UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

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

For the transition period from                      to                     

THE LUBRIZOL CORPORATION

(Exact name of registrant as specified in its charter)

Ohio (State or other jurisdiction of incorporation or organization)		34-0367600 (I.R.S.Employer Identification No.)

29400 Lakeland Boulevard
Wickliffe, Ohio 44092-2298
(Address of principal executive offices)
(Zip Code)

(440) 943-4200
(Registrant’s telephone number, including area code)

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

Yes þ No o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Number of the registrant’s common shares, without par value, outstanding as of June 30, 2008: 67,701,995.

 

 

THE LUBRIZOL CORPORATION
Quarterly Report on Form 10-Q
Three and Six Months Ended June 30, 2008

Table of Contents

				Page Number
PART I. FINANCIAL INFORMATION
Item 1		Financial Statements (unaudited)			3
		Consolidated Statements of Income			3
		Consolidated Balance Sheets			4
		Consolidated Statements of Cash Flows			5
		Notes to Consolidated Financial Statements			6
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3		Quantitative and Qualitative Disclosures about Market Risk			40
Item 4		Controls and Procedures			41
PART II. OTHER INFORMATION
Item 1A		Risk Factors			42
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 4		Submission of Matters to a Vote of Security Holders			43
Item 6		Exhibits			44
		Signatures			44

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In Millions Except Per Share Data)		2008				2007				2008				2007
Revenues		$	1,350.2			$	1,154.6			$	2,577.5			$	2,231.3
Cost of sales			1,044.7				858.8				1,979.2				1,657.1
Gross profit			305.5				295.8				598.3				574.2
Selling and administrative expenses			101.9				103.4				210.5				205.7
Research, testing and development expenses			55.7				53.7				109.8				105.4
Amortization of intangible assets			7.0				5.9				14.0				11.9
Restructuring and impairment charges (credits)			14.6				0.9				19.4				(1.5	)
Other (income) expense-net			(1.4	)			1.5				(3.9	)			(4.2	)
Interest income			(3.1	)			(6.9	)			(7.3	)			(14.0	)
Interest expense			20.7				24.4				38.6				48.6
Income before income taxes			110.1				112.9				217.2				222.3
Provision for income taxes			32.0				31.9				65.5				70.0
Net income		$	78.1			$	81.0			$	151.7			$	152.3
Net income per share, basic		$	1.14			$	1.17			$	2.22			$	2.20
Net income per share, diluted		$	1.13			$	1.15			$	2.19			$	2.17
Dividends paid per share		$	0.31			$	0.30			$	0.61			$	0.56

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORPORATION

CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
(In Millions Except Share Data)		2008				2007
ASSETS
Cash and short-term investments		$	420.1			$	502.3
Receivables			819.3				665.9
Inventories			652.2				600.0
Other current assets			88.7				79.1
Total current assets			1,980.3				1,847.3
Property and equipment – at cost			2,883.5				2,763.2
Less accumulated depreciation			1,695.6				1,601.7
Property and equipment-net			1,187.9				1,161.5
Goodwill			1,193.7				1,170.8
Intangible assets-net			376.5				381.3
Investments in non-consolidated companies			7.1				8.3
Other assets			69.7				74.6
TOTAL		$	4,815.2			$	4,643.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt and current portion of long-term debt		$	202.7			$	204.9
Accounts payable			475.7				404.8
Accrued expenses and other current liabilities			235.2				275.0
Total current liabilities			913.6				884.7
Long-term debt			1,227.6				1,223.9
Pension obligations			202.5				195.2
Other postretirement benefit obligations			94.2				93.1
Noncurrent liabilities			143.3				147.7
Deferred income taxes			86.0				85.5
Total liabilities			2,667.2				2,630.1
Minority interest in consolidated companies			63.6				62.4
Preferred stock without par value – unissued
Common shares without par value:
Authorized – 120,000,000 shares Outstanding – 67,701,995 shares as of June 30, 2008 after deducting 18,493,899 treasury shares; 68,383,833 shares at December 31, 2007 after deducting 17,812,061 treasury shares			764.3				763.6
Retained earnings			1,189.9				1,128.7
Accumulated other comprehensive income			130.2				59.0
Total shareholders’ equity			2,084.4				1,951.3
TOTAL		$	4,815.2			$	4,643.8

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended
		June 30,
(In Millions)		2008				2007
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net income		$	151.7			$	152.3
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			84.2				78.8
Deferred income taxes			(3.6	)			19.1
Deferred compensation			5.9				11.9
Restructuring and impairment charges			14.9				0.8
Gain from sales of property and equipment			(0.1	)			(8.0	)
Change in current assets and liabilities, net of acquisitions:
Receivables			(141.7	)			(71.7	)
Inventories			(38.1	)			47.7
Accounts payable, accrued expenses and other current liabilities			25.1				(2.3	)
Other current assets			(3.9	)			2.2
			(158.6	)			(24.1	)
Change in noncurrent liabilities			(2.4	)			(5.4	)
Other items-net			3.5				1.8
Total operating activities			95.5				227.2
INVESTING ACTIVITIES
Capital expenditures			(97.6	)			(75.8	)
Acquisitions			0.9				(15.7	)
Net proceeds from sales of property and equipment			0.3				12.1
Other items – net			–				(1.3	)
Total investing activities			(96.4	)			(80.7	)
FINANCING ACTIVITIES
Changes in short-term debt-net			–				2.3
Repayments of long-term debt			–				(79.4	)
Dividends paid			(41.6	)			(38.8	)
Common shares purchased			(50.1	)			(50.1	)
Proceeds from the exercise of stock options			3.0				24.9
Tax benefit from the exercise of stock options and awards			2.0				8.0
Total financing activities			(86.7	)			(133.1	)
Effect of exchange rate changes on cash			5.4				3.5
Net (decrease) increase in cash and short-term investments			(82.2	)			16.9
Cash and short-term investments at the beginning of period			502.3				575.7
Cash and short-term investments at the end of period		$	420.1			$	592.6

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORPORATION

(Unaudited)

(In Millions of Dollars Except Share and Per Share Data)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals unless otherwise noted) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

2. Significant Accounting Policies

Net Income Per Share

Net income per share is computed by dividing net income by the weighted-average common shares outstanding during the period, including contingently issuable shares. Net income per diluted share includes the dilutive impact resulting from outstanding stock options and awards. Per share amounts are computed as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Numerator:
Net income		$	78.1			$	81.0			$	151.7			$	152.3
Denominator (in millions of shares):
Weighted-average common shares outstanding			68.3				69.4				68.4				69.4
Dilutive effect of stock options and awards			0.8				0.8				0.8				0.8
Denominator for net income per share, diluted			69.1				70.2				69.2				70.2
Net income per share, basic		$	1.14			$	1.17			$	2.22			$	2.20
Net income per share, diluted		$	1.13			$	1.15			$	2.19			$	2.17

