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, 2007

OR

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

For the transition period from                      to                     

Commission File Number 1-5263

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

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

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

Number of the registrant’s common shares, without par value, outstanding as of June 30, 2007: 69,066,226.

 

 

THE LUBRIZOL CORPORATION
Quarterly Report on Form 10-Q
Quarter Ended June 30, 2007

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		20
Item 3		Quantitative and Qualitative Disclosures about Market Risk		35
Item 4		Controls and Procedures		36
PART II. OTHER INFORMATION
Item 1		Legal Proceedings		36
Item 1A		Risk Factors		37
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 4		Submission of Matters to a Vote of Security Holders		38
Item 6		Exhibits		38
		Signatures		39
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In Millions of Dollars Except Per Share Data)		2007				2006				2007				2006
Net sales		$	1,153.5			$	1,039.9			$	2,229.3			$	2,023.4
Royalties and other revenues			1.1				1.2				2.0				1.9
Total revenues			1,154.6				1,041.1				2,231.3				2,025.3
Cost of sales			858.1				774.5				1,655.8				1,513.0
Selling and administrative expenses			103.4				85.7				205.7				178.9
Research, testing and development expenses			53.7				52.6				105.4				102.3
Amortization of intangible assets			5.9				5.9				11.9				11.7
Restructuring and impairment charges (credits)			0.9				1.8				(1.5	)			3.6
Total costs and expenses			1,022.0				920.5				1,977.3				1,809.5
Other (expense) income – net			(1.5	)			(0.3	)			4.1				(1.8	)
Interest income			6.9				3.7				14.0				5.9
Interest expense			(24.4	)			(24.7	)			(48.6	)			(50.0	)
Income from continuing operations before income taxes			113.6				99.3				223.5				169.9
Provision for income taxes			32.2				35.8				70.5				60.6
Income from continuing operations			81.4				63.5				153.0				109.3
Discontinued operations – net of tax			–				(12.4	)			–				(73.1	)
Net income		$	81.4			$	51.1			$	153.0			$	36.2
Basic earnings (loss) per share:
Continuing operations		$	1.17			$	0.92			$	2.21			$	1.60
Discontinued operations			–				(0.18	)			–				(1.07	)
Net income per share, basic		$	1.17			$	0.74			$	2.21			$	0.53
Diluted earnings (loss) per share:
Continuing operations		$	1.16			$	0.92			$	2.18			$	1.58
Discontinued operations			–				(0.18	)			–				(1.06	)
Net income per share, diluted		$	1.16			$	0.74			$	2.18			$	0.52
Dividends paid per share		$	0.30			$	0.26			$	0.30			$	0.26

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORPORATION

CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
(In Millions of Dollars Except Share Data)		2007				2006
ASSETS
Cash and short-term investments		$	592.6			$	575.7
Receivables			659.5				573.6
Inventories			546.6				589.0
Other current assets			82.2				98.0
Total current assets			1,880.9				1,836.3
Property and equipment – at cost			2,623.7				2,546.0
Less accumulated depreciation			1,526.3				1,464.7
Property and equipment – net			1,097.4				1,081.3
Goodwill			1,096.9				1,076.1
Intangible assets – net			322.1				322.8
Investments in non-consolidated companies			6.7				7.7
Other assets			67.4				62.0
TOTAL		$	4,471.4			$	4,386.2
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt and current portion of long-term debt		$	5.9			$	3.7
Accounts payable			386.6				340.5
Accrued expenses and other current liabilities			213.9				287.8
Total current liabilities			606.4				632.0
Long-term debt			1,457.1				1,538.0
Pension obligations			208.9				218.5
Other postretirement benefit obligations			80.5				82.0
Noncurrent liabilities			141.3				66.7
Deferred income taxes			93.3				88.9
Total liabilities			2,587.5				2,626.1
Minority interest in consolidated companies			57.6				52.7
Contingencies and commitments
Shareholders’ equity:
Preferred stock without par value – authorized and unissued:
Serial preferred stock – 2,000,000 shares			–				–
Serial preference shares – 25,000,000 shares			–				–
Common shares without par value:
Authorized – 120,000,000 shares
Outstanding – 69,066,226 shares as of June 30, 2007 after deducting 17,129,668 treasury shares; 69,020,569 shares as of December 31, 2006 after deducting 17,175,325 treasury shares			751.9				710.1
Retained earnings			1,104.3				1,050.2
Accumulated other comprehensive loss			(29.9	)			(52.9	)
Total shareholders’ equity			1,826.3				1,707.4
TOTAL		$	4,471.4			$	4,386.2

