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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K



(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

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

COMMISSION FILE NUMBER: 1-15157


PACTIV CORPORATION
(Exact name of Registrant as Specified in its Charter)



DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST FIELD COURT 60045
LAKE FOREST, ILLINOIS (Zip Code)
(Address of principal executive offices)


Registrant's telephone number, including area code: (847) 482-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:



NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS --------------------------------------------------------
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Common Stock ($.01 par value) and associated Preferred New York Stock Exchange
Stock Purchase Rights


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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No __

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

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

Yes X No __

State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value is computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of the last business day of the registrant's most recently completed
second fiscal quarter.



CLASS OF VOTING STOCK AND NUMBER OF SHARES MARKET VALUE OF COMMON STOCK HELD BY
HELD BY NON-AFFILIATES AT JUNE 30, 2004 NON-AFFILIATES
- -------------------------------------------------------- --------------------------------------------------------
COMMON STOCK 149,268,385 SHARES $3,722,753,522


INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock ($.01
par value). 148,956,990 shares outstanding as of February 28, 2005. (See Note 11
to the Financial Statements.)

DOCUMENTS INCORPORATED BY REFERENCE:



PART OF THE FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
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Pactiv Corporation's Definitive Proxy Statement for Part III
the Annual Meeting of Shareholders to be held May 20,
2005


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TABLE OF CONTENTS



PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Item 4.1 Executive Officers of the Registrant........................ 6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities.......... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 57
Item 9A. Controls and Procedures..................................... 57
Item 9B. Other Information........................................... 57
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 57
Item 11. Executive Compensation...................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 57
Item 13. Certain Relationships and Related Transactions.............. 58
Item 14. Principal Accounting Fees and Services...................... 58
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 58



ITEM 1. BUSINESS.

OVERVIEW

Pactiv Corporation (Pactiv or the company) is a global supplier of
specialty-packaging and consumer products with 2004 sales of $3.4 billion. The
company operates 77 manufacturing facilities in 14 countries around the world.
Pactiv has three key operating segments: Consumer Products, Foodservice/Food
Packaging, and Protective and Flexible Packaging. The company's consumer
products include plastic, aluminum, and paper-based products, such as waste
bags, food-storage bags, and disposable tableware and cookware. Pactiv's
foodservice/food packaging products include foam, clear plastic, aluminum,
pressed-paperboard, and molded-fiber packaging for customers in the
food-distribution channel, including wholesalers, supermarkets, and packer
processors, who prepare and process food for consumption. The company's
protective-packaging products are generally used to protect and cushion various
commercial and industrial products from the point of manufacture to the point of
delivery or pick-up. Pactiv's flexible-packaging products are used mainly in
food, medical, pharmaceutical, chemical, and hygienic applications, and often
involve custom design.

The company was incorporated in the state of Delaware in 1965 under the
name of Packaging Corporation of America. The company changed its name to
Tenneco Packaging Inc. in November 1995 and, concurrent with its 1999 spin-off
from Tenneco Inc., changed its name to Pactiv Corporation.

PRODUCTS AND MARKETS

Consumer Products

The company manufactures, markets, and sells consumer products such as
plastic storage bags for food and household items; plastic waste bags; foam,
pressed-paperboard, and molded-fiber tableware; and aluminum cookware. Many of
these products are sold under such recognized brand names as Hefty(R),
Baggies(R), Hefty(R) OneZip(R), Hefty(R) Cinch Sak(R), Hefty(R) The Gripper(R),
Hefty(R) Zoo Pals(R), Kordite(R), and EZ Foil(TM). These products, which are
typically used by consumers in their homes, are sold through a variety of
retailers, including supermarkets, mass merchandisers, and other stores where
consumers purchase household goods.

Foodservice/Food Packaging

For foodservice customers, the company offers products to merchandise and
serve on-premises and takeout meals. These items include tableware products such
as plates, bowls, and cups, and a broad line of takeout-service containers made
from clear plastic, microwaveable plastic, foam, molded-fiber, paperboard, and
aluminum.

The company's food-packaging products are designed to protect food during
distribution, aid retailers in merchandising food products, and help customers
prepare and serve meals in their homes. Food packaging products for supermarkets
include clear rigid-display packaging for produce, delicatessen, and bakery
applications; microwaveable containers for prepared, ready-to-eat meals; and
foam trays for meat and produce. The company also manufactures plastic zipper
closures for a variety of other packaging applications.

For food processors, the company's products include dual-ovenable
paperboard containers, molded-fiber egg cartons, meat and poultry trays,
aluminum containers, and modified atmosphere packaging, which extends the shelf
life of red meat products.

The company also manufactures, markets, and sells foam products for use in
the construction industry.

Protective and Flexible Packaging

The company manufactures, markets, and sells protective packaging for use
in many industries, including the automotive, computer, electronics, furniture,
durable-goods, building, and construction

1


industries. Pactiv's sheet foams and air-encapsulated bubble products are used
for cushioning and surface protection, and its paperboard honeycomb and
engineered foam-plank products provide protection against shock, vibration, and
thermal damage. Pactiv also offers padded mailers, a variety of laminated
protective coverings, and customized-packaging systems.

The company's flexible-packaging products are used in consumer, medical,
pharmaceutical, chemical, hygienic, and industrial applications. These products
include liners for disposable diapers, wrap-around sleeves for glass and plastic
bottles, polypropylene bags for sterile intravenous fluid delivery, modified
atmosphere films, stand-up pouches, food and hygienic packaging, surgical
drapes, and medical packaging.

BUSINESS STRATEGY

Pactiv expects to grow by expanding its existing businesses and through
strategic acquisitions. In seeking organic or acquisition growth, the company
focuses on markets that have strong expansion characteristics and attractive
margins. Through its broad product lines and custom-design capability, the
company offers customers "material-neutral" packaging solutions. With this
approach and the availability of worldwide geographic coverage, the company has
become a primary supplier to several national and international manufacturers
and distributors and has developed long-term relationships with key participants
in the consolidating packaging and foodservice-distribution industries.
Fostering such relationships is critical in identifying and penetrating new
markets.

Market Presence

Many of Pactiv's products have strong market-share positions, including the
number one position in key markets such as zipper storage bags, tableware,
foodservice-foam containers, clear rigid-display packaging, foam trays, and
aluminum cookware. In 2004, more than 80% of the company's sales came from
products that hold the number one or number two share position in markets
served, reflecting the strength of the company's Hefty(R) and EZ Foil(TM)
brands, the breadth of its product lines, and its ability to offer "one-stop
shopping" to customers.

New Products/Design Services

The company drives growth by developing new products and value-added
product line extensions. In 2004, the company spent $33 million on research and
development activities, compared with $32 million and $35 million in 2003 and
2002, respectively, and introduced more than 50 new products.

In the Consumer Products business segment, several major new products were
introduced in 2004: Hefty(R) Ultra Flex(TM) waste bags, Hefty(R) Handy Saks(TM)
waste bags and, Hefty(R) Zoo Pals(R) Bowls and Funtensils Cutlery(TM) for
children.

In 2004, the Foodservice/Food Packaging business segment broadened its
product offerings through the introduction of new containers for agricultural
products, a new sheetcake pan for a major grocery store, and several new
containers for major fast-food chains.

In the U.S., the protective-packaging product line was expanded in late
2004 with the introduction of the Pactiv 9000 Air-Paq(TM) inflatable engineered
cushioning system.

Service Capabilities

Building on broad product lines and strong relationships with national
distributors, in 2002, Pactiv completed the implementation of its
customer-linked manufacturing system for the Foodservice/Food Packaging segment.
Today, the systems and information-management infrastructure and distribution
network are fully in place to support this segment's "One Face to the Customer"
strategy, which is aimed at reducing supply-chain costs, enhancing customer
service, and improving productivity.

2


Productivity/Cost Reduction

Pactiv's continuing focus on enhancing productivity and reducing
manufacturing and logistics costs is key to improving the business'
profitability. In 2004, approximately 28% of the company's research and
development spending and roughly 31% of its capital spending was devoted to
efforts to reduce costs and improve manufacturing and distribution productivity.

Strategic Acquisitions

Strategic acquisitions have been, and will continue to be, an important
element of the company's growth strategy. Since the beginning of 2000, the
company has invested approximately $225 million to acquire businesses and
assets.

MARKETING, DISTRIBUTION, AND CUSTOMERS

The company has a combined sales and marketing staff of approximately 650
people. Consumer products are sold through a direct sales force and a national
network of brokers and manufacturers' representatives. Foodservice and
food-packaging customers are served principally through a direct sales force.
The Protective and Flexible Packaging business sells to distributors,
fabricators, and directly to end-users worldwide.

In each of 2004 and 2003, Wal-Mart Stores, Inc. accounted for 11.4% of the
company's consolidated sales. In general, the company's backlog of orders is not
material.

ANALYSIS OF SALES

The following table sets forth information regarding sales from continuing
operations.



2004 2003 2002
---------------- ---------------- ----------------
Amount % Total Amount % Total Amount % Total
(Dollars in millions) ------ ------- ------ ------- ------ -------

Consumer Products......................... $ 934 28% $ 888 28% $ 841 29%
Foodservice/Food Packaging................ 1,490 44 1,371 44 1,221 43
Protective and Flexible Packaging......... 958 28 879 28 818 28
------ --- ------ --- ------ ---
Total..................................... $3,382 100% $3,138 100% $2,880 100%
------ --- ------ --- ------ ---


See Note 15 to the financial statements for additional segment and
geographic information.

COMPETITION

Pactiv conducts business in highly competitive markets and faces
significant competition in all of its product lines from numerous global,
national, and regional companies of various sizes. Some competitors have
available to them more extensive financial and other resources than Pactiv,
while others are significantly smaller than the company with lower fixed costs
and more operating flexibility. In addition, certain competitors offer a variety
of packaging materials and concepts and serve geographic regions through various
distribution channels. In general, the company believes that success in
obtaining business is driven by price, quality, product features, and service.

INTERNATIONAL

Pactiv has facilities and sells products in countries throughout the world.
As a result, it is subject to various risks such as fluctuations in
foreign-currency exchange rates, limitations on conversion of foreign currencies
into U.S. dollars, restrictions on remittance of dividends and other payments by
foreign subsidiaries, withholding and other taxes on remittances by foreign
subsidiaries, hyperinflation in foreign countries, and restrictions on
investments in foreign countries. See Note 15 to the financial statements for
additional information regarding the company's international operations.

3


RAW MATERIALS

The principal raw materials used by the company are plastic resins,
including polystyrene, polyethylene, polypropylene, polyvinyl chloride and
amorphous polyethylene terephthalate (APET); aluminum; paperboard; pulp; and
recycled fiber. More than 80% of Pactiv's sales come from products made from
different types of plastics. In general, these raw materials are readily
available from a wide variety of suppliers. Raw-material prices can be volatile
and are a function of, among other things, the availability of production
capacity; oil, natural gas, and other energy-related feedstock costs; and
geopolitical circumstances. The supply of raw materials was adequate in 2004 and
the company's management believes that such supply will remain adequate in 2005.

ENVIRONMENTAL REGULATION

The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Where it is
probable that related liabilities exist and where reasonable estimates of such
liabilities can be made, Pactiv establishes associated reserves. Estimated
liabilities are subject to change as additional information becomes available
regarding the magnitude of possible clean-up costs, the expense and
effectiveness of alternative clean-up methods, and other possible liabilities
associated with such situations. However, management believes that any
additional costs that may be incurred as more information becomes available will
not have a material adverse effect on the company's financial position, although
such costs could have a material effect on the company's results of operations
or cash flows in a particular period.

In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District, and, effective
November 2003, has entered into a settlement agreement with that agency
regarding the appropriate actions to be taken to address the matter, which
settlement agreement is subject to the approval of the U.S. Environmental
Protection Agency. The company does not believe that the costs involved,
including any monetary sanctions, will have a material adverse effect on the
company's financial position, results of operations, or cash flows.

OTHER

As of December 31, 2004, Pactiv employed approximately 14,500 people, of
which approximately 1,100 were employed by joint ventures in which the company
has a controlling interest and 11.4% were covered by collective-bargaining
agreements. Two of those agreements, covering a total of 466 employees, are
scheduled for renegotiation in 2005. In Europe and the Middle East,
approximately 2,800 employees are represented by works councils. Management
believes that employee relations are generally satisfactory.

The company owns a number of U.S. and foreign patents, trademarks, and
other intellectual property that are significant with regard to the manufacture,
marketing, and distribution of certain products. The company also utilizes
numerous software licenses that are important to its business. The company
believes that its intellectual-property and licensing rights are adequate for
its business.

AVAILABLE INFORMATION

The company's website is www.pactiv.com. On this website, under the
investor relations link, the company makes available free of charge its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to these reports, as soon as reasonably practicable after it
electronically files or furnishes such materials to the Securities and Exchange
Commission. The company also makes available on this website, under the Investor
Relations link, the company's code of ethics, including the code of ethics for
its principal executive, financial, and accounting officers.

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ITEM 2. PROPERTIES.

Pactiv's executive offices are located at 1900 West Field Court, Lake
Forest, Illinois 60045. Its telephone number at that address is (847) 482-2000.

Following is a summary of the company's facilities worldwide.



NUMBER OF
BUSINESS SEGMENT GEOGRAPHIC LOCATION PROCESS, FUNCTION, OR PRODUCTS PLANTS
- ---------------- ------------------- ------------------------------ ---------

Consumer Products/Foodservice and
Food Packaging.................
North America Plastic and aluminum 26
manufacturing
Molded-fiber packaging 7
Molded-fiber tooling 1
Ovenable paperboard 3
Protective and Flexible
Packaging......................
North America Plastic extrusion, foaming, and 9
converting
Paperboard converting 9
Protective and Flexible
Packaging......................
Europe Plastic foaming and mailers, 18
plastic air-encapsulated bubble,
plank, plastic flexible and
medical products, paperboard
converting and other protective
packaging, molded-fiber packaging
Protective and Flexible
Packaging......................
United Kingdom Thermoformed plastic food 4
containers and films, plastic
air-encapsulated bubble, foam,
converting, mailers
--
Grand Total...................... 77
==


In addition to the above, 2 research and development centers for consumer
and foodservice/food packaging products and process development are located in
Canandaigua, New York, and Vernon Hills, Illinois. A design center and
process-development operation for protective-and flexible-packaging products is
located in Buffalo Grove, Illinois. The company also operates 5 regional
distribution centers throughout the United States. Also, Pactiv has
joint-venture interests in a folding-carton operation in Dongguan, China (50%
owned) and a corrugated-converting operation in Shaoxing, China (62.5% owned).

In general, management believes that the company's plant and equipment are
well maintained and in good operating condition, and that it has satisfactory
title to owned properties, subject to certain liens that do not detract
materially from the value or use of the properties.

ITEM 3. LEGAL PROCEEDINGS.

On November 3, 2003, the company reached an agreement to settle a civil,
class-action lawsuit filed in 1999 against Tenneco, Tenneco Packaging, and
Packaging Corporation of America (PCA), Tenneco's former containerboard business
(Tenneco Packaging litigation). The settlement resulted in Pactiv recording a
pretax charge of $56 million, $35 million after tax, or $0.22 per share. This
charge included the establishment of a reserve for the estimated liability
associated with lawsuits filed by certain members of the original class-action
who opted out of the class and filed their own lawsuits. While it is not
possible to predict the outcome of any of these proceedings, the company's
management, based on its assessment of the facts and circumstances now known,
does not believe that any of these proceedings, individually or in the
aggregate, will have a materially adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.

The company is party to legal proceedings arising from its operations.
Related reserves are recorded when it is probable that liabilities exist and
where reasonable estimates of such liabilities can be made. While it is not
possible to predict the outcome of any of these proceedings, the company's
management,

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based on its assessment of the facts and circumstances now known, does not
believe that any of these proceedings, individually or in the aggregate, will
have a material adverse effect on the company's financial position. However,
actual outcomes may be different than expected and could have a material effect
on the company's results of operations or cash flows in a particular period.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

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

ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.

Set forth below are the executive officers of the company at February 28,
2005, the positions held by such officers, and the date of appointment to such
positions. These descriptions are being included in Part I of this Form 10-K
pursuant to Instruction 3 to Item 401(b) of Regulation S-K.

Richard L. Wambold, 53, Chairman of the Board of Directors, President, and
Chief Executive Officer. Mr. Wambold has served as Chairman since March 2000,
President since June 1999, and Chief Executive Officer since the spin-off in
November 1999. Prior to 1999, Mr. Wambold served as Executive Vice President and
General Manager of the company's specialty-packaging and consumer-products
business units.

Andrew A. Campbell, 59, Senior Vice President and Chief Financial
Officer. Mr. Campbell joined the company in October 1999 as Vice President and
Chief Financial Officer and has served as Senior Vice President and Chief
Financial Officer since January 2001. Prior to joining the company, Mr. Campbell
served as Acting Chief Financial Officer of Foamex International, Inc. from May
to September 1999.

James V. Faulkner, Jr., 60, Vice President, General Counsel, and
Secretary. Mr. Faulkner has been Vice President and General Counsel of the
company since 1995, and was elected Secretary of the company in December 2002.

Peter J. Lazaredes, 54, Executive Vice President and General Manager,
Foodservice/Food Packaging. Mr. Lazaredes has served as Executive Vice President
and General Manager, Foodservice/Food Packaging, since July 2004. Prior to 2004,
and since he joined the company in 1996, Mr. Lazaredes held various senior
management positions in the company's specialty-packaging unit.

James D. Morris, 51, Senior Vice President and General Manager, Protective
and Flexible Packaging. Mr. Morris has served as Senior Vice President and
General Manager, Protective and Flexible Packaging, since January 2001. Prior to
2001, and since he joined the company in 1995, Mr. Morris held various senior
management positions in the company's specialty-packaging unit.

John N. Schwab, 55, Senior Vice President and General Manager, Hefty(R)
Consumer Products. Mr. Schwab has served as Senior Vice President and General
Manager, Hefty(R) Consumer Products, since January 2001. Prior to 2001, and
since he joined the company in 1995, Mr. Schwab held various senior management
positions in the company's specialty-packaging unit.

Henry M. Wells, III, 60, Vice President and Chief Human Resources
Officer. Mr. Wells has served as Vice President and Chief Human Resources
Officer since April 2000. Prior to joining the company, Mr. Wells served as Vice
President, Human Resources, for Banta Corporation from April 1996 to April 2000.

6


PART II

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

The outstanding shares of common stock ($0.01 par value) of Pactiv
Corporation are listed on the New York Stock Exchange under the symbol "PTV".
Stock price and dividend information for 2004 and 2003 is shown below.



