.2 million, respectively, net of tax. The adoption of SFAS No. 123(R) on January 1, 2006 resulted in compensation cost for the three-month period ended June 30, 2006 of $0.8 million more than what it would have been under APB No. 25, or $0.01 per share. For the six months ended June 30, 2006, the compensation cost recorded under SFAS No. 123(R) was $2.2 million, or $0.2 per share, which is the same amount that would have been recognized under APB No. 25.

SFAS No. 123(R) requires that the benefits of tax deductions in excess of compensation cost recognized be reported as a financing cash flow, rather than as an operating cash flow as was previously required. This requirement will reduce net operating cash flows and increase net financing cash flows. However, because PolyOne is in a net operating loss carryforward position for income taxes, there was no impact on its cash flow statement for the six-month period ended June 30, 2006.

The following table illustrates the effect on net income and income per share for the three-month and six-month periods ended June 30, 2005 as if PolyOne had applied the fair value recognition provisions of SFAS No. 123 to share-based employee compensation using the fair value estimate computed by the Black-Scholes-Merton option-pricing model for the three-month and six-month periods ended June 30, 2005. The Black-Scholes-Merton option-pricing model was developed to estimate the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models use highly subjective assumptions, including expected share price volatility.

		Three Months				Six Months
		Ended				Ended
(In millions, except per share data)		June 30, 2005				June 30, 2005
Net income, as reported		$	31.3			$	44.7
Add: Total share-based employee compensation benefit included in reported net income, net of tax			(0.8	)			(0.4	)
Deduct: Total share-based employee compensation expense determined under the fair value-based method for all awards, net of tax			(1.0	)			(2.0	)
Pro forma net income		$	29.5			$	42.3
Net earnings per share:
Basic and diluted — as reported		$	0.34			$	0.49
Basic and diluted — pro forma		$	0.32			$	0.46

New Accounting Pronouncements — In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires these items to be recognized as current-period charges and that fixed production overhead be allocated to conversion costs based on the normal capacity of the associated production facilities. PolyOne adopted SFAS No. 151 effective January 1, 2006. The adoption of SFAS No. 151 has not had, nor is it expected to have, a material impact on the Company’s financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting

pronouncement that do not include explicit transition provisions. SFAS No. 154 requires changes in accounting principle to be applied retroactively, instead of including the cumulative effect in the income statement. The correction of an error will continue to require financial statement restatement. A change in accounting estimate will continue to be accounted for in the period of change and in subsequent periods, if necessary. PolyOne adopted SFAS No. 154 as of January 1, 2006. The adoption of SFAS No. 154 has not had, nor is it expected to have, a material impact on the Company’s financial position or results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” which is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is currently evaluating the impact the adoption of FIN 48 may have on its financial statements.

Use of Estimates — The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during these periods. Significant estimates in these Condensed Consolidated Financial Statements include, but are not limited to, sales discounts and rebates, restructuring charges, allowances for doubtful accounts, estimates of future cash flows associated with assets, asset impairments, useful lives for depreciation and amortization, loss contingencies, net realizable value of inventories, environmental and asbestos-related liabilities, income taxes and tax valuation reserves, goodwill, and the determination of discount and other rate assumptions that are used to determine pension and post-retirement employee benefit expenses. Actual results could differ from these estimates.

Reclassification — Certain amounts for 2005 have been reclassified to conform to the 2006 presentation.

Consolidated Statements of Cash Flows — For the six months ended June 30, 2005, PolyOne has separately disclosed the operating, investing and financing portions of the cash flows that were attributable to its discontinued operations to conform with the presentation shown for the six months ended June 30, 2006 and with the presentation in PolyOne’s Annual Report on Form 10-K/A for the year ended December 31, 2005. In periods prior to December 31, 2005, cash flows that were attributable to discontinued operations were reported on a combined basis on one separate line item.

