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 March 31, 2006

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		34-0367600
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 April 30, 2006: 68,374,897

 

 

THE LUBRIZOL CORPORATION
Quarterly Report on Form 10-Q
Quarter Ended March 31, 2006

Table of Contents

				Page Number
PART I. FINANCIAL INFORMATION
Item 1		Financial Statements (unaudited)			3
		Consolidated Statements of Operations			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			28
Item 3		Quantitative and Qualitative Disclosures about Market Risk			41
Item 4		Controls and Procedures			42
PART II. OTHER INFORMATION
Item 1		Legal Proceedings			42
Item 1A		Risk Factors			42
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 6		Exhibits			43
		Signatures			44
EX-31.1 Certification
EX-31.2 Certification
EX-32.1 Certification

PART I. FINANCIAL INFORMATION

THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months
		Ended March 31,
(In Millions of Dollars Except Per Share Data)		2006				2005
Net sales		$	983.5			$	847.9
Royalties and other revenues			0.6				0.9
Total revenues			984.1				848.8
Cost of sales			738.4				618.2
Selling and administrative expenses			93.3				85.6
Research, testing and development expenses			49.6				48.5
Amortization of intangible assets			5.8				5.9
Restructuring and impairment charges			1.8				6.1
Total costs and expenses			888.9				764.3
Other (expense) income - net			(1.5	)			0.6
Interest income			2.2				1.8
Interest expense			(25.3	)			(26.3	)
Income from continuing operations before income taxes			70.6				60.6
Provision for income taxes			24.7				20.5
Income from continuing operations			45.9				40.1
Discontinued operations - net of tax			(60.7	)			8.4
Net (loss) income		$	(14.8	)		$	48.5
Basic earnings (loss) per share:
Continuing operations		$	0.67			$	0.59
Discontinued operations			(0.89	)			0.13
Net (loss) income per share, basic		$	(0.22	)		$	0.72
Diluted earnings (loss) per share:
Continuing operations		$	0.66			$	0.59
Discontinued operations			(0.88	)			0.12
Net (loss) income per share, diluted		$	(0.22	)		$	0.71
Dividends per share		$	0.26			$	0.26

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORPORATION

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
(In Millions of Dollars)		2006				2005
ASSETS
Cash and short-term investments		$	233.3			$	262.4
Receivables - net			566.8				585.6
Inventories			531.5				586.0
Other current assets			127.3				138.3
Assets held for sale			286.0				–
Total current assets			1,744.9				1,572.3
Property and equipment - at cost			2,496.4				2,621.5
Less accumulated depreciation			1,431.8				1,437.1
Property and equipment - net			1,064.6				1,184.4
Goodwill			1,055.6				1,138.8
Intangible assets - net			379.1				404.6
Investments in non-consolidated companies			7.8				7.6
Other assets			55.2				58.6
TOTAL		$	4,307.2			$	4,366.3
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt and current portion of long-term debt		$	8.2			$	7.9
Accounts payable			341.2				372.2
Accrued expenses and other current liabilities			273.2				284.8
Liabilities held for sale			17.0				–
Total current liabilities			639.6				664.9
Long-term debt			1,637.0				1,662.9
Postretirement health-care obligations			101.6				102.6
Noncurrent liabilities			196.8				204.0
Deferred income taxes			114.3				113.7
Total liabilities			2,689.3				2,748.1
Minority interest in consolidated companies			48.5				51.0
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 - 68,343,245 shares as of March 31, 2006 after deducting 17,852,649 treasury shares, 68,043,241 shares as of December 31, 2005 after deducting 18,152,653 treasury shares			674.7				663.7
Retained earnings			1,001.2				1,016.0
Accumulated other comprehensive loss			(106.5	)			(112.5	)
Total shareholders’ equity			1,569.4				1,567.2
TOTAL		$	4,307.2			$	4,366.3

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months
		Ended March 31,
(In Millions of Dollars)		2006				2005
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net (loss) income		$	(14.8	)		$	48.5
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Depreciation and amortization			42.9				47.3
Deferred income taxes			8.1				3.1
Restructuring and impairment charges			61.0				4.4
Change in current assets and liabilities, net of acquisitions and divestitures:
Receivables			(38.1	)			(49.4	)
Inventories			(13.2	)			(26.7	)
Accounts payable, accrued expenses and other current liabilities			(32.0	)			(9.6	)
Other current assets			0.9				0.2
			(82.4	)			(85.5	)
Change in noncurrent liabilities			4.1				14.7
Other items - net			6.8				(2.9	)
Total operating activities			25.7				29.6
INVESTING ACTIVITIES
Capital expenditures			(30.3	)			(29.7	)
Net proceeds from divestitures and sales of property and equipment			8.5				1.6
Total investing activities			(21.8	)			(28.1	)
FINANCING ACTIVITIES
Changes in short-term debt, net			0.3				(4.0	)
Repayments of long-term debt			(23.7	)			(0.1	)
Dividends paid			(17.7	)			(17.4	)
Proceeds from the exercise of stock options			7.3				30.9
Total financing activities			(33.8	)			9.4
Effect of exchange rate changes on cash			0.8				(7.0	)
Net (decrease) increase in cash and short-term investments			(29.1	)			3.9
Cash and short-term investments at the beginning of period			262.4				335.9
Cash and short-term investments at the end of period		$	233.3			$	339.8

Amounts shown are unaudited.

