LUBRIZOL CORP, 10-K, 1998-03-26

LUBRIZOL CORP
10-K, 1998-03-26
INDUSTRIAL ORGANIC CHEMICALS

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<PAGE> 1

FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES 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 of incorporation) (I.R.S. Employer Identification No.)

29400 Lakeland Boulevard
Wickliffe, Ohio 44092-2298
(Address of principal executive officers, including zip code)

Registrant's telephone number, including area code: (440) 943-4200
Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
- ------------------------------- -----------------------
Common Shares without par value New York Stock Exchange
Common Share purchase rights New York Stock Exchange

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---

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

Aggregate market value (on basis of closing sale price) of voting stock
held by nonaffiliates as of March 6, 1998 $2,192,961,092

Number of the registrant's Common Shares, without par value,
outstanding as of March 6, 1998 56,901,269

Documents Incorporated by Reference

Portions of the registrant's 1997 Annual Report to its shareholders
(Incorporated into Part I and II of this Form 10-K)

Portions of the registrant's Proxy Statement dated March 18, 1998
(Incorporated into Part III of this Form 10-K)

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<PAGE> 2

PART I
------

ITEM 1. BUSINESS

The Lubrizol Corporation was organized under the laws of Ohio
in 1928. The company began business as a compounder of special-purpose
lubricants, and in the early 1930's was among the first to commence research in
the field of lubricant additives. Today, the company is a worldwide supplier of
performance chemicals and products to diverse markets worldwide. Principally,
the company develops, produces and sells specialty additive packages used in
transportation and industrial finished lubricants such as gasoline and diesel
engine lubricating oils, automatic transmission fluids, gear oils, marine and
tractor lubricants, fuel products and industrial fluids. The company's additive
packages are generally produced in shared manufacturing facilities and sold
largely to a common customer base. These specialty chemical products are created
through the application of advanced chemical and mechanical technologies to
enhance the performance, quality and value of the products in which they are
used. The company also produces and supplies coatings additives, refinery and
oil field chemicals, specialty monomers, process chemicals, synthetic
refrigerant compressor lubricants, fluid metering devices and particulate
emission trap devices.

Over the past five years the company has divested its
non-strategic assets comprised primarily of its assets associated with its
former Agribusiness segment, including its investments in Mycogen Corporation,
and its investments in Genentech, Inc. common stock. The company had
substantially liquidated its non-strategic assets as of December 31, 1996.
(Please refer to Note 8 to the Financial Statements which is included in the
company's 1997 Annual Report to its shareholders and is incorporated herein by
reference.)

PRINCIPAL PRODUCTS. The company's principal products are
specialty additive systems for gasoline and diesel engine lubricating oils,
automatic transmission fluids, gear oils, industrial fluids, metalworking
compounds and fuels. The company also offers other specialty chemical products,
fluid metering devices and particulate emission trap devices. Additives for
engine lubricating oils accounted for 51% of consolidated revenues in 1997, 1996
and 1995. Additives for driveline oils accounted for 23%, 25% and 24% of
consolidated revenues for these respective periods.

Additives improve the lubricants and fuels used in cars,
trucks, buses, off-highway equipment, marine engines and industrial
applications. In lubricants, additives enable oil to withstand a broader range
of temperatures, limit the buildup of sludge and varnish deposits, reduce wear,
inhibit the formation of foam, rust and corrosion, and retard oxidation. In
fuels, additives help maintain efficient operation of the fuel delivery system,
help control deposits and corrosion, improve combustion and assist in preventing
decomposition during storage.

Due to the variety in the properties and applications of oils,
a number of different chemicals are used to formulate the company's products.
Each additive combination is designed to fit the characteristics of the
customer's base oil and the level of performance specified. Engine oils for
passenger cars contain a combination of chemical additives which usually
includes one or more detergents, dispersants, oxidation inhibitors and wear
inhibitors, pour point depressants and viscosity improvers. Other chemical
combinations are used in specialty additive systems for heavy duty engine oils
used by trucks and off-highway equipment and in formulations for gear oils,
automatic transmission fluids, industrial oils, metalworking fluids, and
gasoline, diesel and residual fuels.

COMPETITION. The chemical additive field is highly competitive
in terms of price, technology development, product performance and customer

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service. The company's principal competitors, both in the United States and
overseas, are three major petroleum companies and one chemical company. The
petroleum companies produce lubricant and fuel additives for their own use, and
also sell additives to others. These competing companies are also customers of
the company. Excluding viscosity improvers, management believes, based on volume
sold, that the company is the largest supplier to the petroleum industry of
performance additive systems for lubricants.

CUSTOMERS. In the United States, the company markets its
additive products through its own sales organization. The company's additive
customers consist primarily of oil refiners and independent oil blenders and are
located in more than 100 countries. Approximately 40% of the company's sales are
made to customers in North America, 30% in Europe and 30% in Asia-Pacific, the
Middle East and Latin America. Sales to Mobil Corporation and its affiliates
accounted for 10% of consolidated sales in 1997, 1996 and 1995. The company's
ten largest customers, most of which are international oil companies and a
number of which are groups of affiliated entities, accounted for approximately
44% of consolidated sales in 1997. The loss of one or more of these customers
could have a material adverse effect on the company's business.

RAW MATERIALS. The company utilizes a broad variety of
chemical raw materials in the manufacture of its additives and uses oil in
processing and blending additives. These materials are obtainable from several
sources, and for the most part are derived from petroleum. Unstable political
and economic conditions in the Middle East have, in the past, caused and may
continue to cause the cost of raw materials to fluctuate significantly; however,
the availability of raw materials to the company has not been significantly
affected when these conditions occurred. The company expects raw materials to be
available in adequate quantities during 1998.