There were 0.3 million shares excluded from the diluted earnings per share calculations because they were antidilutive for the three and six months ended June 30, 2008. There were an insignificant number of shares excluded from the diluted earnings per share calculations because they were antidilutive for the three and six months ended June 30, 2007.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

New Accounting Standards

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. This statement will become effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133.” This statement amends the disclosure requirements for derivative instruments and hedging activities in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. At initial adoption, comparative disclosures for earlier periods is encouraged, but not required. The company currently is evaluating the impact of this recently issued standard on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Financial Statements - an amendment of ARB No. 51.” This statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement requires consolidated net income attributable to both the parent and the noncontrolling interest to be reported and disclosed in the consolidated financial statements. This statement also requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal years and interim periods beginning after December 15, 2008 and shall be applied prospectively as of the beginning of the fiscal year in which it is initially adopted, except for the presentation and disclosure requirements, which are applied retrospectively for all periods presented. Early adoption is prohibited. The company currently is evaluating the impact of this recently issued standard on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” This statement replaces SFAS No. 141, “Business Combinations,” and requires an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling interests in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. SFAS No. 141R requires that costs incurred to effect the acquisition be recognized separately from the acquisition as period costs. SFAS No. 141R also requires the recognition of restructuring costs that the acquirer expects to incur, but is not obligated to incur, separately from the business combination. In addition, this statement requires an acquirer to recognize assets and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. Other key provisions of this statement include the requirement to recognize the acquisition-date fair values of research and development assets separately from goodwill and the requirement to recognize changes in the amount of deferred tax benefits that are recognizable due to the business combination in either income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. At June 30, 2008,

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

the company had amounts recorded in its financial statements for unrecognized tax benefits and deferred tax valuation allowances related to past acquisitions. Any reversal of these amounts prior to the adoption of SFAS No. 141R would affect goodwill. However, subsequent to the adoption of SFAS No. 141R, any reversals would affect the income tax provision in the period of reversal. With the exception of certain tax-related aspects described above, this statement applies prospectively to business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. The company currently is evaluating the impact of this recently issued standard on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to make an irrevocable election to measure many financial instruments and certain other items at fair value at specified election dates. The fair value option may be applied instrument by instrument and must be applied to entire instruments. Unrealized gains and losses on items for which the entity elects the fair value option are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The company adopted this standard on January 1, 2008 and did not elect to measure any financial instruments or other items at fair value that previously were not required under other accounting standards.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

3. Stock-Based Compensation

The company utilizes the 2005 Stock Incentive Plan (2005 Plan) to provide equity awards to its key employees and directors. Key employees and directors may also receive equity compensation under the company’s deferred compensation plans. The 2005 Plan, approved by the company’s shareholders on April 25, 2005, provides for the granting of stock appreciation rights, restricted and unrestricted shares, share units and options to buy common shares up to an aggregate of 4,000,000 common shares, of which no more than 2,000,000 can be settled as full-value awards. After the 2,000,000 limit has been reached, full-value awards are counted in a 3-to-1 ratio against the 4,000,000 limit. Options become exercisable 50% one year after date of grant, 75% after two years, 100% after three years and expire 10 years after the date of grant. In addition, the 2005 Plan provides each nonemployee director of the company an automatic annual grant of restricted stock units worth approximately $0.1 million based on the fair market value of the company’s common shares on the date of each Annual Meeting of Shareholders. These restricted stock units vest one year after the grant date. For all grants of share-based awards, fair market value is determined using the closing price of the company’s common shares on the date of grant.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

The fair value of share-based payment awards is estimated using the Black-Scholes option pricing model. There were 253,100 and 213,200 stock options granted during the six months ended June 30, 2008 and 2007, respectively. The weighted-average assumptions used to value the options granted were as follows:

		Six Months Ended
		June 30,
		2008				2007
Risk-free interest rate			3.5	%			4.8	%
Dividend yield			2.1	%			2.0	%
Expected volatility			20.0	%			17.8	%
Expected life (years)			6.5				10.0
Weighted-average fair value per share of options granted during the period		$	12.27			$	14.68

The company uses treasury shares for all net common shares issued pursuant to the 2005 Plan and the deferred compensation plans. The company issued 29,750 and 97,475 common shares from treasury shares upon exercise of employee stock options during the three and six months ended June 30, 2008, respectively. The company issued 527,210 and 838,133 common shares from treasury shares upon exercise of employee stock options during the three and six months ended June 30, 2007, respectively. Cash received from option exercises during the six months ended June 30, 2008 and 2007 was $3.0 million and $24.9 million, respectively. When options are exercised, the company receives a tax deduction for the excess of the stock price over the exercise price of the options. In addition, when the company issues share-based awards pursuant to the 2005 Plan, the company receives a tax deduction equal to the fair market value of the company’s common shares on the date of issuance. The company realized a reduction in its income tax payable of $2.0 million and $8.0 million for the six months ended June 30, 2008 and 2007, respectively, relating to the exercise of stock options and the issuance of awards. For accounting purposes, these tax benefits were realized as increases in paid-in capital included in the common shares caption in shareholders’ equity (see Note 11).

At June 30, 2008, there was $19.1 million of total pretax unrecognized compensation cost related to all stock-based awards that were not vested. That cost is expected to be recognized over a weighted-average period of 1.8 years.

Under the company’s long-term incentive program (LTIP), dollar-based target awards are determined by the organization and compensation committee of the board of directors for three-year performance periods. During the six months ended June 30, 2008, the award for the 2005-2007 performance period was distributed resulting in the issuance of 134,578 common shares and the deferral of 96,969 common shares into a deferred compensation plan. During the six months ended June 30, 2007, the award for the 2004-2006 performance period was distributed resulting in the issuance of 71,658 common shares as well as a cash distribution and the deferral of 106,882 common shares into a deferred compensation plan.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

The following table identifies the number of common shares expected to be issued based on current LTIP performance measures and the fair market value of the company’s common shares on the date of grant for the performance shares granted:

						Fair Market
		Expected				Value of
		Number of Common				Common Shares
Award		Shares to be Issued				on Date of Grant
2006–2008			286,018			$	43.07
2007–2009			252,744			$	53.07
2008–2010			116,990			$	58.45
Performance-based share awards at June 30, 2008 and changes during the six months ended June 30, 2008 were as follows:
						Weighted-
						Average
						Grant Date
		Share				Fair Value
		Units				Per Share
Nonvested at January 1, 2008			543,998			$	47.76
Granted			116,990			$	58.45
Performance increase			–			$	–
Vested			–			$	–
Forfeited			(5,236	)		$	48.04
Nonvested at June 30, 2008			655,752			$	49.67

Total stock-based compensation expense recognized in the consolidated statements of income for the three and six months ended June 30, 2008 was $1.3 million and $5.5 million, respectively, compared with $5.4 million and $14.5 million, respectively, for the three and six months ended June 30, 2007. The related tax benefit for the three and six months ended June 30, 2008 was $0.4 million and $1.9 million, respectively, compared with $1.9 million and $5.1 million, respectively, for the three and six months ended June 30, 2007.