See accompanying notes to the financial statements.

THE LUBRIZOL CORPORATION

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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals unless otherwise noted) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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 other stock awards. Per share amounts from continuing operations are computed as follows:

		Three Months
		Ended March 31,
(in millions except per share data)		2006				2005
Numerator:
Income from continuing operations		$	45.9			$	40.1
Denominator:
Weighted-average common shares outstanding			68.4				67.4
Dilutive effect of stock options and awards			0.7				0.8
Denominator for income from continuing operations per share, diluted			69.1				68.2
Income from continuing operations per share, basic		$	0.67			$	0.59
Income from continuing operations per share, diluted		$	0.66			$	0.59

Weighted-average shares issuable upon the exercise of stock options that were excluded from the diluted earnings per share calculations because they were antidilutive for the three months ended March 31, 2006 were 0.1 million.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

New Accounting Standards

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections.” This statement established new standards on accounting for changes in accounting principles. Pursuant to the new rules, all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 completely replaces Accounting Principles Board (APB) Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” though it carries forward the guidance in those pronouncements with respect to accounting for changes in estimates, changes in the reporting entity, and the correction of errors. This statement is effective for accounting changes and corrections of errors starting January 1, 2006. The company’s adoption of this standard did not have a material impact on its financial position, results of operations or cash flows.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This standard requires that such items be recognized as current-period charges. The standard also establishes the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Any unallocated overhead must be recognized as an expense in the period incurred. This standard is effective for inventory costs incurred starting January 1, 2006. The company’s adoption of this standard did not have a material impact on its financial position, results of operations or cash flows.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 year presentation.

3. Stock-Based Compensation

Effective January 1, 2006, the company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the first quarter of 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. The company recognizes these compensation costs, net of a forfeiture rate, on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three years with the options becoming exercisable 50% one year after grant, 75% after two years and 100% after three years. The company estimated the forfeiture rate for the first quarter of 2006 based on its historical experience during the preceding 10 years.

The company utilizes the Long-Term Incentive Plan and the 2005 Stock Incentive Plan (2005 Plan) to reward key employees. Additionally, the company had outstanding stock options under its 1991 Stock Incentive Plan (1991 Plan), although the 1991 Plan terminated on November 15, 2004. Prior to January 1, 2006, the company accounted

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

for its 2005 Plan and 1991 Plan using the intrinsic value method under the recognition and measurement principles of APB Opinion 25, “Accounting for Stock Issued to Employees” and related Interpretations and applied SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” for disclosure purposes only. SFAS No. 123 disclosures included pro forma net income and earnings per share as if the fair value-based method of accounting had been used. Under the provisions of APB No. 25, no stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying stock on the date of grant.

The impact of adopting SFAS No. 123R for the company’s first quarter of 2006 was an increase in compensation expense of $0.8 million ($0.5 million after tax), a reduction of $0.01 for both basic and diluted earnings per share. As of March 31, 2006, there was $17.5 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 2.2 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.

The pro forma table below reflects net earnings and basic and diluted net earnings per share for the first quarter of 2005 had the company applied the fair value recognition provisions of SFAS No. 123, as follows:

		Three Months Ended
(in millions of dollars except per share data)		March 31, 2005
Reported net income		$	48.5
Plus: stock-based employee compensation (net of tax) included in net income			1.4
Less: stock-based employee compensation (net of tax) using the fair value method			(2.2	)
Pro forma net income		$	47.7
Reported net income per share, basic		$	0.72
Pro forma net income per share, basic		$	0.71
Reported net income per share, diluted		$	0.71
Pro forma net income per share, diluted		$	0.70

Stock Incentive Plans

The 2005 Plan was approved by the company’s shareholders on April 25, 2005. The 2005 Plan provides for the granting of 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 are intended either to qualify as “incentive stock options” under the Internal Revenue Code of 1986, as amended (IRC), or to be “non-statutory stock options” not intended to so qualify. Under the 2005 Plan, options generally become exercisable 50% one year after grant, 75% after two years, 100% after three years and expire up to 10 years after grant. The 2005 Plan generally supersedes the 1991 Plan, although options outstanding under the 1991 Plan remain exercisable until their expiration dates. The option price for stock options under the 2005 Plan is not less than the fair market value of the shares on the date of grant. The 2005 Plan permits the granting of stock appreciation rights in connection with the grant of options. In addition, the 2005 Plan provides to each outside director of the company an automatic annual

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

grant of the number of restricted stock units that are worth $0.1 million, based on the fair market value of the company’s common shares on the date of the Annual Meeting of Shareholders. The restricted stock units generally vest one year after the grant date.

The 1991 Plan provided for the granting of restricted and unrestricted shares and options to buy common shares up to an amount equal to 1% of the outstanding common shares at the beginning of any year, plus any unused amount from prior years. Options were intended either to qualify as “incentive stock options” under the IRC or to be “non-statutory stock options” not intended to so qualify. Under the 1991 Plan, options generally became exercisable 50% one year after grant, 75% after two years, 100% after three years and expire up to 10 years after grant. The option price for stock options under the 1991 Plan was not less than the fair market value of the shares on the date of grant. The 1991 Plan provided to each outside director of the company an automatic annual grant of an option to purchase 2,500 common shares, with terms generally comparable to employee stock options.

