##### Table of Contents



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




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##### 



THE LUBRIZOL CORPORATION  Quarterly Report on Form 10-Q  Quarter Ended June 30, 2007
 Table of Contents
 Page NumberPART I. FINANCIAL INFORMATIONItem 1
    
    Financial Statements (unaudited)
    
    3Consolidated Statements of Income
    
    3Consolidated Balance Sheets
    
    4Consolidated Statements of Cash Flows
    
    5Notes to Consolidated Financial Statements
    
    6Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    20Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    35Item 4
    
    Controls and Procedures
    
    36PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    36Item 1A
    
    Risk Factors
    
    37Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    37Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    38Item 6
    
    Exhibits
    
    38Signatures
    
    39EX-31.1EX-31.2EX-32.1
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 THE LUBRIZOL CORPORATION
 
 
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In Millions of Dollars Except Per Share Data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    1,153.5
    
    
    $
    1,039.9
    
    
    $
    2,229.3
    
    
    $
    2,023.4Royalties and other revenues
    
    
    1.1
    
    
    
    1.2
    
    
    
    2.0
    
    
    
    1.9Total revenues
    
    
    1,154.6
    
    
    
    1,041.1
    
    
    
    2,231.3
    
    
    
    2,025.3Cost of sales
    
    
    858.1
    
    
    
    774.5
    
    
    
    1,655.8
    
    
    
    1,513.0Selling and administrative expenses
    
    
    103.4
    
    
    
    85.7
    
    
    
    205.7
    
    
    
    178.9Research, testing and development expenses
    
    
    53.7
    
    
    
    52.6
    
    
    
    105.4
    
    
    
    102.3Amortization of intangible assets
    
    
    5.9
    
    
    
    5.9
    
    
    
    11.9
    
    
    
    11.7Restructuring and impairment charges (credits)
    
    
    0.9
    
    
    
    1.8
    
    
    
    (1.5
    )
    
    
    3.6Total costs and expenses
    
    
    1,022.0
    
    
    
    920.5
    
    
    
    1,977.3
    
    
    
    1,809.5Other (expense) income  net
    
    
    (1.5
    )
    
    
    (0.3
    )
    
    
    4.1
    
    
    
    (1.8
    )Interest income
    
    
    6.9
    
    
    
    3.7
    
    
    
    14.0
    
    
    
    5.9Interest expense
    
    
    (24.4
    )
    
    
    (24.7
    )
    
    
    (48.6
    )
    
    
    (50.0
    )Income from continuing operations before
income taxes
    
    
    113.6
    
    
    
    99.3
    
    
    
    223.5
    
    
    
    169.9Provision for income taxes
    
    
    32.2
    
    
    
    35.8
    
    
    
    70.5
    
    
    
    60.6Income from continuing operations
    
    
    81.4
    
    
    
    63.5
    
    
    
    153.0
    
    
    
    109.3Discontinued operations  net of tax
    
    
    
    
    
    
    (12.4
    )
    
    
    
    
    
    
    (73.1
    )Net income
    
    $
    81.4
    
    
    $
    51.1
    
    
    $
    153.0
    
    
    $
    36.2Basic earnings (loss) per share:Continuing operations
    
    $
    1.17
    
    
    $
    0.92
    
    
    $
    2.21
    
    
    $
    1.60Discontinued operations
    
    
    
    
    
    
    (0.18
    )
    
    
    
    
    
    
    (1.07
    )Net income per share, basic
    
    $
    1.17
    
    
    $
    0.74
    
    
    $
    2.21
    
    
    $
    0.53Diluted earnings (loss) per share:Continuing operations
    
    $
    1.16
    
    
    $
    0.92
    
    
    $
    2.18
    
    
    $
    1.58Discontinued operations
    
    
    
    
    
    
    (0.18
    )
    
    
    
    
    
    
    (1.06
    )Net income per share, diluted
    
    $
    1.16
    
    
    $
    0.74
    
    
    $
    2.18
    
    
    $
    0.52Dividends paid per share
    
    $
    0.30
    
    
    $
    0.26
    
    
    $
    0.30
    
    
    $
    0.26
 Amounts shown are unaudited.
 See accompanying notes to the financial statements.
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THE LUBRIZOL CORPORATION
 