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended
		June 30,
(In Millions of Dollars)		2007				2006
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net income		$	153.0			$	36.2
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			78.8				82.4
Deferred income taxes			19.1				14.3
Deferred compensation			11.9				7.0
Restructuring and impairment charges			0.8				61.0
(Gain) loss from divestitures and sales of property and equipment			(8.0	)			5.5
Change in current assets and liabilities, net of acquisitions and divestitures:
Receivables			(71.7	)			(67.9	)
Inventories			47.7				(21.0	)
Accounts payable, accrued expenses and other current liabilities			(2.0	)			(62.8	)
Other current assets			2.2				4.2
			(23.8	)			(147.5	)
Change in noncurrent liabilities			(6.4	)			14.4
Other items – net			1.8				16.3
Total operating activities			227.2				89.6
INVESTING ACTIVITIES
Capital expenditures			(75.8	)			(62.2	)
Acquisitions			(15.7	)			–
Net proceeds from divestitures and sales of property and equipment			12.1				275.4
Other items – net			(1.3	)			(0.7	)
Total investing activities			(80.7	)			212.5
FINANCING ACTIVITIES
Changes in short-term debt – net			2.3				6.9
Repayments of long-term debt			(79.4	)			(57.7	)
Dividends paid			(38.8	)			(35.5	)
Common shares purchased			(50.1	)			–
Proceeds from the exercise of stock options			32.9				10.3
Total financing activities			(133.1	)			(76.0	)
Effect of exchange rate changes on cash			3.5				3.0
Net increase in cash and short-term investments			16.9				229.1
Cash and short-term investments at the beginning of period			575.7				262.4
Cash and short-term investments at the end of period		$	592.6			$	491.5

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORPORATION

(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 generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (GAAP) 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 six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by 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 effect resulting from outstanding stock options and awards. Per share amounts from continuing operations are computed as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Numerator:
Income from continuing operations		$	81.4			$	63.5			$	153.0			$	109.3
Denominator (in millions):
Weighted-average common shares outstanding			69.4				68.6				69.4				68.5
Dilutive effect of stock options and awards			0.8				0.6				0.8				0.6
Denominator for income from continuing operations per share, diluted			70.2				69.2				70.2				69.1
Income from continuing operations per share, basic		$	1.17			$	0.92			$	2.21			$	1.60
Income from continuing operations per share, diluted		$	1.16			$	0.92			$	2.18			$	1.58

Weighted-average shares issuable upon the exercise of stock options and awards that were excluded from the diluted earnings per share calculations because they were antidilutive were less than 0.1 million for the three and six months ended June 30, 2007 and 2006, respectively.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

New Accounting Standards

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. Early adoption is permitted as of the beginning of the fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements.” Entities are not permitted to apply this statement retrospectively to the fiscal years preceding the effective date unless the entity chooses early adoption. The company currently is evaluating the impact of this recently issued standard on its consolidated financial statements.

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 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 GAAP. SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity’s own fair value assumptions as the lowest level. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those years. SFAS No. 157 requires adoption prospectively as of the beginning of the fiscal year in which this statement is initially 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 is initially applied. The company currently is evaluating the impact of this recently issued standard on its consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with 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) and other deferred compensation plans to provide equity awards to its key employees. 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 and options to buy common shares up to an amount equal to 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 up to 10 years after 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.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

The fair value of share-based payment awards are estimated using the Black-Scholes option pricing model. There were 213,200 stock options granted during the six months ended June 30, 2007. There were no stock options granted during the six months ended June 30, 2006. The weighted-average assumptions used to value the options granted during the first half of 2007 were as follows:

Risk-free interest rate			4.8	%
Dividend yield			2.0	%
Volatility			17.8	%
Expected life (years)			10.0
Weighted-average fair value of options granted during the year		$	14.68

The company issued 527,210 and 838,133 common shares from treasury upon exercise of employee stock options during the three and six months ended June 30, 2007, respectively. The company issued 83,881 and 346,024 common shares from treasury upon exercise of employee stock options during the three and six months ended June 30, 2006, respectively. Cash received from option exercises during the six months ended June 30, 2007 was $24.9 million. The company realized a reduction in its income tax payable of $8.0 million for the six months ended June 30, 2007 relating to the exercise of nonqualified stock options. 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 14).

As of June 30, 2007, there was $20.2 million of total before-tax unrecognized compensation cost related to nonvested stock-based awards. That cost is expected to be recognized over a weighted-average period of 1.9 years. The company is using previously purchased treasury shares for all net shares issued for option exercises, long-term incentive plans and restricted stock awards.

Under the company’s long-term incentive program, 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, 2007, the award for the 2004-2006 performance period was paid resulting in the issuance of 178,541 shares in lieu of a cash distribution. In addition, during the six months ended June 30, 2006, the award for the 2003-2005 performance period was paid in cash.

The following table identifies the number of shares expected to be issued based on current performance measures and the stock price on the date of grant for the performance shares granted:

		Expected				Average
		Number of Units				Stock Price on
Award		to be Issued				Date of Grant
2005-2007			243,532			$	39.44
2006-2008			291,306			$	43.07
2007-2009			168,272			$	53.07

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

Performance-based stock awards as of June 30, 2007 and changes during the six months ended June 30, 2007 were as follows:

						Weighted-
						Average
		Share				Grant Date
		Units				Fair Value
Nonvested at January 1, 2007			370,448			$	40.95
Granted			129,930			$	53.07
Performance increase			213,223			$	44.40
Vested			–				–
Forfeited			(10,491	)		$	43.01
Nonvested at June 30, 2007			703,110			$	44.20

Total stock-based compensation expense recognized in the consolidated statements of income for the three and six months ended June 30, 2007 was $3.4 million and $11.7 million, respectively, compared to $2.7 million and $5.5 million, respectively, for the same periods in 2006. The related tax benefit for the three and six months ended June 30, 2007 was $1.2 million and $4.1 million, respectively, compared to $0.9 million and $1.9 million for the three and six months ended June 30, 2006, respectively.