RESEARCH, TESTING AND DEVELOPMENT. The company has
historically emphasized research and has developed a large percentage of the
additives it manufactures and sells. Technological developments in the design of
engines and other automotive equipment, combined with rising demands for
environmental protection and fuel economy, require increasingly sophisticated
chemical additives to meet industry performance standards. The frequency of
changes in industry performance standards compresses time cycles for new product
development and affects the company's technical spending patterns.

Research and development expenditures were $88.4 million in
1997, $93.4 million in 1996 and $104.9 million in 1995. These amounts were
equivalent to 5.3%, 5.8% and 6.3% of the respective revenues for such years.
These amounts include expenditures for the performance evaluation of additive
developments in engines and other types of mechanical equipment as well as
expenditures for the development of specialty chemicals for industrial
applications. In addition, $58.2 million, $67.6 million and $74.7 million was
spent in 1997, 1996 and 1995, respectively, for technical service activities,
principally for evaluation in mechanical equipment of specific lubricant
formulations designed for the needs of petroleum industry customers throughout
the world.

The company has two research facilities at Wickliffe, Ohio,
one of which is principally for lubricant additive research and the other for
research in the field of other specialty chemicals. The company also maintains a
mechanical testing laboratory at Wickliffe, equipped with a variety of gasoline
and diesel engines and other mechanical equipment to evaluate the performance of
additives for lubricants and fuels. The company has similar mechanical testing
laboratories in England and Japan and, in addition, makes extensive use of
independent contract research firms. Extensive field testing is also conducted
through various arrangements with fleet operators and others.

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Liaison offices in Detroit, Michigan; Hazelwood, England;
Hamburg, Germany; Tokyo, Japan; and Paris, France maintain close contact with
the principal automotive and equipment manufacturers of the world and keep the
company abreast of the performance requirements for its products in the face of
changing technologies. These liaison activities also serve as contacts for
cooperative development and evaluation of products for future applications.
Contacts with the automotive and equipment industry are important so the company
may have the necessary direction and lead time to develop products for use in
engines, transmissions, gear sets, and other areas of equipment that require
lubricants of advanced design.

PATENTS. The company owns certain United States patents
relating to lubricant and fuel additives, lubricants, chemical compositions and
processes, and protective coating materials and processes. It also owns similar
patents in foreign countries. While such domestic and foreign patents expire
from time to time, the company continues to apply for and obtain patent
protection on an ongoing basis. Although the company believes that, in the
aggregate, its patents constitute an important asset, it does not regard its
business as being materially dependent upon any single patent or any group of
related patents.

The company has filed claims against Exxon Corporation and its
affiliates ("Exxon") relating to various commercial matters, including alleged
infringements by Exxon of certain of the company's patents. These suits are
pending in the United States (in Ohio), Canada, and the United Kingdom, and are
at various stages. The international suits allege infringement of patents that
correspond to a United States patent admitted as valid by Exxon in a settlement
in 1988. In the suit in Canada, a determination of liability has been made by
the courts against Exxon and in favor of the company, and the case has been
returned to the trial court for an assessment of damages, but no date has been
set for a determination of such damages. In the suit in the United Kingdom, a
patent trial court declared the company's patent invalid and the company is
appealing that decision, which appeal is expected to be heard in March 1998. For
further information regarding these cases, refer to Note 18 to the Financial
Statements which is included in the company's 1997 Annual Report to its
shareholders and is incorporated herein by reference.

ENVIRONMENTAL MATTERS. The company is subject to federal,
state and local laws and regulations designed to protect the environment and
limit manufacturing wastes and emissions. The company believes that as a general
matter its policies, practices and procedures are properly designed to prevent
unreasonable risk of environmental damage and the consequent financial liability
to the company. Compliance with the environmental laws and regulations requires
continuing management effort and expenditures by the company. Capital
expenditures for environmental projects approximated $7 million in 1997, and
over the past three years have averaged 14% of annual capital spending.
Management believes that the cost of complying with environmental laws and
regulations will not have a material affect on the earnings, liquidity or
competitive position of the company.

The company is engaged in the handling, manufacture, use,
transportation and disposal of substances that are classified as hazardous or
toxic by one or more regulatory agencies. The company believes that its
handling, manufacture, use, transportation and disposal of such substances
generally have been in accord with environmental laws and regulations.

Among other environmental laws, the company is subject to the
federal "Superfund" law, under which the company has been designated as a
"potentially responsible party" that may be liable for cleanup costs associated
with various waste sites, some of which are on the U.S. Environmental Protection
Agency Superfund priority list. The company's experience, consistent with what
it believes to be the experience of others in

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similar cases, is that Superfund site liability tends to be apportioned among
parties based upon contribution of materials to the Superfund site. Accordingly,
the company measures its liability and carries out its financial reporting
responsibilities with respect to Superfund sites based upon this standard, even
though Superfund site liability is technically joint and several in nature. The
company views the expense of remedial cleanup as a part of its product cost, and
accrues for estimated environmental liabilities with charges to cost of sales.
Management considers its environmental accrual to be adequate to provide for its
portion of costs for all known environmental matters, including Superfund sites.
Based upon consideration of currently available information, management believes
liabilities for environmental matters will not have a material adverse affect on
the company's financial position, operating results or liquidity.

GENERAL

EMPLOYEES. At December 31, 1997, the company and its
wholly-owned subsidiaries had 4,291 employees of which approximately 62% were in
the U.S.