 
 June 30,
    
    
    December 31,(In Millions of Dollars Except Share Data)
    
    2007
    
    
    2006ASSETSCash and short-term investments
    
    $
    592.6
    
    
    $
    575.7Receivables
    
    
    659.5
    
    
    
    573.6Inventories
    
    
    546.6
    
    
    
    589.0Other current assets
    
    
    82.2
    
    
    
    98.0Total current assets
    
    
    1,880.9
    
    
    
    1,836.3Property and equipment  at cost
    
    
    2,623.7
    
    
    
    2,546.0Less accumulated depreciation
    
    
    1,526.3
    
    
    
    1,464.7Property and equipment  net
    
    
    1,097.4
    
    
    
    1,081.3Goodwill
    
    
    1,096.9
    
    
    
    1,076.1Intangible assets  net
    
    
    322.1
    
    
    
    322.8Investments in non-consolidated companies
    
    
    6.7
    
    
    
    7.7Other assets
    
    
    67.4
    
    
    
    62.0TOTAL
    
    $
    4,471.4
    
    
    $
    4,386.2LIABILITIES AND SHAREHOLDERS EQUITYShort-term debt and current portion of long-term debt
    
    $
    5.9
    
    
    $
    3.7Accounts payable
    
    
    386.6
    
    
    
    340.5Accrued expenses and other current liabilities
    
    
    213.9
    
    
    
    287.8Total current liabilities
    
    
    606.4
    
    
    
    632.0Long-term debt
    
    
    1,457.1
    
    
    
    1,538.0Pension obligations
    
    
    208.9
    
    
    
    218.5Other postretirement benefit obligations
    
    
    80.5
    
    
    
    82.0Noncurrent liabilities
    
    
    141.3
    
    
    
    66.7Deferred income taxes
    
    
    93.3
    
    
    
    88.9Total liabilities
    
    
    2,587.5
    
    
    
    2,626.1Minority interest in consolidated companies
    
    
    57.6
    
    
    
    52.7Contingencies and commitmentsShareholders 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 sharesOutstanding  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
    
    
    
    710.1Retained earnings
    
    
    1,104.3
    
    
    
    1,050.2Accumulated other comprehensive loss
    
    
    (29.9
    )
    
    
    (52.9
    )Total shareholders equity
    
    
    1,826.3
    
    
    
    1,707.4TOTAL
    
    $
    4,471.4
    
    
    $
    4,386.2
 Amounts shown are unaudited.
 See accompanying notes to the financial statements.
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THE LUBRIZOL CORPORATION
 
 
 Six Months EndedJune 30,(In Millions of Dollars)
    
    2007
    
    
    2006CASH PROVIDED BY (USED FOR):OPERATING ACTIVITIESNet income
    
    $
    153.0
    
    
    $
    36.2Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    78.8
    
    
    
    82.4Deferred income taxes
    
    
    19.1
    
    
    
    14.3Deferred compensation
    
    
    11.9
    
    
    
    7.0Restructuring and impairment charges
    
    
    0.8
    
    
    
    61.0(Gain) loss from divestitures and sales of property and equipment
    
    
    (8.0
    )
    
    
    5.5Change 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
    )
    
    
    14.4Other items  net
    
    
    1.8
    
    
    
    16.3Total operating activities
    
    
    227.2
    
    
    
    89.6INVESTING ACTIVITIESCapital expenditures
    
    
    (75.8
    )
    
    
    (62.2
    )Acquisitions
    
    
    (15.7
    )
    
    
    Net proceeds from divestitures and sales of property and equipment
    
    
    12.1
    
    
    
    275.4Other items  net
    
    
    (1.3
    )
    
    
    (0.7
    )Total investing activities
    
    
    (80.7
    )
    
    
    212.5FINANCING ACTIVITIESChanges in short-term debt  net
    
    
    2.3
    
    
    