In prior years, certain international employees received stock-based awards that are similar to stock appreciation rights. These awards vested 50% one year after grant, 75% two years after grant and 100% three years after grant and have a 10-year exercise period from the date of grant. The value of these awards is based on the fair market value of the company’s common shares and is paid in cash upon employee exercise. The value of the unexercised portion of these fully vested stock-based awards is accounted for as a liability award. Credits to compensation expense recognized in the consolidated statements of income for the three and six months ended June 30, 2008 were $2.1 million and $1.9 million, respectively, compared with compensation expense of $1.9 million and $2.7 million, respectively, for the three and six months ended June 30, 2007. These amounts are included in the total stock-based compensation expense reported above.

4. Acquisitions

On November 1, 2007, the company completed the acquisition of the refrigeration lubricants business of Croda International Plc (Croda) for approximately $123.7 million in cash, net of a $0.9 million purchase price adjustment

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

received in the first quarter of 2008. The acquisition primarily included lubricant technology, trade names, customer lists, manufacturing know-how and inventory. No manufacturing facilities were included in the transaction. The company began consolidating the results of the refrigeration lubricants business of Croda in the company’s consolidated financial statements in November 2007. The preliminary purchase price allocation for this acquisition included goodwill of $51.2 million and intangible assets of $66.8 million.

On February 7, 2007, the company completed the acquisition of a broad line of additive products used in the metalworking markets worldwide from Lockhart Chemical Company (Lockhart) for approximately $15.7 million in cash. The company purchased Lockhart’s entire metalworking product line, which included natural, synthetic and gelled sulfonates; emulsifier packages; corrosion inhibitors and lubricity agents; grease additives; oxidates; esters; soap; semi-finished coatings; and rust preventatives. The company began consolidating the results of the metalworking business of Lockhart in the company’s consolidated financial statements in February 2007. The purchase price allocation for this acquisition included goodwill of $8.3 million and intangible assets of $7.6 million.

The pro forma impacts of acquisitions in 2007 were immaterial to the company’s consolidated financial statements.

5. Inventories

The company’s inventories were comprised of the following:

		June 30,				December 31,
		2008				2007
Finished products		$	366.8			$	332.7
Products in process			99.7				105.0
Raw materials			151.0				132.2
Supplies and engine test parts			34.7				30.1
Total inventories		$	652.2			$	600.0

6. Goodwill and Intangible Assets

Goodwill is tested for impairment at the reporting unit level as of October 1 each year or more frequently if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

The carrying amount of goodwill by reportable segment at June 30, 2008 follows:

		Lubrizol
		Advanced				Lubrizol
		Materials				Additives				Total
Balance, January 1, 2008		$	1,010.9			$	159.9			$	1,170.8
Translation and other adjustments			22.7				0.2				22.9
Balance, June 30, 2008		$	1,033.6			$	160.1			$	1,193.7

The following table shows the components of identifiable intangible assets:

		June 30, 2008								December 31, 2007
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Customer lists		$	199.6			$	41.4			$	195.5			$	34.6
Technology			155.4				60.9				155.1				55.1
Trademarks			25.1				8.4				23.6				7.2
Patents			15.1				6.5				14.4				5.7
Land-use rights			11.0				1.7				10.3				1.5
Non-compete agreements			2.1				1.2				2.6				1.0
Total amortized intangible assets			408.3				120.1				401.5				105.1
Non-amortized trademarks			88.3				–				84.9				–
Total		$	496.6			$	120.1			$	486.4			$	105.1

Definite-lived intangible assets are amortized over their useful lives, which range between 3 and 50 years. The company’s indefinite-lived intangible assets consist of certain trademarks that are tested for impairment each year as of October 1 or more frequently if impairment indicators arise. Indefinite-lived trademarks are assessed for impairment separately from goodwill. Annual intangible amortization expense for the next five years will approximate $26.8 million in 2008, $25.1 million in 2009, $25.0 million in 2010, $24.8 million in 2011 and $24.4 million in 2012.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

7. Comprehensive Income

Total comprehensive income was comprised of the following:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Net income		$	78.1			$	81.0			$	151.7			$	152.3
Foreign currency translation adjustment			(13.8	)			10.3				62.4				20.3
Pension and other postretirement benefit plans			0.2				–				0.7				–
Unrealized gain – natural gas hedges			3.4				(0.7	)			6.2				0.8
Amortization of treasury rate locks			0.8				0.8				1.9				1.5
Total comprehensive income		$	68.7			$	91.4			$	222.9			$	174.9

8. Segment Reporting

The company is organized into two operating and reportable segments: Lubrizol Additives and Lubrizol Advanced Materials. The Lubrizol Additives segment represented 68% of the company’s consolidated revenues for the three and six months ended June 30, 2008. The Lubrizol Advanced Materials segment represented 32% of the company’s consolidated revenues for the three and six months ended June 30, 2008.

Lubrizol Additives consists of two product lines: (i) engine additives and (ii) driveline and industrial oil additives. Engine additives is comprised of additives for lubricating engine oils, such as for gasoline, diesel, marine and stationary gas engines and additive components, additives for fuel products and refinery and oil field chemicals, as well as outsourcing strategies for supply chain and knowledge center management. In addition, this product line sells additive components and viscosity improvers within its lubricant and fuel additives product areas. Driveline and industrial oil additives is comprised of additives for driveline oils, such as automatic transmission fluids, gear oils and tractor lubricants and industrial oil additives, such as additives for hydraulic, grease and metalworking fluids, as well as compressor lubricants. Lubrizol Additives product lines generally are produced in company-owned or shared manufacturing facilities and largely sold to a common customer base.

The Lubrizol Advanced Materials segment consists of three product lines: (i) engineered polymers, (ii) performance coatings and (iii) Noveon^® consumer specialties. The engineered polymers product line is characterized by products such as TempRite^® engineered polymers and Estane^® thermoplastic polyurethane. Engineered polymers products are sold to a diverse customer base comprised of major manufacturers in the construction, automotive, telecommunications, electronics and recreation industries. The performance coatings product line includes high-performance polymers and additives for paints, coatings and adhesives, graphic arts, paper and textiles and plastics applications. The Noveon consumer specialties product line is characterized by global production of acrylic thickeners, specialty monomers, film formers, fixatives, emollients, silicones, surfactants and process chemicals. The company markets products in the Noveon consumer specialties product line to the personal care and pharmaceutical industries. The Noveon consumer specialties products are sold to customers worldwide and these customers include major manufacturers of cosmetics, personal care products, water soluble polymers and household products.

The company primarily evaluates performance and allocates resources based on segment operating income, defined as revenues less expenses identifiable to the product lines included within each segment, as well as projected future

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

returns. Segment operating income reconciles to consolidated income before income taxes by deducting net corporate expenses that are not attributed to the operating segments, restructuring and impairment charges (credits) and net interest expense.