INTERNATIONAL OPERATIONS. Financial information with respect
to domestic and foreign operations is contained in Note 14 to the Financial
Statements which is included in the company's 1997 Annual Report to its
shareholders and is incorporated herein by reference.

The company supplies its additive customers abroad from
overseas manufacturing plants and through export from the United States. Sales
and technical service offices are maintained in more than 30 countries outside
the United States. As a result, the company is subject to business risks
inherent in non-U.S. activities, including political and economic uncertainty,
import and export limitations, exchange controls and currency fluctuations. The
company believes risks related to its foreign operations are mitigated due to
the political and economic stability of the countries in which its largest
foreign operations are located.

While changes in the U.S. dollar value of foreign currencies
will affect earnings from time to time, the longer term economic effect of these
changes should not be significant given the company's net asset exposure and
currency mix relative to its revenues and expenses. The company's consolidated
net income will generally benefit as foreign currencies increase in value
compared to the U.S. dollar and will generally decline as foreign currencies
decrease in value.

ITEM 2. PROPERTIES

The general offices of the company are located in Wickliffe,
Ohio. The company has various leases for general office space primarily located
in Houston, Texas; and London, England. The company owns three additive
manufacturing plants in the United States; one located in the Cleveland, Ohio
area, at Painesville, and two near Houston, Texas, at Deer Park and Bayport.
Outside the United States, the company owns additive manufacturing/blending
plants in Australia, Brazil, Canada, England, France (three locations), Japan,
South Africa and Singapore. All of these plants, other than Singapore, are owned
in fee. In Singapore, the company owns the plant but leases the land on which
the plant is located. The company owns in fee research, development and testing
facilities in Wickliffe, Ohio; Hazelwood, England; and Atsugi, Japan. The
company also owns in fee a facility in Midland, Michigan, at which air and
refrigeration compressor lubricants are developed and marketed; manufacturing
plants in Germany that manufacture performance chemical additives for the
coatings industry and specialty additives for the metalworking fluid and
industrial lubricant markets in Germany and throughout the European Union; a
manufacturing plant in Atlanta, Georgia, that manufactures fluid metering
devices; a manufacturing plant in Newmarket, Ontario, Canada, that manufactures
particulate emission control devices; and a manufacturing plant

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<PAGE> 6

in Fareham, Hampshire, England, that manufactures additive injection equipment.

Additive manufacturing plants in India and Saudi Arabia, are
owned and operated by joint venture companies licensed by Lubrizol. Lubrizol's
ownership of each of these companies ranges from 40% to 49%.

The company has entered into long-term contracts for its
exclusive use of major marine terminal facilities at the Port of Houston, Texas.
In addition, Lubrizol has leases for storage facilities in Australia, Chile,
Ecuador, Finland, France, Holland, Singapore, Spain, South Africa, Sweden, and
Turkey; Los Angeles, California; St. Paul, Minnesota; Bayonne, New Jersey; and
Tacoma, Washington. In some cases, the ownership or leasing of such facilities
is through certain of its subsidiaries or affiliates.

Management continues to maintain a capital expenditure program
to support the company's operations and believes that the company's facilities
are adequate for its present operations and for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

The company is a party in a case brought by Exxon Corporation
and its affiliates, Exxon Chemical Patents, Inc. and Exxon Research &
Engineering Company, in the Southern District of Texas, Houston Division, on
September 19, 1989. The plaintiffs alleged that the company willfully infringed
an Exxon patent pertaining to an oil soluble copper additive component and
requested monetary damages and injunctive relief. On June 24, 1996, the U.S.
Supreme Court denied Exxon's request to review a September 1995 decision of the
United States Court of Appeals for the Federal Circuit in Washington, D.C.,
regarding this case. The Court of Appeals' decision overturned a December 1992
jury verdict that the company had infringed an Exxon patent and entered judgment
in favor of the company as a matter of law. The ruling of the Court of Appeals
also vacated an injunction and a significant monetary judgment against the
company. The Supreme Court decision finalized the Court of Appeals' judgment.
Notwithstanding the Supreme Court decision, Exxon filed a motion in the original
trial court seeking a new trial in order to assert an allegedly different theory
of infringement under the same patent. The motion was denied by the trial judge
on the ground that he lacked the authority to consider any request for a new
trial in view of the reversal of the prior trial verdict by the Appellate Court.
Acting upon an appeal by Exxon, the Court of Appeals in Washington, D.C.,
without deciding the merits of whether Exxon was entitled to a second trial,
ruled that the trial court does have the authority to consider Exxon's motion
and remanded the issue to the trial court.

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

No matters were submitted to the vote of the security holders
during the three months ended December 31, 1997.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth the name, age, recent business experience and
certain other information relative to each person who is an executive officer of
the company as of March 1, 1998.

Name Business Experience
---- -------------------

W. G. Bares Mr. Bares, age 56, became Chairman of the Board on
April 22, 1996, and Chief Executive Officer on January
1, 1996. He has been President since 1982. From 1987
through 1995, he was also Chief Operating Officer.

R. A. Andreas Mr. Andreas, age 53, has been Vice President and Chief
Financial Officer since June 1990.

J. W. Bauer Mr. Bauer, age 44, became Vice President and General
Counsel in April 1992, after serving as General Counsel
from August 1991.

S. A. Di Biase Dr. Di Biase, age 45, has been Vice President since
September 1993. He is responsible for Research and
Development. From 1990 to September 1993, he was
Director of Strategic Research.