    6.9Repayments 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
    
    
    
    10.3Total financing activities
    
    
    (133.1
    )
    
    
    (76.0
    )Effect of exchange rate changes on cash
    
    
    3.5
    
    
    
    3.0Net increase in cash and short-term investments
    
    
    16.9
    
    
    
    229.1Cash and short-term investments at the beginning of period
    
    
    575.7
    
    
    
    262.4Cash and short-term investments at the end of period
    
    $
    592.6
    
    
    $
    491.5
 Amounts shown are unaudited.
 See accompanying notes to the financial statements.
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THE LUBRIZOL CORPORATION
 
 Notes to Consolidated Financial Statements
 June 30, 2007
  1. Basis of Presentation
   2. Significant Accounting Policies
 Net Income Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Income from continuing operations
    
    $
    81.4
    
    
    $
    63.5
    
    
    $
    153.0
    
    
    $
    109.3Denominator (in millions):Weighted-average common shares outstanding
    
    
    69.4
    
    
    
    68.6
    
    
    
    69.4
    
    
    
    68.5Dilutive effect of stock options and awards
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.6Denominator for income from continuing operations
per share, diluted
    
    
    70.2
    
    
    
    69.2
    
    
    
    70.2
    
    
    
    69.1Income from continuing operations per share, basic
    
    $
    1.17
    
    
    $
    0.92
    
    
    $
    2.21
    
    
    $
    1.60Income from continuing operations per share, diluted
    
    $
    1.16
    
    
    $
    0.92
    
    
    $
    2.18
    
    
    $
    1.58
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
 New Accounting Standards
   Use of Estimates
  Reclassifications
  3. Stock-Based Compensation
  -7-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
  Risk-free interest rate
    
    
    4.8
    %Dividend yield
    
    
    2.0
    %Volatility
    
    
    17.8
    %Expected life (years)
    
    
    10.0Weighted-average fair value of
options granted during the year
    
    $
    14.68
     Expected
    
    AverageNumber of Units
    
    Stock Price onAward
    
    to be Issued
    
    Date of Grant2005-2007
    
    
    243,532
    
    
    $
    39.442006-2008
    
    
    291,306
    
    
    $
    43.072007-2009
    
    
    168,272
    
    
    $
    53.07
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
  Weighted-AverageShare
    
    Grant DateUnits
    
    Fair ValueNonvested at January 1, 2007
    
    
    370,448
    
    
    $
    40.95Granted
    
    
    129,930
    
    
    $
    53.07Performance increase
    
    
    213,223
    
    
    $
    44.40Vested
    
    
    
    
    
    
    Forfeited
    
    
    (10,491
    )
    
    $
    43.01Nonvested at June 30, 2007
    
    
    703,110
    
    
    $
    44.20
    4. Acquisitions
  5. Divestitures
  -9-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
 ®
  6. Inventories
  June 30,
    
    
    December 31,2007
    
    
    2006Finished products
    
    $
    295.9
    
    
    $
    315.0Products in process
    
    
    86.4
    
    
    
    108.2Raw materials
    
    
    133.5
    
    
    
    138.2Supplies and engine test parts
    
    
    30.8
    
    
    
    27.6Total inventory
    
    $
    546.6
    
    
    $
    589.0
 7. Goodwill and Intangible Assets
   LubrizolAdvanced
    
    
    LubrizolMaterials
    
    
    Additives
    
    
    TotalBalance, January 1, 2007
    
    $
    978.3
    
    
    $
    97.8
    
    
    $
    1,076.1Additions
    
    
    
    
    
    
    8.1
    
    
    
    8.1Translation
and other adjustments
    
    
    12.4
    
    
    
    0.3
    
    
    
    12.7Balance, June 30, 2007
    
    $
    990.7
    
    
    $
    106.2
    
    
    $
    1,096.9
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
 June 30, 2007
    
    
    December 31, 2006Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Customer lists
    
    $
    150.8
    
    
    $
    28.8
    
    
    $
    145.0
    
    
    $
    24.0Technology
    
    
    141.5
    
    
    