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 Lubrizol common shares and is paid in cash upon employee exercise. At June 30, 2007, the portion of these fully vested stock-based awards that remained unexercised are accounted for using variable accounting. Compensation expense recognized in the consolidated statements of income for the three and six months ended June 30, 2007 was $1.9 million and $2.7 million, respectively, compared to compensation credits of $1.1 million and $0.9 million, respectively, for the same periods in 2006.

The three and six months ended June 30, 2006, also includes compensation expense of $0.9 million and $1.9 million, respectively, related to the cash portion of the 2002, 2003, February 2005 and December 2005 three-year performance periods under the company’s long-term incentive program.

4. Acquisitions

On February 7, 2007, the company completed the acquisition of the entire metalworking additives product line of Lockhart Chemical Company (Lockhart), a private company with headquarters in Gibsonia, Pennsylvania, for approximately $15.7 million. Annualized revenues of these products are approximately $20.0 million. The company began including the results of the acquired products in the Lubrizol Additives segment in February 2007. The purchase price for this acquisition included goodwill of $8.1 million.

5. Divestitures

In May 2006, the company sold the food ingredients and industrial specialties business (FIIS) and the active pharmaceutical ingredients and intermediate compounds business (A&I), both of which were included in the Lubrizol Advanced Materials segment. The results of these divested businesses have been reflected in the discontinued operations - net of tax line item in the company’s consolidated statements of income for the three and six months ended June 30, 2006.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

In February 2006, the company sold certain assets and liabilities of its Telene^® resins business (Telene), which was included in the Lubrizol Advanced Materials segment. The results of Telene have been reflected in the discontinued operations - net of tax line item in the company’s consolidated statements of income for the six months ended June 30, 2006.

Total revenues from discontinued operations for the three and six months ended June 30, 2006 were $36.7 million and $143.8 million, respectively. Net loss from discontinued operations for the three and six months ended June 30, 2006 was $12.4 million or $0.18 per diluted share and $73.1 million or $1.06 per diluted share, respectively.

6. Inventories

The company’s inventories were comprised of the following:

		June 30,				December 31,
		2007				2006
Finished products		$	295.9			$	315.0
Products in process			86.4				108.2
Raw materials			133.5				138.2
Supplies and engine test parts			30.8				27.6
Total inventory		$	546.6			$	589.0

7. Goodwill and Intangible Assets

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

The carrying amount of goodwill by reporting segment as of June 30, 2007 follows:

		Lubrizol
		Advanced				Lubrizol
		Materials				Additives				Total
Balance, January 1, 2007		$	978.3			$	97.8			$	1,076.1
Additions			–				8.1				8.1
Translation and other adjustments			12.4				0.3				12.7
Balance, June 30, 2007		$	990.7			$	106.2			$	1,096.9

The following table shows the components of identifiable intangible assets.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

		June 30, 2007								December 31, 2006
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Customer lists		$	150.8			$	28.8			$	145.0			$	24.0
Technology			141.5				49.9				139.8				44.9
Trademarks			22.0				6.2				20.7				5.5
Patents			14.3				5.0				14.0				4.2
Land-use rights			8.9				1.3				7.5				1.2
Non-compete agreements			1.6				1.2				8.2				7.2
Other			0.1				–				0.9				0.7
Total amortized intangible assets			339.2				92.4				336.1				87.7
Non-amortized trademarks			75.3				–				74.4				–
Total		$	414.5			$	92.4			$	410.5			$	87.7

Definite-lived intangible assets are amortized over their useful lives, which range between 3 and 40 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 $23.6 million in 2007, $22.2 million in 2008 and $20.3 million in 2009, 2010 and 2011, respectively.

8. Income Taxes

Effective January 1, 2007, the company adopted the provisions of FASB Interpretation (FIN) No. 48 “Accounting for Uncertainty in Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in tax returns. Under FIN No. 48, the economic benefit associated with a tax position only will be recognized if it is more likely than not that a tax position ultimately will be sustained. After this threshold is met, a tax position is reported at the largest amount of benefit that is more likely than not to be ultimately sustained. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. Prior to January 1, 2007, the company regularly assessed positions with regard to tax exposures and recorded liabilities for uncertain income tax positions in accordance with SFAS No. 5, “Accounting for Contingencies.”