G. R. Hill Dr. Hill, age 56, has been Senior Vice President since
1988. In 1996, he became responsible for Corporate
Strategic Planning and has been responsible for
Business Development since October 1993. Prior to
October 1993, he was responsible for Research and
Development.

J. E. Hodge Mr. Hodge, age 55, has been Vice President since
September 1993. He is responsible for Operations.
During 1989 through 1993, he was General Manager - Deer
Park/Bayport Plants.

K. H. Hopping Mr. Hopping, age 51, has been Vice President and
Secretary of the Corporation since April 1991.

S. F. Kirk Mr. Kirk, age 48, has been Vice President since
September 1993. In April 1996, he became responsible
for Sales. From 1993 to April 1996, he was responsible
for Segment Management. From January 1991 to 1993, he
was Senior Vice President - Marketing and Technology
for Lubrizol Petroleum Chemicals Company.

Y. Le Couedic Mr. Le Couedic, age 50, has been Vice President since
September 1993. He is responsible for Management
Information Systems. From 1991 to 1993, he was Division
Head - Corporate R&D - Administrative Services.

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Name Business Experience
- ---- -------------------

G. P. Lieb Mr. Lieb, age 45, was named Controller - Accounting and
Financial Reporting in November 1993, and was named
Principal Accounting Officer in January 1994. From
October 1991 to October 1993, he was Administrative
Manager for the Hazelwood, U.K. Laboratory.

M. W. Meister Mr. Meister, age 43, has been Vice President since
April 1993. He is responsible for Human Resources. From
November 1992 to April 1993, he was General Manager -
Human Resources.

D. A. Muskat Mr. Muskat, age 58, was named Operations Manager in
August 1993. From September 1989 to August 1993 he was
Vice President - Operations for Lubrizol Petroleum
Chemicals Company.

L. M. Reynolds Ms. Reynolds, age 37, was named Assistant Secretary in
April 1995, and has been Counsel since February 1991.

R. D. Robins Mr. Robins, age 55, became Vice President in April
1996. He is responsible for Segment Management. From
October 1993 to April 1996 he was Passenger Car Segment
Manager. From November 1991 to October 1993 he was Fuel
Products Group Business Manager.

J. A. Thomas Mr. Thomas, age 59, has been Vice President since April
1994. In 1996, he became responsible for managing
Corporate Strategies in the Asia Pacific Region. From
April 1994 through April 1996, he was responsible for
Corporate Planning and Development. From December 1990
to April 1994, he was General Manager-Sales for Asia
Pacific, Latin America and the Middle East.

All executive officers serve at the pleasure of the Board.

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PART II
-------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.

The common shares of the company are listed on the New York
Stock Exchange under the symbol LZ. The number of shareholders of record of
common shares was 5,708 as of March 6, 1998.

Information relating to the recent price and dividend history
of the company's common shares follows:

Common Share Price History Dividends
--------------------------
1997 1996 Per Common Share
---- ---- ----------------

High Low High Low 1997 1996
---- --- ---- --- ---- ----

<S> <C> <C> <C> <C> <C>
1st quarter $36 $30 1/2 $31 $26 5/8 $ .25 $.24
2nd quarter 42 1/8 30 3/8 30 1/2 27 1/4 .25 .24
3rd quarter 44 7/8 41 15/16 30 1/2 27 7/8 .25 24
4th quarter 46 15/16 34 7/8 32 3/8 28 1/2 .26 .25
----- ----

$1.01 $.97
===== ====
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA.

The summary of selected financial data for each of the last
five years included in the Historical Summary contained on pages 38 and 39 of
the company's 1997 Annual Report to its shareholders is incorporated herein by
reference. Other income (charges) for 1996, 1995, 1994 and 1993 includes $53.3
million, $38.5 million, $41.2 million and $42.4 million, respectively, for gains
on sale of investments; and in 1993, a special charge of $86.3 million. In
addition, the company changed its method of accounting for postretirement
benefits and for income taxes, effective January 1, 1993, to comply with two
newly effective accounting standards, which reduced 1993 net income by $39.4
million.

Total debt reported in the Historical Summary includes the
following amounts classified as long-term at December 31: $182.2 in 1997, $157.6
million in 1996, $194.4 million in 1995, $114.2 million in 1994 and $55.3
million in 1993.

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

The Management's Discussion and Analysis of Financial Condition
and Results of Operations, including the company's cautionary statement for
"Safe Harbor" purposes under the Private Securities Litigation Reform Act of
1995, contained on pages 16 through 22, inclusive, of the company's 1997 Annual
Report to its shareholders is incorporated herein by reference.

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

Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements of the company and its
subsidiaries, together with the independent auditors' report relating thereto,
contained on pages 22 through 36, inclusive, of the company's 1997 Annual Report
to its shareholders, and the Quarterly Financial Data (Unaudited) contained on
page 37 of such 1997 Annual Report, are incorporated herein by reference.

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

Not applicable.

PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information contained under the heading "Election of
Directors" on pages 2 to 6, inclusive, of the company's Proxy Statement dated
March 18, 1998, is incorporated herein by reference. Information relative to
executive officers of the company is contained under "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K. The information
contained under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 22 of the company's Proxy Statement dated March 18, 1998, is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information relating to executive compensation contained
under the headings "Committees and Compensation of the Board of Directors" on
pages 6 and 7, "Executive Compensation" on pages 12 through 14, inclusive, and
under "Employee and Executive Officer Benefit Plans - Pension Plans" and "-
Executive Agreements" on pages 19 through 21, inclusive, of the company's Proxy
Statement dated March 18, 1998, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information relating to security ownership set forth under
the heading "Security Ownership of Directors, Executive Officers and Certain
Beneficial Owners" on pages 10 and 11 of the company's Proxy Statement dated
March 18, 1998, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Not applicable.