Note E — Goodwill and Intangible Assets (restated)

During the six months ended June 30, 2006, there were no acquisitions, disposals or impairment of PolyOne’s goodwill. Goodwill as of June 30, 2006 and December 31, 2005, by operating segment, was as follows:

		June 30,				December 31,
(In millions)		2006				2005
Vinyl Compounds		$	152.3			$	152.3
International Color and Engineered Materials			72.0				72.0
Polymer Coating Systems			61.1				61.1
PolyOne Distribution			1.6				1.6
Total		$	287.0			$	287.0

Information regarding PolyOne’s other intangible assets follows:

		As of June 30, 2006
		Acquisition				Accumulated				Currency
(In millions)		Cost				Amortization				Translation				Net
Non-contractual customer relationships		$	8.6			$	(5.9	)		$	—			$	2.7
Sales contract			9.6				(8.7	)			—				0.9
Patents, technology and other			7.3				(2.4	)			1.1				6.0
Total		$	25.5			$	(17.0	)		$	1.1			$	9.6

		As of December 31, 2005
		Acquisition				Accumulated				Currency
(In millions)		Cost				Amortization				Translation				Net
Non-contractual customer relationships		$	8.6			$	(5.6	)		$	—			$	3.0
Sales contract			9.6				(8.4	)			—				1.2
Patents, technology and other			7.3				(2.0	)			1.1				6.4
Total		$	25.5			$	(16.0	)		$	1.1			$	10.6

Amortization of other intangible assets was $0.4 million and $0.6 million for the three-month periods ended June 30, 2006 and 2005, respectively, and $1.0 million and $1.3 million for the six-month periods ended June 30, 2006 and 2005, respectively.

The carrying values of intangible assets and other investments are adjusted to the estimated net future cash flows based upon an evaluation done each year end, or more often, when indicators of impairment exist. For the six-month period ended June 30, 2006 there were no indicators of impairment for either goodwill or intangible assets.

Note F — Inventories

Components of inventories are as follows:

		June 30,				December 31,
(In millions)		2006				2005
Finished products and in-process inventories		$	172.7			$	155.0
Raw materials and supplies			96.3				86.8
			269.0				241.8
LIFO reserve			(40.8	)			(50.0	)
Total		$	228.2			$	191.8

Note G — Income Taxes

Income tax expense for each of the three months ended June 30, 2006 and 2005 was $2.4 million. For the six months ended June 30, 2006 and 2005, income tax expense was $4.1 million and $5.0 million, respectively. The effective tax rate for each period presented is lower than the federal statutory rate due to utilizing net operating loss carryforwards for which valuation allowances had been previously provided. For the second quarter and first half of 2006, a tax provision was recorded for federal alternative minimum tax, various state income taxes and foreign taxes. A domestic tax provision was not applied against income before income taxes in either the second quarter or the first half of 2005. Tax expense for 2005 represents foreign taxes. In accordance with SFAS No. 109, “Accounting for Income Taxes,” due to the uncertainty regarding the full utilization of the Company’s deferred income taxes,

PolyOne intends to maintain the valuation allowance until additional realization events occur, including the generation of future sustainable taxable income, that would support reversal of all or a portion of the allowance. Tax expense for each period primarily represents foreign, state and local taxes, while tax expense for the second quarter and first half of 2006 also includes $0.3 million and $0.5 million, respectively, for federal alternative minimum taxes.

Note H — Investment in Equity Affiliates

PolyOne’s Resin and Intermediates segment consists primarily of investments in equity affiliates. PolyOne owns 24% of Oxy Vinyls, LP (OxyVinyls), a manufacturer and marketer of PVC resins. OxyVinyls is a leading producer of PVC resins in North America. The following table presents OxyVinyls’ summarized financial results for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in millions)		2006				2005				2006				2005
Net sales		$	647.2			$	621.4			$	1,340.3			$	1,236.9
Operating income			62.9				97.6				169.8				181.7
Partnership income as reported by OxyVinyls			68.1				82.3				170.0				144.6
PolyOne’s ownership of OxyVinyls			24	%			24	%			24	%			24	%
PolyOne’s proportionate share of OxyVinyls’ earnings			16.3				19.8				40.8				34.7
Amortization of the difference between PolyOne’s investment and its underlying share of OxyVinyls’ equity			0.2				0.1				0.3				0.3
Equity affiliate earnings recorded by PolyOne		$	16.5			$	19.9			$	41.1			$	35.0