The 1991 Plan was terminated by the board of directors with respect to future grants effective November 15, 2004. Outstanding grants under the 1991 Plan remain effective subject to their terms.

Under the 1991 Plan, the company had granted performance share stock awards to certain executive officers. Common shares equal to the number of performance share stock awards granted were to be issued if the market price of the company’s common stock reached $45.00 per common share for 10 consecutive trading days or, on March 24, 2003, whichever occurred first. Under certain conditions such as retirement, a grantee of performance share stock awards could have been issued a pro-rata number of common shares. The company recognized compensation expense related to performance share stock awards ratably over the estimated period of vesting. On March 24, 2003, 3,500 shares were issued and 57,250 shares were deferred to the deferred compensation plan for officers. The company allocated 340 and 344 share units under this plan in the first quarter of 2006 and 2005, respectively, which represent quarterly dividends paid on the company’s shares. As of March 31, 2006, 42,981 share units were outstanding.

Under a supplemental retirement plan, an account for the participant is credited with 500 share units each year and is credited with additional share units for quarterly dividends paid on the company’s shares. When the participant retires, the company will issue shares equal to the number of share units in the participant’s account or the cash equivalent. The company has allocated 13 share units under this plan for each of the three months ended March 31, 2006 and 2005. As of March 31, 2006, 2,295 share units were outstanding. Compensation costs recognized for this plan were less than $0.1 million for the three months ended March 31, 2006 and 2005. For share units attributable to grants credited after January 1, 2004, the payment will be in cash.

Under the deferred stock compensation plan for outside directors, each nonemployee director received 500 share units on each October 1 and is credited with additional share units for quarterly dividends paid on the company’s shares. When a participant ceases to be a director, the company issues shares equal to the number of share units in the director’s account. The company has allocated to nonemployee directors 254 and 250 share units under this plan for the three months ended March 31, 2006 and 2005, respectively. Director fee expense recognized for share units was less than $0.1 million for the three months ended March 31, 2006 and 2005. As of March 31, 2006, 41,999 share units for nonemployee directors were outstanding. No new grants will be made under this plan after January 1, 2004.

In addition, under a separate deferred compensation plan for outside directors, the company has allocated to nonemployee directors 115 and 113 share units under this plan for the three months ended March 31, 2006 and 2005, respectively. These share units continue to accrue quarterly dividends paid on the company’s shares. When a participant ceases to be a director, the company issues shares equal to the number of share units in the director’s account. As of March 31, 2006, 18,959 share units for nonemployee directors were outstanding. Director fee expense

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

recognized for share units for this plan was less than $0.1 million for the three months ended March 31, 2006 and 2005.

Under the deferred compensation plan for executive officers, participants may elect to defer any amount of their variable pay. Deferred amounts are converted into share units based on the current market price of the company’s shares. There is a 25% company match. Additional share units are credited for quarterly dividends paid on the company’s shares. At the end of the deferral period, which is at least three years, the company issues shares equal to the number of share units in the participant’s account. The company has allocated to executive officers 30,041 and 18,243 share units under this plan for the three months ended March 31, 2006 and 2005, respectively. Compensation costs recognized for share units were approximately $1.3 million and $0.8 million for the three months ended March 31, 2006 and 2005, respectively. As of March 31, 2006, 90,903 share units for executive officers were outstanding. For share units attributable to the company match credited after January 1, 2004, distributions will be made in cash.

Under the 1991 Plan, effective January 1, 2003, the company granted 15,000 restricted shares to each of three executive officers. The shares will be issued only if the executive remains an employee until January 1, 2008. Also, effective January 1, 2003, the company granted 5,000 restricted shares to one executive officer, which would be issued only if the executive remained with the company until January 1, 2008. On July 26, 2004, this grant was amended to issue the shares if the executive remained employed until July 29, 2004. The shares were issued on July 29, 2005. There are no voting or dividend rights on the restricted shares described in this paragraph unless and until they are issued. The restricted shares stock awards had a fair value of $25.83 at the date of grant. The company recognizes compensation expense related to restricted shares ratably over the estimated period of vesting. Compensation costs recognized for restricted share stock awards were approximately $0.1 million and $0.3 million for the three months ended March 31, 2006 and 2005, respectively.

For the first quarter of 2006, the combined 2005 Plan and 1991 Plan expense was $0.9 million. The fair value of prior share-based payment awards were estimated using the Black-Scholes option pricing model. No options were granted in the three months ended March 31, 2006 or 2005.

Option activity under the 2005 Plan and 1991 Plan as of March 31, 2006 and changes during the three months ended March 31, 2006 were as follows:

										Weighted-Average				Aggregate
						Weighted-				Remaining				Intrinsic
						Average				Contractual				Value
		Shares				Exercise Price				Term (in years)				(in millions)
Outstanding at December 31, 2005			4,283,917			$	32.35				6.0			$	47.5
Granted			–
Exercised			262,143				30.40
Forfeited			1,600				30.06
Outstanding at March 31, 2006			4,020,174			$	32.48				6.0			$	45.1
Exercisable at March 31, 2006			3,282,537			$	30.93				5.3			$	39.1

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the company’s closing stock price on the last trading day of the first quarter of fiscal 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

option holders exercised their options on March 31, 2006. This amount changes based on the fair market value of the company’s stock. Total intrinsic value of options exercised for the three months ended March 31, 2006 was $3.5 million. Total fair value of options vested and expensed was $0.5 million, net of tax, for the three months ended March 31, 2006.