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<PAGE> 11

PART IV
-------

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES,
AND REPORTS ON FORM 8-K.

(a) Documents filed as part of this Annual Report:

1. The following consolidated financial statements
of The Lubrizol Corporation and its
subsidiaries, together with the independent
auditors' report relating thereto, contained on
pages 22 through 37, inclusive, of Lubrizol's
1997 Annual Report to its shareholders and
incorporated herein by reference:

Independent Auditors' Report

Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995

Consolidated Balance Sheets at December 31, 1997
and 1996

Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995

Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1996 and
1995

Notes to Financial Statements

Quarterly Financial Data (Unaudited)

2. Schedules

No financial statement schedules are required to
be filed as part of this Annual Report.

3. Exhibits

(3)(a) Amended Articles of Incorporation of
The Lubrizol Corporation, as adopted
September 23, 1991. (Reference is made
to Exhibit (3)(a) to The Lubrizol
Corporation's Annual Report on Form
10-K for the year ended December 31,
1993, which Exhibit is incorporated
herein by reference.)

(3)(b) Regulations of The Lubrizol
Corporation, as amended effective April
27, 1992. (Reference is made to Exhibit
(3)(b) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year
ended December 31, 1993, which Exhibit
is incorporated herein by reference.)

(4)(a) Amendment to Article Fourth of Amended
Articles of Incorporation. (Reference
is made to Exhibits (3)(a) and (4)(a)
to The Lubrizol Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1993, which Exhibits are
incorporated herein by reference.)

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<PAGE> 12

(4)(b) The company agrees, upon request, to
furnish to the Securities and Exchange
Commission copies of instruments
authorizing long-term debt. No one
instrument authorizes debt in excess of
10% of the total assets of the company
and its subsidiaries on a consolidated
basis.

(4)(c) Rights Agreement between The Lubrizol
Corporation and American Stock Transfer
& Trust Company dated as of October 13,
1997. (Reference is made to Exhibit 4.l
to The Lubrizol Corporation's
Registration Statement on Form 8-A
dated October 1, 1997, which Exhibit is
incorporated herein by reference.)

(10)(a)* The Lubrizol Corporation 1985 Employee
Stock Option Plan, as amended.
(Reference is made to Exhibit (10)(b)
to The Lubrizol Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1993, which Exhibit is
incorporated herein by reference.)

(10)(b)* The Lubrizol Corporation Amended
Deferred Compensation Plan for
Directors. (Reference is made to
Exhibit (10)(b) to The Lubrizol
Corporation's Annual Report on Form
10-K for the year ended December 31,
1994, which Exhibit is incorporated
herein by reference.)

(10)(c)* Form of Employment Agreement between
The Lubrizol Corporation and certain of
its senior executive officers.
(Reference is made to Exhibit (10)(e)
to The Lubrizol Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1993, which Exhibit is
incorporated herein by reference.)

(10)(d)* The Lubrizol Corporation Excess Defined
Benefit Plan, as amended. (Reference is
made to Exhibit (10)(d) to The Lubrizol
Corporation's Quarterly Report on Form
10-Q for the quarterly period ended
September 30, 1997, which Exhibit is
incorporated herein by reference.)

(10)(e)* The Lubrizol Corporation Excess Defined
Contribution Plan, as amended.
(Reference is made to Exhibit (10)(e)
to The Lubrizol Corporation's Quarterly
Report on Form 10-Q for the quarterly
period ended September 30, 1997, which
Exhibit is incorporated herein by
reference.)

(10)(f)* The Lubrizol Corporation Performance
Pay Plan (formerly Variable Award
Plan), as amended. (Reference is made
to Exhibit (10)(f) to The Lubrizol
Corporation's Annual Report on Form
10-K for the year ended December 31,
1996, which Exhibit is incorporated
herein by reference.)

-12-
<PAGE> 13

(10)(g)* The Lubrizol Corporation Executive
Death Benefit Plan, as amended.
(Reference is made to Exhibit (10)(g)
to The Lubrizol Corporation's Quarterly
Report on Form 10-Q for the quarterly
period ended September 30, 1997, which
Exhibit is incorporated herein by
reference.)

(10)(h)* The Lubrizol Corporation 1991 Stock
Incentive Plan, as amended. (Reference
is made to Exhibit (10)(h) to The
Lubrizol Corporation's Annual Report on
Form 10-K for the year ended December
31, 1996, which Exhibit is incorporated
herein by reference.)

(10)(i)* The Lubrizol Corporation Deferred Stock
Compensation Plan for Outside
Directors, as amended. (Reference is
made to Exhibit (10)(i) to The Lubrizol
Corporation's Annual Report on Form
10-K for the year ended December 31,
1995, which Exhibit is incorporated
herein by reference.)

(10)(j)* The Lubrizol Corporation Officers'
Supplemental Retirement Plan, as
amended. (Reference is made to Exhibit
(10)(j) to The Lubrizol Corporation's
Quarterly Report on Form 10-Q for the
quarterly period ended September 30,
1997, which Exhibit is incorporated
herein by reference.)

(10)(k)* The Lubrizol Corporation Deferred
Compensation Plan for Officers, as
amended. (Reference is made to Exhibit
(10)(k) to The Lubrizol Corporation's
Quarterly Report on Form 10-Q for the
quarterly period ended September 30,
1997, which Exhibit is incorporated
herein by reference.)