		June 30,				December 31,
(In millions)		2006				2005
Current assets		$	457.6			$	467.3
Non-current assets			1,265.0				1,234.8
Total assets			1,722.6				1,702.1
Current liabilities			264.4				276.0
Non-current liabilities			328.1				376.0
Total liabilities			592.5				652.0
Partnership capital		$	1,130.1			$	1,050.1

PolyOne also owns 50% of SunBelt Chlor-Alkali Partnership (SunBelt). The following table presents SunBelt’s summarized financial results for the periods indicated:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in millions)		2006				2005				2006				2005
Net sales		$	51.6			$	43.0			$	95.7			$	81.5
Operating income			29.7				23.4				57.4				44.4
Partnership income as reported by SunBelt			27.4				20.7				52.6				38.9
PolyOne’s ownership of SunBelt			50	%			50	%			50	%			50	%
Equity affiliate earnings recorded by PolyOne		$	13.7			$	10.4			$	26.3			$	19.5

		June 30,				December 31,
(In millions)		2006				2005
Current assets		$	48.4			$	28.4
Non-current assets			114.8				120.5
Total assets			163.2				148.9
Current liabilities			18.5				19.4
Non-current liabilities			134.1				134.1
Total liabilities			152.6				153.5
Partnership capital (deficit)		$	10.6			$	(4.6	)

OxyVinyls purchases chlorine from SunBelt under an agreement that expires in 2094. The agreement requires OxyVinyls to purchase all of the chlorine produced by SunBelt up to 250,000 tons per year at market price, less a discount.

The All Other segment includes DH Compounding Company equity affiliate (owned 50% and included in the Producer Services segment) and BayOne Urethane Systems, L.L.C equity affiliate (owned 50% and included in the Polymer Coating Systems segment). The Vinyl Compounds segment includes Geon/Polimeros Andinos equity affiliate (owned 50%). Combined summarized financial information for these equity affiliates is presented below. The amounts shown represent the entire operations of these businesses.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In millions)		2006				2005				2006				2005
Net sales		$	34.3			$	33.2			$	65.9			$	64.0
Operating income		$	3.4			$	3.7			$	6.6			$	7.5
Net income		$	3.0			$	3.5			$	6.0			$	6.9

Note I — Share-Based Compensation

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

PolyOne has one active share-based compensation plan, which is described below. The pre-tax and after-tax compensation cost recognized for the three months and six months ended June 30, 2006 was $0.8 million and $2.2 million, respectively. For the three months and six months ended June 30, 2005, PolyOne recognized a benefit of $0.8 million and $0.4 million, respectively. This activity is included in selling and administrative expenses in the Condensed Consolidated Statement of Operations.

2005 Equity and Performance Incentive Plan

In May 2005, PolyOne’s shareholders approved the PolyOne Corporation 2005 Equity and Performance Incentive Plan (2005 EPIP). All future grants and awards will be issued only from this plan. As a result, all previous equity-based plans were frozen in May 2005. The 2005 EPIP provides for the award of a broad variety of share-based compensation alternatives such as non-qualified stock options, incentive stock options, restricted stock, restricted stock units, performance shares, performance units and stock appreciation rights. Five million shares of common stock have been reserved for future grants and awards under the 2005 EPIP. It is anticipated that all share-based grants and awards that are exercised will be issued from shares of PolyOne common stock that are held in treasury.

Stock Appreciation Rights

During the first quarter of 2006, the Compensation and Governance Committee of the Company’s Board of Directors authorized the issuance of 1,029,300 stock appreciation rights (SARs). The awards were approved and communicated on January 4, 2006 for certain employees and on February 21, 2006 for the Chief Executive Officer. These dates have been used as the grant dates for valuation purposes. The grant date stock price was $6.51 for the January 4, 2006 grant and $9.19 for the February 21, 2006 grant. Vesting is based on a service period of one year and the achievement of stock price targets. This condition is considered a market-based measure under SFAS No. 123(R) and is considered in determining the grant’s fair value. This fair value is not subsequently revised for actual market price achievement, but rather is a fixed expense subject only to service-related forfeitures. The awards vest in one-third increments based on stock price achievement of $7.50, $8.50 and $10.00 per share, but may not be exercised earlier than one year from the date of the grant. The SARs have seven-year exercise periods that expire on January 4, 2013 and February 21, 2013.