STOCK PRICE/SHARE
----------------- DIVIDENDS
HIGH LOW PAID
------- ------- ---------

2003
First quarter............................................. $22.65 $17.55 $--
Second quarter............................................ 21.25 18.13 --
Third quarter............................................. 20.90 17.95 --
Fourth quarter............................................ 24.03 20.28 --
2004
First quarter............................................. 23.96 19.80 --
Second quarter............................................ 25.28 21.55 --
Third quarter............................................. 25.16 22.10 --
Fourth quarter............................................ 25.73 22.30 --


As of February 28, 2005, there were approximately 41,109 holders of record
of the company's common stock, including brokers and other nominees.

Dividend declarations are at the discretion of the company's board of
directors. The company does not currently plan to declare a dividend; however,
the company periodically considers alternatives, including dividend payments, to
increase shareholder value.

The company did not purchase any shares of its common stock in the fourth
quarter of 2004. In August 2004, the board of directors approved a plan for the
company to repurchase up to 5,000,000 shares of its common stock, using
open-market or privately negotiated transactions, with the repurchased shares to
be held in treasury for general corporate purposes. As of December 31, 2004, the
maximum number of shares that may yet be purchased under this plan was
3,905,900.

7


ITEM 6. SELECTED FINANCIAL DATA.



(In millions, except per-share data) 2004 2003 2002 2001 2000
FOR THE YEARS ENDED DECEMBER 31 ------- ------- ------- ------- -------

STATEMENT OF INCOME
Sales
Consumer Products............................... $ 934 $ 888 $ 841 $ 815 $ 785
Foodservice/Food Packaging...................... 1,490 1,371 1,221 1,182 1,416
Protective and Flexible Packaging............... 958 879 818 815 851
------- ------- ------- ------- -------
3,382 3,138 2,880 2,812 3,052
------- ------- ------- ------- -------
Operating income.................................. 345 466 463 391 341
Tenneco Packaging litigation settlement and
other........................................... -- 56 -- -- --
Interest expense, net of interest capitalized..... 101 96 96 107 134
Income-tax expense................................ 90 118 146 118 91
Minority interest................................. (1) 1 1 1 3
------- ------- ------- ------- -------
Income from continuing operations................. 155 195 220 165 113
Income from discontinued operations, net of income
tax............................................. -- -- -- 28 134
Cumulative effect of changes in accounting
principles, net of income tax................... -- (12) (72) -- --
------- ------- ------- ------- -------
Net income........................................ $ 155 $ 183 $ 148 $ 193 $ 247
------- ------- ------- ------- -------
Average number of shares of common stock
outstanding
Basic........................................... 151.290 157.932 158.618 158.833 161.722
Diluted......................................... 153.763 160.144 160.613 159.527 161.779
Earnings per share
Basic
Continuing operations......................... $ 1.02 $ 1.23 $ 1.38 $ 1.04 $ 0.70
Discontinued operations....................... -- -- -- 0.17 0.83
Cumulative effect of changes in accounting
principles................................. -- (0.07) (0.45) -- --
------- ------- ------- ------- -------
$ 1.02 $ 1.16 $ 0.93 $ 1.21 $ 1.53
------- ------- ------- ------- -------
Diluted
Continuing operations......................... $ 1.01 $ 1.21 $ 1.37 $ 1.03 $ 0.70
Discontinued operations....................... -- -- -- 0.17 0.83
Cumulative effect of changes in accounting
principles................................. -- (0.07) (0.45) -- --
------- ------- ------- ------- -------
$ 1.01 $ 1.14 $ 0.92 $ 1.20 $ 1.53
------- ------- ------- ------- -------
STATEMENT OF FINANCIAL POSITION
Net assets of discontinued operations............. $ -- $ -- $ -- $ -- $ 72
Total assets...................................... 3,741 3,706 3,412 4,060 4,341
Short-term debt including current maturities of
long-term debt.................................. 472 5 13 7 13
Long-term debt.................................... 869 1,336 1,224 1,211 1,560
Minority interest................................. 9 8 21 8 22
Shareholders' equity.............................. 1,083 1,061 897 1,689 1,539
STATEMENT OF CASH FLOWS
Cash provided by operating activities............. $ 367 $ 336 $ 384 $ 371 $ 290
Cash provided (used) by investing activities...... (91) (194) (244) (1) 302
Cash used by financing activities................. (197) (134) (57) (354) (578)
Expenditures for property, plant, and equipment... (100) (112) (126) (145) (135)


OTHER INFORMATION

The company has not paid a cash dividend in any of the past 5 years.

The notes to the financial statements cover changes in accounting principles in
Note 2 and reclassifications to components of sales in Note 15.

8


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

BASIS OF PRESENTATION

Financial statements for all periods presented herein have been prepared on
a consolidated basis in accordance with generally accepted accounting principles
consistently applied. All per-share information is presented on a diluted basis
unless otherwise noted. Certain amounts in the prior years' financial statements
have been reclassified to conform with the presentation used in 2004.

The company has 4 reporting segments: Consumer Products, which relates
principally to the manufacture and sale of disposable plastic, molded-fiber,
pressed-paperboard, and aluminum packaging products, such as waste bags,
tableware, food-storage bags, and cookware, for consumer markets, such as
grocery stores, mass merchandisers, and discount chains; Foodservice/Food
Packaging, which relates primarily to the manufacture and sale of various
disposable plastic, molded-fiber, pressed-paperboard, and aluminum packaging
products for foodservice and food-packaging markets, such as restaurants and
other institutional foodservice outlets, food processors, and grocery chains;
Protective and Flexible Packaging, which relates to the manufacture and sale of
plastic, paperboard, and molded-fiber products for protective-packaging markets,
such as electronics, automotive, furniture, and e-commerce, and for
flexible-packaging applications in food, medical, pharmaceutical, chemical, and
hygienic markets; and Other, which relates to corporate and
administrative-service operations and retiree-benefit income and expense. The
accounting policies of the reporting segments are the same as those for Pactiv
as a whole. Where discrete financial information is not available by segment,
reasonable allocations of expenses and assets are used.

RESTRUCTURING AND OTHER

In the first quarter of 2004, the company announced a restructuring program
to rationalize excess manufacturing capacity and reduce overhead costs, and to
reinvest a portion of the related savings in strategic growth initiatives. In
this connection, the company recorded restructuring and other charges totaling
$93 million, $58 million after tax, or $0.38 per share in 2004. The principal
strategic objectives of the program are to (1) rationalize inefficient
manufacturing assets, primarily certain molded-fiber facilities in North America
and the United Kingdom; (2) reduce overhead in several areas of the business,
thereby eliminating non-value-added activities; (3) increase the number of new
product launches over the next several years; and (4) increase the value of the
Hefty(R) brand. Implementation of the program resulted in the elimination of
approximately 1,000 salaried and hourly positions worldwide. The total cost of
the restructuring program is expected to be approximately $96 million, $60
million after tax, or $0.39 per share, covering severance, asset write-offs, and
other, which consists principally of asset removal costs, including asbestos
insulation abatement and associated expenses at the company's closed
molded-fiber facility in the United Kingdom. The majority of the program was
executed in the second quarter of 2004, with the balance of the program expected
to be completed in 2005.

After-tax cash payments related to the restructuring and other actions
totaled $12 million for full-year 2004.

9


The following summarizes actual and expected impacts of restructuring and
related actions.



SEVERANCE ASSET WRITE-OFFS OTHER (1) TOTAL
(In millions) --------- ---------------- --------- -----

Accrued restructuring balance at January 1, 2004..... $ -- $ -- $ -- $ --
Additions/adjustments to the account
Consumer Products.................................... 4 -- -- 4
Foodservice/Food Packaging........................... 8 18 5 31
Protective and Flexible Packaging.................... 12 9 34 55
Other................................................ -- -- 3 3
---- ---- ---- ----
Total additions/adjustments.......................... 24 27 42 93
Cash payments........................................ (21) -- (34) (55)
Charges against asset accounts....................... -- (27) -- (27)
---- ---- ---- ----
Accrued restructuring balance at December 31, 2004... $ 3 $ -- $ 8 $ 11
---- ---- ---- ----
PROJECTED TOTAL RESTRUCTURING PROGRAM COSTS
Consumer Products.................................... $ 4 $ -- $ -- $ 4
Foodservice/Food Packaging........................... 8 18 6 32
Protective and Flexible Packaging.................... 12 9 36 57
Other................................................ -- -- 3 3
---- ---- ---- ----
Total................................................ $ 24 $ 27 $ 45 $ 96
---- ---- ---- ----


- ---------------

(1) Consists principally of asset removal costs, including asbestos insulation
abatement and associated expenses at the company's closed molded-fiber
facility in the United Kingdom.

EXECUTIVE OVERVIEW

Business

Pactiv's primary business is the manufacture and sale of consumer and
specialty-packaging products for the consumer, foodservice/food packaging, and
protective- and flexible-packaging markets. The company's consumer products
include plastic, aluminum, and paper-based products, such as waste bags,
food-storage bags, and disposable tableware and cookware, sold under such
well-known brand names as Hefty(R), Baggies(R), Hefty(R) OneZip(R), Hefty(R)
CinchSak(R), Hefty(R) The Gripper(R), Hefty(R) Zoo Pals(R), Kordite(R), and EZ
Foil(TM). Foodservice and food-packaging products include foam, clear plastic,
aluminum, pressed-paperboard, and molded-fiber packaging for customers in the
food-distribution channel, including wholesalers, supermarkets, and packer
processors, who prepare and process food for consumption. The company's
protective-packaging products are generally used to protect and cushion various
commercial and industrial products from the point of manufacture to the point of
delivery or pick-up. Pactiv's flexible-packaging products are used mainly in
food, medical, pharmaceutical, chemical, and hygienic applications, and often
involve custom design. The company operates 77 manufacturing facilities in 14
countries worldwide.

Pactiv generates sales and profits through the arms-length sale of its
products to a wide array of customers, including grocery stores, mass
merchandisers, discount chains, restaurants, distributors, fabricators, and
directly to end-users worldwide. Costs are incurred in connection with the
manufacture and sale of these products and are recorded as either cost of sales
or selling, general, and administrative expenses.

Greater than 80% of Pactiv's sales comes from products made from different
types of plastics. The principal raw materials used to manufacture these
products are plastic resins, including polystyrene, polyethylene, polypropylene,
polyvinyl chloride, and APET. Plastic-resin prices can be volatile and are a
function of, among other things, the availability of production capacity; oil,
natural gas, and other energy-related feedstock costs; and geopolitical
circumstances.

10


The company generates cash by collecting receivables on profitable sales in
a timely manner, effectively managing inventory levels, optimizing
vendor-payment terms, utilizing tax-minimization strategies, and optimizing
other elements of working capital. Pactiv uses the cash it generates to invest
in property, plant, and equipment and acquisitions to provide long-term sales,
profit, and cash-flow growth; to retire debt; and, from time to time, to
repurchase its stock. The company anticipates that its cash flow from operations
will continue to be sufficient to fund its investing and financing activities.

Pactiv has pension plans that cover substantially all of its employees. In
addition, the company, in conjunction with its spin-off from Tenneco Inc.
(Tenneco) in 1999, became the sponsor of retirement plans covering participating
employees of certain former subsidiaries and affiliates of Tenneco. Pactiv
records net pension income on its pension plans as an offset to selling,
general, and administrative expenses; however, management typically excludes the
effect of pension income and pension assets and liabilities in assessing
performance and returns of the company.

Several opportunities and challenges may influence the company's continued
growth. Near-term risks include the impact of energy-market volatility on resin
costs, the ability to increase selling prices, and the continued effectiveness
of the company's productivity and procurement initiatives. Longer-term, the
company faces potential changes in consumer-demand patterns, possible supplier
and customer consolidations, potential increases in foreign-based competition,
and possible growth in unbranded products' market share. The company expects to
continue to be successful by adjusting selling prices to offset resin-price
movements, implementing aggressive cost-management and productivity programs,
leveraging its existing customer base into new distribution channels,
introducing innovative new products, and making strategic acquisitions.

SIGNIFICANT TRENDS AND OTHER

The principal raw materials used to manufacture the company's products are
plastic resins, principally polystyrene and polyethylene. Average industry
prices for polystyrene were approximately 55% higher at the end of 2004 than at
the end of 2003, driven principally by higher oil and benzene prices, while
average industry prices for polyethylene rose by approximately 40% over the same
period, fueled by higher natural-gas prices. In response to the significant
escalation in resin costs, the company raised selling prices in many areas of
its business during 2004, which were effective in offsetting approximately 50%
of the resin-cost increases.

Raw-material costs will likely continue to be a source of uncertainty for
the company in the near-term future. Resin vendors have announced additional
price increases effective in the first and second quarters of 2005; however, at
this time it is not clear whether these price increases will be successfully
implemented as announced, or at all. The company is closely monitoring the resin
marketplace in order to respond quickly to any material cost increases.

The company is also sensitive to other energy-related cost movements,
particularly with respect to transportation and logistics costs. Historically,
the company has been able to mitigate higher energy-related costs with
productivity improvements and other cost reductions; however, future significant
energy-related cost increases may not be fully offset with productivity
initiatives.

The company recently announced the launch of a major new-product family in
its Consumer tableware business, and 2 additional new-product launches are
expected to occur in 2005. To support these growth initiatives and the Hefty(R)
UltraFlex(TM) waste-bag line that was launched in the third quarter of 2004, the
company's investment in advertising and promotion (A&P) in 2005 is expected to
increase between $60 million and $70 million compared with 2004. The impact on
pretax profit of higher A&P spending, net of operating income on incremental
new-product sales, is expected to be approximately $45 million to $55 million in
2005.

11


YEAR 2004 COMPARED WITH 2003

RESULTS OF CONTINUING OPERATIONS

Sales



2004 2003 CHANGE
(Dollars in millions) ------ ------ ------

Consumer Products........................................... $ 934 $ 888 5.2%
Foodservice/Food Packaging.................................. 1,490 1,371 8.7
Protective and Flexible Packaging........................... 958 879 9.0
------ ------
Total....................................................... $3,382 $3,138 7.8%
------ ------


Total sales increased $244 million, or 7.8%, in 2004. Excluding the
positive impact of foreign-currency exchange rates ($55 million), sales grew
5.9%, driven primarily by volume growth in the base business ($78 million) and
acquisitions ($55 million), as well as price increases ($56 million).

Sales for the Consumer Products business of $934 million increased $46
million, or 5.2%, from $888 million in 2003, reflecting strong volume growth.
Volume growth was broad-based, led by an increase in tableware and the
introduction of new products, including Hefty(R) Ultra-Flex(TM) waste bags and a
line of cups.

Foodservice/Food Packaging segment sales of $1.490 billion increased $119
million, or 8.7%, from $1.371 billion in 2003. Sales growth was driven by
broad-based volume gains ($65 million) and higher selling prices ($54 million).
Selling-price increases were implemented to offset the impact of significant
increases in polystyrene-resin costs.

Sales of Protective and Flexible Packaging products of $958 million
increased $79 million, or 9.0%, from $879 million in 2003. Excluding the
positive impact of foreign-currency exchange rates ($55 million), sales for this
segment increased 2.5%, primarily reflecting higher protective-packaging volume,
particularly in North America, offset partially by the effect of closing a
molded-fiber plant in the United Kingdom.

Operating Income



2004 2003 CHANGE
(Dollars in millions) ---- ---- ------

Consumer Products........................................... $175 $195 (10.3)%
Foodservice/Food Packaging.................................. 138 178 (22.5)
Protective and Flexible Packaging........................... 20 58 (65.5)
Other....................................................... 12 35 (65.7)
---- ----
Total....................................................... $345 $466 (26.0)%
---- ----


Total operating income was $345 million in 2004, a decrease of $121
million, or 26%, from 2003, driven in large part by the recording of
restructuring and other charges of $93 million in 2004, as well as by the
unfavorable effect of higher plastic-resin and other energy-related costs,
increased marketing-support expenditures, and lower noncash pension income,
offset partially by the positive impact of selling-price increases, volume
gains, restructuring-program benefits, and productivity improvements.

12


The following tables summarize by segment the impact of restructuring and
other charges on 2004 and 2003 operating income determined in accordance with
generally accepted accounting principles (GAAP).



OPERATING INCOME -- TWELVE MONTHS ENDED DECEMBER 31,
2004
-----------------------------------------------------
GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING
BASIS OTHER CHARGES AND OTHER CHARGES
(Dollars in millions) ----- ------------------ ------------------------

Consumer Products.................................. $175 $ 4 $179
Foodservice/Food Packaging......................... 138 31 169
Protective and Flexible Packaging.................. 20 55 75
Other.............................................. 12 3 15
---- --- ----
Total.............................................. $345 $93 $438
---- --- ----




OPERATING INCOME -- TWELVE MONTHS ENDED DECEMBER 31,
2003
-----------------------------------------------------
GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING
BASIS OTHER CHARGES AND OTHER CHARGES
(Dollars in millions) ----- ------------------ ------------------------

Consumer Products.................................. $195 $ -- $195
Foodservice/Food Packaging......................... 178 (1) 177
Protective and Flexible Packaging.................. 58 1 59
Other.............................................. 35 -- 35
---- ----- ----
Total.............................................. $466 $ -- $466
---- ----- ----


The company's management believes that focusing on operating income
excluding the effect of restructuring and other charges is a meaningful
alternative way of evaluating the company's operating results. The restructuring
and other charges relate to actions that will have an ongoing effect on the
company, and to consider such charges as being only applicable to 2004 and 2003
could make the company's operating performance in those periods more difficult
to evaluate, particularly when compared with other periods in which there were
no such charges. The company's management uses operating income excluding
restructuring and other charges to evaluate operating performance, and, along
with other factors, in determining management compensation.

The following table summarizes operating income excluding restructuring and
other charges for 2004 and 2003.



2004 2003 CHANGE
(Dollars in millions) ---- ---- ------

Consumer Products........................................... $179 $195 (8.2)%
Foodservice/Food Packaging.................................. 169 177 (4.5)
Protective and Flexible Packaging........................... 75 59 27.1
Other....................................................... 15 35 (57.1)
---- ----
Total....................................................... $438 $466 (6.0)%
---- ----


Total operating income excluding restructuring and other charges was $438
million, down $28 million, or 6.0%, versus 2003, as increased plastic-resin and
other energy-related costs, higher marketing-support expenses, and lower noncash
pension income were only partially offset by higher selling prices, volume
growth, restructuring savings, and productivity gains.

Operating income excluding restructuring and other charges for the Consumer
Products business was $179 million, down 8.2% compared with 2003, as higher
plastic-resin and other energy-related costs and increased advertising and
promotional expenses were only partially offset by increased volume, higher
selling prices, and productivity gains.