(10)(l)* The Lubrizol Corporation Executive
Council Deferred Compensation Plan, as
amended. (Reference is made to Exhibit
(10)(l) to The Lubrizol Corporation's
Quarterly Report on Form 10-Q for the
quarterly period ended September 30,
1997, which Exhibit is incorporated
herein by reference.)

(12) Computation of Ratio of Earnings to
Fixed Charges.

(13) The following portions of The Lubrizol
Corporation 1997 Annual Report to its
shareholders:

Pages 16-22 Management's
Discussion and
Analysis of Financial
Condition and Results
of Operations

Page 22 Independent Auditors'
Report

Page 23 Consolidated
Statements of Income
for the years ended
December 31, 1997,
1996 and 1995

Page 24 Consolidated Balance
Sheets at December 31,
1997 and 1996

Page 25 Consolidated
Statements of Cash
Flows for the years
ended December 31,
1997, 1996 and 1995

-13-
<PAGE> 14

Page 26 Consolidated
Statements of
Shareholders' Equity
for the years ended
December 31, 1997,
1996 and 1995

Pages 27-36 Notes to Financial
Statements

Page 37 Quarterly Financial
Data (Unaudited)

Pages 38-39 Historical Summary

(21) List of Subsidiaries of The Lubrizol
Corporation

(23) Consent of Independent Auditors

(27) Financial Data Schedule for the year
ended December 31, 1997

(27.1) Restated Financial Data Schedules for
the periods ended June 30, 1997 and
September 30, 1997

(27.2) Restated Financial Data Schedules for
the periods ended March 31, 1996 and
June 30, 1996

(27.3) Restated Financial Data Schedule for
the year ended December 31, 1995

*Indicates management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the three
months ended December 31, 1997.

-14-
<PAGE> 15

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
March 23, 1998, on its behalf by the undersigned, thereunto duly authorized.

THE LUBRIZOL CORPORATION

BY /s/ W. G. Bares
----------------------------------------
W. G. Bares, Chairman of the Board,
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below on March 23, 1998, by the following
persons on behalf of the Registrant and in the capacities indicated.

/s/ W. G. Bares Chairman of the Board, President and Chief
- -------------------------- Executive Officer
W. G. Bares (Principal Executive Officer)

/s/ R. A. Andreas Vice President and Chief Financial Officer
- -------------------------- (Principal Financial Officer)
R. A. Andreas

/s/ G. P. Lieb Controller, Accounting and Financial
- -------------------------- Reporting
G. P. Lieb (Principal Accounting Officer)

/s/ Edward F. Bell Director
- --------------------------
Edward F. Bell

/s/ L. E. Coleman Director
- --------------------------
L. E. Coleman

/s/ Peggy G. Elliott Director
- --------------------------
Peggy G. Elliott

/s/ Forest J. Farmer, Sr. Director
- --------------------------
Forest J. Farmer, Sr.

/s/ Gordon D. Harnett Director
- --------------------------
Gordon D. Harnett

/s/ Victoria F. Haynes Director
- --------------------------
Victoria F. Haynes

/s/ David H. Hoag Director
- --------------------------
David H. Hoag

/s/ William P. Madar Director
- --------------------------
William P. Madar

/s/ Ronald A. Mitsch Director
- --------------------------
Ronald A. Mitsch

/s/ M. Thomas Moore Director
- --------------------------
M. Thomas Moore

<PAGE> 16

EXHIBIT INDEX
-------------

Exhibits

<PAGE> 17

<PAGE> 18
(12) Computation of Ratio of Earnings to
Fixed Charges.

(13) The following portions of The Lubrizol
Corporation 1997 Annual Report to its
shareholders:

Pages 16-22 Management's Discussion
and Analysis of
Financial Condition and
Results of Operations

Page 22 Independent Auditors'
Report

Page 23 Consolidated Statements
of Income for the years
ended December 31,
1997, 1996 and 1995

Page 24 Consolidated Balance
Sheets at December 31,
1997 and 1996

Page 25 Consolidated Statements
of Cash Flows for the
years ended December
31, 1997, 1996 and 1995

Page 26 Consolidated Statements
of Shareholders' Equity
for the years ended
December 31, 1997, 1996
and 1995

Pages 27-36 Notes to Financial
Statements

Page 37 Quarterly Financial
Data
(Unaudited)

Pages 38-39 Historical Summary

(21) List of Subsidiaries of The Lubrizol
Corporation

(23) Consent of Independent Auditors

(27) Financial Data Schedule for the year
ended December 31, 1997

(27.1) Restated Financial Data Schedules for
the periods ended June 30, 1997 and
September 30, 1997

(27.2) Restated Financial Data Schedules for
the periods ended March 31, 1996 and
June 30, 1996

(27.3) Restated Financial Data Schedule for
the year ended December 31, 1995

* Indicates management contract or compensatory plan or arrangement.