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

		2006
Expected volatility		44.00%
Expected dividends		—
Expected term (in years)		3.7 - 4.3
Risk-free rate		4.26% - 4.57%
Value of SAR options granted		$2.63 - $3.82

In January 2005, the Compensation and Governance Committee authorized the issuance of 474,300 SARs. The fair value of the SARs was $4.18 per share and was calculated using the Black-Scholes-Merton valuation method. The SARs will be issued in shares of PolyOne common stock and vest in one-

third increments when PolyOne’s common stock price increases by 10%, 20% and 30% above the $8.94 per share base price. The SARs have a seven-year exercise period that expires on January 4, 2012.

In December 2003, the Compensation and Governance Committee authorized the issuance of 1,300,000 SARs with an exercise term of 36 months. The SARs will be issued in shares of PolyOne common stock and vest in one-third increments upon attaining target prices of $8.00, $9.00 and $10.00 per share of PolyOne’s common stock.

A summary of SAR activity under the 2005 EPIP as of June 30, 2006 and changes during the six months then ended are presented below:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares (in				Exercise				Contractual				Value (in
Stock Appreciation Rights		thousands)				Price				Term				millions)
Outstanding at January 1, 2006			1,528			$	7.40
Granted			1,029				6.96
Exercised			(422	)			6.13
Forfeited or expired			(90	)			7.36
Outstanding at June 30, 2006			2,045			$	7.45			4.9 years				$	3.1
Vested at June 30, 2006			1,068			$	7.53			5.3 years				$	1.6
Exercisable at June 30, 2006			417			$	8.37			3.5 years				$	0.4

There were no SARs granted during the three months ended June 30, 2006 and 2005. The total intrinsic value of SARs that were exercised during the three months ended June 30, 2006 and 2005 was $0.2 million and $0, respectively.

The weighted-average grant date fair value of SARs granted during the six months ended June 30, 2006 and 2005 was $2.70 and $4.18, respectively. The total intrinsic value of SARs that were exercised during the six months ended June 30, 2006 and 2005 was $0.9 million and $0.2 million, respectively.

As of June 30, 2006, there was $1.4 million of total unrecognized compensation cost related to SARs, which is expected to be recognized over a weighted-average period of one year.

Stock Options

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

A summary of option activity as of June 30, 2006 and changes during the six months then ended, is presented below:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares (in				Exercise				Contractual				Value (in
Stock Options		thousands)				Price				Term				millions)
Outstanding at January 1, 2006			9,115			$	11.55
Granted			—
Exercised			(394	)		$	6.81
Forfeited or expired			(947	)		$	11.68
Outstanding at June 30, 2006			7,774			$	11.76			3.17 years				$	2.3
Vested and exercisable at June 30, 2006			7,774			$	11.76			3.17 years				$	2.3

The total intrinsic value of stock options that were exercised during the six months ended June 30, 2006 and 2005 was $0.8 million and $0.1 million, respectively.

Cash received during the first six months of 2006 and 2005 from the exercise of stock options was $2.8 million and $0.3 million, respectively.

Performance Shares

In January 2005, the Compensation and Governance Committee authorized the issuance of performance shares to selected executives and other key employees. The performance shares vest only to the extent that management goals for cash flow, return on invested capital, and the level of earnings before interest, taxes, depreciation and amortization in relation to debt are achieved for the period commencing January 1, 2005 and ending December 31, 2007. The fair value of each performance share is equal to the grant date market price.

At December 31, 2005, there were 587,202 performance share awards outstanding with a weighted-average fair value of $8.94 per share. During the first quarter of 2006, an additional 87,000 performance share awards were issued with a weighted-average fair value of $9.19 per share. For the six months ended June 30, 2006, compensation cost of $0.5 million was recognized for these awards. As of June 30, 2006, based on projected performance attainment for the remaining life of the awards, the unrecognized compensation cost of these awards was approximately $1.1 million.