Operating income excluding restructuring and other charges for the
Foodservice/Food Packaging business was $169 million, down 4.5% from a year ago,
reflecting the unfavorable impact of higher plastic-

13


resin and other energy-related costs, offset, in part, by selling price
increases, higher volume, and productivity improvements.

Operating income excluding restructuring and other charges for the
Protective and Flexible Packaging segment was $75 million, up 27.1% from 2003,
primarily reflecting volume growth in North America, restructuring benefits, and
productivity gains.

Operating income excluding restructuring and other charges for the Other
segment decreased 57.1% from 2003, principally because of a decline in noncash
pension income.

Income Taxes

The company's effective tax rate for 2004 was 36.7%, compared with 37.7%
for 2003, reflecting the positive impact of tax-planning strategies implemented
during the year.

Income from Continuing Operations

The company recorded income from continuing operations of $155 million, or
$1.01 per share, in 2004, compared with $195 million, or $1.21 per share, in
2003. The current-period results included restructuring and other charges of $58
million, or $0.38 per share, and noncash pension income of $30 million, or $0.20
per share. Prior-period results included charges for the Tenneco Packaging
litigation settlement and related matters of $35 million, or $0.22 per share,
and noncash pension income of $40 million after tax, or $0.25 per share.

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES

In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities." Pactiv adopted FIN No. 46, effective December 31, 2003, requiring the
company to recognize, as a cumulative effect of change in accounting principles,
depreciation expense on assets leased under its synthetic-lease arrangement from
lease inception to December 31, 2003, which reduced net income in 2003 by $12
million, or $0.07 per share. Consolidation of the variable-interest entity (VIE)
associated with the company's synthetic-lease facility lowered 2004 net income
by approximately $3 million, or $0.02 per share.

See "Changes in Accounting Principles" for further information.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization



2004 2003
DECEMBER 31 (In millions) ------ ------

Short-term debt, including current maturities of long-term
debt...................................................... $ 472 $ 5
Long-term debt.............................................. 869 1,336
------ ------
Total debt.................................................. 1,341 1,341
Minority interest........................................... 9 8
Shareholders' equity........................................ 1,083 1,061
------ ------
Total capitalization........................................ $2,433 $2,410
------ ------


Short-term debt increased and long-term debt decreased by $467 million from
December 31, 2003, to December 31, 2004, reflecting the reclassification as
current of long-term debt amounts due during the following 12 months.
Shareholders' equity at the end of 2004 increased $22 million from the end of
2003, reflecting the recording of net income of $155 million, the issuance of
$45 million of company stock, the impact of favorable foreign-currency
translation adjustments of $33 million, and the recording of a favorable
minimum-pension liability adjustment of $19 million, offset partially by the
repurchase of $230 million of company stock.

14


The ratio of debt to total capitalization declined to 55.1% at December 31,
2004, from 55.6% at December 31, 2003, due to the increase in shareholders'
equity.

Cash Flows



2004 2003
(In millions) ----- -----

Cash provided (used) by:
Operating activities...................................... $ 367 $ 336
Investing activities...................................... (91) (194)
Financing activities...................................... (197) (134)


Cash provided by operating activities was $367 million in 2004, compared
with $336 million in 2003. The $31 million increase reflected better
working-capital management, particularly with respect to inventories, and higher
cash earnings.

Investing activities used $91 million of cash in 2004, principally for
capital expenditures ($100 million). Cash used by investing activities was $194
million in 2003, primarily for capital outlays ($112 million) and acquisitions
($82 million).

Cash used by financing activities was $197 million in 2004, driven
primarily by the repurchase of company stock ($230 million), offset partially by
the issuance of company stock in connection with the administration of employee
benefit plans ($33 million). Financing activities used $134 million of cash in
2003, primarily related to the repurchase of company stock ($87 million) and the
retirement of variable-rate debt ($67 million), offset partially by the issuance
of company stock in connection with the administration of employee benefit plans
($20 million).

Capital Commitments

Commitments for authorized capital expenditures totaled approximately $156
million at December 31, 2004, of which approximately $141 million will be spent
in 2005 It is anticipated that the majority of these expenditures will be funded
over the next 12 months from existing cash and short-term investments and
internally generated cash.

Contractual Obligations

The company enters into arrangements that obligate it to make future
payments under long-term contracts. Summarized below are such contractual
obligations at December 31, 2004.



DUE IN
----------------------------------------------------
MORE THAN
TOTAL LESS THAN 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
(In millions) ------ ---------------- --------- --------- ---------

Long-term debt obligations(1)............ $2,526 $560 $237 $126 $1,603
Operating-lease obligations.............. 126 21 31 41 33
Purchase obligations(2).................. 403 378 22 2 1
Other long-term liabilities(3)........... 446 23 38 32 353
------ ---- ---- ---- ------
Total.................................... $3,501 $982 $328 $201 $1,990
------ ---- ---- ---- ------


- ---------------

(1) Includes fixed-rate debentures, variable-rate debt related to the company's
synthetic-lease agreement, and other fixed-rate debt, plus related
interest-payment obligations based on rates in effect at December 31, 2004.

(2) Includes open capital commitments, amounts related to the purchase of
minimum quantities of raw materials at current market prices under supply
agreements and other long-term vendor agreements with specific payment
provisions and early termination penalties.

15


(3) Includes undiscounted workers' compensation obligations, and undiscounted
and unfunded post-retirement medical and supplemental pension-funding
requirements.

Liquidity and Off-Balance-Sheet Financing

The company uses various sources of funding to manage liquidity. Sources of
liquidity include cash flow from operations and a 5-year, $600 million
revolving-credit facility, none of which was outstanding at December 31, 2004.
The company was in full compliance with financial and other covenants of its
revolving-credit agreement at year-end 2004. The company also utilizes an
asset-securitization program as off-balance-sheet financing. Amounts securitized
under this program were $10 million at both December 31, 2004, and December 31,
2003. Termination of the asset-securitization program would require the company
to increase its debt or decrease its cash balance by a corresponding amount.

The company has pension plans that cover substantially all of its
employees. Cash-funding requirements for the plans are governed primarily by the
Employee Retirement Income Security Act (ERISA). Based on long-term projections
and regulations in existence at December 31, 2004, no cash contributions to the
plans will be required through at least 2014.

On November 3, 2003, the company reached an agreement to settle a civil,
class-action lawsuit filed in 1999 against Tenneco, Tenneco Packaging, and
Packaging Corporation of America (PCA), Tenneco's former containerboard business
(Tenneco Packaging litigation). The settlement resulted in Pactiv recording a
pretax charge of $56 million, $35 million after tax, or $0.22 per share, a
portion of which ($35 million, or $19 million after tax) was paid in cash in
2003. This charge included the establishment of a reserve for the estimated
liability associated with lawsuits filed by certain members of the original
class action who subsequently opted out of the class and filed their own
lawsuits. While it is not possible to predict the outcome of related
proceedings, the company's management, based on its assessment of the facts and
circumstances now known, does not believe that any of these proceedings,
individually or in the aggregate, will have a materially adverse effect on the
company's financial position. However, actual outcomes may be different than
expected and could have a material effect on the company's results of operations
or cash flows in a particular period.

In December 2003, the board of directors approved a plan for the company to
repurchase up to 5 million shares of its common stock using open-market or
privately-negotiated transactions, with the repurchased shares to be held in
treasury for general corporate purposes. In March 2004, the board of directors
approved a plan for the company to repurchase an additional 5 million shares of
its common stock under terms and conditions similar to those included in the
December 2003 plan. In August 2004, the board of directors approved a plan for
the company to repurchase a third tranche of 5 million shares of its common
stock under terms and conditions similar to those included in the December 2003
and March 2004 plans. Pursuant to these authorizations, in 2004 the company
acquired 10.1 million shares at an average cost of $22.71 per share, or a total
outlay of $230 million. See Part II, Item 8 for additional information.

In January 2005, the company voluntarily prepaid its $169 million
synthetic-lease facility. See Note 18 for additional information.

Management believes that cash flow from operations, available cash
reserves, and the ability to obtain cash under the company's credit facilities
and asset-securitization program will be sufficient to meet current and future
liquidity and capital requirements.

16


YEAR 2003 COMPARED WITH 2002

RESULTS OF CONTINUING OPERATIONS

Sales



2003 2002 CHANGE
(Dollars in millions) ------ ------ ------

Consumer Products........................................... $ 888 $ 841 5.6%
Foodservice/Food Packaging.................................. 1,371 1,221 12.3
Protective and Flexible Packaging........................... 879 818 7.5
------ ------
Total....................................................... $3,138 $2,880 9.0%
------ ------


Total sales increased $258 million, or 9.0%, in 2003. Excluding the
positive impact of foreign-currency exchange rates ($71 million) and
acquisitions ($116 million), sales grew 2%, driven primarily by price increases
and volume growth in the base business.

Sales for the Consumer Products business of $888 million increased $47
million, or 5.6%, from $841 million in 2002, reflecting strong volume growth,
higher waste-bag selling prices, and lower promotional spending. Volume grew
solidly in tableware and waste bags, aided by realizing the full-year effect of
sales of new products introduced in 2002 (primarily Hefty(R) The Gripper(R) tall
kitchen bags). Similarly, the Hefty(R) Pals line of children's plates introduced
in 2002 posted volume and market-share growth during 2003.

Foodservice/Food Packaging segment sales of $1.371 billion increased $150
million, or 12.3%, from $1.221 billion in 2002. Excluding the positive impact of
acquisitions ($111 million) and foreign-currency exchange rates ($3 million),
sales grew 3%, driven primarily by higher selling prices. During 2003, price
increases were implemented in many areas of this business in response to higher
polystyrene-resin costs.

Sales of Protective and Flexible Packaging products of $879 million
increased $61 million, or 7.5%, from $818 million in 2002. Excluding the
positive impact of foreign-currency exchange rates ($68 million) and
acquisitions ($5 million), sales for this segment fell 1%, primarily reflecting
volume softness in Europe, offset partially by price increases in both North
America and Europe.

Operating Income



2003 2002 CHANGE
(Dollars in millions) ---- ---- ------

Consumer Products........................................... $195 $188 3.7%
Foodservice/Food Packaging.................................. 178 158 12.7
Protective and Flexible Packaging........................... 58 62 (6.5)
Other....................................................... 35 55 (36.4)
---- ----
Total....................................................... $466 $463 0.6%
---- ----


Total operating income was $466 million in 2003, an increase of $3 million,
or 0.6%, over 2002. The increase was driven principally by volume growth in both
the base business and from acquisitions, benefits from the company's
productivity and procurement initiatives, and lower advertising and promotion
expenses, offset partially by unfavorable spread (the difference between selling
prices and raw-material costs), a $45 million decline in noncash pension income,
and a $4 million reversal in 2002 of a previously recorded restructuring charge.

Operating income for the Consumer Products segment increased $7 million, or
3.7%, in 2003, driven principally by volume growth, productivity improvements,
and lower advertising and promotion expenses, offset partially by lower spread.

Operating income for the Foodservice/Food Packaging segment increased $20
million, or 12.7%, in 2003, driven principally by volume growth in the base
business and through acquisitions, and productivity improvements, offset
partially by lower spread.

17


Operating income for the Protective and Flexible Packaging segment
decreased $4 million, or 6.5%, from 2002, mainly reflecting unfavorable spread,
lower volume, and a $4 million reversal in 2002 of a previously recorded
restructuring charge, offset partially by benefits from productivity
improvements.

Operating income for the Other segment was $35 million in 2003, a decrease
of $20 million, or 36.4%, from 2002, driven mainly by a $45 million decline in
noncash pension income, offset partially by the impact of administrative
productivity improvement and procurement savings.

Tenneco Packaging Litigation Settlement and Other

On November 3, 2003, the company reached an agreement to settle a civil,
class-action lawsuit filed in 1999 against Tenneco, Tenneco Packaging, and PCA,
Tenneco's former containerboard business (Tenneco Packaging litigation). The
settlement resulted in Pactiv recording a pretax charge of $56 million, $35
million after tax, or $0.22 per share. This charge includes the establishment of
a reserve for the estimated liability associated with lawsuits filed by certain
members of the original class action who subsequently opted out of the class and
filed their own lawsuits. See Note 16 for additional information.

Income Taxes

The company's effective tax rate for 2003 was 37.7%, compared with 40.0%
for 2002, reflecting the positive impact of tax-planning strategies implemented
in the United States.

Income from Continuing Operations

The company recorded income from continuing operations of $195 million, or
$1.21 per share, in 2003, compared with $220 million, or $1.37 per share, in
2002. Income for 2003 included the impact of the Tenneco Packaging litigation
settlement of $35 million after tax, or $0.22 per share, and noncash pension
income of $40 million after tax, or $0.25 per share. Income for 2002 included
noncash pension income of $65 million after tax, or $0.41 per share, and $2
million after tax, or $0.01 per share, from the aforementioned reversal of a
previously recorded restructuring charge.

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." Pactiv adopted FIN No. 46, effective December 31, 2003,
requiring the company to recognize, as a cumulative effect of change in
accounting principles, depreciation expense on assets leased under its
synthetic-lease arrangement from lease inception to December 31, 2003, which
reduced net income in 2003 by $12 million, or $0.07 per share.

In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." Effective January 1,
2002, the company adopted SFAS No. 142 and recorded a related
goodwill-impairment charge for certain Protective and Flexible Packaging
businesses of $83 million, $72 million after tax, or $0.45 per share, as a
cumulative effect of change in accounting principles in the first quarter of
2002.

See "Changes in Accounting Principles" for further information.

CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142. SFAS No. 141 requires that business combinations initiated after
June 30, 2001, be accounted for using the purchase method of accounting and
broadens the criteria for recording intangible assets separate from goodwill.
SFAS No. 142 does not permit goodwill and certain intangibles to be amortized,
but requires that an impairment loss be recognized if recorded amounts exceed
fair values. Effective January 1, 2002, the company adopted SFAS No. 142, and
recorded a related goodwill-impairment charge of $83 million, $72 million after
tax, or $0.45 per share, in the first quarter of 2002.

18


In January 2003, the FASB issued FIN No. 46. FIN No. 46 addresses
accounting for VIEs, defined as separate legal structures that either do not
have equity investors with voting rights or have equity investors with voting
rights that do not provide sufficient financial resources for entities to
support their activities. FIN No. 46 requires that (1) companies consolidate
VIEs if they are required to recognize the majority of such entities' gains and
losses and (2) disclosures be made regarding VIEs that companies are not
required to consolidate but in which they have a significant variable interest.
Consolidation requirements apply immediately to VIEs created after January 31,
2003, and to existing VIEs in the first fiscal year or interim period ending
after December 15, 2003. Certain of the disclosure requirements apply to
financial statements issued after January 31, 2003, regardless of when VIEs were
created. Upon Pactiv's December 31, 2003, adoption of FIN No. 46, the company
consolidated a VIE associated with properties covered by its synthetic-lease
facility, resulting in an increase in long-term debt and property, plant, and
equipment of $169 million and $150 million, respectively. Consolidation of the
VIE also required the company to recognize, as a cumulative effect of change in
accounting principles, depreciation expense on the leased assets from lease
inception to December 31, 2003, of $19 million, $12 million after tax, or $0.07
per share.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS No. 123(R) requires that the fair value of all share-based payments to
employees, including grants of stock options, be recognized in the financial
statements, and supercedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," which required that the "intrinsic
value" method be used in determining compensation expense for share-based
payments to employees. Under SFAS No. 123(R), employee-compensation expense is
based on the grant-date fair value of the award and is recognized in the
statement of income over the period during which an employee is required to
provide service (normally the vesting period). SFAS No. 123(R) is effective as
of the beginning of the first interim or annual period after June 30, 2005. The
impact of adopting SFAS 123(R) cannot be predicted at this time, since it
depends on levels of future share-based payments. However, if the company had
adopted SFAS 123(R) in prior periods, the impact of adoption would have
paralleled impacts described under the caption "Stock-Based Compensation" of
Note 2 to the financial statements. SFAS No. 123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost be reported as cash
flow from financing activities, rather than its current classification in cash
flow from operating activities. It is not possible to predict these amounts,
since they depend on the timing of employee stock option exercises. Amounts
recognized for such excess tax deduction benefits were $6 million, $3 million,
and $1 million in 2004, 2003, and 2002, respectively.

CRITICAL ACCOUNTING POLICIES

Following are Pactiv's accounting policies that in management's opinion
involve the exercise of considerable judgment and the use of estimates, and have
the most significant impact on the company's financial condition and results of
operations.

REVENUE RECOGNITION

The company recognizes sales when the risks and rewards of ownership have
transferred to the customer, which is generally considered to have occurred as
products are shipped. In arriving at net sales, the company estimates the amount
of deductions from sales that are likely to be earned or taken by customers in
conjunction with incentive programs such as volume rebates, early payment
discounts, and coupon redemptions. Such estimates are based on historical trends
and are reviewed quarterly for possible revision. The company believes the
amount of sales deductions reflected in net sales for the 12 months ended
December 31, 2004, is reasonable. In the event that future sales-deduction
trends vary significantly from past or expected trends, reported sales may
increase or decrease by a material amount.

INVENTORY VALUATION

The company's inventories are stated at the lower of cost or market. A
portion of inventories (52% and 53% at December 31, 2004, and 2003,
respectively) is valued using the last-in, first-out
19


(LIFO) method of accounting. Management prefers the LIFO method in that it
reflects in cost of sales the current cost of the company's raw materials
(primarily plastic resins), which can be volatile. If the company had valued
inventories using the first-in, first-out (FIFO) accounting method, net income
would have been $32 million, or $0.21 per share, higher in 2004, $9 million, or
$0.06 per share, higher in 2003, and $2 million, or $0.01 per share, higher in
2002.

The company's Protective and Flexible Packaging business values its
inventory using FIFO or average-cost methods. Many of this business' operations
are located in countries in which the use of the LIFO method of inventory
accounting is not permitted.

Management periodically reviews inventory balances to identify slow-moving
and/or obsolete items. This determination is based on a number of factors,
including new-product introductions, changes in consumer-demand patterns, and
historical usage trends.

PENSION PLANS

The company accounts for pension plans in accordance with requirements of
SFAS No. 87, "Employers' Accounting for Pensions." Pension-plan income ($48
million, $64 million, and $109 million for the 12 months ended December 31,
2004, 2003, and 2002, respectively) is included in the statement of income as an
offset to selling, general, and administrative expenses. It is estimated that
the company's noncash pension income will decline to $46 million in 2005.

Projections of pension income are based on a number of factors, including
estimates of future returns on pension-plan assets; assumptions pertaining to
the amortization of actuarial gains/losses; expectations regarding employee
compensation; and assumptions related to participant turnover, retirement age,
and life expectancy.