As of March 31, 2006, $5.2 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.3 years.

Cash received from option exercises and purchases under the 2005 Plan and 1991 Plan for the three months ended March 31, 2006 was $7.3 million. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment awards totaled $1.3 million for the three months ended March 31, 2006.

Nonvested restricted stock awards as of March 31, 2006 and changes during the three months ended March 31, 2006 were as follows:

						Weighted-
						Average
		Share				Grant Date
		Units				Fair Value
Nonvested at December 31, 2005			58,689			$	33.03
Granted			–
Exercised			–
Forfeited			–
Nonvested at March 31, 2006			58,689			$	33.03

Long-Term Incentive Plan

Under the Long-Term Incentive Plan, dollar-based target awards were determined by the organization and compensation committee of the board of directors in December 2002, December 2003, February 2005 and December 2005 for the three-year performance periods of 2003-2005, 2004-2006, 2005-2007 and 2006-2008, respectively. A portion of each of the awards was converted into a number of share units based on the price of the company common stock on the date of the award. There are no voting or dividend rights associated with the share units until the end of the performance period and a distribution of shares, if any, is made. The target awards correspond to a pre-determined three-year earnings before interest, taxes, depreciation and amortization (EBITDA) and/or earnings per share growth rate targets. Based on the awards granted for 2004-2006, 2005-2007 and 2006-2008 performance periods, the company recognized compensation expense of $1.7 million and $1.8 million for the three months ended March 31, 2006 and March 31, 2005, respectively. In accordance with SFAS No. 123R, compensation expense for these performance awards, except for the 2004-2006 award, was calculated based on the grant-date stock price. The terms of the 2004-2006 award state that payment will be in cash and as such liability accounting was used for this award and compensation expense was calculated based on the end of quarter closing price on March 31, 2006. Compensation expense for the 2004-2006 award amounted to $0.5 million and is included in the $1.7 million mentioned above.

Prior to the adoption of SFAS No. 123R, compensation expense for these awards was based on variable accounting and was calculated using the closing stock price at period end. The other portion of the 2002, 2003, February 2005 and December 2005 award grants is a cash award, which is also determined for the same three-year performance periods. Based on awards granted for these performance periods, the company recognized compensation expense for the cash awards of $1.1 million and $1.6 million for the three months ended March 31, 2006 and March 31, 2005, respectively.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

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
		Number of
		Shares to be				Stock Price on
Award		Issued				Date of Grant
2004 – 2006 (a)			–			$	30.65
2005 – 2007			176,400			$	40.36
2006 – 2008			154,060			$	43.05

Performance based stock awards as of March 31, 2006 and changes during the three months ended March 31, 2006 were as follows:

						Weighted-
						Average Grant
		Share				Date Fair
		Units				Value
Nonvested at December 31, 2005			176,400			$	40.36
Granted			154,060			$	43.05
Exercised			–
Forfeited			–
Nonvested at March 31, 2006			330,460			$	41.61

4. Divestitures

In February 2006, the company sold certain assets and liabilities of Noveon International, Inc.’s Telene^® resins business, which was included in the Specialty Chemicals segment. The company received net cash proceeds of $6.2 million for the sale of this business and recorded a $1.0 million after-tax loss on the sale. The Telene resins business meets the definition of a “component of an entity” and has been accounted for as a discontinued operation for all periods presented under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

In addition, definitive sales agreements were signed on March 16, 2006 for the sale of the food ingredients and industrial specialties businesses (FIIS) and on March 31, 2006 for the active pharmaceutical ingredient and intermediate compounds business (A&I). Both of these businesses previously reported into the Specialty Chemicals segment. A&I and most of the FIIS divestiture reported into the consumer specialties product line, while a small portion of the FIIS divestiture reported into the performance coatings product line. At March 31, 2006, these businesses are classified as held for sale pursuant to the provisions of SFAS No. 144 and are included in discontinued operations for all periods presented. The net assets and liabilities held for sale for both of these businesses at March 31, 2006 consisted of the following:

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

		March 31,
(in millions of dollars)		2006
Accounts receivable		$	57.8
Inventory			68.0
Property and equipment – net			115.0
Goodwill			24.1
Intangible assets – net			19.9
Other assets			1.2
Total assets held for sale		$	286.0
Accounts payable		$	1.4
Other current liabilities			6.1
Other long-term liabilities (including environmental liabilities of $6.4 million)			9.5
Total liabilities held for sale		$	17.0

The sale of the FIIS business closed on May 1, 2006. Cash proceeds of the transaction were approximately $269.7 million, before working capital adjustments. The A&I sale is expected to close in the second quarter of 2006.

In connection with the classification as held for sale at March 31, 2006, the company performed an impairment test on the FIIS business. The company estimated fair value as the expected proceeds to be received, less transaction costs. The carrying value of the FIIS business exceeded fair market value and therefore the company recorded a $60.6 million after-tax impairment charge against goodwill in the first quarter of 2006. As part of the SFAS No. 144 impairment analysis performed at December 31, 2005, the company determined that the estimated fair value of the FIIS businesses exceeded their carrying value. The company calculated the fair value using a probability weighted assessment based on selling the businesses versus continuing operations of the businesses. Based on the results of this impairment analysis an impairment charge was not warranted. Upon closing the sale of the FIIS business in the second quarter of 2006, the company expects to recognize approximately $9.5 million in tax expense related primarily to the book and tax basis differences in goodwill.