The following table presents a summary of the results of the company’s reportable segments:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Revenues from external customers:
Lubrizol Additives		$	923.5			$	759.0			$	1,749.7			$	1,455.0
Lubrizol Advanced Materials			426.7				395.6				827.8				776.3
Total revenues		$	1,350.2			$	1,154.6			$	2,577.5			$	2,231.3
Segment operating income:
Lubrizol Additives		$	117.2			$	106.3			$	230.0			$	207.2
Lubrizol Advanced Materials			37.1				43.5				67.9				88.9
Segment operating income			154.3				149.8				297.9				296.1
Corporate expenses			(12.5	)			(17.6	)			(33.7	)			(39.3	)
Corporate other income (expense)-net			0.5				(0.9	)			3.7				(1.4	)
Restructuring and impairment (charges) credits			(14.6	)			(0.9	)			(19.4	)			1.5
Interest expense-net			(17.6	)			(17.5	)			(31.3	)			(34.6	)
Income before income taxes		$	110.1			$	112.9			$	217.2			$	222.3

The company’s total assets by segment were as follows:

		June 30,				December 31,
		2008				2007
Segment total assets:
Lubrizol Additives		$	1,841.4			$	1,663.4
Lubrizol Advanced Materials			2,328.5				2,240.0
Total segment assets			4,169.9				3,903.4
Corporate assets			645.3				740.4
Total consolidated assets		$	4,815.2			$	4,643.8

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

9. Pension and Postretirement Benefits

The components of net periodic pension cost and net periodic non-pension postretirement benefit cost consisted of the following:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Pension benefits:
Service cost - benefits earned during period		$	8.2			$	8.0			$	15.7			$	15.5
Interest cost on projected benefit obligation			11.2				9.9				22.2				19.7
Expected return on plan assets			(9.2	)			(8.5	)			(19.0	)			(17.1	)
Amortization of prior service costs			0.8				0.7				1.5				1.4
Recognized net actuarial loss			0.9				1.3				1.6				2.5
Net periodic pension cost		$	11.9			$	11.4			$	22.0			$	22.0
Other postretirement benefits:
Service cost - benefits earned during period		$	0.4			$	0.4			$	0.9			$	0.8
Interest cost on projected benefit obligation			1.6				1.5				3.1				2.9
Amortization of prior service credits			(1.7	)			(1.6	)			(3.4	)			(3.2	)
Amortization of initial net obligation			0.2				0.1				0.3				0.2
Recognized net actuarial loss			0.3				0.3				0.5				0.6
Settlement / curtailment gain			–				–				(1.1	)			–
Net periodic non-pension postretirement benefit cost		$	0.8			$	0.7			$	0.3			$	1.3

Expected employer contributions worldwide for pension benefits in 2008 approximate $35.2 million for the qualified plans, of which $11.4 million was contributed during the six months ended June 30, 2008. The portion of the 2008 total expected contributions attributable to the U.S. qualified pension plans is $19.6 million, of which $6.3 million was contributed during the six months ended June 30, 2008. The non-qualified pension plans and other postretirement benefit plans are unfunded. As a result, the 2008 expected contributions to these plans of $1.6 million and $5.1 million, respectively, represent actuarial estimates of future assumed payments based on historic retirement and payment patterns as well as medical trend rates and historical claim information, as appropriate.

10. Restructuring and Impairment Charges (Credits)

During the three and six months ended June 30, 2008, the company recorded aggregate restructuring and impairment charges of $14.6 million and $19.4 million, respectively. The restructuring and impairment charges during the first half of 2008 primarily related to business improvement initiatives in the performance coatings product line of the Lubrizol Advanced Materials segment. In the second quarter of 2008, the company announced additional steps in the improvement of its U.S. performance coatings business. Manufacturing of certain products at various locations will cease or be transferred to more efficient production sites in order to align manufacturing with the company’s end-use markets. In addition, the company restructured its sales, marketing and research and development organizations within the performance coatings product line in the second quarter of 2008. The company also completed the disposition of a textile compounding plant and recognized an asset impairment for a textile coatings production line in the first quarter of 2008. Collectively, these business improvement initiatives

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

resulted in impairment charges of $14.4 million, exit costs of $0.4 million and severance of $4.1 million for the six months ended June 30, 2008. The company does not expect to incur significant future charges related to these previously announced plans.

The following table shows the reconciliation of the restructuring liability since January 1, 2008 by major restructuring activity:

		Liability				Restructuring												Liability
		January 1,				and Impairment								Non-cash				June 30,
		2008				Charges				Cash Paid				Adjustments				2008
Performance Coatings 2008 business improvement initiatives		$	–			$	18.9			$	(2.2	)		$	(14.4	)		$	2.3
Lubrizol Advanced Materials plant closures and sale, production line impairments and workforce reductions			0.4				0.5				(0.3	)			(0.4	)			0.2
Bromborough, U.K. plant closure and sale			0.1				–				–				(0.1	)			–
Noveon International, Inc. restructuring liabilities assumed			0.5				–				–				–				0.5
		$	1.0			$	19.4			$	(2.5	)		$	(14.9	)		$	3.0

The net restructuring and impairment credit of $1.5 million in the first half of 2007 primarily related to a pretax gain of $2.8 million recorded on the sale of the Lubrizol Additives manufacturing facility located in Bromborough, United Kingdom in January 2007 for net cash proceeds of $5.9 million.

On July 29, 2008, the company announced a plan to close a Lubrizol Additives blending, packaging and warehouse site in Ontario, Canada. The company determined that operation of the facility was not sustainable for the long term as the facility’s current and projected volumes, which have been below historical levels, cannot support its cost structure. Operations at the facility are expected to end by June 30, 2009. Approximately 30 employees will be impacted by this facility closure. The facility closure is expected to result in restructuring and impairment charges of approximately $10.9 million, of which $5.6 million is expected to be recognized in the second half of 2008.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

11. Shareholders’ Equity

The following table summarizes the changes in shareholders’ equity since January 1, 2008:

						Shareholders’ Equity
														Accumulated
		Number of												Other
		Shares				Common				Retained				Comprehensive
		Outstanding				Shares				Earnings				Income				Total
Balance, January 1, 2008			68.4			$	763.6			$	1,128.7			$	59.0			$	1,951.3
Comprehensive income:
Net income							–				151.7				–				151.7
Other comprehensive income							–				–				71.2				71.2
Total comprehensive income																			222.9
Dividends declared											(42.1	)							(42.1	)
Deferred stock compensation			–				(2.6	)			–				–				(2.6	)
Common shares – treasury:
Common shares purchased			(0.9	)			(1.7	)			(48.4	)			–				(50.1	)
Shares issued upon exercise of stock options and awards			0.2				5.0				–				–				5.0
Balance, June 30, 2008			67.7			$	764.3			$	1,189.9			$	130.2			$	2,084.4

12. Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosure about fair value measurements. SFAS No. 157 does not expand the use of fair value measures in financial statements, but simplifies and codifies related guidance within U.S. GAAP. This statement defines fair value as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 classifies the inputs used to measure fair value into three tiers. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. SFAS No. 157 is effective for fiscal years and interim periods beginning after November 15, 2007. SFAS No. 157 requires adoption prospectively as of the beginning of the fiscal year in which this statement initially is applied, with the exception of certain financial instruments, in which adoption is applied retrospectively as of the beginning of the fiscal year in which this statement initially is applied.