In developing its assumption regarding the rate of return on pension-plan
assets, the company estimates future returns on various classes of assets,
risk-free rates of return, and long-term inflation rates. Since inception in
1971, the pension plans' annual rate of return on assets has averaged 11.0%.
Historically, the plans have invested approximately 70% of assets in equity
securities and 30% in fixed-income investments. After considering all of these
factors, the company concluded that the use of a 9% rate-of-return on assets
assumption was appropriate for 2004. Holding all other assumptions constant, a
one-half percentage-point change in the rate-of-return on assets assumption
would impact the company's pretax pension income by approximately $19 million.

The company's discount-rate assumption is based on the composite yield on a
portfolio of high-quality corporate bonds constructed with durations to match
the plans' future benefit obligations. In this connection, the company used a
discount-rate assumption of 6.25% for both 2004 and 2003. Holding all other
assumptions constant, a one-half percentage-point change in the discount rate
would impact the company's pretax pension income by approximately $5 million.

The company utilizes a market-related method for calculating the value of
plan assets. This method recognizes the difference between actual and expected
returns on plan assets over a 5-year period. Resulting unrecognized gains or
losses, along with other actuarial gains and losses, are amortized using the
"corridor approach" discussed in SFAS No. 87.

20


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

DERIVATIVE FINANCIAL INSTRUMENTS

The company is exposed to market risks related to changes in
foreign-currency exchange rates, interest rates, and commodity prices. To manage
these risks, the company, from time to time, enters into various hedging
contracts in accordance with established policies and procedures. The company
does not use hedging instruments for trading purposes and is not a party to any
transactions involving leveraged derivatives.

FOREIGN-CURRENCY EXCHANGE

The company uses foreign-currency forward contracts to hedge its exposure
to adverse changes in exchange rates, primarily related to the British pound and
the euro. Associated gains or losses offset gains or losses on underlying assets
or liabilities.

In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at December 31, 2004, all of which will mature in 2005.



NOTIONAL AMOUNT NOTIONAL AMOUNT
OF FOREIGN CURRENCY EXCHANGE RATE OF U.S. DOLLARS
(In millions, except settlement rates) ------------------- ------------- ---------------

Euros -- Purchase...................... 53 1.363 72
-- Sell.......................... (26) 1.363 (36)
British pounds -- Purchase...................... 17 1.925 34
-- Sell.......................... (35) 1.925 (67)
Czech korunas -- Sell.......................... (22) 0.044 (1)
Hungarian forint -- Purchase...................... 245 0.005 2
-- Sell.......................... (595) 0.005 (3)


INTEREST RATES

At December 31, 2004, the company had public-debt securities of $1.174
billion outstanding, with fixed interest rates and maturity dates ranging from 1
to 23 years. Should the company decide to redeem these securities prior to their
stated maturity, it would incur costs based on the fair value of the securities
at that time. In addition, the company had other fixed-rate debt of $1 million
and floating-rate debt of $169 million outstanding at December 31, 2004.

The following table provides information about Pactiv's financial
instruments that are sensitive to interest-rate risks.



THERE-
2005 2007 AFTER TOTAL
(Dollars in millions) ---- ---- ---------- ------

Fixed-rate debt securities.................................. $299 $ 99 $776 $1,174
Average interest rate....................................... 7.2% 8.0% 8.1% 7.9%
Fair value.................................................. $308 $106 $965 $1,379
Floating-rate debt(1)....................................... $169 $ -- $ -- $ 169
Fair value.................................................. $169 $ -- $ -- $ 169
Fixed-rate debt............................................. $ 1 $ -- $ -- $ 1
Average interest rate....................................... 4.5% -- -- 4.5%
Fair value.................................................. $ 1 $ -- $ -- $ 1


- ---------------

(1) In January 2005, the company voluntarily prepaid its $169 million
synthetic-lease facility. See Note 18 for additional information.

Prior to the spin-off, the company entered into an interest-rate swap to
hedge its exposure to interest-rate movements. The company settled this swap in
November 1999, incurring a $43 million loss, which is being recognized as
additional interest expense over the average life of the underlying debt.

21


In the first quarter of 2001, the company entered into interest-rate swap
agreements to convert floating-rate debt on its synthetic-lease obligations to
fixed-rate debt. This action was taken to reduce the company's exposure to
interest-rate risk. During the first quarter of 2002, the company exited these
swap agreements, and the resulting accumulated net loss ($1 million at December
31, 2004) is being expensed over the remaining life of the underlying
obligation.

22


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX OF THE FINANCIAL STATEMENTS OF PACTIV CORPORATION
AND CONSOLIDATED SUBSIDIARIES



PAGE
----

Management's Report on Internal Control over Financial
Reporting................................................. 24
Report of Independent Registered Public Accounting Firm..... 25
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting................. 26
Statement of income for each of the three years in the
period ended December 31, 2004............................ 27
Statement of financial position at December 31, 2004 and
2003...................................................... 28
Statement of cash flows for each of the three years in the
period ended December 31, 2004............................ 29
Statement of shareholders' equity and comprehensive income
(loss) for each of the three years in the period ended
December 31, 2004......................................... 30
Notes to financial statements............................... 31


23


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the company is responsible for establishing and maintaining
effective internal control over financial reporting (as defined in Rules
13a-15(f) under the Securities Exchange Act of 1934). The company's internal
control over financial reporting is designed to provide reasonable assurance to
the company's management and board of directors regarding the preparation and
fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.

Management assessed the effectiveness of the company's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth in the Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our assessment, we believe that, as of December 31,
2004, the company's internal control over financial reporting was effective
based on those criteria.

Management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004, has been audited by Ernst & Young
LLP, the independent registered public accounting firm who also audited the
company's consolidated financial statements. Ernst & Young's attestation report
on management's assessment of the company's internal control over financial
reporting appears on page 25 hereof.

24


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Pactiv Corporation:

We have audited the accompanying consolidated statements of financial
position of Pactiv Corporation and consolidated subsidiaries (the company) as of
December 31, 2004, and 2003, and the related consolidated statements of income,
cash flows, and shareholders' equity and other comprehensive income (loss) for
each of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedule listed in the index for Item 15. These
financial statements and schedule are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

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

As discussed in Notes 2 and 8 to the financial statements, the company
changed its method of accounting for goodwill and intangible assets in the year
ended December 31, 2002, and for consolidation of variable interest entities as
of December 31, 2003.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 15, 2005, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 15, 2005

25


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING

The Board of Directors and Shareholders of Pactiv Corporation:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Pactiv
Corporation and consolidated subsidiaries (the "company") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

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

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

In our opinion, management's assessment that the company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on the
COSO criteria.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the accompanying
consolidated financial statements of the company as of December 31, 2004 and
2003, and for each of the three years in the period ended December 31, 2004, and
our report dated March 15, 2005, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
March 15, 2005

26


CONSOLIDATED STATEMENT OF INCOME



FOR YEARS ENDED DECEMBER 31 2004 2003 2002
(In millions, except share and per-share data) ----------- ----------- -----------

SALES
Consumer Products..................................... $ 934 $ 888 $ 841
Foodservice/Food Packaging............................ 1,490 1,371 1,221
Protective and Flexible Packaging..................... 958 879 818
----------- ----------- -----------
3,382 3,138 2,880
----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales, excluding depreciation and
amortization....................................... 2,450 2,206 1,967
Selling, general, and administrative.................. 323 302 296
Depreciation and amortization......................... 169 163 158
Other expense, net.................................... 2 1 --
Restructuring and other............................... 93 -- (4)
----------- ----------- -----------
3,037 2,672 2,417
----------- ----------- -----------
OPERATING INCOME........................................ 345 466 463
Tenneco Packaging litigation settlement and other....... -- 56 --
Interest expense, net of interest capitalized........... 101 96 96
Income-tax expense...................................... 90 118 146
Minority interest....................................... (1) 1 1
----------- ----------- -----------
Income from continuing operations....................... 155 195 220
Cumulative effect of changes in accounting principles,
net of income tax..................................... -- (12) (72)
----------- ----------- -----------
NET INCOME.............................................. $ 155 $ 183 $ 148
EARNINGS PER SHARE
Average number of shares of common stock outstanding
Basic................................................. 151,289,798 157,932,323 158,618,274
Diluted............................................... 153,763,156 160,143,600 160,613,075
Basic earnings per share of common stock
Continuing operations................................. $ 1.02 $ 1.23 $ 1.38
Cumulative effect of changes in accounting
principles......................................... -- (0.07) (0.45)
----------- ----------- -----------
Net income per basic share of common stock............ $ 1.02 $ 1.16 $ 0.93
----------- ----------- -----------
Diluted earnings per share of common stock
Continuing operations................................. $ 1.01 $ 1.21 $ 1.37
Cumulative effect of changes in accounting
principles......................................... -- (0.07) (0.45)
----------- ----------- -----------
Net income per diluted share of common stock.......... $ 1.01 $ 1.14 $ 0.92
----------- ----------- -----------


The accompanying notes to financial statements are an integral part of this
statement.

27


CONSOLIDATED STATEMENT OF FINANCIAL POSITION



2004 2003
AT DECEMBER 31 (IN MILLIONS, EXCEPT SHARE DATA) ------ ------

ASSETS
Current assets
Cash and temporary cash investments....................... $ 222 $ 140
Accounts and notes receivable
Trade, less allowances of $11 and $11 in the respective
periods............................................... 391 346
Other.................................................. 15 28
Inventories............................................... 406 399
Deferred income taxes..................................... 29 46
Prepayments and other..................................... 16 23
------ ------
Total current assets...................................... 1,079 982
------ ------
Property, plant, and equipment, net......................... 1,445 1,522
------ ------
Other assets
Goodwill.................................................. 657 643
Intangible assets, net.................................... 280 298
Pension assets, net....................................... 214 195
Other..................................................... 66 66
------ ------
Total other assets........................................ 1,217 1,202
------ ------
TOTAL ASSETS................................................ $3,741 $3,706
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt................................................... $ 472 $ 5
Accounts payable.......................................... 246 198
Taxes accrued............................................. 13 16
Interest accrued.......................................... 9 9
Accrued promotions, rebates, and discounts................ 67 69
Accrued litigation........................................ 25 29
Accrued payroll and benefits.............................. 71 79
Other..................................................... 81 69
------ ------
Total current liabilities................................. 984 474
------ ------
Long-term debt.............................................. 869 1,336
------ ------
Deferred income taxes....................................... 248 212
------ ------
Pension and post-retirement benefits........................ 505 576
------ ------
Other....................................................... 43 39
------ ------
Minority interest........................................... 9 8
------ ------
Shareholders' equity
Common stock (148,711,815 and 156,335,967 shares issued
and outstanding after deducting 23,071,362 and
15,447,208 shares held in treasury in the respective
periods)............................................... 2 2
Premium on common stock and other capital surplus......... 1,141 1,326
Accumulated other comprehensive income (loss)
Currency translation adjustment........................ 90 57
Additional minimum pension liability................... (978) (997)
Derivative losses...................................... (1) (1)
Retained earnings......................................... 829 674
------ ------
Total shareholders' equity................................ 1,083 1,061
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $3,741 $3,706
------ ------


The accompanying notes to financial statements are an integral part of this
statement.

28


CONSOLIDATED STATEMENT OF CASH FLOWS



2004 2003 2002
FOR THE YEARS ENDED DECEMBER 31 (In millions) ----- ----- -----

OPERATING ACTIVITIES
Income from continuing operations........................... $ 155 $ 195 $ 220
Adjustments to reconcile income from continuing operations
to cash provided by operating activities
Depreciation and amortization............................. 169 163 158
Deferred income taxes..................................... 34 33 101
Restructuring and other................................... 36 -- (4)
Noncash retirement benefits, net.......................... (48) (64) (109)
Changes in components of working capital
(Increase) decrease in receivables..................... (21) 4 (40)
Increase in inventories................................ (3) (15) (9)
(Increase) decrease in prepayments and other current
assets................................................ 4 (1) 3
Increase (decrease) in accounts payable................ 46 (27) 4
Increase in taxes accrued.............................. 6 36 35
Increase (decrease) in other current liabilities....... (12) 8 10
Other..................................................... 1 4 15
----- ----- -----
CASH PROVIDED BY OPERATING ACTIVITIES....................... 367 336 384
----- ----- -----
INVESTING ACTIVITIES
Net proceeds from sale of businesses and assets............. 9 3 7
Expenditures for property, plant, and equipment............. (100) (112) (126)
Acquisitions of businesses and assets....................... -- (82) (125)
Investments and other....................................... -- (3) --
----- ----- -----
CASH USED BY INVESTING ACTIVITIES........................... (91) (194) (244)
----- ----- -----
FINANCING ACTIVITIES
Issuance of common stock.................................... 33 20 11
Purchase of common stock.................................... (230) (87) (40)
Retirement of long-term debt................................ -- (67) (22)
Net decrease in short-term debt, excluding current
maturities of long-term debt.............................. -- -- (6)
----- ----- -----
CASH USED BY FINANCING ACTIVITIES........................... (197) (134) (57)
----- ----- -----
Effect of foreign-exchange rate changes on cash and
temporary cash investments................................ 3 5 3
----- ----- -----
INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS............. 82 13 86
----- ----- -----
Cash and temporary cash investments, January 1.............. 140 127 41
----- ----- -----
CASH AND TEMPORARY CASH INVESTMENTS, DECEMBER 31............ $ 222 $ 140 $ 127
----- ----- -----
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
Cash paid during year for interest.......................... $ 100 $ 97 $ 97
Cash paid for income taxes.................................. 41 44 18


The accompanying notes to financial statements are an integral part of this
statement.

29


CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
(LOSS)



PREMIUM ON
COMMON STOCK ACCUMULATED
AND OTHER OTHER TOTAL TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME (LOSS) EQUITY INCOME (LOSS)
(In millions) ------ ------------ -------- ------------- ------------- -------------

BALANCE, DECEMBER 31, 2001.... $2 $1,398 $343 $ (54) $1,689
Premium on common stock issued
(1,369,545 shares).......... 21 21
Treasury stock repurchased
(2,119,009 shares).......... (40) (40)
Translation of
foreign-currency
statements.................. 42 42 $ 42
Additional minimum pension-
liability adjustment, net of
tax of $538................. (966) (966) (966)
Change in unrealized losses on
interest-rate swaps......... 3 3 3
Net income.................... 148 148 148
-----
Total comprehensive loss...... (773)
-- ------ ---- ----- ------ -----
BALANCE, DECEMBER 31, 2002.... 2 1,379 491 (975) 897
Premium on common stock issued
(1,966,849 shares).......... 34 34
Treasury stock repurchased
(4,312,600 shares).......... (87) (87)
Translation of
foreign-currency
statements.................. 61 61 61
Additional minimum pension-
liability adjustment, net of
tax of $15.................. (28) (28) (28)
Change in unrealized losses on
interest-rate swaps......... 1 1 1
Net income.................... 183 183 183
-----
Total comprehensive income.... 217
-- ------ ---- ----- ------ -----
BALANCE, DECEMBER 31, 2003.... 2 1,326 674 (941) 1,061
Premium on common stock issued
(2,524,346 shares).......... 45 45
Treasury stock repurchased
(10,148,500 shares)......... (230) (230)
Translation of
foreign-currency
statements.................. 33 33 33
Additional minimum pension-
liability adjustment, net of
tax of $12.................. 19 19 19
Net income.................... 155 155 155
-----
TOTAL COMPREHENSIVE INCOME.... $ 207
-- ------ ---- ----- ------ -----
BALANCE, DECEMBER 31, 2004.... $2 $1,141 $829 $(889) $1,083
-- ------ ---- ----- ------


The accompanying notes to financial statements are an integral part of this
statement.

30


NOTES TO FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Financial statements for all periods presented herein have been prepared on
a consolidated basis in accordance with generally accepted accounting principles
consistently applied. All per-share information is presented on a diluted basis
unless otherwise noted. Certain amounts in the prior years' financial statements
have been reclassified to conform with the presentation used in 2004.

The company has 4 reporting segments: Consumer Products, which relates
principally to the manufacture and sale of disposable plastic, molded-fiber,
pressed-paperboard, and aluminum packaging products, such as waste bags,
tableware, food-storage bags, and cookware, for consumer markets, such as
grocery stores, mass merchandisers, and discount chains; Foodservice/Food
Packaging, which relates primarily to the manufacture and sale of various
disposable plastic, molded-fiber, pressed-paperboard, and aluminum packaging
products for foodservice and food-packaging markets, such as restaurants and
other institutional foodservice outlets, food processors, and grocery chains;
Protective and Flexible Packaging, which relates to the manufacture and sale of
plastic, paperboard, and molded-fiber products for protective-packaging markets,
such as electronics, automotive, furniture, and e-commerce, and for
flexible-packaging applications in food, medical, pharmaceutical, chemical, and
hygienic markets; and Other, which relates to corporate and
administrative-service operations and retiree-benefit income and expense. The
accounting policies of the reporting segments are the same as those for Pactiv
as a whole. Where discrete financial information is not available by segment,
reasonable allocations of expenses and assets are used.

NOTE 2. SUMMARY OF ACCOUNTING POLICIES

CONSOLIDATION

The financial statements of the company include all majority-owned
subsidiaries. Investments in 20%-to 50%-owned companies in which Pactiv has the
ability to exert significant influence over operating and financial policies are
carried at cost plus share of equity in undistributed earnings since date of
acquisition. All intercompany transactions are eliminated.

FOREIGN-CURRENCY TRANSLATION

Financial statements of international operations are translated into U.S.
dollars using end-of-period exchange rates for assets and liabilities and the
periods' weighted-average exchange rates for sales, expenses, gains, and losses.
Translation adjustments are recorded as a component of shareholders' equity.

CASH AND TEMPORARY CASH INVESTMENTS

The company defines cash and temporary cash investments as checking
accounts, money-market accounts, certificates of deposit, and U.S. Treasury
notes having an original maturity of 90 days or less.

ACCOUNTS AND NOTES RECEIVABLE

Trade accounts receivable are classified as current assets and are reported
net of allowances for doubtful accounts. The company records such allowances
based on a number of factors, including historical trends and specific customer
liquidity.

On a recurring basis, the company sells an undivided interest in a pool of
trade receivables meeting certain criteria to a third party as an alternative to
debt financing. Amounts sold were $10 million at both December 31, 2004, and
2003. The remainder of the pool ($94 million at December 31, 2004) is pledged as
collateral in the event any of the sold receivables were to be uncollectible.
Such sales, which represent a form of off-balance-sheet financing, are recorded
as a reduction of accounts and notes receivable in the statement of financial
position, and changes in such amounts are included in cash provided by operating
activities in the statement of cash flows. Discounts and fees related to these
sales were immaterial in 2004 and 2003 and totaled $1 million in 2002, and were
included in other income/expense in the statement of

31

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

income. In the event that either Pactiv or the third-party purchaser of the
trade receivables were to discontinue this program, the company's debt would
increase or its cash balance would decrease by an amount corresponding to the
level of sold receivables at such time.