As a result of adopting FIN No. 48 on January 1, 2007, the company recognized an $8.9 million reduction to retained earnings and a $5.4 million increase to goodwill for pre-acquisition income tax liabilities of Noveon International, Inc. (Noveon International). As of January 1, 2007, after recording this FIN No. 48 adoption impact, the company had gross unrecognized tax benefits of $57.8 million, of which $38.8 million, if recognized, would affect the effective tax rate.

The company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of the income tax provision. As of January 1, 2007, the date of adoption, the company had accrued interest of $7.1 million. Penalties were immaterial to the company’s consolidated financial statements.

The company operates in numerous taxing jurisdictions and is subject to regular examinations by various U.S. federal, state and foreign jurisdictions. The company’s income tax positions are based on research and

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

interpretations of the income tax laws and rulings in each of the jurisdictions in which the company does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions and difficulty in estimating the final resolution of complex tax audit matters, the company’s estimates of income tax liabilities may differ from actual payments or assessments.

It is reasonably possible that unrecognized tax benefits may decrease by up to $10.8 million within 12 months of June 30, 2007 primarily as a result of the settlement of foreign audits and the closure of statutes of limitations.

With few exceptions, the company is no longer subject to U.S. federal, state and local tax examinations for years before 2001 and foreign jurisdiction examinations for years before 2000.

Effective with the adoption of FIN No. 48, the majority of the company’s unrecognized tax benefits are classified as noncurrent liabilities because payment of cash is not expected within one year. Prior to the adoption of FIN No. 48, the company classified unrecognized tax benefits in accrued expenses and other current liabilities.

9. Comprehensive Income

Total comprehensive income was comprised of the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Net income		$	81.4			$	51.1			$	153.0			$	36.2
Foreign currency translation adjustment			10.4				31.7				20.7				38.6
Pension and other postretirement benefit plans			–				–				–				(0.8	)
Unrealized (loss) gain - natural gas hedges			(0.7	)			–				0.8				(0.8	)
Amortization of treasury rate locks			0.8				0.9				1.5				1.6
Total comprehensive income		$	91.9			$	83.7			$	176.0			$	74.8

10. Segment Reporting

The company is organized into two operating and reporting segments. The company changed the names of its two reporting segments in 2007. The new segment names are Lubrizol Additives, previously known as Lubricant Additives, and Lubrizol Advanced Materials, previously known as Specialty Chemicals. The change was in name only as the management structure of the segments and product lines included in each segment remained unchanged. The Lubrizol Additives segment represented 66% and 65% of the company’s consolidated revenues for the three and six months ended June 30, 2007, respectively. The Lubrizol Advanced Materials segment represented 34% and 35% of the company’s consolidated revenues for the three and six months ended June 30, 2007, respectively.

Lubrizol Additives consists of two product lines: engine additives and 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

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

fluids, as well as compressor lubricants. Lubrizol Additives product lines generally are produced in company-owned shared manufacturing facilities and largely sold to a common customer base.

The Lubrizol Advanced Materials segment consists of engineered polymers, performance coatings and Noveon^® consumer specialties product lines. The engineered polymers product line is characterized by products such as TempRite^® engineered polymers and Estane^® engineered polymers. 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 specialty paper, graphic arts, paint and textile coatings applications. The Noveon consumer specialties product line is characterized by global production of acrylic thickeners, specialty monomers, film formers, fixatives, emollients, silicones, surfactants, botanicals and process chemicals. The company markets products in the Noveon consumer specialties product line to the personal care and pharmaceutical primary end-use 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. During the first quarter of 2006, the company completed the sale of the Telene business. In addition, the FIIS and A&I businesses were sold during the second quarter of 2006. The company recorded the results of operations of these divested businesses in the discontinued operations - net of tax line item in the consolidated statements of income for 2006.

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

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues from external customers:
Lubrizol Additives		$	759.0			$	678.4			$	1,455.0			$	1,306.0
Lubrizol Advanced Materials			395.6				362.7				776.3				719.3
Total revenues		$	1,154.6			$	1,041.1			$	2,231.3			$	2,025.3
Segment operating income:
Lubrizol Additives		$	107.0			$	89.8			$	208.4			$	164.4
Lubrizol Advanced Materials			43.5				48.4				88.9				92.9
Total segment operating income			150.5				138.2				297.3				257.3
Corporate expenses			(17.6	)			(12.6	)			(39.3	)			(34.0	)
Corporate other expense – net			(0.9	)			(3.5	)			(1.4	)			(5.7	)
Restructuring and impairment (charges) credits			(0.9	)			(1.8	)			1.5				(3.6	)
Interest expense – net			(17.5	)			(21.0	)			(34.6	)			(44.1	)
Income from continuing operations before income taxes		$	113.6			$	99.3			$	223.5			$	169.9

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

		June 30,				December 31,
		2007				2006
Segment total assets:
Lubrizol Additives		$	1,467.0			$	1,392.9
Lubrizol Advanced Materials			2,210.5				2,193.7
Total segment assets			3,677.5				3,586.6
Corporate assets			793.9				799.6
Total consolidated assets		$	4,471.4			$	4,386.2