Restricted Stock Awards

On February 21, 2006, PolyOne issued 200,000 shares of restricted stock as part of the compensation package for its new Chief Executive Officer. The value of the restricted shares was established using the market price of PolyOne’s common stock on the date of the grant. Compensation expense is being recorded on a straight-line basis over the three-year cliff restricted stock vesting period. As of June 30, 2006, all 200,000 shares remain unvested with a weighted-average grant date fair value of $8.84 per share and a weighted-average remaining contractual term of 32 months. Compensation expense recorded in the first six months of 2006 was $0.2 million. Unrecognized compensation cost for restricted stock awards at June 30, 2006 was $1.6 million.

Note J — Earnings Per Share Computation

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In millions)		2006				2005				2006				2005
Weighted-average shares outstanding — basic			92.4				91.8				92.2				91.8
Weighted-average shares — diluted:
Weighted-average shares outstanding — basic			92.4				91.8				92.2				91.8
Plus dilutive impact of stock options and stock awards			0.6				0.3				0.4				0.3
Weighted-average shares — diluted			93.0				92.1				92.6				92.1

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

Outstanding stock options with exercise prices greater than the average price of the common shares are anti-dilutive and are not included in the computation of diluted earnings per share. The number of anti-dilutive options and awards was 7.7 million at June 30, 2006 and 9.3 million at June 30, 2005.

Note K — Employee Separation and Plant Phaseout

Since the formation of PolyOne in 2000, management has undertaken several restructuring initiatives to improve profitability and, as a result, PolyOne has incurred employee separation and plant phaseout costs. For further discussion of these initiatives, see Note F to the Consolidated Financial Statements included in PolyOne’s Annual Report on Form 10-K/A for the year ended December 31, 2005.

2006 Charges — Operating income for the six months ended June 30, 2006 includes a $0.5 million charge related to the closing of the Manchester, England color additives facility, which was included in the International Color and Engineered Materials segment. During the first six months of 2006, two additional employees were affected by the closing and all 24 remaining employees were terminated.

During the six months ended June 30, 2006, PolyOne recognized a net benefit of $0.8 million, which was comprised of a gain on sale of its Burlington vinyl compound plant of $2.7 million, impairment charges of $2.2 million to write down to net realizable value two plants held for sale, and a net benefit of $0.3 million on the sale of its Yerrington engineered films facility and its Somerset color and additives facility.

The net benefit for the three months and six months ended June 30, 2006 of $0.2 million and $0.3 million, respectively, is included as a separate line item “Employee separation and plant phaseout” in the Condensed Consolidated Statement of Operations for the three months and six months ended June 30, 2006.

The following table summarizes the movement of the reserves associated with each of these initiatives from December 31, 2005 to June 30, 2006:

(In millions, except employee numbers)		Employee Separation								Plant Phaseout Costs
		Number of								Cash				Asset Write-
Closure and exit of Manchester, England Color Additives facility		Employees				Costs				Closure				Downs				Total
Balance at December 31, 2005			22			$	—			$	—			$	—			$	—
Continuing operations charge			2				0.5				—				—				0.5
Utilized			(24	)			(0.5	)			—				—				(0.5	)
Balance at June 30, 2006			—			$	—			$	—			$	—			$	—

		Employee Separation								Plant Phaseout Costs
		Number of								Cash				Asset Write-
Executive severance		Employees				Costs				Closure				Downs				Total
Balance at December 31, 2005			—			$	2.5			$	—			$	—			$	2.5
Utilized			—				(0.7	)			—				—				(0.7	)
Balance at June 30, 2006			—			$	1.8			$	—			$	—			$	1.8

		Employee Separation								Plant Phaseout Costs
		Number of								Cash				Asset Write-
Sale of previously closed facilities		Employees				Costs				Closure				Downs				Total
Balance at December 31, 2005			—			$	—			$	—			$	—			$	—
Continuing operations (benefit)			—				—				—				(0.8	)			(0.8	)
Utilized			—				—				—				0.8				0.8
Balance at June 30, 2006			—			$	—			$	—			$	—			$	—

		Employee Separation								Plant Phaseout Costs
		Number of								Cash				Asset Write-
Total		Employees				Costs				Closure				Downs				Total
Balance at December 31, 2005			22			$	2.5			$	—			$	—			$	2.5
Continuing operations charge (benefit)			2				0.5				—				(0.8	)			(0.3	)
Utilized			(24	)			(1.2	)			—				0.8				(0.4	)
Balance at June 30, 2006			—			$	1.8			$	—			$	—			$	1.8