In December 2005, the company sold certain assets, liabilities and stock of its Engine Control Systems (ECS) business and, in September 2005, the company sold certain assets and liabilities of its U.S. and U.K. Lubrizol Performance Systems (LPS) operations, which were both included in the Lubricant Additives segment. The company has reflected the results of these businesses as discontinued operations in the consolidated statement of operations for the three months ended March 31, 2005.

Total revenues from discontinued operations were $107.1 million for the three months ended March 31, 2006 compared to $122.2 million for the same period in 2005. Loss from discontinued operations, net of tax and loss on sale, was $60.7 million for the three months ended March 31, 2006 and related primarily to the $60.6 million after-tax impairment charge. Income from discontinued operations, net of tax, for the corresponding period in 2005 was $8.4 million. Income from discontinued operations is net of income tax expenses of $1.6 million and $5.0 million for the three months ended March 31, 2006 and 2005, respectively. The company realized a $0.1 million pre-tax loss ($1.0 million after-tax loss) for the three months ended March 31, 2006 relating to the Telene resins disposition.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

The company’s consolidated balance sheet at December 31, 2005 included $132.1 million in current assets, $115.6 million in net property and equipment, $85.1 million in goodwill, $20.4 million in net intangible assets, $0.6 million in other current assets, $8.5 million in current liabilities and $6.4 million in long-term liabilities pertaining to businesses reflected as discontinued operations.

5. Inventories

The company’s inventories were comprised of the following as of March 31, 2006 and December 31, 2005:

		March 31,				December 31,
(in millions of dollars)		2006				2005
Finished products		$	285.1			$	319.6
Products in process			95.4				86.9
Raw materials			125.8				151.2
Supplies and engine test parts			25.2				28.3
Total inventory		$	531.5			$	586.0

6. Goodwill and Intangible Assets

The major components of the company’s identifiable intangible assets are customer lists, technology, trademarks, patents, land-use rights and non-compete agreements. Excluding the non-amortized trademarks, which are indefinite-lived and will not be amortized, the intangible assets are amortized over the lives of the respective agreements or other periods of value, which range between three and forty years. The company assesses the indefinite-lived trademarks for impairment separately from goodwill.

		March 31, 2006								December 31, 2005
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
(in millions of dollars)		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Customer lists		$	139.4			$	16.6			$	151.5			$	15.8
Technology			139.8				37.5				144.4				35.6
Trademarks			19.0				4.0				24.5				4.2
Patents			12.5				2.8				11.8				2.5
Land-use rights			7.3				1.0				7.3				1.0
Non-compete agreements			8.2				5.8				9.1				5.9
Other			5.3				0.7				5.4				0.7
Total amortized intangible assets			331.5				68.4				354.0				65.7
Non-amortized trademarks			116.0				–				116.3				–
Total		$	447.5			$	68.4			$	470.3			$	65.7

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

Annual intangible amortization expense from continuing operations for the next five years will approximate $23.7 million for 2006, $22.2 million in 2007, $20.7 million in 2008, $19.1 million in 2009 and $19.1 million in 2010.

The carrying amount of goodwill by reporting segment as of March 31, 2006 was as follows:

		Lubricant				Specialty
(in millions of dollars)		Additives				Chemicals				Total
Balance, January 1, 2006		$	95.8			$	1,043.0			$	1,138.8
Goodwill impairment – discontinued operations			–				(61.0	)			(61.0	)
Goodwill held for sale			–				(24.1	)			(24.1	)
Translation & other adjustments			0.3				1.6				1.9
Balance, March 31, 2006		$	96.1			$	959.5			$	1,055.6

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

7. Comprehensive (Loss) Income

Total comprehensive (loss) income for the three months ended March 31, 2006 and 2005 was comprised of the following:

		Three Months
		Ended March 31,
(in millions of dollars)		2006				2005
Net (loss) income		$	(14.8	)		$	48.5
Foreign currency translation adjustment			6.9				(48.7	)
Pension plan minimum liability			(0.8	)			–
Unrealized (losses) gains - natural gas hedges			(0.8	)			0.7
Unrealized gains - interest rate swaps			0.7				–
Amortization of treasury rate locks			–				0.6
Total comprehensive (loss) income		$	(8.8	)		$	1.1

8. Segment Reporting

The company is organized into two operating and reporting segments: Lubricant Additives and Specialty Chemicals. The Lubricant Additives segment, also referred to as Lubrizol Additives, represented 64% of the company’s consolidated revenues for the three months ended March 31, 2006 and is comprised of the company’s businesses in engine additives and specialty driveline and industrial oil additives. The Specialty Chemicals segment, also referred to as the Noveon segment, represented 36% of the company’s consolidated revenues for the three months ended

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

March 31, 2006 and is comprised of the company’s businesses in consumer specialties, specialty materials and performance coatings.

Lubricant Additives consists of two product lines: engine additives and specialty 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. Specialty driveline and industrial oil additives is comprised of additives for driveline oils, such as automatic transmission fluids, gear oils and tractor lubricants and industrial oil additives, such as additives for hydraulic, grease and metalworking fluids, as well as compressor lubricants. Lubricant Additives product lines are produced generally in company-owned shared manufacturing facilities and sold largely to a common customer base. During 2005, the company sold the equipment companies, ECS and LPS, and recorded the results of operations of these businesses in discontinued operations in 2005 (see Note 4).