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

11. 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 Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Pension benefits:
Service cost - benefits earned during period		$	7.7			$	8.0			$	14.9			$	16.0
Interest cost on projected benefit obligation			9.7				8.3				19.3				16.6
Expected return on plan assets			(8.5	)			(7.2	)			(17.1	)			(14.3	)
Amortization of prior service costs			0.6				0.5				1.2				0.9
Recognized net actuarial loss			1.3				2.1				2.5				4.2
Settlement / curtailment loss			–				–				–				3.3
Amortization of initial net asset obligation			–				–				–				0.1
Net periodic pension cost		$	10.8			$	11.7			$	20.8			$	26.8
Other postretirement benefits:
Service cost - benefits earned during period		$	0.3			$	0.4			$	0.6			$	0.7
Interest cost on projected benefit obligation			1.4				1.3				2.7				2.5
Amortization of prior service costs			(1.6	)			(2.1	)			(3.2	)			(4.1	)
Recognized net actuarial loss			0.3				0.4				0.6				0.9
Net periodic non-pension postretirement benefit cost		$	0.4			$	–			$	0.7			$	–

Expected employer contributions worldwide for pension benefits in 2007 approximate $53.6 million for the qualified plans, of which $32.1 million was contributed during the six months ended June 30, 2007. The portion of the 2007 total expected contributions attributable to the U.S. qualified pension plans is $29.8 million, of which $24.3 million was contributed during the six months ended June 30, 2007. The non-qualified pension plans and other postretirement benefit plans are unfunded. As a result, the 2007 expected contributions to these plans of $1.8 million and $4.6 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. The settlement loss in 2006 primarily resulted from a distribution from a non-qualified pension plan.

12. Restructuring and Impairment Charges (Credits)

During the three and six months ended June 30, 2007, the company recorded aggregate restructuring and impairment charges (credits) of $0.9 million and ($1.5) million, respectively. The net restructuring and impairment credit during the first half of 2007 primarily related to a pretax gain and restructuring credit of $2.8 million recorded on the sale of the manufacturing facility located in Bromborough, U.K. in January 2007 for net cash proceeds of $5.9 million.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

The following table shows the reconciliation of the restructuring liability since January 1, 2007 by major restructuring activity:

		Liability				Restructuring												Liability
		January 1,				and Impairment								Non-cash				June 30,
		2007				(Credits) Charges				Cash Paid				Adjustments				2007
Bromborough, U.K. plant closure and sale		$	1.0			$	(0.7	)		$	(0.1	)		$	(0.1	)		$	0.1
Lubrizol Advanced Materials plant and line closures and workforce reductions			0.7				1.1				(1.0	)			(0.5	)			0.3
Corporate / other workforce reductions			0.2				0.1				(0.3	)			–				–
Noveon International restructuring liabilities assumed			0.9				–				(0.3	)			–				0.6
		$	2.8			$	0.5			$	(1.7	)		$	(0.6	)		$	1.0

Included in restructuring and impairment charges (credits) for the six months ended June 30, 2007 was a $2.0 million gain on the sale of the U.K. plant.

13. Debt

During the three and six months ended June 30, 2007, the company repaid €35.0 million and €60.0 million, respectively, against its €250.0 million revolving credit agreement. The remaining balance outstanding as of June 30, 2007 under this arrangement was €25.0 million, or $33.7 million.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

14. Shareholders’ Equity

The following table summarizes the changes in shareholders’ equity since December 31, 2006:

						Shareholders’ Equity
														Accumulated
		Number of												Other
		Shares				Common				Retained				Comprehensive
		Outstanding				Shares				Earnings				(Loss) Income				Total
Balance, December 31, 2006			69.0			$	710.1			$	1,050.2			$	(52.9	)		$	1,707.4
Cumulative effect of a change in accounting principle due to the adoption of FIN No. 48							–				(8.9	)			–				(8.9	)
Balance, January 1, 2007			69.0				710.1				1,041.3				(52.9	)			1,698.5
Comprehensive income:
Net income							–				153.0				–				153.0
Other comprehensive income							–				–				23.0				23.0
Total comprehensive income																			176.0
Dividends							–				(41.6	)			–				(41.6	)
Deferred stock compensation							10.6				–				–				10.6
Common shares – treasury:
Common shares purchased			(0.8	)			(1.7	)			(48.4	)			–				(50.1	)
Shares issued upon exercise of stock options and awards			0.9				32.9				–				–				32.9
Balance, June 30, 2007			69.1			$	751.9			$	1,104.3			$	(29.9	)		$	1,826.3

15. 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.