<PAGE> 1
EXHIBIT 12

THE LUBRIZOL CORPORATION AND SUBSIDIARIES

Computation of Ratio of Earnings to Fixed Charges

(all amounts except ratios are shown in thousands)

1997 1996 1995 1994 1993
-------- -------- -------- -------- ------

<S> <C> <C> <C> <C> <C>
Pretax income $231,147 $250,608 $225,574 $251,459 $119,651

Deduct earnings of less
than 50% owned affiliates
(net of distributed
earnings) included in
pretax income (3,018) (48) (1,384) (871) (2,355)

Add losses of less than 50%
owned affiliates included
in pretax income 66 56 1,808 490 21,063

Add fixed charges net of
capitalized interest 10,803 10,955 10,376 3,149 4,154

Add previously capitalized
interest amortized during
period 1,118 968 1,096 452 272
------- ------- ------- ------- -------

"Earnings" $240,116 $262,539 $237,470 $254,679 $142,785
======= ======= ======= ======= =======

Gross interest expense
including capitalized
interest ("Fixed Charges") $ 13,194 $ 14,010 $ 14,693 $ 6,922 $ 6,292

Ratio of earnings to
fixed charges 18.2 18.7 16.2 36.8 22.7

SPECIAL ADJUSTMENTS:

"Earnings" $240,116 $262,539 $237,470 $254,679 $142,785

Plus asset impairment
and special charges 9,489 86,303

Less gains on investments (53,280) (38,459) (41,235) (42,443)
------- ------- ------- ------- -------

Adjusted "Earnings" $240,116 $209,259 $208,500 $213,444 $186,645
======= ======= ======= ======= =======

Ratio of adjusted earnings
to fixed charges 18.2 14.9 14.2 30.8 29.7

</TABLE>

<PAGE> 1
Exhibit 13

THE LUBRIZOL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Lubrizol Corporation is a full-service supplier of performance chemicals and
products to diverse markets worldwide. Principally, the company develops,
produces and sells specialty additive packages used in transportation and
industrial finished lubricants such as gasoline and diesel engine lubricating
oils, automatic transmission fluids, gear oils, marine and tractor lubricants,
fuel products and industrial fluids. The company's additive packages are
generally produced in shared manufacturing facilities and sold largely to a
common customer base. These specialty chemical products are created through the
application of advanced chemical and mechanical technologies to enhance the
performance, quality and value of the products in which they are used. The
company also produces and supplies coatings additives, refinery and oil field
chemicals, specialty monomers, process chemicals, synthetic refrigerant
compressor lubricants, fluid metering devices and particulate emission trap
devices.

The company estimates the growth rate of the lubricant additive industry is
approximately 1% per year. This aggregate growth rate includes mature markets
such as North America and Europe, where the majority of the company's business
is located, and faster growing markets such as Asia-Pacific and Latin America.
The overall growth rate has declined in recent years due to market forces such
as improved engine design, longer drain intervals and product specification
changes. In addition, customers continue to search for stronger, longer-term
relationships with a few key suppliers for help in improving the quality and
performance of their products and services and reducing overall costs. These
factors, along with excess production capacity within the lubricant additive
industry, are causing a more competitive marketplace in certain product lines
and continuing pressure on selling prices for the company's products. The
company expects this competitive marketplace to continue in 1998.

The company has been responding to these challenges. It has entered into and
will continue to actively pursue strategic relationships with its customers, the
finished lubricant suppliers, in order to increase its share of its customers'
business, eliminate redundant costs and jointly pursue growth in developing
regions of the world. The company also has various short-term and long-term
initiatives relating to its cost structure, such as further consolidation of
intermediate production and continuing simplification of its product lines, to
further enhance its competitiveness and market leadership position. Progress on
these initiatives has resulted in a more cost-efficient organization, and the
company believes it is well positioned to compete in the current industry
environment and gain additional market share from these opportunities. In
addition to growth through market share gains in its traditional business, the
company has continued to pursue growth opportunities in certain selected
markets. Business growth has been achieved in these markets through acquisitions
and application of technologies.

1997 RESULTS OF OPERATIONS

In 1997, the company made significant progress with each of its strategies to
grow its business, improve its cost structure and build its franchise. During
1997, revenues increased 5% as product shipments increased 17% over 1996 and the
company's market share grew. The company continued its focus to improve its cost
structure as operating expenses were flat versus 1996, even with significantly
higher production throughput. Net income per share in 1997 increased 20%, after
excluding from 1996 the gain on investments. This record performance was
achieved despite the unfavorable effect on earnings of the stronger U.S. dollar.

REVENUES (millions)
[GRAPHIC]

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues (millions) $1,525.5 $1,599.0 $1,663.6 $1,597.6 $1,673.8
</TABLE>

In 1997, the company had record revenues of $1.67 billion, an increase of $76.2
million over 1996. Increased revenues resulted from a 17% increase in specialty
chemical shipment volumes (contributing a 15% increase in consolidated
revenues), partially offset by a 10% decline in the average selling price.
Although the average selling price stabilized during the second half of the
year, the full-year decline for 1997 was attributable approximately 50% to
changing product mix, 30% to unfavorable currency effects and 20% to lower
product pricing. The unfavorable product mix effect resulted from volume gains
in product lines having lower than the overall average selling price. On
balance, the company's acquisition/divestiture activity did not significantly
affect 1997 annual revenues as recent acquisitions offset a prior year
disposition. However, acquisitions contributed one-fourth, or $11.4 million, of
the 13% increase in consolidated revenues for the fourth quarter of 1997
compared with the fourth quarter of 1996.

A primary strategy of the company in 1997 was to grow its business. The company
is having success building global and regional alliances with targeted customers
and is actively pursuing additional strategic relationships with finished
lubricant suppliers. As compared with 1996, sales volume increased throughout
the year. Higher sales volumes were realized in all geographic zones and across
a broad customer base. In 1997, sales volume increased 14% to North American
customers and 18% to international customers, primarily in Asia-Pacific, Western
Europe and Latin America. The growth in sales volume was derived principally
from market share gains within established markets rather than overall industry
growth.