The Specialty Chemicals segment consists of consumer specialties, specialty materials and performance coatings product lines. The consumer specialties product line is characterized by global production of acrylic thickeners, specialty monomers, film formers, fixatives, emollients, silicones, surfactants, botanicals, over-the-counter pharmaceutical ingredients and intermediates and process chemicals. The company markets products in the consumer specialties product line to the following primary end-use industries: personal care and pharmaceuticals. The consumer specialties products are sold to customers worldwide and these customers include major manufacturers of cosmetics, personal care products, water soluble polymers and household products. The specialty materials product line is characterized by products such as TempRite^® and Estane^® engineered polymers. The company markets products of specialty materials through the primary product category of specialty plastics. Specialty materials 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 for specialty paper, printing and packaging, industrial and architectural specialty coatings and textile applications. The company markets the performance coatings products through the primary product categories of performance polymers and coatings and textile performance chemicals. Performance coatings products serve major companies in the specialty paper, printing and packaging, paint and coatings, and textile industries. During the first quarter of 2006, the company completed the sale of the Telene resins business and entered into sale agreements to divest the FIIS and A&I businesses. The company recorded the results of operations of these businesses in discontinued operations in all periods presented (see Note 4).

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

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

The following table presents a summary of the results of the company’s reportable segments for the three months ended March 31, 2006 and 2005:

		Three Months
		Ended March 31,
(in millions of dollars)		2006				2005
Revenues from external customers:
Lubricant Additives		$	627.5			$	513.5
Specialty Chemicals			356.6				335.3
Total revenues		$	984.1			$	848.8
Segment operating income:
Lubricant Additives		$	74.4			$	67.7
Specialty Chemicals			44.6				38.9
Segment operating income			119.0				106.6
Corporate expenses			(21.3	)			(14.7	)
Corporate other expense			(2.2	)			(0.7	)
Restructuring and impairment charges			(1.8	)			(6.1	)
Interest expense – net			(23.1	)			(24.5	)
Income from continuing operations before income taxes		$	70.6			$	60.6

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

		March 31,				December 31,
(in millions of dollars)		2006				2005
Segment total assets:
Lubricant Additives		$	1,370.0			$	1,319.1
Specialty Chemicals			2,197.7				2,536.8
Total segment assets			3,567.7				3,855.9
Corporate assets			453.5				510.4
Assets held for sale			286.0				–
Total consolidated assets		$	4,307.2			$	4,366.3

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

9. Pension and Postretirement Benefits

The components of net periodic pension cost and postretirement benefits cost consisted of the following:

		Three Months
		Ended March 31,
(in millions of dollars)		2006				2005
Pension benefits:
Service cost - benefits earned during period		$	7.9			$	7.1
Interest cost on projected benefit obligation			8.3				7.9
Expected return on plan assets			(7.1	)			(6.8	)
Amortization of prior service costs			0.5				0.5
Settlement / curtailment loss			3.3				–
Recognized net actuarial loss			2.1				1.1
Net periodic benefit cost		$	15.0			$	9.8
Other benefits:
Service cost - benefits earned during period		$	0.4			$	0.7
Interest cost on projected benefit obligation			1.3				1.9
Amortization of prior service costs			(2.1	)			(1.5	)
Recognized net actuarial loss			0.4				0.6
Net periodic benefit cost		$	–			$	1.7

Expected employer contributions worldwide for pension benefits in 2006 approximate $15.3 million for the qualified plans, of which $2.8 million was paid in the three months ended March 31, 2006. The portion of the 2006 total expected contributions attributable to the U.S. qualified pension plans is $4.6 million, none of which was paid in the first quarter of 2006. The non-qualified pension plans and postretirement benefit plans are unfunded. As a result, the 2006 expected contributions to these plans of $6.9 million and $4.4 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 was triggered by a distribution from a non-qualified pension plan.

As part of the Noveon International integration efforts to provide consistent benefits, the company communicated to employees in May 2005 changes to the benefits structure of certain of its U.S. pension and postretirement benefit plans. This communication triggered a remeasurement of the related benefit obligations and net periodic benefit cost in 2005 for both the legacy Noveon International U.S. pension plans as well as for the U.S. postretirement benefit plan. The net impact of the benefit and actuarial assumption changes reduced the company’s aggregate net periodic pension and postretirement benefit cost by $3.5 million during 2005. The annualized savings resulting from this benefits change is estimated to be approximately $5.3 million.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

10. Restructuring and Impairment Charges

For the three months ended March 31, 2006 and 2005, the company recorded aggregate restructuring and impairment charges of $1.8 million and $6.1 million, respectively. The restructuring charges were related primarily to the phase-out of manufacturing facilities in both the Lubricant Additives and Specialty Chemicals segments.

The following table shows the reconciliation of the restructuring liability since January 1, 2006 by major restructuring activity:

		Liability												Liability
		January 1,				Restructuring								March 31,
(in millions of dollars)		2006				Charges				Cash Paid				2006
Specialty Chemicals plant closures and workforce reductions		$	2.5			$	0.4			$	(0.5	)		$	2.4
Bromborough, United Kingdom closure			2.3				1.5				(0.8	)			3.0
Corporate / other workforce reductions			0.3				–				(0.2	)			0.1
Noveon International restructuring liabilities assumed			1.3				(0.1	)			(0.2	)			1.0
		$	6.4			$	1.8			$	(1.7	)		$	6.5

In the first quarter of 2005, the company made the decision to close two Specialty Chemicals performance coatings production facilities in the United States. The facility in Mountaintop, Pennsylvania was closed in October 2005 and sold in January 2006. An additional $0.4 million in severance obligations was recorded in the first quarter of 2006 relating to the Linden, New Jersey facility, which is scheduled to close in the third quarter of 2006.