In February 2008, the FASB issued FASB Staff Position (FSP) 157-1 “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and FSP 157-2 “Effective Date of Statement 157.” FSP 157-1 removed leasing transactions accounted for under Statement 13 and related guidance from the scope of SFAS No. 157. FSP 157-2 deferred the effective date of SFAS No. 157 for all nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. The company adopted the required provisions of SFAS No. 157 for financial assets and liabilities on January 1, 2008. The company’s adoption of this standard for

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

financial assets and liabilities did not have a material impact on its consolidated financial statements. The company currently is evaluating the impact of adopting the provisions of SFAS No. 157 for nonfinancial assets and liabilities on its consolidated financial statements.

The company estimates the fair value of financial instruments using available market information and generally accepted valuation methodologies. The following table shows the company’s financial assets and liabilities accounted for at fair value on a recurring basis at June 30, 2008:

						Fair Value Measurements at Reporting Date Using
						Quoted Prices				Significant				Significant
						in Active Markets				Other				Unobservable
		June 30,				for Identical Assets				Observable Inputs				Inputs
		2008				Level 1				Level 2				Level 3
Assets:
Forward commodity contracts (1)		$	8.9			$	–			$	8.9			$	–
Interest rate swaps (2)			2.6				–				2.6				–
Total		$	11.5			$	–			$	11.5			$	–
Liabilities:
Deferred compensation plans (3)		$	20.4			$	20.4			$	–			$	–

(1)		The fair values of forward commodity contracts are based on counterparty quotes of market forward rates and reflect the present value of the amount that the company would pay or receive for contracts involving the same notional amounts and maturity dates.
(2)		The fair value of interest rate swaps is obtained from counterparty quotes, which use discounted cash flows and the then-applicable forward interest rates.
(3)		The company allows directors and senior management to defer their fees, salary and incentive compensation into a non-qualified deferred compensation plan, which is funded informally through trust-owned life insurance held in a rabbi trust. Deferrals can be made into various cash investment accounts and/or a share unit account. Changes in the value of compensation deferred under these plans are recognized each period based on the fair value of the underlying investments, including the company’s common share price if amounts are held in a share unit account at the end of the reporting period.

13. Contingencies

The company has numerous purchase commitments for materials, supplies and energy in the ordinary course of business. The company also has numerous sales commitments for product supply contracts in the ordinary course of business.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

General

There are pending or threatened claims, lawsuits and administrative proceedings against the company or its subsidiaries, all arising from the ordinary course of business with respect to commercial, employment, product liability and environmental matters, which seek remedies or damages. The company believes that any liability that finally may be determined with respect to commercial and product liability claims should not have a material adverse effect on the company’s consolidated financial position, results of operations or cash flows. From time to time, the company also is involved in legal proceedings as a plaintiff involving contract, patent protection, environmental and other matters. Gain contingencies, if any, are recognized when they are realized.

Environmental

The company’s environmental engineers and consultants review and monitor environmental issues at operating facilities and, where appropriate, the company initiates corrective and/or preventive environmental projects to ensure environmental compliance and safe and lawful activities at its current operations. The company also conducts compliance and management systems audits.

The company and its subsidiaries are generators of both hazardous and non-hazardous wastes, the treatment, storage, transportation and disposal of which are regulated by various laws and governmental regulations. These laws and regulations generally impose liability for costs to investigate and remediate contamination without regard to fault and, under certain circumstances, liability may be joint and several resulting in one party being held responsible for the entire obligation. Liability also may include damages to natural resources. Although the company believes past operations were in substantial compliance with the then-applicable regulations, either the company or the predecessor of Noveon International, Inc. (Noveon International), the Performance Materials Segment of Goodrich Corporation (Goodrich), has been designated under a country’s laws and/or regulations as a potentially responsible party (PRP) in connection with several sites including both third party sites and/or current operating facilities.

The company participates in the remediation process for onsite and third-party waste management sites at which the company has been identified as a PRP. This process includes investigation, remedial action selection and implementation, as well as discussions and negotiations with other parties, which primarily include PRPs, past owners and operators and governmental agencies. The estimates of environmental liabilities are based on the results of this process. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, remediation standards and evolving technologies for managing investigations and remediation. The company revises its estimates accordingly as events in this process occur and additional information is obtained.

The company’s environmental reserves, measured on an undiscounted basis, totaled $14.6 million at June 30, 2008 and $18.7 million at December 31, 2007. Of these amounts, $8.2 million and $5.3 million were included in accrued expenses and other current liabilities at June 30, 2008 and December 31, 2007, respectively. Goodrich provided Noveon International with an indemnity for various environmental liabilities. The company estimates Goodrich’s share of such currently identified liabilities under the indemnity, which extends through February 2011, to be approximately $1.8 million of which $0.6 million of the recovery is included in receivables and $1.2 million is included in other assets. There are specific environmental contingencies for company-owned sites for which third parties such as past owners and/or operators are the named PRPs and also for which the company is indemnified by Goodrich. Goodrich currently is indemnifying Noveon International for several environmental remediation projects. Goodrich’s share of all of these liabilities may increase to the extent such third parties fail to honor their obligations through February 2011.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

The company believes that its environmental accruals are adequate based on currently available information and that it is reasonably possible that $8.2 million in additional costs may be incurred at certain locations beyond the amounts accrued as a result of new information, newly discovered conditions, changes in remediation standards or technologies or a change in the law. Additionally, as the indemnification from Goodrich extends through February 2011, changes in assumptions regarding when costs will be incurred may result in additional expenses to the company. Additional costs in excess of $8.2 million currently cannot be estimated.

Indemnifications

In connection with the sale of the food ingredients and industrial specialties business to SPM Group Holdings, LLC, now known as Emerald Performance Materials, LLC (Emerald), in May 2006, the company has provided indemnifications to Emerald with respect to the business sold. These indemnifications have been associated with the price and quantity of raw material purchases, permit costs, costs incurred due to the inability to obtain permits and environmental matters. In each of these circumstances, payment by the company is dependent on Emerald filing a claim. In addition, the company’s obligations under these agreements may be limited in terms of time and/or amount. The indemnifications related to the price of raw material purchases expired on December 31, 2007. It is not possible to predict the maximum potential amount of future payments under certain of these agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. For those indemnification agreements where a payment by the company is probable and estimable, a liability has been recorded at June 30, 2008. The company believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the company’s business, financial condition or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(In Millions of Dollars Except Per Share Data)

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Historical results and percentage relationships set forth in the consolidated financial statements, including trends that might appear, should not be taken as indicative of future operations. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in such forward-looking statements as a result of various factors, including those described under the section “Cautionary Statements for Safe Harbor Purposes” included elsewhere in this quarterly report on Form 10-Q.