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, 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.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

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, 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 $14.4 million at June 30, 2007 and $14.2 million at December 31, 2006. Of these amounts, $4.4 million and $4.5 million were included in accrued expenses and other current liabilities at June 30, 2007 and December 31, 2006, 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 $3.6 million of which $0.6 million is included in receivables and $3.0 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 company believes that its environmental accruals are adequate based on currently available information. The company believes that it is reasonably possible that $21.6 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 $21.6 million cannot currently be estimated.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2007

Guarantees

On May 1, 2006, the company sold the FIIS business to SPM Group Holdings, LLC, now known as Emerald Performance Materials, LLC (Emerald). As a result of the sale, Emerald became responsible for contracts relating to FIIS, including a Toluene Sale and Purchase Agreement between SK Corporation (SK) and the company dated December 6, 2005 (the Toluene Agreement). Although Emerald has assumed the obligations under the Toluene Agreement, the company has guaranteed to SK the timely performance of Emerald’s payment obligations under the Toluene Agreement for purchases thereunder. The term of the Toluene Agreement extends to January 31, 2008.

If Emerald does not satisfy its obligations under the Toluene Agreement, SK shall notify the company and use commercially reasonable efforts to collect what is due from Emerald. If SK is unable to collect from Emerald, then SK may make a demand on the company for payment of the outstanding obligations. The guarantee is revocable by the company upon 60 days’ prior written notice.

Because of the guarantee’s existing revocation clause, the company estimates that the maximum liability under the guarantee would be approximately $20.0 million, representing the estimated liability for two shipments to Emerald. However, the company believes that it is highly unlikely that an event would occur requiring the company to pay any monies pursuant to the guarantee. Accordingly, no liability has been reflected in the accompanying consolidated balance sheet at June 30, 2007.

Indemnifications

In connection with the sale of the FIIS business, 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. 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. 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. For those indemnification agreements where a payment by the company is probable and estimable, a liability has been recorded as of June 30, 2007.

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

(In Millions of Dollars except Share and 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 29 countries, including production facilities in 20 countries and laboratories in 13 countries, in key regions around the world through the efforts of approximately 6,800 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 February 7, 2007, we completed the acquisition of the entire metalworking additives product line of Lockhart Chemical Company (Lockhart), a private company with headquarters in Gibsonia, Pennsylvania. Annualized revenues of these products are approximately $20.0 million.

In May 2006, we sold the food ingredients and industrial specialties business (FIIS) and the active pharmaceutical ingredients and intermediate compounds business (A&I), both of which were included in the Lubrizol Advanced Materials segment. We have reflected the results of these divested businesses in the discontinued operations – net of tax line item in the consolidated statements of income for the three and six months ended June 30, 2006.

In February 2006, we sold certain assets and liabilities of our Telene^® resins business (Telene), which was included in the Lubrizol Advanced Materials segment. We have reflected the results of Telene in the discontinued operations - net of tax line item in the consolidated statement of income for the six months ended June 30, 2006.

RESULTS OF OPERATIONS

Income from continuing operations increased $17.9 million to $81.4 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 and increased $43.7 million to $153.0 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. The increase in earnings from continuing operations for the three-month and six-month comparative periods primarily was due to improvements in the combination of price and product mix in the Lubrizol Additives segment as we continued to recover lost margin attributable to past raw material cost increases in this segment. Income from continuing operations also was impacted positively by the favorable resolution of tax matters from prior years, lower net interest costs, higher volume and a favorable currency impact. Higher raw material costs, increased manufacturing costs and higher selling, technology, administrative and research (STAR) expenses partially offset improvements in income from continuing operations for both the three-month and six-month comparative periods. In addition, the six-month period also was impacted favorably by an increase in other income primarily as a result of a gain on the sale of land and a restructuring credit associated with the sale of the manufacturing facility located in Bromborough, U.K.

Net income of $51.1 million for the three months ended June 30, 2006 included a $12.4 million loss from discontinued operations – net of tax. Net income of $36.2 million for the six months ended June 30, 2006 included a $73.1 million loss from discontinued operations – net of tax, which primarily was comprised of a $60.6 million after-tax impairment charge recorded to reflect the FIIS business at its fair value and losses on the sales of the FIIS and A&I businesses.

Revenues

The changes in consolidated revenues are summarized as follows:

		Three Months Ended
		June 30,
		2007				2006				$ Change				% Change
Net sales		$	1,153.5			$	1,039.9			$	113.6				11%
Royalties and other revenues			1.1				1.2				(0.1	)			(8%	)
Total revenues		$	1,154.6			$	1,041.1			$	113.5				11%

		Six Months Ended
		June 30,
		2007				2006				$ Change				% Change
Net sales		$	2,229.3			$	2,023.4			$	205.9				10%
Royalties and other revenues			2.0				1.9				0.1				5%
Total revenues		$	2,231.3			$	2,025.3			$	206.0				10%

The increase in revenues for the three months ended June 30, 2007 compared to the same period in 2006 was due to a 6% improvement in the combination of price and product mix, a 3% increase in volume and a 2% favorable currency impact. The increase in revenues for the six months ended June 30, 2007 compared to the same period in 2006 was due to a 7% improvement in the combination of price and product mix, a 2% favorable currency impact and a 1% increase in volume.