Note L — Employee Benefit Plans

Components of defined benefit pension plan costs are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In millions)		2006				2005				2006				2005
Service cost		$	0.4			$	0.2			$	0.7			$	0.4
Interest cost			7.4				7.1				14.9				14.2
Expected return on plan assets			(7.5	)			(7.8	)			(15.1	)			(15.5	)
Amortization of unrecognized losses, transition obligation and prior service cost			3.6				3.4				7.3				6.8
		$	3.9			$	2.9			$	7.8			$	5.9

No minimum pension funding payment is expected to be required in 2006.

Components of post-retirement health care plan benefit costs are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In millions)		2006				2005				2006				2005
Service cost		$	0.1			$	0.2			$	0.2			$	0.3
Interest cost			1.4				1.5				2.8				3.1
Expected return on plan assets			—				—				—				—
Amortization of unrecognized losses, transition obligation and prior service cost			(0.9	)			(0.7	)			(1.8	)			(1.3	)
		$	0.6			$	1.0			$	1.2			$	2.1

Note M — Financing Arrangements

PolyOne is exposed to market risk from changes in interest rates on debt obligations and from changes in foreign currency exchange rates. Information about these risks and exposure management is included in Item 7A “Qualitative and Quantitative Information about Market Risk” in PolyOne’s Annual Report on Form 10-K/A for the year ended December 31, 2005. PolyOne periodically enters into interest rate swap agreements that modify its exposure to interest rate risk by converting fixed-rate obligations to floating rates. PolyOne maintained interest rate swap agreements on six of its fixed-rate obligations in the aggregate amount of $100.0 million at June 30, 2006. These exchange agreements are “perfectly effective” as defined by SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities.” At June 30, 2006, these agreements had a net fair value obligation of $7.2 million. The weighted-average interest rate for these six agreements was 9.0%. There have been no material changes in the market risk faced by PolyOne from December 31, 2005 to June 30, 2006.

In June 2006, PolyOne repurchased $15.0 million aggregate principal amount of its 10.625% senior notes at a premium of $1.2 million. The premium is shown as a separate line item in the Condensed Consolidated Statements of Operations. Unamortized deferred note issuance costs of $0.2 million were expensed due to this repurchase and are included in interest expense in the Condensed Consolidated Statements of Operations.

Note N — Sale of Accounts Receivable

Accounts receivable consist of the following:

		June 30,				December 31,
(In millions)		2006				2005
Trade accounts receivable		$	177.8			$	139.6
Retained interest in securitized accounts receivable			208.6				187.3
Allowance for doubtful accounts			(6.5	)			(6.4	)
		$	379.9			$	320.5

Under the terms of its receivables sale facility, PolyOne sells its accounts receivable to PolyOne Funding Corporation (PFC), a wholly owned, bankruptcy-remote subsidiary. At June 30, 2006, accounts receivable totaling $208.6 million were sold by PolyOne to PFC. PFC in turn may sell an undivided interest in these accounts receivable to certain investors and realize proceeds of up to $175 million. The maximum amount of proceeds that PFC may receive under the facility is limited to 85% of the eligible accounts receivable that are sold to PFC. At June 30, 2006, PFC had not sold any of its undivided interests in accounts receivable, compared with $7.9 million at December 31, 2005. PolyOne retained an interest in the $208.6 million difference between the amount of trade receivables sold by PolyOne to

PFC and the undivided interests sold by PFC as of June 30, 2006. As a result, this interest retained by PolyOne is included in accounts receivable on the Condensed Consolidated Balance Sheet at June 30, 2006.

The receivables sale facility also makes up to $40 million available for the issuance of standby letters of credit as a sub-limit within the $175 million facility, of which $11.7 was used at June 30, 2006. Continued availability of the receivables sale facility depends upon compliance with a fixed charge coverage ratio covenant related primarily to operating performance that is set forth in the related agreements. As of June 30, 2006, PolyOne was in compliance with this covenant.