OVERVIEW

We are an innovative specialty chemical company that produces and supplies technologies that improve the quality and performance of our customers’ products in the global transportation, industrial and consumer markets. Our business is founded on technological leadership. Innovation provides opportunities for us in growth markets as well as advantages over our competitors. From a base of approximately 1,600 patents, we use our product development and formulation expertise to sustain our leading market positions and fuel our future growth. We create additives, ingredients, resins and compounds that enhance the performance, quality and value of our customers’ products, while minimizing their environmental impact. Our products are used in a broad range of applications, and are sold into stable markets such as those for engine oils, specialty driveline lubricants and metalworking fluids, as well as higher-growth markets such as personal care and over-the-counter pharmaceutical products and performance coatings and inks. Our engineered polymers products also are used in a variety of industries, including the construction, sporting goods, medical products and automotive industries. We are an industry leader in many of the markets in which our product lines compete.

We are geographically diverse, with an extensive global manufacturing, supply chain, technical and commercial infrastructure. We operate facilities in 27 countries, including production facilities in 19 countries and laboratories in 12 countries, in key regions around the world through the efforts of more than 6,900 employees. We sell our products in more than 100 countries and believe that our customers value our ability to provide customized, high-quality, cost-effective performance formulations and solutions worldwide. We also believe that our customers value our global supply chain capabilities.

On July 29, 2008, we announced a plan to close a Lubrizol Additives blending, packaging and warehouse site in Ontario, Canada. We determined that operation of the facility was not sustainable for the long term as the facility’s current and projected volumes, which have been below historical levels, cannot support its cost structure. We expect operations at the facility to end by June 30, 2009. Approximately 30 employees will be impacted by this facility closure. We expect the facility closure to result in restructuring and impairment charges of approximately $10.9 million, of which $5.6 million is expected to be recognized in the second half of 2008.

During the three and six months ended June 30, 2008, we recorded aggregate restructuring and impairment charges of $14.6 million and $19.4 million, respectively. The restructuring and impairment charges during the first half of 2008 primarily related to business improvement initiatives in the performance coatings product line of the Lubrizol Advanced Materials segment. In the second quarter of 2008, we announced additional steps in the improvement of our U.S. performance coatings business. Manufacturing of certain products at various locations will cease or be transferred to more efficient production sites in order to align manufacturing with our end-use markets. In addition, we restructured the sales, marketing and research and development organizations within our performance coatings product line in the second quarter of 2008. We also completed the disposition of a textile compounding plant and recognized an asset impairment for a textile coatings production line in the first quarter of 2008. Collectively, these business improvement initiatives resulted in impairment charges of $14.4 million, exit costs of $0.4 million and

severance of $4.1 million for the six months ended June 30, 2008. We expect second half of 2008 charges related to these previously announced plans to approximate $0.4 million. We expect the actions that we have announced to date to generate cost savings of approximately $3.0 million in 2008 and more than $7.0 million in 2009.

On March 25, 2008, we announced our decision to launch a 10-year phased investment plan to upgrade and increase global capacity in our Lubrizol Additives segment. We will implement an extensive debottlenecking program at our existing facilities as well as a greenfield investment in China. In an effort to meet the evolving demands of the global lubricant and fuel additives market, we will increase investments to keep pace with growth in global additive demand and to ensure the security of future supply. As part of the 10-year plan, we signed a letter of intent to reserve land use rights in China for a wholly owned manufacturing plant, which will be developed and phased-in as market needs require. By phasing in selective capacity additions in China, we aim to respond to lubricant growth in Asia and better match our manufacturing capability with global demand patterns. We expect that the debottlenecking and China investment will require a $200.0 million investment over the next decade.

On November 1, 2007, we completed the acquisition of the refrigeration lubricants business of Croda International Plc (Croda) for approximately $123.7 million in cash, net of a $0.9 million purchase price adjustment received in the first quarter of 2008. The acquisition primarily included lubricant technology, trade names, customer lists, manufacturing know-how and inventory. No manufacturing facilities were included in the transaction. We began consolidating the results of the refrigeration lubricants business of Croda in our consolidated financial statements in November 2007. The preliminary purchase price allocation for this acquisition included goodwill of $51.2 million and intangible assets of $66.8 million.

On February 7, 2007, we completed the acquisition of a broad line of additive products used in the metalworking markets worldwide from Lockhart Chemical Company (Lockhart) for approximately $15.7 million in cash. We purchased Lockhart’s entire metalworking product line, which included natural, synthetic and gelled sulfonates; emulsifier packages; corrosion inhibitors and lubricity agents; grease additives; oxidates; esters; soap; semi-finished coatings; and rust preventatives. We began consolidating the results of the metalworking business of Lockhart in our consolidated financial statements in February 2007. The purchase price allocation for this acquisition included goodwill of $8.3 million and intangible assets of $7.6 million.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2008 Compared With Three Months Ended June 30, 2007

Net income decreased $2.9 million to $78.1 million for the three months ended June 30, 2008 compared with $81.0 million for the same period in 2007. The decrease in earnings primarily was due to higher raw material costs, an increase in restructuring and impairment charges, higher manufacturing expenses and an increase in the effective tax rate, mostly offset by an improvement in the combination of price and product mix, increased volume, a favorable currency impact and contributions from an acquisition.

		Three Months
		Ended June 30,
		2008				2007				$ Change				% Change
Revenues		$	1,350.2			$	1,154.6			$	195.6				17%
Cost of sales			1,044.7				858.8				185.9				22%
Gross profit			305.5				295.8				9.7				3%
Selling and administrative expenses			101.9				103.4				(1.5	)			(1%)
Research, testing and development expenses			55.7				53.7				2.0				4%
Amortization of intangible assets			7.0				5.9				1.1				19%
Restructuring and impairment charges			14.6				0.9				13.7				*
Other (income) expense-net			(1.4	)			1.5				(2.9	)			*
Interest income			(3.1	)			(6.9	)			3.8				(55%)
Interest expense			20.7				24.4				(3.7	)			(15%)
Income before income taxes			110.1				112.9				(2.8	)			(2%)
Provision for income taxes			32.0				31.9				0.1				–
Net income		$	78.1			$	81.0			$	(2.9	)			(4%)
Net income per share, basic		$	1.14			$	1.17			$	(0.03	)			(3%)
Net income per share, diluted		$	1.13			$	1.15			$	(0.02	)			(2%)

*		Calculation not meaningful

Revenues The increase in revenues for the three months ended June 30, 2008 compared with the same period in 2007 was due to an 8% improvement in the combination of price and product mix, a 5% increase in volume and a 4% favorable currency impact. Included in these factors were incremental revenues from a 2007 acquisition, which contributed 2% to revenues for the quarter.