The following table shows the geographic break-down of our volume for the three and six months ended June 30, 2007:

		2007 Volume
		2nd Quarter				Year-to-Date
North America			47	%			47	%
Europe			26	%			27	%
Asia-Pacific / Middle East			21	%			20	%
Latin America			6	%			6	%
Total			100	%			100	%

The following table shows the percentage change in our volume by geographic zone for the three and six months ended June 30, 2007 compared to the corresponding periods in 2006:

		2007 vs. 2006
		% Change
		2nd Quarter				Year-to-Date
North America			(1	%)			(2	%)
Europe			9	%			5	%
Asia-Pacific / Middle East			(1	%)			(1	%)
Latin America			23	%			23	%
Total			3	%			1	%

Segment volume variances by geographic zone as well as the factors explaining the changes in segment revenues for the three and six months ended June 30, 2007 compared with the same periods in 2006 are contained within the “Segment Analysis” section below.

Costs and Expenses

The changes in consolidated costs and expenses are summarized as follows:

		Three Months Ended
		June 30,
		2007				2006				$ Change				% Change
Cost of sales		$	858.1			$	774.5			$	83.6				11	%
Selling and administrative expenses			103.4				85.7				17.7				21	%
Research, testing and development expenses			53.7				52.6				1.1				2	%
Amortization of intangible assets			5.9				5.9				–				–
Restructuring and impairment charges			0.9				1.8				(0.9	)			*
Total costs and expenses		$	1,022.0			$	920.5			$	101.5				11	%

		Six Months Ended
		June 30,
		2007				2006				$ Change				% Change
Cost of sales		$	1,655.8			$	1,513.0			$	142.8				9	%
Selling and administrative expenses			205.7				178.9				26.8				15	%
Research, testing and development expenses			105.4				102.3				3.1				3	%
Amortization of intangible assets			11.9				11.7				0.2				2	%
Restructuring and impairment (credits) charges			(1.5	)			3.6				(5.1	)			*
Total costs and expenses		$	1,977.3			$	1,809.5			$	167.8				9	%

*Calculation not meaningful

The increase in cost of sales for the three and six months ended June 30, 2007 compared to the same periods in 2006 primarily was due to higher average raw material cost and higher manufacturing expenses. Average raw material cost increased 7% for both periods in 2007 compared to the same periods in 2006. Total manufacturing expenses increased 12% and 11% in the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006. The increase for both comparative periods primarily was due to an unfavorable currency impact, increased salaries and benefits, higher maintenance materials and contract labor costs in the Lubrizol Additives segment mostly attributable to the U.S. Gulf Coast and increased environmental-related charges. In addition, for the six months ended June 30, 2007 we experienced unfavorable manufacturing cost absorption as we lowered first quarter production to reduce inventory levels from the prior year end. The six-month increase partially was offset by a decrease in utility costs. On a per-unit-sold basis, manufacturing costs increased 9% for both periods in 2007 compared to the same periods in 2006.

Gross profit (net sales less cost of sales) increased $30.0 million, or 11%, and $63.1 million, or 12%, for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006. The increases primarily were due to improvement in the combination of price and product mix in the Lubrizol Additives segment and a favorable currency impact offset by higher average unit raw material cost and higher manufacturing cost. Our gross profit percentage (gross profit divided by net sales) increased to 25.6% and 25.7% for the three and six months ended June 30, 2007, respectively, compared to 25.5% and 25.2% in the same periods last year. The increases in gross profit percentage for the three-month and six-month comparative periods were attributable to increases in the Lubrizol Additives segment gross profit percentage largely due to the favorable combination of price and product mix, partially offset by gross profit percentage decreases in the Lubrizol Advanced Materials segment primarily as a result of higher raw material costs.

Selling and administrative expenses increased $17.7 million, or 21%, and $26.8 million, or 15%, for the three and six months ended June 30, 2007, respectively, compared to the same periods in 2006. The increase for both periods primarily was due to an increase in salaries and benefits due to annual merit increases, higher incentive compensation expense, the funding of growth resources in the Lubrizol Advanced Materials segment and an unfavorable currency impact. The first quarter of 2006 included a $2.8 million pension settlement charge related to a non-qualified pension plan distribution.

Research, testing and development expenses increased $1.1 million, or 2%, and $3.1 million, or 3%, for the three and six months ended June 30, 2007, respectively, compared to the same periods in the prior year. The year-to-date increase primarily was due to an unfavorable currency impact.

In the three and six months ended June 30, 2007, we recorded aggregate restructuring and impairment charges (credits) of $0.9 million and ($1.5) million, respectively. The net restructuring credit for the six-month period primarily related to a $2.8 million pretax gain and restructuring credit recorded on the sale of the manufacturing facility located in Bromborough, United Kingdom.

Restructuring and impairment charges of $1.8 million and $3.6 million were recorded during the three and six months ended June 30, 2006, respectively, which primarily were associated with the U.K. plant closure mentioned above.