INVENTORIES

Inventories are stated at the lower of cost or market. A portion of
inventories (52% and 53% at December 31, 2004, and 2003, respectively) are
valued using the last-in, first-out method of accounting. All other inventories
are valued using first-in, first-out (FIFO) or average-cost methods. If FIFO or
average-cost methods had been used to value all inventories, the total inventory
balance would have been $54 million higher at December 31, 2004, and $3 million
higher at December 31, 2003.

PROPERTY, PLANT, AND EQUIPMENT, NET

Depreciation is recorded on a straight-line basis over the estimated useful
lives of assets. Useful lives range from 10 to 40 years for buildings and
improvements and from 3 to 25 years for machinery and equipment. Depreciation
expense totaled $152 million, $146 million, and $140 million for the years ended
December 31, 2004, 2003, and 2002, respectively.

The company capitalizes certain costs related to the purchase and
development of software used in its business. Such costs are amortized over the
estimated useful lives of the assets, ranging from 3 to 12 years. Capitalized
software development costs, net of amortization, were $47 million and $53
million at December 31, 2004, and 2003, respectively.

The company periodically reevaluates carrying values and estimated useful
lives of long-lived assets to determine if adjustments are warranted. The
company uses estimates of undiscounted cash flows from long-lived assets to
determine whether the book value of such assets is recoverable over the assets'
remaining useful lives.

GOODWILL AND INTANGIBLES, NET

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 does not permit goodwill and indefinite-lived
intangibles to be amortized and requires that these assets be reviewed at least
annually for possible impairment. The company's annual review for possible
impairment of goodwill and indefinite-lived intangibles is conducted in the
quarter ending December 31, or earlier as warranted by events or changes in
circumstances. Possible impairment of goodwill is determined using a two-step
process. The first step requires that the fair value of individual reporting
units be compared with their respective carrying values. If the carrying value
of a reporting unit exceeds its fair value, a second step is performed to
measure the amount of impairment, if any. This second step requires that the
fair value of a reporting unit be allocated to all of the assets and liabilities
of that unit, including definite- and indefinite-lived intangibles. Any
remaining fair value is the implied goodwill of the reporting unit, which is
then compared with the carrying value of goodwill to determine possible
impairment. In determining the fair value of tangible assets, the company
obtains appraisals from independent valuation firms. Similarly, the impairment
test for definite- and indefinite-lived intangible assets requires that their
fair values be compared with their carrying values. If the carrying value of an
intangible asset exceeds its fair value, an impairment equal to the excess is
recognized. Estimates of fair value used in testing goodwill and
indefinite-lived intangible assets for possible impairment are primarily
determined using projected discounted cash flows, along with other publicly
available market information. These approaches use estimates and assumptions,
including the amount and timing of projected cash flows, discount rates
reflecting the risk inherent in future cash flows, perpetual growth rates, and
appropriate market comparables. Intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. See Note
8 to the financial statements for additional information.

32

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

ENVIRONMENTAL LIABILITIES

The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Where it is
probable that related liabilities exist and where reasonable estimates of such
liabilities can be made, Pactiv establishes associated reserves. Estimated
liabilities are subject to change as additional information becomes available
regarding the magnitude of possible clean-up costs, the expense and
effectiveness of alternative clean-up methods, and other possible liabilities
associated with such situations. However, management believes that any
additional costs that may be incurred as more information becomes available will
not have a material adverse effect on the company's financial position, although
such costs could have a material effect on the company's results of operations
or cash flows in a particular period.

REVENUE RECOGNITION

The company recognizes sales when the risks and rewards of ownership have
transferred to the customer, which is generally considered to have occurred as
products are shipped.

FREIGHT

The company records amounts billed to customers for shipping and handling
as sales, and records shipping and handling expenses as cost of sales.

GENERAL AND ADMINISTRATIVE EXPENSES

The company records net pension income as an offset to selling, general,
and administrative expenses. Such noncash income totaled $48 million, $64
million, and $109 million in 2004, 2003, and 2002, respectively.

RESEARCH AND DEVELOPMENT

Research and development costs, which are expensed as incurred, totaled $33
million, $32 million, and $35 million in 2004, 2003, and 2002, respectively.

ADVERTISING

Advertising production costs are expensed as incurred, while advertising
media costs are expensed in the period in which the related advertising first
takes place. Advertising expenses were $12 million, $7 million, and $17 million
in 2004, 2003, and 2002, respectively.

STOCK-BASED COMPENSATION

In accounting for stock-based employee compensation, the company uses the
intrinsic-value method specified in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Shown below are net income
and basic and diluted earnings per share as reported and

33

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

adjusted to reflect the use of the fair-value method in determining stock-based
compensation costs, as prescribed in SFAS No. 123, "Accounting for Stock-Based
Compensation."



2004 2003 2002
(In millions, except for per-share data) ------ ------ ------

Net income.................................................. $ 155 $ 183 $ 148
After-tax adjustment of stock-based compensation costs
Intrinsic-value method.................................... 3 4 4
Fair-value method......................................... (13) (14) (13)
------ ------ ------
Pro forma................................................... $ 145 $ 173 $ 139
------ ------ ------
EARNINGS PER SHARE
Basic....................................................... $ 1.02 $ 1.16 $ 0.93
Adjustment of stock-based compensation costs
Intrinsic-value method.................................... 0.02 0.03 0.02
Fair-value method......................................... (0.08) (0.09) (0.08)
------ ------ ------
Pro forma................................................... $ 0.96 $ 1.10 $ 0.87
------ ------ ------
Diluted..................................................... $ 1.01 $ 1.14 $ 0.92
Adjustment of stock-based compensation costs
Intrinsic-value method.................................... 0.02 0.03 0.02
Fair-value method......................................... (0.08) (0.09) (0.08)
------ ------ ------
Pro forma................................................... $ 0.95 $ 1.08 $ 0.86
------ ------ ------


INCOME TAXES

The company utilizes the asset and liability method of accounting for
income taxes, which requires that deferred-tax assets and liabilities be
recorded to reflect the future tax consequences of temporary timing differences
between the tax and financial-statement basis of assets and liabilities.
Deferred-tax assets are reduced by a valuation allowance if management
determines that it is more likely than not that a portion of deferred-tax assets
will not be realized in a future period. Estimates used to recognize
deferred-tax assets are subject to revision in subsequent periods based on new
facts or circumstances.

The company does not provide for U.S. federal income taxes on unremitted
earnings of foreign subsidiaries in that it is management's present intention to
reinvest those earnings in foreign operations. Unremitted earnings of foreign
subsidiaries totaled $157 million and $128 million at December 31, 2004, and
December 31, 2003, respectively. The unrecognized deferred-tax liability
associated with unremitted earnings totaled approximately $42 million and $25
million at December 31, 2004, and December 31, 2003, respectively.

In October 2004, the American Jobs Creation Act of 2004 was enacted. The
Act provides a temporary incentive to U.S. corporations to repatriate
accumulated income earned abroad by allowing them to claim a deduction of 85% of
dividends received for certain dividends from controlled foreign corporations.
This provision is subject to several limitations, and, uncertainty currently
exists with respect to how to interpret numerous provisions in the Act. As a
result, the company is not yet able to determine whether, and to what extent, it
will repatriate foreign earnings that have not yet been remitted to the United
States.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding. Diluted
earnings per share is calculated in the same manner; however, adjustments are
made to reflect the potential issuance of dilutive shares.

34

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

RISK MANAGEMENT

From time to time, the company uses derivative financial instruments,
principally foreign-currency purchase and sale contracts with terms of less than
1 year, to hedge its exposure to changes in foreign-currency exchange rates. Net
gains or losses on such contracts are recognized in the income statement as
offsets to foreign-currency gains or losses on the underlying transactions. In
the statement of cash flows, cash receipts and payments related to hedge
contracts are classified in the same way as cash flows from the transactions
being hedged.

Interest-rate risk management is accomplished through the use of swaps.
Gains and losses on the settlement of swaps are amortized over the remaining
lives of underlying assets or liabilities.

From time to time, the company employs commodity forward or other
derivative contracts to hedge its exposure to adverse changes in the price
levels of certain commodities. These instruments are intended to limit the
upside risk on purchases of such commodities used in the company's production
processes.

Gains and losses on derivative contracts were not material in 2004, 2003,
and 2002. The company does not use derivative financial instruments for
speculative purposes.

CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142. SFAS No. 141 requires that business combinations initiated after
June 30, 2001, be accounted for using the purchase method of accounting and
broadens the criteria for recording intangible assets separate from goodwill.
SFAS No. 142 does not permit goodwill and certain intangibles to be amortized,
but requires that an impairment loss be recognized if recorded amounts exceed
fair values. Effective January 1, 2002, the company adopted SFAS No. 142, and
recorded a goodwill-impairment charge of $83 million, $72 million after tax, or
$0.45 per share, in the first quarter of 2002. See Note 8 for additional
information.

In January 2003, the FASB issued Financial Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 addresses accounting
for variable interest entities (VIEs), defined as separate legal structures that
either do not have equity investors with voting rights or have equity investors
with voting rights that do not provide sufficient financial resources for
entities to support their activities. FIN No. 46 requires that (1) companies
consolidate VIEs if they are required to recognize the majority of such
entities' gains and losses and (2) disclosures be made regarding VIEs that
companies are not required to consolidate but in which they have a significant
variable interest. Consolidation requirements apply immediately to VIEs created
after January 31, 2003, and to existing VIEs in the first fiscal year or interim
period ending after December 15, 2003. Certain of the disclosure requirements
apply to financial statements issued after January 31, 2003, regardless of when
VIEs were created. Upon Pactiv's December 31, 2003, adoption of FIN No. 46, the
company consolidated a VIE associated with properties covered by its
synthetic-lease facility, resulting in an increase in long-term debt and
property, plant, and equipment of $169 million and $150 million, respectively.
Consolidation of the VIE also required the company to recognize, as a cumulative
effect of change in accounting principles, depreciation expense on the leased
assets from lease inception to December 31, 2003, of $19 million, $12 million
after tax, or $0.07 per share. Consolidation of the VIE associated with the
company's synthetic-lease facility lowered 2004 net income by approximately $3
million, or $0.02 per share.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS No. 123(R) requires that the fair value of all share-based payments to
employees, including grants of stock options, be recognized in the financial
statements, and supercedes APB No. 25, which required that the "intrinsic value"
method be used in determining compensation expense for share-based payments to
employees. Under SFAS No. 123(R), employee-compensation expense is based on the
grant-date fair value of the award and is recognized in the statement of income
over the period during which an employee is required

35

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

to provide service (normally the vesting period). SFAS No. 123(R) is effective
as of the beginning of the first interim or annual period after June 30, 2005.
The impact of adopting SFAS 123(R) cannot be predicted at this time, since it
depends on levels of future share-based payments. However, if the company had
adopted SFAS 123(R) in prior periods, the impact of adoption would have
paralleled impacts described under the caption "Stock-Based Compensation" of
this footnote. SFAS No. 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost be reported as cash flow from financing
activities, rather than its current classification in cash flow from operating
activities. It is not possible to predict these amounts, since they depend on
the timing of employee stock option exercises. Amounts recognized for such
excess tax deduction benefits were $6 million, $3 million, and $1 million in
2004, 2003, and 2002, respectively.

ESTIMATES

Financial-statement presentation requires management to make estimates and
assumptions that affect reported amounts for assets, liabilities, sales, and
expenses. Actual results may differ from such estimates.

RECLASSIFICATIONS

Certain prior-year amounts have been reclassified to conform to
current-year presentation.

NOTE 3. RESTRUCTURING AND OTHER

In the first quarter of 2004, the company announced a restructuring program
to rationalize excess manufacturing capacity and reduce overhead costs, and to
reinvest a portion of the related savings in strategic growth initiatives. In
this connection, the company recorded restructuring and other charges totaling
$93 million, $58 million after tax, or $0.38 per share in 2004. The principal
strategic objectives of the program are to (1) rationalize inefficient
manufacturing assets, primarily certain molded-fiber facilities in North America
and the United Kingdom; (2) reduce overhead in several areas of the business,
thereby eliminating non-value-added activities; (3) increase the number of new
product launches over the next several years; and (4) increase the value of the
Hefty(R) brand. Implementation of the program resulted in the elimination of
approximately 1,000 salaried and hourly positions worldwide. The total cost of
the restructuring program is expected to be approximately $96 million, $60
million after tax, or $0.39 per share, covering severance, asset write-offs, and
other, which consists principally of asset removal costs, including asbestos
insulation abatement and associated expenses at the company's closed
molded-fiber facility in the United Kingdom. The majority of the program was
executed in the second quarter of 2004, with the balance expected to be
completed in 2005.

After-tax cash payments related to the restructuring and other actions
totaled $12 million for full-year 2004.

36

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following summarizes actual and expected impacts of restructuring and
related actions.



ASSET
SEVERANCE WRITE-OFFS OTHER(1) TOTAL
(In millions) --------- ---------- --------- -----

Accrued restructuring balance at January 1, 2004......... $ -- $ -- $ -- $ --
Additions/adjustments to the account
Consumer Products...................................... 4 -- -- 4
Foodservice/Food Packaging............................. 8 18 5 31
Protective and Flexible Packaging...................... 12 9 34 55
Other.................................................. -- -- 3 3
---- ---- ---- ----
Total additions/adjustments.............................. 24 27 42 93
Cash payments............................................ (21) -- (34) (55)
Charges against asset accounts........................... -- (27) -- (27)
---- ---- ---- ----
Accrued restructuring balance at December 31, 2004....... $ 3 $ -- $ 8 $ 11
---- ---- ---- ----
PROJECTED TOTAL RESTRUCTURING PROGRAM COSTS
Consumer Products...................................... $ 4 $ -- $ -- $ 4
Foodservice/Food Packaging............................. 8 18 6 32
Protective and Flexible Packaging...................... 12 9 36 57
Other.................................................. -- -- 3 3
---- ---- ---- ----
Total.................................................... $ 24 $ 27 $ 45 $ 96
---- ---- ---- ----


- ---------------

(1) Consists principally of asset removal costs, including asbestos insulation
abatement and associated expenses at the company's closed molded-fiber
facility in the United Kingdom.

NOTE 4. ACQUISITIONS AND DISPOSITIONS

On June 18, 2002, the company purchased Winkler Forming Inc., a leading
thermoformer of amorphous polyethylene terephthalate (APET) products for food
packaging, for $78 million. During the third quarter of 2002, the company
received $3 million from the seller in interim settlement of working-capital
amounts. Appraisals of the fair-market value of the assets and liabilities
acquired were finalized during the second quarter of 2003, resulting in related
goodwill being reduced by $14 million and property, plant, and equipment and
intangible assets both being increased by $7 million.

On October 21, 2002, Pactiv purchased a 70% interest in the stock of
Mexico-based Central de Bolsas, S.A. de C.V. (Jaguar), a leading thermoformer of
high-impact polystyrene (HIPS) cold cups and plates and polystyrene foam
foodservice/food packaging. For this interest, Pactiv paid $31 million to the
shareholders of Jaguar and made a $20 million equity investment in Jaguar. On
August 8, 2003, the company acquired the remaining 30% of the stock of Jaguar
for $22 million, making it a wholly-owned subsidiary of Pactiv. At December 31,
2003, the allocation of the purchase price to the net assets of Jaguar and the
related recognition of $12 million of goodwill were based on preliminary
estimates of the fair-market value of the assets and liabilities acquired, and,
therefore, were subject to revision upon receipt of final appraisals. Appraisals
of the fair-market value of the assets acquired were finalized during 2004,
resulting in related goodwill being increased by $10 million, and property,
plant, and equipment being decreased by $10 million.

On October 27, 2003, Pactiv purchased, for $60 million, the
plastic-packaging assets of Rock-Tenn Company, which are used in the manufacture
of APET and polypropylene products for food packaging. Appraisals of the
fair-market value of the assets acquired were finalized during the second
quarter of 2004, resulting in related goodwill being reduced by $6 million, and
property, plant, and equipment and intangible assets being increased by $5
million and $1 million, respectively.

37

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS

LONG-TERM DEBT



2004 2003
DECEMBER 31 (In millions) ----- ------

Pactiv Corporation
Notes due 2005, effective interest rate of 7.2%........... $ 299 $ 297
Notes due 2007, effective interest rate of 8.0%........... 98 98
Debentures due 2017, effective interest rate of 8.1%...... 300 300
Debentures due 2025, effective interest rate of 7.9%, net
of $1 million of unamortized discount.................. 275 275
Debentures due 2027, effective interest rate of 8.4%, net
of $4 million of unamortized discount.................. 196 196
Debentures due 2005, effective interest rate based on
LIBOR plus 1.1%........................................ 169 169
Subsidiaries
Notes due 2005 through 2006, average effective interest
rate of 3.6% in 2004 and 4.9% in 2003.................. -- 2
Less current maturities..................................... (468) (1)
----- ------
Total long-term debt........................................ $ 869 $1,336
----- ------


Aggregate maturities of debt outstanding at December 31, 2004, were $468
million, $99 million, and $776 million for 2005, 2007, and thereafter,
respectively.

As December 31, 2004, the company was in full compliance with financial and
other covenants in its various credit agreements.

SHORT-TERM DEBT



2004 2003
DECEMBER 31 (In millions) ---- ----

Current maturities of long-term debt........................ $468 $1
Other....................................................... 4 4
---- --
Total short-term debt....................................... $472 $5
---- --


The company uses lines of credit and overnight borrowings to finance
certain of its short-term capital requirements. Information regarding short-term
debt excluding current maturities of long-term debt is shown below.



2004(A) 2003(A)
(DOLLARS IN MILLIONS) -------- --------

Borrowings at end of year................................... $ 4 $ 4
Weighted-average interest rate on borrowings at end of
year...................................................... 5.3% 7.2%
Maximum month-end borrowings during year.................... 6 6
Average month-end borrowings during year.................... 4 4
Weighted-average interest rate on average month-end
borrowings during year.................................... 5.8% 8.5%


- ---------------

(a) Includes borrowings under committed credit facilities and uncommitted lines
of credit.

In 1999, the company's former parent, Tenneco Inc. (Tenneco) realigned
certain of its debt in preparation for the spin-off of Pactiv. In conjunction
with this realignment, the company paid bank-facility fees of $10 million and
entered into an interest-rate swap to hedge its exposure to interest-rate
movement. The company settled this swap in November 1999 at a loss of $43
million. Both the loss on the swap and the bank-facility fees are being
recognized as additional interest expense over the average life of the
underlying debt.