Management is in the process of phasing out production for the previously announced closure of the Lubricant Additives manufacturing facility in Bromborough, United Kingdom. Production phase-out of this site is expected to be completed in the third quarter of 2006. The dismantling and decommissioning process is scheduled to be completed in 2007. United Kingdom-production is being transferred to facilities in France and the United States. Approximately 69 employees have already or will be impacted by this closure.

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

11. Debt

During the three months ended March 31, 2006, the company repaid €20.0 million against the €250.0 million revolving credit agreement. The remaining balance outstanding as of March 31, 2006 under this arrangement was €162.0 million.

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

12. Shareholders’ Equity

The following table summarizes the changes in shareholders’ equity since January 1, 2006:

						Shareholders’ Equity
														Accumulated
		Number of												Other
		Shares				Common				Retained				Comprehensive
(in millions)		Outstanding				Shares				Earnings				(Loss) Income				Total
Balance, January 1, 2006			68.0			$	663.7			$	1,016.0			$	(112.5	)		$	1,567.2
Comprehensive loss:
Net loss							–				(14.8	)			–				(14.8	)
Other comprehensive loss							–				–				6.0				6.0
Comprehensive loss							–				–				–				(8.8	)
Dividends declared																			–
Deferred stock compensation							0.9				–				–				0.9
Common shares – treasury:
Shares issued upon exercise of stock options and awards			0.3				10.1				–				–				10.1
Balance, March 31, 2006			68.3			$	674.7			$	1,001.2			$	(106.5	)		$	1,569.4

13. Contingencies

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

General

In addition, 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 is also involved in legal proceedings as a plaintiff involving contract, patent protection, environmental and other matters. Gain contingencies, if any, are recognized when they are realized.

Environmental

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

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

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 may also 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 remediations. 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 and excluding environmental liabilities included in liabilities held for sale, totaled $16.7 million at March 31, 2006 and $23.2 million at December 31, 2005. Of these amounts, $3.1 million and $3.4 million were included in accrued expenses and other current liabilities at March 31, 2006 and December 31, 2005, 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 $2.1 million of which $0.6 million of the recovery is included in receivables and $1.5 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 is currently 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 $13.0 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 $13.0 million cannot currently be estimated.

THE LUBRIZOL CORPORATION

14. Guarantor and Non-Guarantor Subsidiary Information

The repayment of the unsecured senior notes, debentures and bank term loans is unconditionally guaranteed on a joint and several basis by the company and its direct and indirect, wholly owned, domestic subsidiaries. The following supplemental condensed consolidating financial information presents the company’s statements of operations and cash flows for the three months ended March 31, 2006 and 2005 and its balance sheets as of March 31, 2006 and December 31, 2005. The elimination of intercompany profit in inventory as of the respective balance sheet date is reflected in the eliminations columns of the condensed consolidating financial information.

		Condensed Consolidating Statement of Operations
		For Three Months Ended March 31, 2006
		Parent				Subsidiary				Other								Total
		Company				Guarantors				Subsidiaries				Eliminations				Consolidated
Net sales		$	379.0			$	182.2			$	532.5			$	(110.2	)		$	983.5
Royalties and other revenues			0.6				–				–				–				0.6
Total revenues			379.6				182.2				532.5				(110.2	)			984.1
Cost of sales			303.6				122.8				422.2				(110.2	)			738.4
Selling and administrative expenses			42.0				25.8				25.5				–				93.3
Research, testing and development expenses			23.1				9.4				17.1				–				49.6
Amortization of intangible assets			0.6				3.6				1.6				–				5.8
Restructuring and impairment charges			0.3				–				1.5				–				1.8
Total costs and expenses			369.6				161.6				467.9				(110.2	)			888.9
Other (expense) income – net			5.0				6.2				(12.1	)			(0.6	)			(1.5	)
Interest expense – net			(22.5	)			–				(0.6	)			–				(23.1	)
Equity in income of subsidiaries			3.3				39.2				–				(42.5	)			–
Income (loss) from continuing operations before income taxes			(4.2	)			66.0				51.9				(43.1	)			70.6
Provision for income taxes			8.4				6.8				9.5				–				24.7
Income (loss) from continuing operations			(12.6	)			59.2				42.4				(43.1	)			45.9
Discontinued operations – net of tax			(2.2	)			(56.2	)			(2.3	)			–				(60.7	)
Net (loss) income		$	(14.8	)		$	3.0			$	40.1			$	(43.1	)		$	(14.8	)