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

		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

		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	)

		Three Months Ended June 30, 2006
		Other Plant
		Exit Costs				Severance				Total
Lubrizol Advanced Materials plant closures and workforce reductions		$	–			$	0.1			$	0.1
Bromborough, U.K. plant closure			1.1				0.6				1.7
Total restructuring and impairment charges		$	1.1			$	0.7			$	1.8

		Six Months Ended June 30, 2006
		Other Plant
		Exit Costs				Severance				Total
Lubrizol Advanced Materials plant closures and workforce reductions		$	–			$	0.5			$	0.5
Bromborough, U.K. plant closure			2.0				1.2				3.2
Other			–				(0.1	)			(0.1	)
Total restructuring and impairment charges		$	2.0			$	1.6			$	3.6

The charges and credits for these cost reduction initiatives and impairments are reported as a separate line item in the consolidated statements of income, entitled “Restructuring and impairment charges (credits)” and are included in the “Total cost and expenses” subtotal on the consolidated statements of income.

Other Items and Net Income

The changes in other items and net income are summarized as follows:

		Three Months Ended
		June 30,
		2007				2006				$ Change				% Change
Other expense – net		$	1.5			$	0.3			$	1.2				*
Interest expense – net			17.5				21.0				(3.5	)			(17	%)
Income from continuing operations before income taxes			113.6				99.3				14.3				14	%
Provision for income taxes			32.2				35.8				(3.6	)			(10	%)
Income from continuing operations			81.4				63.5				17.9				28	%
Discontinued operations			–				(12.4	)			12.4				*
Net income			81.4				51.1				30.3				*

		Six Months Ended
		June 30,
		2007				2006				$ Change				% Change
Other income (expense) – net		$	4.1			$	(1.8	)		$	5.9				*
Interest expense – net			34.6				44.1				(9.5	)			(22	%)
Income from continuing operations before income taxes			223.5				169.9				53.6				32	%
Provision for income taxes			70.5				60.6				9.9				16	%
Income from continuing operations			153.0				109.3				43.7				40	%
Discontinued operations			–				(73.1	)			73.1				*
Net income			153.0				36.2				116.8				*

*Calculation not meaningful

The increase in other income (expense) – net for the six months ended June 30, 2007 compared to the same period in 2006 primarily was due to a $5.0 million gain on the sale of land recorded in the first half of 2007.

The decrease in interest expense – net for the three and six months ended June 30, 2007 compared to the same periods in 2006 primarily was attributable to an increase in interest income as a result of our increased cash and short-term investments from the divestiture proceeds received in May 2006.

Our effective tax rates were 28.3% and 31.5% for the three and six months ended June 30, 2007, respectively, compared to our effective tax rates of 36.1% and 35.6% for the same respective periods in 2006. The decreases in both periods in 2007 compared to 2006 primarily were due to the favorable second quarter resolution of tax matters from prior years and an improvement in our geographic earnings mix due to our strong international growth.

Primarily as a result of the above factors, net income per diluted share was $1.16 and $2.18 for the three and six months ended June 30, 2007, respectively, compared to net income per diluted share of $0.74 and $0.52 for the same respective periods in 2006. Net income per diluted share for the three and six months ended June 30, 2006 included a loss from discontinued operations per diluted share of $0.18 and $1.06, respectively. The loss from discontinued operations per diluted share for the six months ended June 30, 2006 included a $0.01 per diluted share of operating income, an $0.87

per diluted share non-cash impairment charge and a $0.20 per diluted share loss on the sale of the FIIS, A&I and Telene businesses.

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 from continuing operations before income taxes by deducting corporate expenses and income 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,
		2007				2006				2007				2006
Revenues:
Lubrizol Additives		66%				65%				65%				64%
Lubrizol Advanced Materials		34%				35%				35%				36%
Segment Operating Income:
Lubrizol Additives		71%				65%				70%				64%
Lubrizol Advanced Materials		29%				35%				30%				36%

The operating results by segment were as follows:

		Three Months Ended																Six Months Ended
		June 30,																June 30,
		2007				2006				$ Change					% Change			2007				2006				$ Change					% Change
Revenues:
Lubrizol Additives		$	759.0			$	678.4			$	80.6				12	%		$	1,455.0			$	1,306.0			$	149.0				11	%
Lubrizol Advanced Materials			395.6				362.7				32.9				9	%			776.3				719.3				57.0				8	%
Total		$	1,154.6			$	1,041.1			$	113.5				11	%		$	2,231.3			$	2,025.3			$	206.0				10	%
Gross Profit:
Lubrizol Additives		$	186.1			$	159.8			$	26.3				16	%		$	354.1			$	300.9			$	53.2				18	%
Lubrizol Advanced Materials			109.3				105.6				3.7				4	%			219.4				209.5				9.9				5	%
Total		$	295.4			$	265.4			$	30.0				11	%		$	573.5			$	510.4			$	63.1				12	%
Segment Operating Income:
Lubrizol Additives		$	107.0			$	89.8			$	17.2				19	%		$	208.4			$	164.4			$	44.0				27	%
Lubrizol Advanced Materials			43.5				48.4				(4.9	)			(10	%)			88.9				92.9				(4.0	)			(4	%)
Total		$	150.5			$	138.2			$	12.3				9	%		$	297.3			$	257.3			$	40.0				16	%