38

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. FINANCIAL INSTRUMENTS

ASSET AND LIABILITY INSTRUMENTS

At December 31, 2004, and 2003, the fair value of cash and temporary cash
investments, short- and long-term receivables, accounts payable, and short-term
debt were considered to be the same as, or not materially different than,
amounts recorded for these assets and liabilities. The fair value of long-term
debt at December 31, 2004, and 2003, was approximately $1.071 billion and $1.535
billion, respectively, compared with recorded amounts of $869 million and $1.336
billion, respectively. The fair value of long-term debt was based on quoted
market prices for the company's debt instruments.

INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (INCLUDING DERIVATIVES)

The company utilizes derivative instruments, principally swaps, forward
contracts, and options, to manage its exposure to movements in foreign-currency
values, interest rates, and commodity prices. These derivatives are either
designated primarily as cash-flow hedges, in that the company's strategy in
entering into such transactions is to limit the variability of expected future
cash flows, or not designated as hedging instruments. Changes in the fair value
of the company's cash-flow hedges are reported as other comprehensive income and
are recognized in the income statement in the period in which the hedging
transactions affect earnings. Net gains or losses on derivatives not designated
as hedges are recognized in the income statement as offsets to gains or losses
on the underlying transactions. Amounts recognized in earnings related to the
company's hedging transactions were not material in 2004, 2003, or 2002.

From time to time, Pactiv enters into foreign-currency forward contracts
with terms of less than 1 year to mitigate its exposure to exchange-rate changes
related to third-party trade receivables and accounts payable. The following
table summarizes open foreign-currency contracts as of December 31, 2004.



NOTIONAL AMOUNT
---------------
PURCHASE SELL
(In millions) -------- ----

Foreign-currency contracts
Euros..................................................... $ 72 $ 36
British pounds............................................ 34 67
Czech korunas............................................. -- 1
Hungarian forints......................................... 2 3
---- ----
$108 $107
---- ----


Based on exchange rates at December 31, 2004, the cost of replacing these
contracts in the event of nonperformance by counter parties would not be
material.

LINES OF CREDIT AND GUARANTEES

From time to time, the company utilizes various lines of credit, backed by
payment and performance guarantees, to finance operations of its foreign
subsidiaries. These lines of credit are mainly used as overdraft and
foreign-exchange settlement facilities and are in effect until cancelled by one
or both parties. Performance under the guarantees would be required if
subsidiaries failed to satisfy their obligations. At December 31, 2004, total
available lines of credit were $19 million; however, no amounts were outstanding
under the company's guaranteed lines of credit at that date.

39

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7. INVENTORIES



2004 2003
DECEMBER 31 (In millions) ---- ----

Finished goods.............................................. $216 $245
Work in process............................................. 69 57
Raw materials............................................... 82 69
Other materials and supplies................................ 39 28
---- ----
$406 $399
---- ----


NOTE 8. GOODWILL AND INTANGIBLE ASSETS

On January 1, 2002, the company adopted SFAS No. 142. Following this
adoption, the company reviewed recorded goodwill for possible impairment by
comparing the fair value and carrying value of goodwill for each reporting unit.
Fair value was determined using the income approach. Goodwill was found to be
impaired for certain Protective and Flexible Packaging businesses that were
acquired prior to the company's spin-off from Tenneco. Faced with increased
competition, these businesses experienced lower operating margins, and, as a
result, the company recorded a goodwill-impairment charge of $83 million, $72
million after tax, or $0.45 per share, in the first quarter of 2002. Further
impairment of goodwill did not occur in either 2003 or 2004.

Changes in the carrying value of goodwill during 2003 and 2004 by operating
segment are shown in the following table.



CONSUMER FOODSERVICE/ FOOD PROTECTIVE AND
PRODUCTS PACKAGING FLEXIBLE PACKAGING TOTAL
(In millions) -------- ----------------- ------------------ -----

Balance, December 31, 2002.................. $136 $302 $174 $612
Goodwill additions.......................... -- 28 1 29
Goodwill adjustment--prior acquisitions..... -- (14) (1) (15)
Currency-translation adjustments............ -- 4 13 17
---- ---- ---- ----
Balance, December 31, 2003.................. $136 $320 $187 $643
Goodwill adjustment -- prior acquisitions... -- 4 -- 4
Currency-translation adjustment............. -- 2 8 10
---- ---- ---- ----
Balance, December 31, 2004.................. $136 $326 $195 $657
---- ---- ---- ----


Details of intangible assets at December 31, 2004, and 2003, are shown in
the following table.



2004 2003
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
CARRYING AMOUNT AMORTIZATION CARRYING AMOUNT AMORTIZATION
(In millions) --------------- ------------ --------------- ------------

Intangible assets subject to
amortization
Patents............................... $ 85 $ 47 $ 85 $42
Other................................. 177 66 179 54
---- ---- ---- ---
262 113 264 96
Intangible assets not subject to
amortization (primarily trademarks)... 131 -- 130 --
---- ---- ---- ---
Total intangible assets................. $393 $113 $394 $96
---- ---- ---- ---


The weighted-average amortization period used for patents and other
intangible assets subject to amortization is 15.9 years and 20.9 years,
respectively. Amortization of intangible assets was $17 million for the year
ended December 31, 2004. Amortization expense is estimated to total $15 million,
$13 million, $13 million, $12 million, and $12 million for 2005, 2006, 2007,
2008, and 2009, respectively.

40

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9. PROPERTY, PLANT, AND EQUIPMENT, NET



2004 2003
DECEMBER 31 (In millions) ------- ------

Original cost
Land, buildings, and improvements......................... $ 745 $ 735
Machinery and equipment................................... 1,654 1,653
Other, including construction in progress................. 111 102
------- ------
2,510 2,490
Less accumulated depreciation and amortization.............. (1,065) (968)
------- ------
$ 1,445 $1,522
------- ------


Capitalized interest was $2 million in 2004 and $4 million in both 2003 and
2002.

NOTE 10. INCOME TAXES

The domestic and foreign components of income from continuing operations
before income taxes were as follows:



2004 2003 2002
(In millions) ---- ---- ----

U.S. income before income taxes............................. $256 $280 $325
Foreign income (loss) before income taxes................... (12) 34 42
---- ---- ----
Total income from continuing operations before income
taxes..................................................... $244 $314 $367
---- ---- ----


Following is a comparative analysis of income-tax expense related to
continuing operations.



2004 2003 2002
(In millions) ---- ---- ----

Current
Federal................................................... $30 $ 62 $ 26
State and local........................................... 1 10 10
Foreign................................................... 25 13 9
--- ---- ----
56 85 45
--- ---- ----
Deferred
Federal................................................... 40 31 87
State and local........................................... 6 1 6
Foreign................................................... (12) 1 8
--- ---- ----
34 33 101
--- ---- ----
Total income-tax expense -- continuing operations........... $90 $118 $146
--- ---- ----


41

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of the difference between the U.S. statutory federal
income-tax rate and the company's effective income-tax rate is shown in the
following table.



2004 2003 2002
---- ---- ----

U.S. statutory federal income-tax rate...................... 35.0% 35.0% 35.0%
Increase (decrease) in income-tax rate resulting from:
Foreign income taxed at various rates..................... 6.4 0.7 0.5
State and local taxes on income, net of U.S. federal
income-tax benefit..................................... 2.0 2.1 2.9
Foreign branch losses..................................... (4.8) -- --
Research and development credit........................... (2.5) (0.5) --
Other..................................................... 0.6 0.4 1.6
---- ---- ----
Effective income-tax rate................................... 36.7% 37.7% 40.0%
---- ---- ----


Summarized below are the components of the company's net deferred-tax
liabilities



2004 2003
DECEMBER 31 (In millions) ---- ----

Deferred-tax assets
Tax-loss carryforwards
State and local........................................ $ 5 $ 1
Foreign................................................ 46 16
Pensions.................................................. 76 111
Post-retirement benefits.................................. 34 33
Other items............................................... 57 52
Valuation allowance(1).................................... (38) (14)
---- ----
Total deferred-tax assets................................. 180 199
---- ----
Deferred-tax liabilities
Property and equipment.................................... 318 282
Other items............................................... 81 83
---- ----
Total deferred-tax liabilities............................ 399 365
---- ----
Net deferred-tax liabilities................................ $219 $166
---- ----


- ---------------

(1) Related to state and foreign tax-loss carryforwards.

State tax-loss carryforwards at December 31, 2004, ($58 million) will
expire at various dates from 2005 to 2011. Foreign tax-loss carryforwards at
December 31, 2004, totaled $154 million, of which $74 million will expire at
various dates from 2006 to 2015, with the balance having unlimited lives.

NOTE 11. COMMON STOCK

The company has 350 million shares of common stock ($0.01 par value)
authorized, of which 148,711,815 shares were issued and outstanding as of
December 31, 2004.

42

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

RESERVES

Reserved shares at December 31, 2004 were as follows:



(In thousands)

Thrift plans................................................ 1,397
2002 incentive-compensation plan............................ 24,107
Employee stock-purchase plan................................ 2,135
------
27,639
------


STOCK PLANS

2002 Incentive-Compensation Plan -- In November 1999, the company initiated
a stock-ownership plan that permits the granting of a variety of awards,
including common stock, restricted stock, performance shares, stock-appreciation
rights, and stock options to directors, officers, and employees. In May 2002,
the 1999 plan was succeeded by the 2002 incentive-compensation plan, and all
share balances under the 1999 plan were transferred to the new plan, which will
remain in effect until amended or terminated. Under the 2002 plan, up to 27
million shares of common stock can be issued (including shares issued under the
prior plan), of which 19 million were issued or granted as of December 31, 2004.

Restricted-stock, performance-share, and stock-option awards generally
require that, among other things, grantees remain with the company for certain
periods of time. Performance shares granted under the plan vest upon the
attainment of specified performance goals in the 3 years following the date of
grant.

Changes in performance-share balances were as follows:



PERFORMANCE
SHARES
-----------

Outstanding, January 1, 2003................................ 616,592
Granted................................................... 366,242
Canceled.................................................. (12,000)
Vested.................................................... (265,508)
--------
Outstanding, December 31, 2003.............................. 705,326
Granted................................................... 218,761
Canceled.................................................. (31,648)
Vested.................................................... (260,053)
--------
Outstanding, December 31, 2004.............................. 632,386
--------


The weighted-average grant date fair value of performance shares issued in
2004, 2003, and 2002 was $22.06, $20.72, and $16.88 per share, respectively.

43

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Summarized below are changes in stock-option balances.



SHARES UNDER WEIGHTED-AVERAGE
OPTION EXERCISE PRICE
------------ ----------------

Outstanding, January 1, 2003................................ 14,187,373 $21.19
2003 activity
Granted................................................ 2,315,714 20.25
Exercised.............................................. (972,551) 13.27
Canceled............................................... (559,667) 32.48
----------
Outstanding, December 31, 2003.............................. 14,970,869 21.13
----------
Exercisable, December 31, 2003.............................. 10,518,208 22.13
----------
Outstanding, January 1, 2004................................ 14,970,869 21.13
2004 activity
Granted................................................ 2,049,676 23.97
Exercised.............................................. (1,720,752) 14.30
Canceled............................................... (982,205) 27.91
----------
Outstanding, December 31, 2004.............................. 14,317,588 21.89
----------
Exercisable, December 31, 2004.............................. 10,376,435 21.94
----------


Stock options expire 10 to 20 years following date of grant and vest over
periods ranging from 1 to 3 years.

The weighted-average fair value of options granted in 2004 ($7.83), 2003
($6.90), and 2002 ($6.17) was determined using the Black-Scholes option-pricing
model with the following assumptions:



2004 2003 2002
---- ---- ----

ACTUARIAL ASSUMPTIONS
Risk-free interest rate................................... 3.4% 3.0% 3.0%
Life (years).............................................. 4.5 4.4 4.4
Volatility................................................ 34.1% 36.9% 38.7%


Summarized below is information regarding stock options outstanding and
exercisable at December 31, 2004.



OUTSTANDING OPTIONS
------------------------------------------------ EXERCISABLE OPTIONS
WEIGHTED-AVERAGE -----------------------------
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
RANGE OF EXERCISE PRICE ---------- ---------------- ---------------- ---------- ----------------

$7 to $12........... 1,059,792 5.8 years $11.59 1,059,792 $11.59
$13 to $21........... 8,044,770 6.9 16.69 6,131,082 15.83
$22 to $29........... 2,039,012 9.7 23.98 11,547 23.24
$30 to $37........... 1,522,434 9.1 34.20 1,522,434 34.20
$38 to $45........... 1,651,580 6.5 39.97 1,651,580 39.97
---------- ----------
14,317,588 10,376,435
---------- ----------


See Note 2 for additional information regarding accounting for stock-based
employee compensation.

Employee Stock-Purchase Plan -- The company has a stock-purchase plan that
allows U.S. and Canadian employees to purchase Pactiv common stock at a 15%
discount, subject to an annual limitation

44

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

of $25,000. In 2004, 2003, and 2002, employees purchased 270,298, 333,239, and
401,469 shares of stock, respectively, at a weighted-average price of $19.52,
$17.38, and $14.68 per share, respectively.

Employee 401(k) Plans -- The company has qualified 401(k) plans for
employees under which eligible participants may make contributions equal to a
percentage of their annual salary. A portion of such contributions are matched
by the company in the form of Pactiv common stock. The company or plan
participants may contribute additional amounts in accordance with the plans'
terms. In 2004, 2003, and 2002, the company incurred 401(k) plan expenses of $11
million, $13 million, and $12 million, respectively.

Grantor Trust -- In November 1999, the company established a grantor trust
and reserved 3,200,000 shares of Pactiv common stock for the trust. These shares
were issued to the trust in January 2000. This so-called "rabbi trust" is
designed to assure the payment of deferred-compensation and supplemental pension
benefits. These shares are not considered to be outstanding for purposes of
financial reporting.

QUALIFIED OFFER RIGHTS PLAN

In November 1999, Pactiv adopted a qualified offer rights plan (QORP) to
deter coercive takeover tactics and to prevent a potential acquirer from gaining
control of the company in a transaction that would not be in the best interest
of shareholders. Under the plan, if a person becomes the beneficial owner of 20%
or more of the company's outstanding common stock, other than pursuant to a
qualified offer, each right entitles its holder, other than the 20% or more
holder, to purchase common stock having a market value of twice the right's
exercise price.

Rights are not exercisable in connection with a qualified offer, which is
defined as an all-cash tender offer for all outstanding shares of common stock
that is fully financed, remains open for a period of at least 60 business days,
results in the offer or owning at least 85% of the common stock after
consummation of the offer, assures a prompt second-step acquisition of shares
not purchased in the initial offer at the same price as in the initial offer,
and meets certain other requirements.

In connection with the adoption of the QORP, the board of directors also
adopted an evaluation mechanism that calls for an independent board committee to
review, on an ongoing basis, the QORP and developments in rights plans in
general and, if it deems appropriate, to recommend modification or termination
of the plan. The independent committee is required to report to the board at
least every 3 years as to whether the QORP continues to be in the best interest
of shareholders.

45

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

EARNINGS PER SHARE

Earnings from continuing operations per share of common stock outstanding
were computed as follows:



2004 2003 2002
(In millions, except share and per-share data) ------------ ------------ ------------

BASIC EARNINGS PER SHARE
Income from continuing operations.................. $ 155 $ 195 $ 220
Average number of shares of common stock
outstanding...................................... 151,289,798 157,932,323 158,618,274
------------ ------------ ------------
Basic earnings from continuing operations per
share............................................ $ 1.02 $ 1.23 $ 1.38
------------ ------------ ------------
DILUTED EARNINGS PER SHARE
Income from continuing operations.................. $ 155 $ 195 $ 220
Average number of shares of common stock
outstanding...................................... 151,289,798 157,932,323 158,618,274
Effect of dilutive securities
Stock options.................................... 2,033,810 1,726,512 1,579,885
Performance shares............................... 439,548 484,765 414,916
------------ ------------ ------------
Average number of shares of common stock
outstanding including dilutive securities........ 153,763,156 160,143,600 160,613,075
------------ ------------ ------------
Diluted earnings from continuing operations per
share............................................ $ 1.01 $ 1.21 $ 1.37
------------ ------------ ------------


In 2004, the company acquired 10,148,500 shares of its common stock at an
average price of $22.71 per share (total outlay of $230 million). During 2003,
the company repurchased 4,312,600 shares at an average price of $20.24 per share
(total outlay of $87 million). In 2002, the company acquired 2,119,009 of its
common stock at an average price of $19.20 per share, for a total outlay of $40
million.

NOTE 12. PREFERRED STOCK

Pactiv has 50 million shares of preferred stock ($0.01 par value)
authorized, none of which were issued at December 31, 2004. The company has
reserved 750,000 shares of preferred stock for the QORP.

NOTE 13. MINORITY INTEREST

In October 2002, Pactiv acquired a 70% interest in Central de Bolsas, S.A.
de C.V.(Jaguar), and purchased the remaining 30% interest in that company in
August 2003.

NOTE 14. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS

The company has pension plans that cover substantially all of its
employees. Benefits are based on years of service and, for most salaried
employees, final-average compensation. The company's funding policy is to
contribute to the plans amounts necessary to satisfy requirements of applicable
laws and regulations. Plan assets consist principally of equity and fixed-income
securities and included 4,110,058 shares of Pactiv stock with a fair-market
value of $104 million at December 31, 2004. These shares were contributed to the
plans by Tenneco prior to the spin-off. Effective with the spin-off, Pactiv
became the sponsor of Tenneco's retirement plans, receiving related assets and
assuming the obligation to provide pension benefits to participating employees
of Tenneco Automotive Inc. and certain former subsidiaries and affiliates of
Tenneco. For Tenneco Automotive Inc. employees, benefits accrued under these
plans were frozen as of November 30, 1999. The company uses a September 30
measurement date for its plans. Effective December 31, 2004, after the company's
September 30, 2004, measurement date, the company's two U.S. qualified pension
plans were merged. The merger had no effect on the participants' benefits or any
other substantive feature of the plans. The impact of this merger on the

46

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

company's financial statements has not yet been measured and will be reflected
in the 2005 financial statements.

The company has post-retirement health-care and life insurance plans that
cover certain of its salaried and hourly employees who retire in accordance with
the various provisions of such plans. Benefits may be subject to deductibles,
co-payments, and other limitations. The company reserves the right to change
post-retirement plans, which are not funded.

On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was enacted. The Act expands Medicare coverage,
primarily by adding a prescription-drug benefit for Medicare-eligible
participants, starting in 2006. The Act provides employers currently sponsoring
prescription drug programs for Medicare-eligible participants with a range of
options for coordination with the new government-sponsored program to
potentially reduce employers' costs. These options include supplementing the
government program on a secondary payor basis or accepting a direct subsidy from
government to support a portion of the cost of employer programs.