    49.9
    
    
    
    139.8
    
    
    
    44.9Trademarks
    
    
    22.0
    
    
    
    6.2
    
    
    
    20.7
    
    
    
    5.5Patents
    
    
    14.3
    
    
    
    5.0
    
    
    
    14.0
    
    
    
    4.2Land-use rights
    
    
    8.9
    
    
    
    1.3
    
    
    
    7.5
    
    
    
    1.2Non-compete agreements
    
    
    1.6
    
    
    
    1.2
    
    
    
    8.2
    
    
    
    7.2Other
    
    
    0.1
    
    
    
    
    
    
    
    0.9
    
    
    
    0.7Total amortized intangible assets
    
    
    339.2
    
    
    
    92.4
    
    
    
    336.1
    
    
    
    87.7Non-amortized trademarks
    
    
    75.3
    
    
    
    
    
    
    
    74.4
    
    
    
    Total
    
    $
    414.5
    
    
    $
    92.4
    
    
    $
    410.5
    
    
    $
    87.7
  8. Income Taxes
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
     9. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    81.4
    
    
    $
    51.1
    
    
    $
    153.0
    
    
    $
    36.2Foreign currency translation adjustment
    
    
    10.4
    
    
    
    31.7
    
    
    
    20.7
    
    
    
    38.6Pension 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
    
    
    
    1.6Total comprehensive income
    
    $
    91.9
    
    
    $
    83.7
    
    
    $
    176.0
    
    
    $
    74.8
 10. Segment Reporting
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
  ® ® ®
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues from external customers:Lubrizol Additives
    
    $
    759.0
    
    
    $
    678.4
    
    
    $
    1,455.0
    
    
    $
    1,306.0Lubrizol Advanced Materials
    
    
    395.6
    
    
    
    362.7
    
    
    
    776.3
    
    
    
    719.3Total revenues
    
    $
    1,154.6
    
    
    $
    1,041.1
    
    
    $
    2,231.3
    
    
    $
    2,025.3Segment operating income:Lubrizol Additives
    
    $
    107.0
    
    
    $
    89.8
    
    
    $
    208.4
    
    
    $
    164.4Lubrizol Advanced Materials
    
    
    43.5
    
    
    
    48.4
    
    
    
    88.9
    
    
    
    92.9Total
segment operating income
    
    
    150.5
    
    
    
    138.2
    
    
    
    297.3
    
    
    
    257.3Corporate 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
  June 30,
    
    
    December 31,2007
    
    
    2006Segment total assets:Lubrizol Additives
    
    $
    1,467.0
    
    
    $
    1,392.9Lubrizol Advanced Materials
    
    
    2,210.5
    
    
    
    2,193.7Total
segment assets
    
    
    3,677.5
    
    
    
    3,586.6Corporate assets
    
    
    793.9
    
    
    
    799.6Total consolidated assets
    
    $
    4,471.4
    
    
    $
    4,386.2
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
 11. Pension and Postretirement Benefits
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Pension benefits:Service cost - benefits earned during period
    
    $
    7.7
    
    
    $
    8.0
    
    
    $
    14.9
    
    
    $
    16.0Interest cost on projected benefit obligation
    
    
    9.7
    
    
    
    8.3
    
    
    
    19.3
    
    
    
    16.6Expected return on plan assets
    
    
    (8.5
    )
    
    
    (7.2
    )
    
    
    (17.1
    )
    
    
    (14.3
    )Amortization of prior service costs
    
    
    0.6
    
    
    
    0.5
    
    
    
    1.2
    
    
    
    0.9Recognized net actuarial loss
    
    
    1.3
    
    
    
    2.1
    
    
    
    2.5
    
    
    
    4.2Settlement / curtailment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.3Amortization of initial net asset obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Net periodic pension cost
    
    $
    10.8
    
    
    $
    11.7
    
    
    $
    20.8
    
    
    $
    26.8Other postretirement benefits:Service cost - benefits earned during period
    