Analysis of Volume - 2008 vs. 2007 Volume patterns vary in different geographic zones. The following table shows the geographic break-down of our volume for the three months ended June 30, 2008 as well as the percentage changes compared with the same period in 2007:

										Excluding
		2nd Quarter				2nd Quarter				the Impact of
		2008				2008 vs. 2007				Acquisitions
		Volume				% Change				% Change
North America			42	%			(6	%)			(7	%)
Europe			26	%			5	%			3	%
Asia-Pacific / Middle East			25	%			25	%			23	%
Latin America			7	%			26	%			24	%
Total			100	%			5	%			4	%

Segment volume variances by geographic zone, as well as the factors explaining the changes in segment revenues for the three months ended June 30, 2008 compared with the same period in 2007, are contained within the “Segment Analysis” section.

Cost of Sales The increase in cost of sales for the three months ended June 30, 2008 compared with the same period in 2007 primarily was due to higher raw material costs, higher manufacturing expenses and an increase in volume. Average raw material cost increased 20% in the second quarter of 2008 compared with the same period in 2007. Total manufacturing expenses increased 6% in the second quarter of 2008 compared with the same quarter last year primarily due to an unfavorable currency impact, increased salaries and benefits and higher utilities, partially offset by lower environmental-related charges. On a per-unit-sold basis, manufacturing costs increased 1% in the second quarter of 2008 compared with the same quarter in the prior year.

Gross Profit Gross profit increased $9.7 million, or 3%, for the three months ended June 30, 2008 compared with the same period in 2007. The increase primarily was due to an improvement in the combination of price and product mix, higher volume and a favorable currency impact, partially offset by higher average raw material cost and higher manufacturing expenses. Our gross profit percentage decreased in the second quarter of 2008 to 22.6% compared with 25.6% in the same quarter last year as the increase in revenues from higher volumes and pricing improvements to recover higher raw material costs was substantially greater than the increase in gross profit dollars.

Selling and Administrative Expenses Selling and administrative expenses decreased $1.5 million, or 1.5%, for the three months ended June 30, 2008 compared with the same period in 2007. The decrease primarily was due to lower incentive compensation expense, partially offset by an unfavorable currency impact and higher costs associated with the implementation of a common information systems platform primarily in the Lubrizol Advanced Materials segment.

Research, Testing and Development Expenses Research, testing and development expenses increased $2.0 million, or 4%, in the second quarter of 2008 compared with the same quarter in 2007 primarily due to an increase in outside testing expenses and unfavorable currency.

Restructuring and Impairment Charges We recorded aggregate restructuring and impairment charges of $14.6 million for the three months ended June 30, 2008. In the second quarter of 2008, we announced additional steps in the improvement of our U.S. performance coatings business. Manufacturing of certain products at various locations will cease or be transferred to more efficient production sites in order to align manufacturing with our end-use markets. In addition, we restructured the sales, marketing and research and development organizations within our performance coatings product line in the second quarter of 2008.

The components of restructuring and impairment charges are detailed as follows:

		Three Months Ended June 30, 2008
		Asset				Other Plant
		Impairments				Exit Costs				Severance				Total
Performance Coatings 2008 business improvement initiatives		$	10.4			$	0.4			$	3.3			$	14.1
Lubrizol Advanced Materials plant closures and workforce reductions			0.3				–				0.2				0.5
Total restructuring and impairment charges		$	10.7			$	0.4			$	3.5			$	14.6

		Three Months Ended June 30, 2007
		Asset				Other Plant
		Impairments				Exit Costs				Severance				Total
Lubrizol Advanced Materials plant closures and workforce reductions		$	0.5			$	–			$	0.3			$	0.8
Bromborough, U.K. plant closure and sale			–				0.1				–				0.1
Total restructuring and impairment charges		$	0.5			$	0.1			$	0.3			$	0.9

Interest Income The decrease in interest income in the second quarter of 2008 compared with the same period in 2007 primarily was due to our lower cash and short-term investment balance and lower average interest rate.

Interest Expense The decrease in interest expense in the second quarter of 2008 compared with the same period in 2007 was due to our reduced debt balance and lower average interest rate.

Provision for Income Taxes Our effective tax rate was 29.1% in the second quarter of 2008 compared with 28.3% in the same prior-year quarter. The effective tax rate for the second quarter of 2008 benefited from a decrease in U.S. tax on foreign income and an improvement in geographic earnings mix. The effective tax rate for the second quarter of 2007 benefited from the favorable resolution of tax matters from prior years.

Net Income Primarily as a result of the above factors, net income per diluted share decreased 2% to $1.13 for the three months ended June 30, 2008 compared with $1.15 in the same period in 2007.

Six Months Ended June 30, 2008 Compared With Six Months Ended June 30, 2007

Net income decreased $0.6 million to $151.7 million for the six months ended June 30, 2008 compared with $152.3 million for the same period in 2007. The decrease in earnings primarily was due to higher raw material and manufacturing expenses, an increase in net restructuring and impairment charges and higher selling, technology, administrative and research (STAR) expenses, mostly offset by an improvement in the combination of price and product mix, an increase in volume, a favorable currency impact, lower net interest costs and contributions from acquisitions.

		Six Months
		Ended June 30,
		2008				2007				$ Change				% Change
Revenues		$	2,577.5			$	2,231.3			$	346.2				16%
Cost of sales			1,979.2				1,657.1				322.1				19%
Gross profit			598.3				574.2				24.1				4%
Selling and administrative expenses			210.5				205.7				4.8				2%
Research, testing and development expenses			109.8				105.4				4.4				4%
Amortization of intangible assets			14.0				11.9				2.1				18%
Restructuring and impairment charges (credits)			19.4				(1.5	)			20.9				*
Other income-net			(3.9	)			(4.2	)			0.3				(7%)
Interest income			(7.3	)			(14.0	)			6.7				(48%)
Interest expense			38.6				48.6				(10.0	)			(21%)
Income before income taxes			217.2				222.3				(5.1	)			(2%)
Provision for income taxes			65.5				70.0				(4.5	)			(6%)
Net income		$	151.7			$	152.3			$	(0.6	)			–
Net income per share, basic		$	2.22			$	2.20			$	0.02				1%
Net income per share, diluted		$	2.19			$	2.17			$	0.02				1%

*		Calculation not meaningful

Revenues The increase in revenues for the six months ended June 30, 2008 compared with the same period in 2007 was due to a 6% increase in volume, a 6% improvement in the combination of price and product mix and a 4% favorable currency impact. Included in these factors were incremental revenues from our 2007 acquisitions, which contributed 2% to revenues for the period. We experienced volume gains in all geographic zones except North America.

Analysis of Volume - 2008 vs. 2007 Volume patterns vary in different geographic zones. The following table shows the geographic break-down of our volume for the six months ended June 30, 2008 as well as the percentage changes compared with the same period in 2007:

										Excluding
		Year-to-Date				Year-to-Date				the Impact of
		2008				2008 vs. 2007				Acquisitions
		Volume				% Change				% Change
North America			43	%			(4	%)			(5	%)
Europe			27	%			7	%			5	%
Asia-Pacific / Middle East			23	%			19	%			17	%
Latin America			7	%			27	%			26	%
Total			100	%			6	%			4	%

Segment volume variances by geographic zone, as well as the factors explaining the changes in segment revenues for the six months ended June 30, 2008 compared with the same period in 2007, are contained within the “Segment Analysis” section.