Pactiv's plans currently provide prescription drug benefits that will
coordinate with the related Medicare benefits. As a result, at September 30,
2004, the plans accumulated benefit obligation was reduced by $8 million. For
accounting purposes, this amount will be treated as an actuarial gain. The
enactment of the Act will also reduce 2005's net periodic benefit cost by
approximately $1 million.

47

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Financial data pertaining to the company's pension- and post-retirement
benefit plans appears below.



POST-RETIREMENT
PENSION PLANS PLANS
--------------- ----------------
2004 2003 2004 2003
(In millions) ------ ------ ------ -------

Accumulated benefit obligation, September 30................ $3,901 $3,847 $ -- $ --
Changes in projected benefit obligations
Benefit obligations at September 30 of the previous
year................................................... 3,909 3,644 105 102
Currency-rate conversion.................................. 9 10 -- --
Service cost of benefits earned........................... 30 33 1 1
Interest cost on benefit obligations...................... 236 237 6 7
Plan amendments........................................... 1 1 -- --
Actuarial losses.......................................... 31 241 (6) 3
Benefits paid............................................. (261) (256) (12) (11)
Employee contributions.................................... 1 -- -- --
Participant contributions................................. -- -- 4 3
Impact of SFAS No. 88(1).................................. (2) (1) -- --
------ ------ ---- -----
Benefit obligations at September 30....................... $3,954 $3,909 $ 98 $ 105
------ ------ ---- -----
Changes in fair value of plan assets
Fair value at September 30 of the previous year........... $3,382 $3,057 $ -- $ --
Currency-rate conversion.................................. 5 5 -- --
Actual return on plan assets.............................. 404 566 -- --
Employer contributions(2)................................. 21 9 8 8
Participant contributions................................. 1 1 4 3
Benefits paid............................................. (261) (256) (12) (11)
------ ------ ---- -----
Fair value at September 30................................ $3,552 $3,382 $ -- $ --
------ ------ ---- -----
Development of amounts recognized in the statement of
financial position
Funded status at September 30............................. $ (402) $ (527) $(98) $(105)
Contributions during the fourth quarter................... 2 2 2 2
Unrecognized costs
Actuarial losses....................................... 1,685 1,737 38 45
Prior-service costs.................................... 13 16 (3) (3)
------ ------ ---- -----
Net amounts recognized at December 31..................... $1,298 $1,228 $(61) $ (61)
------ ------ ---- -----
Amounts recognized in the statement of financial position
Prepaid benefit costs..................................... $ 203 $ 187 $ -- $ --
Contributions during the fourth quarter................... 2 2 2 2
Accrued benefit costs..................................... (441) (528) (63) (63)
Intangible assets......................................... 12 15 -- --
Accumulated other comprehensive income.................... 1,522 1,552 -- --
------ ------ ---- -----
Net amount recognized at December 31...................... $1,298 $1,228 $(61) $ (61)
------ ------ ---- -----


- ---------------

(1) SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits"

(2) 2004 employer contributions included $12 million contributed by another
participating employer.

48

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The additional minimum liability for the company's pension plans was $1.534
billion and $1.567 billion at December 31, 2004, and 2003, respectively. Other
comprehensive income of $19 million after tax was recognized in 2004 as a result
of the decrease in the additional minimum liability during 2004. The total
additional minimum liability recorded in accumulated other comprehensive income
was $975 million after tax at December 31, 2004.

Benefit payments expected to be made under the pension plans and
post-retirement benefit plans over the next 10 years are summarized below.



PENSION PLANS POST-RETIREMENT PLANS
(In millions) ------------- ---------------------

2005........................................................ $ 266 $9
2006........................................................ 265 7
2007........................................................ 267 8
2008........................................................ 269 8
2009........................................................ 270 8
2010-2014................................................... 1,415 42


The company expects to contribute $10 million to its foreign and
non-qualified pension plans and $9 million to its post-retirement benefit plans
in 2005.

The impact of pension plans on pretax income from continuing operations was
as follows:



2004 2003 2002
(In millions) ----- ----- -----

Components of periodic benefit income (expense)
Service cost of benefits earned........................... $ (30) $ (33) $ (35)
Interest cost on benefit obligations...................... (236) (237) (237)
Expected return on plan assets............................ 351 354 385
Amortization of:
Unrecognized net losses................................ (33) (15) --
Unrecognized prior-service costs....................... (4) (5) (5)
Unrecognized net transition obligations................ -- -- 1
----- ----- -----
Total net periodic benefit income........................... $ 48 $ 64 $ 109
----- ----- -----


Pension-plan actuarial assumptions are shown below.



2004 2003 2002
SEPTEMBER 30 ---- ---- ----

Actuarial assumptions
Discount rate............................................. 6.23% 6.23% 6.75%
Compensation increases.................................... 4.0 4.0 4.9
Return on assets.......................................... 9.0 9.0 9.0


For all of the company's worldwide pension plans, accumulated benefit
obligations totaled $3.901 billion and $3.847 billion at December 31, 2004, and
2003, respectively. For pension plans with accumulated benefit obligations in
excess of plan assets, projected benefit obligations, accumulated benefit
obligations, and fair value of plan assets were $3.653 billion, $3.601 billion,
and $3.163 billion, respectively, at September 30, 2004, and $3.594 billion,
$3.532 billion, and $3.006 billion, respectively, at September 30, 2003.

The company's discount-rate assumption for its U.S. plans is based on the
composite yield on a portfolio of high-quality corporate bonds constructed with
durations to match the plans' future benefit

49

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

obligations. In this connection, the company's discount-rate assumption for its
U.S. plans was 6.25% for both 2004 and 2003.

In developing actuarial assumptions for the return on pension-plan assets,
the company receives independent input on asset-allocation strategies,
projections regarding long-term rates of return on various asset classes,
risk-free rates of return, and long-term inflation rates. Since inception in
1971, the pension plans' annual rate of return on assets has averaged 11%.
Historically, the plans have invested approximately 70% of assets in equity
securities and 30% in fixed-income investments. After considering of all of
these factors, the company concluded that a 9% rate of return on assets
assumption for its U.S. plans was appropriate for 2004 and 2003.

The company utilizes a market-related method for calculating the value of
plan assets. This method recognizes the difference between actual and expected
returns on plan assets over 5 years. Resulting unrecognized gains or losses,
along with other actuarial gains and losses, are amortized using the "corridor
approach" discussed in SFAS No. 87.

The weighted-average asset allocations for the company's U.S. pension plans
at September 30, 2004, and 2003, are summarized below.



2004 2003
----- -----

Equity securities........................................... 70.0% 65.4%
Fixed-income securities..................................... 30.0 34.6
----- -----
Total....................................................... 100.0% 100.0%
----- -----


A mixture of equity and fixed-income investments are used to maximize the
long-term return on pension-plan assets for a prudent level of risk. Risk
tolerances are established through careful consideration of plan liabilities,
plan funded status, and company financial condition. The investment portfolio
contains a diversified blend of equity and fixed-income investments. Equity
investments include U.S. and non-U.S. stocks, as well as growth, value, and
small- and large-capitalization investments. Other asset classes, such as
private equity investments, are used judiciously to enhance long-term returns
while increasing portfolio diversification. Investment risk is measured and
monitored on an ongoing basis through quarterly investment portfolio reviews,
annual liability measurements, and periodic asset/liability studies. Based on
long-term projections and regulations in existence at December 31,2004, the
company does not expect to be required to contribute cash to its U.S. qualified
pension plans until at least 2014. The company makes contributions of
approximately $4 million annually to its nonqualified retirement plans for
supplemental benefits paid to retirees. The company's foreign subsidiaries
contributed $6 million to various pension plans in 2004.

The impact of post-retirement benefit plans on pretax income from
continuing operations was as follows:



2004 2003 2002
(IN MILLIONS) ---- ---- ----

Service cost of benefits earned............................. $ 1 $ 1 $ 1
Interest cost on benefit obligations........................ 6 7 6
Prior-service costs......................................... -- 1 2
Losses...................................................... 4 3 2
--- --- ---
Total post-retirement benefit-plan costs.................... $11 $12 $11
--- --- ---


50

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Actuarial assumptions used to determine post-retirement benefit obligations
follow.



2004 2003 2002
----- ----- -----

Actuarial assumptions
Health-care cost inflation(a)............................. 10.0% 11.0% 12.0%
Discount rate............................................. 6.25 6.25 6.75


(a) Assumed to decline to 5% in 2008.

A one percentage-point change in assumed health-care cost inflation would
have the following effects:



1% INCREASE 1% DECREASE
(In millions) ----------- -----------

Effect on total service and interest costs.................. $1 $(1)
Effect on post-retirement benefit obligations............... 7 (7)


The company contributed $8 million in both 2004 and 2003 to fund
post-retirement medical-plan obligations. The company expects to contribute $9
million to fund its post-retirement medical-plan obligations in 2005.

NOTE 15. SEGMENT AND GEOGRAPHIC AREA INFORMATION

The company reports the results of its segments in accordance with SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." The
company has 4 reporting segments: Consumer Products, which relates principally
to the manufacture and sale of disposable plastic, molded-fiber,
pressed-paperboard, and aluminum packaging products, such as waste bags,
tableware, food-storage bags, and cookware, for consumer markets, such as
grocery stores, mass merchandisers, and discount chains; Foodservice/Food
Packaging, which relates primarily to the manufacture and sale of various
disposable plastic, molded-fiber, pressed-paperboard, and aluminum packaging
products for foodservice and food-packaging markets, such as restaurants and
other institutional-foodservice outlets, food processors, and grocery chains;
Protective and Flexible Packaging, which relates principally to the manufacture
and sale of plastic, paperboard, and molded-fiber products for
protective-packaging markets, such as electronics, automotive, furniture, and
e-commerce, and for flexible-packaging applications in food, medical,
pharmaceutical, chemical, and hygienic markets; and Other, which relates to
corporate and administrative-service operations and retiree-benefit income and
expense. The accounting policies of the reporting segments are the same as those
for Pactiv as a whole. Where discrete financial information is not available by
segment, reasonable allocations of expenses and assets are used.

Products are transferred between segments and among geographic areas at, as
nearly as possible, market value. In both 2004 and 2003, Wal-Mart Stores, Inc.
accounted for 11.4% of the company's consolidated sales. These sales were
reflected in the results of the Consumer Products and Foodservice/ Food
Packaging segments. In general, the company's backlog of orders is not material.

51

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth certain segment information.



SEGMENT
--------------------------------------------------
FOODSERVICE/ PROTECTIVE AND
CONSUMER FOOD FLEXIBLE
PRODUCTS PACKAGING PACKAGING OTHER TOTAL
(In millions) -------- ------------ -------------- ----- ------

AT DECEMBER 31, 2004, AND FOR THE YEAR
THEN ENDED
Sales to external customers............ $ 934 $1,490 $958 $ -- $3,382
Depreciation and amortization.......... 53 77 32 7 169
Operating income....................... 175(a) 138(b) 20(c) 12(d) 345
Total assets........................... 1,022 1,090 806 823(e) 3,741
Investment in affiliated companies..... -- 2 4 -- 6
Capital expenditures................... 16 52 28 4 100
Noncash items other than depreciation
and amortization..................... -- 18 18 (48)(f) (12)
AT DECEMBER 31, 2003, AND FOR THE YEAR
THEN ENDED
Sales to external customers............ $ 888 $1,371 $879 $ -- $3,138
Depreciation and amortization.......... 51 71 34 7 163
Operating income....................... 195 178(b) 58(c) 35(d) 466
Cumulative effect of changes in
accounting principles................ (3) (6) (1) (2) (12)
Total assets........................... 1,005 1,199 773 729(e) 3,706
Investment in affiliated companies..... -- 1 4 -- 5
Capital expenditures................... 24 55 29 4 112
Noncash items other than depreciation
and amortization..................... -- (1) 1 (64)(f) (64)
AT DECEMBER 31, 2002, AND FOR THE YEAR
THEN ENDED
Sales to external customers............ $ 841 $1,221 $818 $ -- $2,880
Depreciation and amortization.......... 52 69 30 7 158
Operating income....................... 188 158 62(c) 55(d) 463
Cumulative effect of changes in
accounting principles................ -- -- (72) -- (72)
Total assets........................... 960 1,097 713 642(e) 3,412
Investment in affiliated companies..... -- 1 3 -- 4
Capital expenditures................... 19 65 39 3 126
Noncash items other than depreciation
and amortization..................... -- -- (4) (109)(f) (113)


(a) Includes restructuring and other charges of $4 million in 2004.

(b) Includes restructuring and other charges of $31 million and $1 million in
2004, and 2003, respectively.

(c) Includes restructuring and other charges (credits) of $55 million, $1
million, and $(4) million, in 2004, 2003, and 2002, respectively.

(d) Includes pension-plan income, unallocated corporate expense, and $3 million
restructuring and other charges in 2004.

(e) Includes assets related to pension plans and administrative-service
operations.

(f) Includes pension-plan income.

52

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth certain geographic area information.



GEOGRAPHIC AREA
--------------------
UNITED
STATES FOREIGN (A) TOTAL
(In millions) ------ ----------- ------

AT DECEMBER 31, 2004, AND FOR THE YEAR THEN ENDED
Sales to external customers(b).............................. $2,607 $775 $3,382
Long-lived assets(c)........................................ 1,419 306 1,725
Total assets................................................ 2,951 790 3,741
AT DECEMBER 31, 2003, AND FOR THE YEAR THEN ENDED
Sales to external customers(b).............................. $2,412 $726 $3,138
Long-lived assets(c)........................................ 1,464 319 1,783
Total assets................................................ 2,938 768 3,706
AT DECEMBER 31, 2002, AND FOR THE YEAR THEN ENDED
Sales to external customers(b).............................. $2,286 $594 $2,880
Long-lived assets(c)........................................ 1,298 304 1,602
Total assets................................................ 2,756 656 3,412


(a) Sales to external customers and long-lived assets for individual countries
(primarily in Europe) were not material.

(b) Geographic assignment is based on location of selling business.

(c) Long-lived assets include all long-term assets other than net assets of
discontinued operations, goodwill, intangibles, and deferred taxes.

NOTE 16. COMMITMENTS AND CONTINGENCIES

CAPITAL COMMITMENTS

The company estimates that the completion of projects authorized at
December 31, 2004, for which commitments have been made, will require
expenditures of approximately $156 million, of which approximately $141 million
is expected to be spent in 2005.

LEASE COMMITMENTS

Certain of the company's facilities, equipment, and other assets are leased
under long-term arrangements. Minimum lease payments under noncancelable
operating leases with lease terms in excess of 1 year are expected to total $32
million, $25 million, $22 million, $18 million, and $15 million for 2005, 2006,
2007, 2008, and 2009, respectively, and $34 million for subsequent years.

Commitments under capital leases are not significant. Total rental costs
for continuing operations for 2004, 2003, and 2002 were $40 million, $41
million, and $42 million, respectively, which included minimum rentals under
noncancelable operating leases of $31 million, $37 million, and $36 million for
the respective periods.

LITIGATION

On November 3, 2003, the company reached an agreement to settle a civil,
class-action lawsuit filed in 1999 against Tenneco, Tenneco Packaging Inc., and
Packaging Corporation of America (PCA), Tenneco's former containerboard business
(Tenneco Packaging litigation). The settlement resulted in Pactiv recording a
pretax charge of $56 million, $35 million after tax, or $0.22 per share. This
charge included the establishment of a reserve for the estimated liability
associated with lawsuits filed by certain members of the original class-action
who opted out of the class and filed their own lawsuits. While it is not
possible to predict the outcome of any of these proceedings, the company's
management, based on its assessment of the facts and circumstances now known,
does not believe that any of these proceedings,

53

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

individually or in the aggregate, will have a materially adverse effect on the
company's financial position. However, actual outcomes may be different than
expected and could have a material effect on the company's results of operations
or cash flows in a particular period.

The company is party to legal proceedings arising from its operations.
Related reserves are recorded when it is probable that liabilities exist and
where reasonable estimates of such liabilities can be made. While it is not
possible to predict the outcome of any of these proceedings, the company's
management, based on its assessment of the facts and circumstances now known,
does not believe that any of these proceedings, individually or in the
aggregate, will have a material adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period

ENVIRONMENTAL MATTERS

In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District, and, effective
November 2003, entered into a settlement agreement with that agency regarding
the appropriate actions to be taken to address the matter. This settlement
agreement is subject to the approval of the U.S. Environmental Protection
Agency. The company expects to resolve this matter through discussions with the
agency and does not believe that the costs involved, including any possible
monetary sanctions, will have a materially adverse effect on the company's
financial position, results of operations, or cash flows.

The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Where it is
probable that related liabilities exist and where reasonable estimates of such
liabilities can be made, Pactiv establishes associated reserves. Estimated
liabilities are subject to change as additional information becomes available
regarding the magnitude of possible clean-up costs, the expense and
effectiveness of alternative clean-up methods, and other possible liabilities
associated with such situations. However, management believes that any
additional costs that may be incurred as more information becomes available will
not have a materially adverse effect on the company's financial position,
although such costs could have a material effect on the company's results of
operations or cash flows in a particular period.

NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)



TENNECO CUMULATIVE
PACKAGING EFFECT OF
LITIGATION INCOME FROM CHANGES IN
RESTRUCTURING SETTLEMENT CONTINUING ACCOUNTING
SALES COST OF SALES AND OTHER AND OTHER OPERATIONS PRINCIPLES NET INCOME
(In millions) ------ ------------- ------------- ---------- ----------- ---------- ----------

2004
First quarter.......... $ 775 $ 552 $70 $-- $ -- $ -- $ --
Second quarter......... 858 611 14 -- 52 -- 52
Third quarter.......... 865 630 2 -- 56 -- 56
Fourth quarter......... 884 657 7 -- 47 -- 47
------ ------ --- --- ---- ---- ----
$3,382 $2,450 $93 $-- $155 $ -- $155
------ ------ --- --- ---- ---- ----
2003
First quarter.......... $ 717 $ 508 $-- $-- $ 44 $ -- $ 44
Second quarter......... 810 571 -- -- 59 -- 59
Third quarter.......... 793 550 -- 56 26 -- 26
Fourth quarter......... 818 577 -- -- 66 (12) 54
------ ------ --- --- ---- ---- ----
$3,138 $2,206 $-- $56 $195 $(12) $183
------ ------ --- --- ---- ---- ----


54

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)



BASIC EARNINGS PER SHARE OF COMMON DILUTED EARNINGS PER SHARE OF
STOCK(A) COMMON STOCK(A) STOCK PRICE/SHARE
----------------------------------- -------------------------------- -----------------
CUMULATIVE CUMULATIVE
EFFECT OF EFFECT OF
CHANGES IN CHANGES IN
CONTINUING ACCOUNTING NET CONTINUING ACCOUNTING NET
OPERATIONS PRINCIPLES INCOME OPERATIONS PRINCIPLES INCOME HIGH LOW
----------- ----------- ------- ---------- ---------- ------ ------- -------

2004
First quarter................. $ -- $ -- $ -- $ -- $ -- $ -- $23.96 $19.80
Second quarter................ 0.34 -- 0.34 0.33 -- 0.33 25.28 21.55
Third quarter................. 0.38 -- 0.38 0.37 -- 0.37 25.16 22.10
Fourth quarter................ 0.32 -- 0.32 0.31 -- 0.31 25.73 22.30
Total year.................... 1.02 -- 1.02 1.01 -- 1.01
2003
First quarter................. $0.27 $ -- $0.27 $ 0.27 $ -- $0.27 $22.65 $17.55
Second quarter................ 0.37 -- 0.37 0.37 -- 0.37 21.25 18.13
Third quarter................. 0.17 -- 0.17 0.16 -- 0.16 20.90 17.95
Fourth quarter................ 0.42 (0.07) 0.35 0.41 (0.07) 0.34 24.03 20.28
Total year.................... 1.23 (0.07) 1.16 1.21 (0.07) 1.14


(a) The sum of amounts shown for individual quarters may not equal the total for
the year because of changes in the weighted-average number of shares
outstanding throughout the year.