    $
    0.3
    
    
    $
    0.4
    
    
    $
    0.6
    
    
    $
    0.7Interest cost on projected benefit obligation
    
    
    1.4
    
    
    
    1.3
    
    
    
    2.7
    
    
    
    2.5Amortization of prior service costs
    
    
    (1.6
    )
    
    
    (2.1
    )
    
    
    (3.2
    )
    
    
    (4.1
    )Recognized net actuarial loss
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.6
    
    
    
    0.9Net periodic non-pension postretirement
benefit cost
    
    $
    0.4
    
    
    $
    
    
    
    $
    0.7
    
    
    $
    
  12. Restructuring and Impairment Charges (Credits)
  -15-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
  Liability
    
    
    Restructuring
    
    
    
    
    
    
    
    
    
    
    LiabilityJanuary 1,
    
    
    and Impairment
    
    
    
    
    
    
    Non-cash
    
    
    June 30,2007
    
    
    (Credits) Charges
    
    
    Cash Paid
    
    
    Adjustments
    
    
    2007Bromborough, U.K. plant closure and sale
    
    $
    1.0
    
    
    $
    (0.7
    )
    
    $
    (0.1
    )
    
    $
    (0.1
    )
    
    $
    0.1Lubrizol Advanced Materials plant and line
closures and workforce reductions
    
    
    0.7
    
    
    
    1.1
    
    
    
    (1.0
    )
    
    
    (0.5
    )
    
    
    0.3Corporate / 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
  13. Debt
    
 -16-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
 14. Shareholders Equity
  Shareholders EquityAccumulatedNumber of
    
    
    
    
    
    
    
    
    
    
    OtherShares
    
    
    Common
    
    
    Retained
    
    
    ComprehensiveOutstanding
    
    
    Shares
    
    
    Earnings
    
    
    (Loss) Income
    
    
    TotalBalance, December 31, 2006
    
    
    69.0
    
    
    $
    710.1
    
    
    $
    1,050.2
    
    
    $
    (52.9
    )
    
    $
    1,707.4Cumulative 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
    )
    
    
    1,698.5Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    153.0
    
    
    
    
    
    
    
    153.0Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23.0
    
    
    
    23.0Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176.0Dividends
    
    
    
    
    
    
    
    
    
    
    (41.6
    )
    
    
    
    
    
    
    (41.6
    )Deferred stock compensation
    
    
    
    
    
    
    10.6
    
    
    
    
    
    
    
    
    
    
    
    10.6Common 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
    
    
    
    
    
    
    
    
    
    
    
    32.9Balance, June 30, 2007
    
    
    69.1
    
    
    $
    751.9
    
    
    $
    1,104.3
    
    
    $
    (29.9
    )
    
    $
    1,826.3
 15. Contingencies
  General
  -17-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
 Environmental
      -18-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2007
 Guarantees
    Indemnifications
  -19-




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  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
     ®
 RESULTS OF OPERATIONS
 -20-




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##### Table of Contents



Revenues
  Three Months EndedJune 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeNet 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 EndedJune 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeNet 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%
  -21-




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##### Table of Contents



2007 Volume2nd Quarter
    
    Year-to-DateNorth America
    
    
    47
    %
    
    
    47
    %Europe
    
    
    26
    %
    
    
    27
    %Asia-Pacific / Middle East
    
    
    21
    %
    
    
    20
    %Latin America
    
    
    6
    %
    
    
    6
    %Total
    
    
    100
    %
    
    
    100
    %
  2007 vs. 2006% Change2nd Quarter
    
    Year-to-DateNorth America
    
    
    (1
    %)
    
    
    (2
    %)Europe
    
    
    9
    %
    
    
    5
    %Asia-Pacific / Middle East
    
    
    (1
    %)
    
    
    (1
    %)Latin America
    
    
    23
    %
    
    
    23
    %Total
    
    
    3
    %
    
    
    1
    %
  Costs and Expenses
  Three Months EndedJune 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeCost 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
    %
 -22-




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##### Table of Contents



Six Months EndedJune 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeCost 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
    %
       -23-