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

		Condensed Consolidating Statement of Operations
		For Three Months Ended March 31, 2005
		Parent				Subsidiary				Other								Total
		Company				Guarantors				Subsidiaries				Eliminations				Consolidated
Net sales		$	306.1			$	146.2			$	460.6			$	(65.0	)		$	847.9
Royalties and other revenues			0.9				–				–				–				0.9
Total revenues			307.0				146.2				460.6				(65.0	)			848.8
Cost of sales			243.1				92.2				347.9				(65.0	)			618.2
Selling and administrative expenses			36.5				21.3				27.8				–				85.6
Research, testing and development expenses			23.4				8.6				16.5				–				48.5
Amortization of intangible assets			0.7				3.6				1.6				–				5.9
Restructuring and impairment charges			3.7				1.6				0.8				–				6.1
Total costs and expenses			307.4				127.3				394.6				(65.0	)			764.3
Other (expense) income – net			7.7				4.1				(11.1	)			(0.1	)			0.6
Interest (expense) income – net			(26.0	)			0.6				0.9				–				(24.5	)
Equity in income of subsidiaries			58.1				17.8				–				(75.9	)			–
Income from continuing operations before income taxes			39.4				41.4				55.8				(76.0	)			60.6
Provision (benefit) for income taxes			(9.1	)			15.3				14.3				–				20.5
Income from continuing operations			48.5				26.1				41.5				(76.0	)			40.1
Discontinued operations – net of tax			–				6.9				1.5				–				8.4
Net income		$	48.5			$	33.0			$	43.0			$	(76.0	)		$	48.5

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

		Condensed Consolidating Balance Sheet
		March 31, 2006
		Parent				Subsidiary				Other								Total
		Company				Guarantors				Subsidiaries				Eliminations				Consolidated
ASSETS
Cash and short-term investments		$	88.9			$	2.3			$	142.1			$	–			$	233.3
Receivables			148.6				93.7				324.5				–				566.8
Inventories			124.4				103.9				329.3				(26.1	)			531.5
Other current assets			74.8				299.4				28.2				10.9				413.3
Total current assets			436.7				499.3				824.1				(15.2	)			1,744.9
Property and equipment – net			381.7				338.6				344.3				–				1,064.6
Goodwill			27.1				579.0				449.5				–				1,055.6
Intangible assets – net			9.4				238.9				130.8				–				379.1
Investments in subsidiaries and intercompany balances			2,560.2				3,435.3				3,262.4				(9,257.9	)			–
Investments in non-consolidated companies			6.4				1.4				–				–				7.8
Other assets			33.2				2.0				20.0				–				55.2
Total		$	3,454.7			$	5,094.5			$	5,031.1			$	(9,273.1	)		$	4,307.2
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt and current portion of long-term debt		$	–			$	–			$	8.2			$	–			$	8.2
Accounts payable			113.3				100.6				127.3				–				341.2
Accrued expenses and other current liabilities			48.2				145.2				96.8				–				290.2
Total current liabilities			161.5				245.8				232.3				–				639.6
Long-term debt			1,440.1				–				196.9				–				1,637.0
Postretirement health care obligations			90.1				5.0				6.5				–				101.6
Noncurrent liabilities			90.9				4.6				101.3				–				196.8
Deferred income taxes			87.5				0.7				26.1				–				114.3
Total liabilities			1,870.1				256.1				563.1				–				2,689.3
Minority interest in consolidated companies			–				–				(0.7	)			49.2				48.5
Total shareholders’ equity			1,584.6				4,838.4				4,468.7				(9,322.3	)			1,569.4
Total		$	3,454.7			$	5,094.5			$	5,031.1			$	(9,273.1	)		$	4,307.2

THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 2006

		Condensed Consolidating Balance Sheet
		December 31, 2005
		Parent				Subsidiary				Other								Total
		Company				Guarantors				Subsidiaries				Eliminations				Consolidated
ASSETS
Cash and short-term investments		$	83.2			$	3.6			$	175.6			$	–			$	262.4
Receivables			143.8				137.0				304.8				–				585.6
Inventories			122.4				175.1				316.4				(27.9	)			586.0
Other current assets			91.5				25.9				11.2				9.7				138.3
Total current assets			440.9				341.6				808.0				(18.2	)			1,572.3
Property and equipment – net			383.4				458.2				342.8				–				1,184.4
Goodwill			27.1				664.1				447.6				–				1,138.8
Intangible assets – net			9.8				262.8				132.0				–				404.6
Investments in subsidiaries and intercompany balances			2,554.3				2,508.2				1,354.0				(6,416.5	)			–
Investments in non-consolidated companies			6.2				1.4				–				–				7.6
Other assets			33.9				3.4				21.3				–				58.6
Total		$	3,455.6			$	4,239.7			$	3,105.7			$	(6,434.7	)		$	4,366.3
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt and current portion of long-term debt		$	–			$	0.1			$	7.8			$	–			$	7.9
Accounts payable			143.5				142.8				85.9				–				372.2
Accrued expenses and other current liabilities			38.9				113.6				132.3				–				284.8
Total current liabilities			182.4				256.5				226.0				–				664.9
Long-term debt			1,445.2				–				217.7				–				1,662.9
Postretirement health care obligations			91.4				4.8				6.4				–				102.6
Noncurrent liabilities			63.5				41.3				99.2				–				204.0
Deferred income taxes			87.6				1.4				24.7				–				113.7
Total liabilities			1,870.1				304.0				574.0				–				2,748.1
Minority interest in consolidated companies			–				–				–				51.0				51.0
Total shareholders’ equity			1,585.5				3,935.7				2,531.7				(6,485.7	)			1,567.2
Total		$	3,455.6			$	4,239.7			$	3,105.7			$	(6,434.7	)		$	4,366.3