NOTE 18. SUBSEQUENT EVENTS

On January 21, 2005, the company voluntarily prepaid its $169 million
synthetic-lease financing arrangements, which had a maturity date of November 4,
2005. The synthetic-lease arrangements covered the company's headquarters in
Lake Forest, Illinois, and distribution centers in Romeoville, Illinois;
Jacksonville, Illinois; Covington, Georgia; Temple, Texas; and Canandaigua, New
York. The company elected to prepay this amount to reduce interest costs. No
prepayment or early termination penalty was incurred as a result of this action.

On March 15, 2005, the company acquired Newspring Industrial Corp., a
leading manufacturer of thin-wall injection molded polypropylene products for
use in the take-out, delicatessen, and foodservice markets, for $98 million.

The preceding notes are an integral part of the foregoing financial
statements.

55


CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements included in this Annual Report on Form 10-K, including
statements in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section and Exhibits 99.1 and 99.2 referenced therein
and in the notes to the financial statements, are "forward-looking statements."
All statements other than statements of historical fact, including statements
regarding prospects and future results, are forward-looking. These
forward-looking statements generally can be identified by the use of terms and
phrases such as "will", "believe", "anticipate", "may", "might", "could",
"expect", "estimated", "projects", "intends", "foreseeable future", and similar
terms and phrases. These forward-looking statements are not based on historical
facts, but rather on the company's current expectations or projections about
future events. Accordingly, these forward-looking statements are subject to
known and unknown risks and uncertainties. While the company believes that the
assumptions underlying these forward-looking statements are reasonable and makes
the statements in good faith, actual results almost always vary from expected
results, and differences could be material. Following are factors that might
cause the company's actual results to differ materially from future results
expressed or implied by these forward-looking statements:

- Changes in consumer demand and selling prices for the company's products,
including new products that the company or its competitors may introduce,
that could impact sales and margins: The company operates in a very
competitive environment in which product innovation and development has
historically been key to obtaining and maintaining market share and
margins. The company's sales and margins can also be impacted by changes
in distribution channels, in customer mix (including customer
concentration and consolidation among customers), and in customer
merchandising strategies, including substitution of unbranded products
for branded products.

- Material substitutions and changes in costs of raw materials, including
plastic resins, labor, or utilities that could impact the company's
expenses and margins: Plastic-resin prices are impacted by the price of
oil and natural gas. Oil and natural gas prices are affected by numerous
factors, including overall economic activity, geopolitical situations
(particularly involving oil-exporting regions), and governmental policies
and regulation.

- Changes in laws or governmental actions, including changes in regulations
such as those relating to air emissions or plastics generally.

- Although the company believes it has adequate sources of liquidity for
its operations, the availability or cost of capital could impact growth
or acquisition opportunities.

- Workforce factors such as strikes or other labor interruptions.

- The general economic, political, and competitive conditions in countries
in which the company operates, including currency fluctuations and other
risks associated with operating outside of the U.S., may impact not only
demand for the company's products, but also the prices of raw materials
and costs of manufacturing.

- Changes in assumptions regarding the long-term rate of return on pension
assets and the discount rate and other assumptions, as well as the level
of amortization of actuarial gains and losses, could have a material
effect on net income and shareholders' equity. Similarly, the actual
return on pension assets will affect the company's net income and
shareholders' equity. Changes in Employee Retirement Income Security Act
pension funding regulations could have a material effect on the company's
cash flow from operations.

- Changes enacted by the Securities and Exchange Commission, the Financial
Accounting Standards Board, or other regulatory or accounting bodies. See
"Changes in Accounting Principles."

- Competition from producers located in countries which have lower labor
and other costs.

- The company's ability to integrate new businesses that it may acquire or
to dispose of businesses or business segments that it may wish to divest.

56


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

There has been no change in accountants, nor has there been any
disagreement on any matter of accounting principles or practices of financial
disclosure.

ITEM 9A. CONTROLS AND PROCEDURES.

The company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the company in the reports it files
or submits under the Securities Exchange Act is recorded, processed, summarized,
and reported within the appropriate time periods. The company, under the
supervision and with the participation of its management, including the
company's principal executive officer and principal financial officer, has
evaluated the effectiveness of its disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and the company and such
officers have concluded that such controls and procedures are adequate and
effective as of December 31, 2004. The company completed its evaluation of such
controls and procedures in connection with the preparation of this annual report
on Form 10-K on March 14, 2005.

There have been no significant changes in the company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses therein. There have been no
changes in internal controls over financial reporting during the quarter ended
December 31, 2004 that have materially affected, or are reasonably likely to
affect internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information regarding the company's executive officers required by this
Item 10 is set forth in Item 4.1 of Part I, "Executive Officers of the
Registrant." Information regarding the company's directors required by this Item
10 is included in the company's Proxy Statement related to its May 20, 2005,
Annual Meeting of Shareholders, and is incorporated by reference herein.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 and information regarding the company's code of ethics required by
this Item 10 is included in the company's Proxy Statement related to its May 20,
2005, Annual Meeting of Shareholders, and is incorporated by reference herein.

ITEM 11. EXECUTIVE COMPENSATION.

Information regarding the compensation of certain of the company's
executive officers required by this Item 11 is included in the company's Proxy
Statement related to its May 20, 2005, Annual Meeting of Shareholders, and is
incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

Information regarding the security ownership of certain beneficial owners
and management and related stockholder matters of the company required by this
Item 12 is included in the company's Proxy Statement related to its May 20,
2005, Annual Meeting of Shareholders, and is incorporated by reference herein.

57


The following table summarizes the company's equity-compensation plans at
December 31, 2004.



NUMBER OF SHARES
NUMBER OF SHARES OF COMMON STOCK
OF COMMON STOCK AVAILABLE FOR FUTURE
TO BE ISSUED UPON WEIGHTED-AVERAGE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY-
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS COMPENSATION PLANS
- ------------- ------------------- ------------------- --------------------

Equity-compensation plans approved by
shareholders............................. 14,949,974(1) 21.89 8,714,311
Equity-compensation plans not approved by
shareholders............................. 691,931(2) 19.98(3) 2,083,210(4)
---------- ------ ----------
Total...................................... 15,641,905 21.81 10,797,521
---------- ------ ----------


(1) Includes outstanding options and performance-share awards. Stock options
generally expire 10 to 20 years after grant date and vest over 1 to 3 years.
The outstanding performance-share awards are subject to vesting based on
future performance criteria and/or continued employment, and may be paid in
stock, or in cash, at the discretion of the compensation committee of the
board of directors. See Note 11 for additional information.

(2) Includes shares purchased, or available for purchase, by employees pursuant
to Pactiv's employee stock-purchase plan, which allows U.S. and Canadian
employees to purchase Pactiv common stock at a 15% discount, subject to an
annual limitation of $25,000. See Note 11 to the financial statements for
additional information regarding this plan. Also includes Pactiv common
stock index units (common stock equivalents) held (640,530 at December 31,
2004) pursuant to the company's deferred compensation plan.

(3) Represents the price of pending purchases of common stock (51,402 shares at
December 31, 2004) acquired under the company's employee stock-purchase
plan.

(4) Represents shares reserved for issuance under the employee stock-purchase
plan, less shares purchased but not yet issued.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information required by this Item 13 is included in the company's Proxy
Statement related to its May 20, 2005, Annual Meeting of Shareholders, and is
incorporated by reference herein.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Information required by this Item 14 is included in the company's Proxy
Statement related to its May 20, 2005, Annual Meeting of Shareholders, and is
incorporated by reference herein.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

FINANCIAL STATEMENTS INCLUDED IN ITEM 8

See "Index of Financial Statements of Pactiv Corporation and Consolidated
Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary
Data."

58


INDEX OF FINANCIAL STATEMENTS AND SCHEDULES INCLUDED IN ITEM 15



PAGE
----

Schedule II -- Valuation and qualifying accounts -- three
years ended December 31, 2004............................. 60

SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I -- Condensed financial information of
registrant................................................
Schedule III -- Real estate and accumulated depreciation....
Schedule IV -- Mortgage loans on real estate................
Schedule V -- Supplemental information concerning
property -- casualty insurance operations.................


59


SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In millions)



COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------- ---------- ----------------------- ---------- ---------
ADDITIONS
-----------------------
CHARGED TO CHARGED TO
(REVERSED (REVERSED
BALANCE AT FROM) FROM) BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
----------- ---------- ---------- ---------- ---------- ---------

Allowance for doubtful accounts
Year ended December 31, 2004.......... $ 11 $ 6 $-- $(6) $ 11
Year ended December 31, 2003.......... 11 (2) 2 -- 11
Year ended December 31, 2002.......... 12 (5) 3 (1) 11

Inventory valuation
Year ended December 31, 2004.......... $ 8 $ 44 $-- $-- $ 52
Year ended December 31, 2003.......... (10) 18 -- -- 8
Year ended December 31, 2002.......... (12) 2 -- -- (10)

Deferred tax asset valuation
Year ended December 31, 2004.......... $ 14 $ 17 $ 7 $-- $ 38
Year ended December 31, 2003.......... 12 2 -- -- 14
Year ended December 31, 2002.......... 13 (1) -- -- 12

Fixed asset valuation
Year ended December 31, 2004.......... $ 7 $ 12 $-- $(4) $ 15
Year ended December 31, 2003.......... 10 (1) (2) -- 7
Year ended December 31, 2002.......... 3 5 2 -- 10


60


INDEX OF EXHIBITS

The following exhibits are filed as part of this Annual Report on Form 10-K
for the fiscal year ended December 31, 2004. Exhibits designated with an
asterisk are filed with this report; exhibit designated with two asterisks are
furnished herewith; all other exhibits are incorporated by reference.



EXHIBIT NO. DESCRIPTION
- ----------- -----------

2 Distribution Agreement by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 2 to
Pactiv Corporation's Current Report on Form 8-K dated
November 11, 1999, File No. 1-15157).
3.1 Restated Certificate of Incorporation of the registrant
(incorporated herein by reference to Exhibit 3.1 to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
3.2 Amended and Restated By-laws of the registrant adopted May
17, 2001 (incorporated herein by reference to Exhibit 3.2 to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, File No. 1-15157).
4.1 Specimen Stock Certificate of Pactiv Corporation Common
Stock (incorporated herein by reference to Exhibit 4.1 to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.2(a) Qualified Offer Plan Rights Agreement, dated as of November
4, 1999, by and between the registrant and First Chicago
Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 4.2 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
4.2(b) Amendment No. 1 to Rights Agreement, dated as of November 7,
2002, by and between the registrant and National City Bank,
as rights agent (incorporated herein by reference to Exhibit
4.4(a) to Pactiv Corporation's Registration Statement on
Form S-8, File No. 333-101121).
4.3(a) Indenture, dated September 29, 1999, by and between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.1 to Tenneco
Packaging Inc.'s Registration Statement on Form S-4, File
No. 333-82923).
4.3(b) First Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(b) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(c) Second Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(c) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(d) Third Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(d) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(e) Fourth Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(e) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(f) Fifth Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(f) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).


61




EXHIBIT NO. DESCRIPTION
- ----------- -----------

4.4 Registration Rights Agreement, dated as of November 4, 1999,
by and between the registrant and the trustees under the
Pactiv Corporation Rabbi Trust (incorporated herein by
reference to Exhibit 4.4 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
9 None.
10.1 Human Resources Agreement, dated as of November 4, 1999, by
and between Tenneco Inc. and the registrant (incorporated
herein by reference to Exhibit 16.1 to Tenneco Inc.'s
Current Report on Form 8-K dated November 4, 1999, File No.
1-12387).
10.2 Tax Sharing Agreement, dated as of November 3, 1999, by and
between Tenneco Inc. and the registrant (incorporated herein
by reference to Exhibit 16.2 to Tenneco Inc.'s Current
Report on Form 8-K dated November 4, 1999, File No.
1-12387).
10.3 Amended and Restated Transition Services Agreement, dated as
of November 4, 1999, by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 10.3
to Tenneco Automotive Inc.'s Quarterly Report on Form 10-Q
for quarterly period ended September 30, 1999, File No.
1-12387).
10.4 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Executive Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.5 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.5 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Supplemental Executive Retirement Plan (incorporated
herein by reference to Exhibit 10.6 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
*10.6 Pactiv Corporation Change in Control Severance Benefit Plan
for Key Executives, amended and restated as of March 1, 2005
(superseding Pactiv Corporation (formerly known as Tenneco
Packaging Inc.) Change in Control Severance Benefit Plan for
Key Executives (incorporated herein by reference to Exhibit
10.7 to Pactiv Corporation's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, File No. 1-15157).
10.7 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Deferred Compensation Plan (incorporated herein by
reference to Exhibit 10.8 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.8 Pactiv Corporation Rabbi Trust (incorporated herein by
reference to Exhibit 10.11 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.9 Employment Agreement, dated as of March 11, 1997, by and
between Richard L. Wambold and Tenneco Inc. (incorporated
herein by reference to Exhibit 10.17 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.10 Long Term Credit Agreement, dated as of September 29, 1999,
among the registrant, Bank of America, N.A., as
Administrative Agent, Credit Suisse First Boston, as
Syndication Agent, Bank One, NA and Banque Nationale de
Paris, as Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.3 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
10.11 Term Loan Agreement, dated as of November 3, 1999, between
the registrant and Bank of America (incorporated herein by
reference to Exhibit 10.21 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).


62




EXHIBIT NO. DESCRIPTION
- ----------- -----------

10.12 Letter of Agreement dated September 10, 1999, by and among
Tenneco Inc., Bank of America, N.A., and Bank of America
Securities LLC, related to Term Loan Agreement, dated as of
November 3, 1999, by and between the registrant and Bank of
America (incorporated herein by reference to Exhibit 10.22
to Pactiv Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No. 1-15157).
10.13 Participation Agreement, dated as of October 28, 1999, among
the registrant, First Security Bank, N.A., Bank of America,
as Administrative Agent, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 10.23 to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, File No.
1-15157).
10.14 Pactiv Corporation 2002 Incentive Compensation Plan
(incorporated herein by reference to Exhibit 4.7 to Pactiv
Corporation's Registration Statement on Form S-8, File No.
333-101121).
10.15 Credit Agreement, dated as of May 27, 2004, among the
registrant, Bank OF America, N.A., as Administrative Agent,
Bank One, as Syndication Agent and L/C Issuer, BNP Paribas,
Suntrust Bank, and Citicorp North America, Inc., as
Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 10.15 to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004, File No.
1-15157).
*10.16 Pactiv Corporation Deferred Retirement Savings Plan.
*10.17 Form of Pactiv Corporation Non-Qualified Stock Option Award
Agreement.
*10.18 Form of Pactiv Corporation Performance Share Award
Agreement.
*10.19 Summary of Compensation Arrangements of Directors.
*10.20 Summary of Compensation Arrangements for Named Executives.
11 None.
12 None.
13 None.
14 Code of Ethical Conduct for Financial Managers (posted to
company's website, www.pactiv.com) in accordance with Item
406(c)(2) of Regulation S-K.
16 None.
18 None.
*21 List of subsidiaries of Pactiv Corporation.
22 None.
*23.1 Consent of Ernst & Young LLP.
23.2 Pactiv Corporation explanation concerning absence of current
written consent of Arthur Andersen LLP.
*24 Powers of Attorney for the following directors of Pactiv
Corporation: Larry D. Brady, K. Dane Brooksher, Robert J.
Darnall, Mary R. (Nina) Henderson, Roger B. Porter, Norman
H. Wesley.
*31.1 Rule 13a-14(a)/15d-14(a) Certification.
*31.2 Rule 13a-14(a)/15d-14(a) Certification.
**32.1 Section 1350 Certification.
**32.2 Section 1350 Certification.


- ---------------

* Filed herewith.

** Furnished herewith.

63


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.

PACTIV CORPORATION

By: /s/ RICHARD L. WAMBOLD
------------------------------------
Richard L. Wambold
Chairman, President and
Chief Executive Officer

Date: March 15, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the registrant and in
the capacities and on the dates indicated.



SIGNATURE TITLE DATE
--------- ----- ----


/s/ RICHARD L. WAMBOLD Chairman, President, Chief March 15, 2005
- ------------------------------------------------ Executive Officer and Director
Richard L. Wambold (principal executive officer)


/s/ ANDREW A. CAMPBELL Senior Vice President and Chief March 15, 2005
- ------------------------------------------------ Financial Officer (principal
Andrew A. Campbell financial and accounting
officer)


/s/ LARRY D. BRADY* Director March 15, 2005
- ------------------------------------------------
Larry D. Brady


/s/ K. DANE BROOKSHER* Director March 15, 2005
- ------------------------------------------------
K. Dane Brooksher


/s/ ROBERT J. DARNALL* Director March 15, 2005
- ------------------------------------------------
Robert J. Darnall


/s/ MARY R. (NINA) HENDERSON* Director March 15, 2005
- ------------------------------------------------
Mary R. (Nina) Henderson


/s/ ROGER B. PORTER* Director March 15, 2005
- ------------------------------------------------
Roger B. Porter


/s/ NORMAN H. WESLEY* Director March 15, 2005
- ------------------------------------------------
Norman H. Wesley


*By: /s/ JAMES V. FAULKNER, JR. March 15, 2005
-----------------------------------------
James V. Faulkner, Jr.
Attorney-in-fact


64