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##### Table of Contents



Three Months Ended June 30, 2007Asset
    
    
    Other PlantImpairments
    
    
    Exit Costs
    
    
    Severance
    
    
    TotalLubrizol Advanced Materials plant closures
and workforce reductions
    
    $
    0.5
    
    
    $
    
    
    
    $
    0.3
    
    
    $
    0.8Bromborough, U.K. plant closure and sale
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Total restructuring and impairment charges
    
    $
    0.5
    
    
    $
    0.1
    
    
    $
    0.3
    
    
    $
    0.9
 Six Months Ended June 30, 2007AssetImpairments
    
    
    Other Plant(Gains)
    
    
    Exit Costs
    
    
    Severance
    
    
    TotalLubrizol Advanced Materials plant closures
and workforce reductions
    
    $
    0.5
    
    
    $
    0.2
    
    
    $
    0.4
    
    
    $
    1.1Bromborough, U.K. plant closure and sale
    
    
    (2.8
    )
    
    
    0.1
    
    
    
    
    
    
    
    (2.7
    )Other
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1Total restructuring and impairment (credits) charges
    
    $
    (2.3
    )
    
    $
    0.3
    
    
    $
    0.5
    
    
    $
    (1.5
    )
 Three Months Ended June 30, 2006Other PlantExit Costs
    
    
    Severance
    
    
    TotalLubrizol Advanced Materials plant closures
and workforce reductions
    
    $
    
    
    
    $
    0.1
    
    
    $
    0.1Bromborough, U.K. plant closure
    
    
    1.1
    
    
    
    0.6
    
    
    
    1.7Total restructuring and impairment charges
    
    $
    1.1
    
    
    $
    0.7
    
    
    $
    1.8
 Six Months Ended June 30, 2006Other PlantExit Costs
    
    
    Severance
    
    
    TotalLubrizol Advanced Materials plant closures
and workforce reductions
    
    $
    
    
    
    $
    0.5
    
    
    $
    0.5Bromborough, U.K. plant closure
    
    
    2.0
    
    
    
    1.2
    
    
    
    3.2Other
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Total restructuring and impairment charges
    
    $
    2.0
    
    
    $
    1.6
    
    
    $
    3.6
  -24-




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##### Table of Contents



OtherItems andNetIncome
  Three Months EndedJune 30,2007
    
    2006
    
    $ Change
    
    % ChangeOther 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 EndedJune 30,2007
    
    2006
    
    $ Change
    
    % ChangeOther 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
    
    
    
    *
      -25-




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##### Table of Contents



SEGMENT ANALYSIS
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues: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%
 - 26 -




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##### Table of Contents



Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    
    
    
    
    
    June 30,2007
    
    
    2006
    
    
    $ Change
    
    
    
    % Change
    
    2007
    
    
    2006
    
    
    $ Change
    
    
    
    % ChangeRevenues: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
    %
 Lubrizol Additives Segment
   2007 Volume2nd Quarter
    
    Year-to-DateNorth America
    
    
    37
    %
    
    
    37
    %Europe
    
    
    31
    %
    
    
    31
    %Asia-Pacific / Middle East
    
    
    25
    %
    
    
    25
    %Latin America
    
    
    7
    %
    
    
    7
    %Total
    
    
    100
    %
    
    
    100
    %
 - 27 -




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##### Table of Contents



2007 vs. 2006% Change2nd Quarter
    
    Year-to-DateNorth America
    
    
    (2
    %)
    
    
    (2
    %)Europe
    
    
    10
    %
    
    
    5
    %Asia-Pacific / Middle East
    
    
    (5
    %)
    