Note O — Segment Information (restated)

Effective with the first quarter of 2006, PolyOne changed its operating and reportable segments. The Producer Services operating segment was formed at the start of 2006 from portions of the North American Color and Additives and the North American Engineered Materials operating segments. As a result, the North American Color and Additives operating segment no longer meets, nor is expected to meet in 2006, any of the quantitative thresholds that would require separate disclosure as a reportable segment, and accordingly, North American Color and Additives is included in the All Other segment. The new Producer Services operating segment also does not meet, nor is expected to meet in 2006, any of the quantitative thresholds and, as a result, is also included in the All Other segment. Segment information for prior periods has been revised to conform to the 2006 segment presentation.

PolyOne manages its business in nine operating segments from which there result five reportable segments and an All Other segment. The five reportable segments are: Vinyl Compounds, Specialty Resins, International Color and Engineered Materials, PolyOne Distribution, and Resin and Intermediates. The All Other segment includes four operating segments, none of which meet the quantitative thresholds for separate disclosure: North American Color and Additives, North American Engineered Materials, Producer Services and Polymer Coating Systems. The accounting policies of each segment are consistent with those described in “Summary of Significant Accounting Policies” in Note D to the Consolidated Financial Statements included in PolyOne’s Annual Report on Form 10-K/A for the year ended December 31, 2005.

Segment assets are primarily customer receivables, inventories, net property, plant and equipment, and goodwill. Intersegment sales are accounted for at prices that approximate those for similar transactions with unaffiliated customers. Corporate and eliminations includes cash, sales of accounts receivable, retained assets and liabilities of discontinued operations, and other unallocated corporate assets and liabilities. Operating income is the primary measure that is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance. Operating income at the segment level does not include: corporate general and administrative costs that are not allocated to segments; intersegment sales and profit eliminations; charges related to specific strategic initiatives such as the consolidation of operations; restructuring activities, including employee separation costs resulting from personnel reduction programs, plant closure and phaseout costs; executive separation agreements; share-based compensation costs; asset impairments; environmental remediation costs for facilities no longer owned or closed in prior years; gains and losses on the divestiture of joint ventures and equity investments; and certain other items that are not included in the measure of segment profit or loss that is reported to and reviewed by the chief operating decision maker. These costs are included in “Corporate and eliminations.”

		Sales to																Depreciation
Six months ended		External				Intersegment								Operating				and				Capital				Total
June 30, 2006 (in millions)		Customers				Sales				Total Sales				Income (Loss)				Amortization				Expenditures				Assets
Vinyl Compounds		$	363.2			$	62.2			$	425.4			$	34.0			$	6.5			$	1.4			$	383.1
Specialty Resins			61.2				10.3				71.5				8.1				2.6				0.5				69.5
International Color and Engineered Materials			265.3				—				265.3				13.0				6.9				5.2				364.9
PolyOne Distribution			379.0				4.8				383.8				11.3				0.7				0.1				189.1
Resin & Intermediates			—				—				—				65.1				0.1				—				286.5
All Other			292.3				15.0				307.3				3.4				9.1				6.1				372.8
Corporate and eliminations			—				(92.3	)			(92.3	)			(3.5	)			2.7				2.2				141.7
Total		$	1,361.0			$	—			$	1,361.0			$	131.4			$	28.6			$	15.5			$	1,807.6

		Sales to																Depreciation
Six months ended		External				Intersegment								Operating				and				Capital				Total
June 30, 2005 (in millions)		Customers				Sales				Total Sales				Income (Loss)				Amortization				Expenditures				Assets
Vinyl Compounds		$	314.1			$	57.0			$	371.1			$	19.4			$	6.8			$	2.4			$	398.3
Specialty Resins			72.2				9.1				81.3				16.7				—				0.5				60.9
International Color and Engineered Materials			247.0				—				247.0				11.9				6.7				6.9				357.9
PolyOne Distribution			333.7				4.0				337.7				9.4				0.7				0.2				166.6
Resin & Intermediates			—				—				—				51.4				0.1				—				293.4
All Other			265.2				14.9				280.1				1.0				9.3				3.9				376.6
Corporate and eliminations			—				(85.0	)			(85.0	)			(11.9	)			1.3				4.1				96.1
Total		$	1,232.2			$	—			$	1,232.2			$	97.9			$	24.9			$	18.0			$	1,749.8