Cost of Sales The increase in cost of sales for the six months ended June 30, 2008 compared with the same period in 2007 primarily was due to higher raw material and manufacturing costs and an increase in volume. Average raw material cost increased 17% in the first half of 2008 compared with the same period in 2007. Total manufacturing expenses increased 6% in the first half of 2008 compared with the same period last year primarily due to an unfavorable currency impact, increased salaries and benefits, utilities and maintenance materials and contract labor costs, partially offset by lower environmental-related charges. On a per-unit-sold basis, manufacturing costs increased 1% in the first half of 2008 compared with the same period in the prior year.

Gross Profit Gross profit increased $24.1 million, or 4%, for the six months ended June 30, 2008 compared with the same period in 2007. The increase primarily was due to an improvement in the combination of price and product mix, higher volume and a favorable currency impact, partially offset by higher average raw material cost and higher manufacturing expenses. Our gross profit percentage decreased to 23.2% in the first half of 2008 compared with 25.7% in the same period last year as the increase in revenues from higher volumes and pricing improvements to recover higher raw material costs was substantially greater than the increase in gross profit dollars.

Selling and Administrative Expenses Selling and administrative expenses increased $4.8 million, or 2%, for the six months ended June 30, 2008 compared with the same period in 2007. The increase primarily was due to an increase in salaries and benefits, mostly attributable to annual merit increases and growth resources in the Lubrizol Advanced Materials segment, an unfavorable currency impact and an increase associated with the implementation of a common information systems platform primarily in the Lubrizol Advanced Materials segment, partially offset by a decrease in incentive compensation expense.

Research, Testing and Development Expenses Research, testing and development expenses increased $4.4 million, or 4%, in the first half of 2008 compared with the same period in 2007 primarily due to higher outside testing expenses and unfavorable currency.

Restructuring and Impairment Charges (Credits) In the first half of 2008, we recorded aggregate restructuring and impairment charges of $19.4 million primarily related to business improvement initiatives in the performance coatings product line of the Lubrizol Advanced Materials segment. In the second quarter of 2008, we announced additional steps in the improvement of our U.S. performance coatings business. Manufacturing of certain products at various locations will cease or be transferred to more efficient production sites in order to align manufacturing

with our end-use markets. In addition, we restructured the sales, marketing and research and development organizations within our performance coatings product line in the second quarter of 2008. We also completed the disposition of a textile compounding plant and recognized an asset impairment for a textile coatings production line in the first quarter of 2008. In the first six months of 2007, we sold the Lubrizol Additives manufacturing facility located in Bromborough, United Kingdom. We received net cash proceeds of $5.9 million and recorded a pretax gain of $2.8 million upon closing of the sale in January 2007.

The components of restructuring and impairment charges (credits) are detailed as follows:

		Six Months Ended June 30, 2008
		Asset				Other Plant
		Impairments				Exit Costs				Severance				Total
Performance Coatings 2008 business improvement initiatives		$	14.4			$	0.4			$	4.1			$	18.9
Lubrizol Advanced Materials plant closures and workforce reductions			0.3				–				0.2				0.5
Total restructuring and impairment charges		$	14.7			$	0.4			$	4.3			$	19.4

		Six Months Ended June 30, 2007
		Asset
		Impairments				Other Plant
		(Gains)				Exit Costs				Severance				Total
Lubrizol Advanced Materials plant closures and workforce reductions		$	0.5			$	0.2			$	0.4			$	1.1
Bromborough, U.K. plant closure and sale			(2.8	)			0.1				–				(2.7	)
Other			–				–				0.1				0.1
Total restructuring and impairment (credits) charges		$	(2.3	)		$	0.3			$	0.5			$	(1.5	)

Other Income-Net Other income-net of $3.9 million in the first half of 2008 primarily consisted of a net favorable currency impact and a $2.0 million gain associated with the settlement of an antitrust lawsuit, partially offset by minority interest earnings. Other income-net of $4.2 million in the first half of 2007 primarily consisted of a $5.0 million gain recorded on the sale of land in the Lubrizol Additives segment.

Interest Income The decrease in interest income in the first half of 2008 compared with the same period in 2007 primarily was due to our lower cash and short-term investment balance and lower average interest rate.

Interest Expense The decrease in interest expense in the first half of 2008 compared with the same period in 2007 was due to our reduced debt balances and lower average interest rate.

Provision for Income Taxes Our effective tax rate was 30.2% in the first half of 2008 compared with 31.5% in the same period in 2007. The decrease in the effective tax rate primarily was a result of lower U.S. tax on foreign income and improvements in our geographic earnings mix, partially offset by the non-recurrence of a benefit from the favorable resolution in the second quarter of 2007 of tax matters from prior years.

Net Income Primarily as a result of the above factors, net income per diluted share increased 1% to $2.19 for the six months ended June 30, 2008 compared with $2.17 in the same period in 2007.

SEGMENT ANALYSIS

We primarily evaluate performance and allocate resources based on segment operating income, defined as revenues less expenses identifiable to the product lines included within each segment, as well as projected future returns. Segment operating income will reconcile to consolidated income before income taxes by deducting net corporate expenses that are not attributable to the operating segments, restructuring and impairment charges (credits) and net interest expense.

The proportion of consolidated revenues and segment operating income attributed to each segment was as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Revenues:
Lubrizol Additives			68	%			66	%			68	%			65	%
Lubrizol Advanced Materials			32	%			34	%			32	%			35	%
Segment Operating Income:
Lubrizol Additives			76	%			71	%			77	%			70	%
Lubrizol Advanced Materials			24	%			29	%			23	%			30	%

The operating results by segment were as follows:

		Three Months Ended																Six Months Ended
		June 30,												%				June 30,												%
		2008				2007				$ Change				Change				2008				2007				$ Change				Change
Revenues:
Lubrizol Additives		$	923.5			$	759.0			$	164.5				22%			$	1,749.7			$	1,455.0			$	294.7				20%
Lubrizol Advanced Materials			426.7				395.6				31.1				8%				827.8				776.3				51.5				7%
Total		$	1,350.2			$	1,154.6			$	195.6				17%			$	2,577.5			$	2,231.3			$	346.2				16%
Gross Profit:
Lubrizol Additives		$	195.9			$	186.4			$	9.5				5%			$	386.1			$	354.5			$	31.6				9%
Lubrizol Advanced Materials			109.6				109.4				0.2				–				212.2				219.7				(7.5	)			(3%)
Total		$	305.5			$	295.8			$	9.7				3%			$	598.3			$	574.2			$	24.1				4%
Segment Operating Income:
Lubrizol Additives		$	117.2			$	106.3			$	10.9				10%			$	230.0			$	207.2			$	22.8				11%
Lubrizol Advanced Materials			37.1				43.5				(6.4	)			(15%)				67.9				88.9				(21.0	)			(24%)
Total		$	154.3			$	149.8			$	4.5				3%			$	297.9			$	296.1			$	1.8				1%