    
    (5
    %)Latin America
    
    
    25
    %
    
    
    20
    %Total
    
    
    2
    %
    
    
    1
    %
       - 28 -




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##### Table of Contents



lubrizol advanced materials Segment
   2007 Volume2nd Quarter
    
    Year-to-DateNorth America
    
    
    68
    %
    
    
    67
    %Europe
    
    
    17
    %
    
    
    18
    %Asia-Pacific / Middle East
    
    
    12
    %
    
    
    11
    %Latin America
    
    
    3
    %
    
    
    4
    %Total
    
    
    100
    %
    
    
    100
    %
  2007 vs. 2006% Change2nd Quarter
    
    Year-to-DateNorth America
    
    
    1
    %
    
    
    (2
    %)Europe
    
    
    6
    %
    
    
    6
    %Asia-Pacific / Middle East
    
    
    21
    %
    
    
    22
    %Latin America
    
    
    15
    %
    
    
    34
    %Total
    
    
    4
    %
    
    
    3
    %
  ® ® ®
 - 29 -




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- 30 -




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##### Table of Contents



WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
  Six Months EndedJune 30,2007
    
    
    2006Cash provided by (used for):Operating activities
    
    $
    227.2
    
    
    $
    89.6Investing activities
    
    
    (80.7
    )
    
    
    212.5Financing activities
    
    
    (133.1
    )
    
    
    (76.0
    )Effect of exchange-rate changes on cash
    
    
    3.5
    
    
    
    3.0Net increase in cash and short-term
investments
    
    $
    16.9
    
    
    $
    229.1
 Operating Activities
   Investing Activities
  Financing Activities
  
 - 31 -




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##### Table of Contents



Capitalization, Liquidity and Credit Facilities
      
  Contractual Cash Obligations
  
 - 32 -




---



##### Table of Contents



NEW ACCOUNTING STANDARDS
         - 33 -




---



##### Table of Contents



CAUTIONARY STATEMENTS FOR SAFE HARBOR PURPOSES
   
    
    The cost, availability and quality of raw materials, especially petroleum-based products.
 
    
    Our ability to sustain profitability of our products in a competitive environment.
 
    
    The demand for our products as influenced by factors such as the global economic environment, longer-term technology
developments and the success of our commercial development programs.
 
    
    The risks of conducting business in foreign countries, including the effects of fluctuations in currency exchange rates
upon our consolidated results and political, social, economic and regulatory factors.
 
    
    The extent to which we are successful in expanding our business in new and existing markets and in identifying,
understanding and managing the risks inherent in those markets.
 
    
    The effect of required principal and interest payments on our ability to fund capital expenditures and acquisitions and
to meet operating needs.
 
    
    Our ability to identify, complete and integrate acquisitions for profitable growth and operating efficiencies.
 
    
    Our success at continuing to develop proprietary technology to meet or exceed new industry performance standards and
individual customer expectations.
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
    
    Our ability to implement a new common information systems platform primarily into our Lubrizol Advanced Materials
segment successfully, including the management of project costs, its timely completion and realization of its benefits.
 
    
    Our ability to continue to reduce complexities and conversion costs and modify our cost structure to maintain and
enhance our competitiveness.
 
    
    Our success in retaining and growing the business that we have with our largest customers.
 
    
    The cost and availability of energy, especially natural gas and electricity.
 
    
    The effect of interest rate fluctuations on our net interest expense.
 
    
    The risk of transportation or weather-related disruptions to our Lubrizol Additives production facilities located near
the U.S. Gulf Coast.
 
    
    Significant changes in government regulations affecting environmental compliance.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
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Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    On April 2, 2007, we issued 4,857 common shares in private placement
transactions exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) of that Act. We issued the common shares to two former directors under
deferred compensation plans for directors.On May 1, 2007, we issued 3,115 common shares in a private placement transaction
exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of
that Act. We issued the common shares to one former officer under a deferred
compensation plan for officers.On May 1, 2007, we issued 1,317 common shares in a private placement transaction
exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of
that Act. We issued the common shares to one former director under a deferred
compensation plan for directors.On May 8, 2007, we issued 99 common shares in a transaction exempt from registration
under the Securities Act of 1933 pursuant to Regulation S. We issued the common
shares to one employee of a wholly owned U. K. subsidiary of the company under an
employee benefit plan.On June 1, 2007, we issued 1,604 common shares in private placement transactions
exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of
that Act. We issued the common shares to three former officers under a deferred
compensation plan for officers.On June 18, 2007, we issued 95 common shares in a transaction exempt from
registration under the Securities Act of 1933 pursuant to Regulation S. We issued
the common shares to one employee of a wholly owned Canadian subsidiary of the
company under an employee benefit plan.(c)
    
    The following table provides information regarding our purchases of Lubrizol
common shares during the second quarter.
 Maximum NumberTotal Number
    
    (or Approximate Dollarof Shares (or Units)
    
    Value) of Shares (orTotal Number of
    
    Average Price
    
    Purchased as Part of
    
    Units) that May YetShares (or Units)
    
    Paid per Share
    
    Publicly Announced
    
    be Purchased UnderPeriod
    
    Purchased1
    
    (or Unit)
    
    Plans or Programs2
    
    the Plans or ProgramsMonth #1
(April 1, 2007 through
April 30, 2007)
    
    0 Shares
    
    
    N/A
    
    
    
    N/A
    
    
    6,413,118 SharesMonth #2
(May 1, 2007 through
May 31, 2007)
    
    440,210 Shares
    
    $
    63.43
    
    
    437,200 Shares
    
    5,975,918 SharesMonth #3
(June 1, 2007 through
June 30, 2007)
    
    57,315 Shares
    
    $
    65.60
    
    
    47,000 Shares
    
    5,928,918 SharesTotal
    
    497,525 Shares
    
    
    
    
    
    484,200 Shares
    
    5,928,918 Shares
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1
    
    This column includes common shares (0 in April; 3,010 in May and
10,315 in June) that we purchased pursuant to our deferred compensation plans whereby we
withhold shares upon a distribution to pay the withholding taxes on behalf of the
employee and pursuant to our stock incentive plan whereby participants exchange already
owned shares to us to pay for the exercise price of an option or whereby we withhold
shares upon the exercise of an option to pay the withholding taxes on behalf of the
employee.2
    
    This column represents common shares that we purchased at a cost
of $30.8 million pursuant to a share repurchase program announced on June 23, 1997. On
April, 23, 2007, our board of directors authorized an enhanced share repurchase program
that permits the company to repurchase up to 5.0 million of its common shares upon
completion of repurchases under the previous share repurchase program. These shares may
be repurchased in the open market or through negotiated transactions. The program does
not have an expiration date. 
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    Election of Directors.
 a.
    
    Harriett Tee Taggart. The vote was 62,690,271 shares for and
1,826,692 shares to withhold authority.b.
    
    James E. Sweetnam. The vote was 62,625,582 shares for and
1,891,381 shares to withhold authority.c.
    
    James L. Hambrick. The vote was 62,698,437 shares for and
1,818,527 shares to withhold authority.d.
    
    Gordon D. Harnett. The vote was 61,267,560 shares for and
3,249,404 shares to withhold authority.e.
    
    Victoria F. Haynes. The vote was 60,706,418 shares for and
3,810,546 shares to withhold authority.f.
    
    William P. Madar. The vote was 61,230,078 shares for and
3,286,886 shares to withhold authority.
 The names of each director whose term of office as a director continued after the
meeting are: Robert E. Abernathy, Jerald A. Blumberg, Forest J. Farmer, Sr. and
Dominic Pileggi.
 2.
    
    A proposal to confirm the appointment of Deloitte & Touche LLP as the
independent registered public accountant. The vote was 64,432,075 shares for; 43,356
shares against; and 41,532 shares abstaining.
 
 Item 6. Exhibits
 31.1
    
    Rule 13a-14(a) Certification of the Chief Executive Officer, as created by
Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
    
    Rule 13a-14(a) Certification of the Chief Financial Officer, as created by
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chief Financial Officer of The
Lubrizol Corporation pursuant to 18 U.S.C. Section 1350, as created by Section 906 of
the Sarbanes-Oxley Act.
 
 Signatures
  THE LUBRIZOL CORPORATION/s/ W. Scott EmerickW. Scott EmerickChief Accounting Officer and Duly Authorized
Signatory of The Lubrizol Corporation  - 39 -