16
<PAGE> 2

The company believes the steps it has taken over the past several years have
improved its competitive position and led to strong growth in sales volume
during 1997. However, the market forces, competitive pressures and economic
uncertainty in Asia will continue to present challenges in 1998. In late 1997,
currency devaluations, market downturns and general financial uncertainties in
Asia have caused economic growth forecasts for this region to be significantly
revised for 1998. Although the company believes the economic fundamentals
throughout most of the region remain positive for the longer-term, the still
developing situation could dampen demand within the region for finished
lubricant additives in 1998. The company believes all of these challenging
conditions will likely reduce the rate of sales volume growth in 1998.

Cost of sales reflects the higher sales volume as well as lower average raw
material costs and level manufacturing costs. Compared with the respective prior
year periods, average material costs, including favorable currency effects and
the impact of less expensive product mix, were 10% lower in the first half of
1997, 6% lower in the second half of 1997 and 8% lower for the year. The
company's manufacturing costs do not fluctuate significantly with changes in
production volume. The effects of the company's ongoing manufacturing
rationalization program and other cost management initiatives have improved
manufacturing efficiency as the company is operating fewer manufacturing units
at higher capacity levels. Manufacturing costs, aided by currency effects, were
flat in 1997 compared with 1996, even though production activity was
significantly higher in 1997 and the company resumed pay increases following the
salary freeze in effect during 1996.

GROSS PROFIT (millions)
[GRAPHIC]

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C>
Gross profit (millions) $485.4 $520.7 $532.4 $509.5 $545.6
</TABLE>

Gross profit (sales less cost of sales) increased $36.2 million, or 7%, in 1997
compared with 1996. This improvement in gross profit amount was after
unfavorable currency effects of $20 million, which occurred evenly over the four
quarters. Acquisition/divestiture activity contributed $13.0 million to the
increase in gross profit for 1997. Gross profit improved to 32.7% of sales in
1997 compared with 32.0% in 1996 as manufacturing efficiencies, lower material
costs and the effect of acquisition/divestiture activities more than offset the
effect of lower average selling price. Gross profit was 31.4% during the second
half of 1997 due to sequentially lower average selling price, higher material
costs and the effect of asset impairment losses of $4.4 million principally in
the fourth quarter. The company believes the gross profit percentage for the
full year 1998 will be approximately the same as the full year 1997.

Selling and administrative expenses increased $12.6 million, or 8%,
in 1997 compared with 1996. These expenses, which were higher in the second half
of the year compared with the first half, increased primarily due to higher
patent-related litigation expenses, the effect of acquisitions, incremental
expenses related to the implementation of the new enterprise-wide management
information system and increased variable compensation as a result of higher
earnings.

During 1997, research, testing and development expense (technology expense)
decreased $14.3 million, or 9%, from 1996. Product standards change periodically
as engine and transmission designs are improved by the equipment manufacturers
to meet new emissions, efficiency, durability and other performance factors.
These changes influence the timing and amount of the company's technology
expense. The lower spending level in 1997 was due to the timing of testing
programs particularly within the engine oil and gear oil product lines, greater
internalization of testing activity that reduced outside testing requirements
and workforce reductions. The company's technology expense in 1997 includes some
costs related to new performance specifications for heavy-duty engine oils which
are expected to become effective during 1998 and new performance specifications
for passenger car engine oils expected to become effective during 2000. The
company expects its technology expense in 1998 will be slightly higher than in
1997.

RESEARCH TESTING & DEVELOPMENT (millions)
[GRAPHIC]

1993 1994 1995 1996 1997
---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C>
Research Testing & Development $171.5 $165.5 $179.6 $161.0 $146.7
</TABLE>

As discussed in Note 17 to the financial statements, in 1997, the company
provided $9.4 million for the impairment of long-lived assets. These charges
related to a shutdown of an intermediate manufacturing system and the write-off
of certain computer equipment and legacy software systems that will be disposed
of due to the computer equipment standardization project and the new
enterprise-wide management information system being implemented.

Primarily as a result of these factors, consolidated revenues increased $37.7
million more than the increase in total costs and expenses in 1997.

Interest income in 1997 was lower than in 1996 as proceeds from the 1996 sale of
investments (discussed below) were temporarily invested in interest-bearing
instruments until used in the company's share repurchase program. Interest
expense in 1997 was level with 1996. The average daily balance of total debt
outstanding during 1997 was $195 million as compared with $188 million in 1996.

The company transacts business in over 100 countries and has a number of
operating facilities in countries outside of the United States. As a result, the
company is subject to business risks inherent in non-U.S. activities, including
political and economic uncertainty, import and export limitations, exchange
controls and currency fluctuations. The company believes risks related to its
foreign operations are mitigated due to the political and economic stability of
the countries in which its largest foreign operations are located. While changes
in the dollar value of foreign currencies will affect earnings from time to
time, the longer term economic effect of these changes should not be significant
given the company's net asset exposure, currency mix and pricing flexibility. As
the U.S. dollar strengthens or weakens against other international currencies in
which the company transacts business, the financial results of the company will
be affected. The principal currencies, other than the U.S. dollar, in which the
company transacts busi-

17
<PAGE> 3
THE LUBRIZOL CORPORATION

ness are the French franc, German deutsche mark, British pound sterling and
Japanese yen. The U.S. dollar continued to strengthen during 1997, causing an
unfavorable effect on net income of approximately $10 million, or $.17 per
share.

As a result of the factors discussed above and after excluding from 1996 the
gain on investments, income before income taxes increased 17%, or $33.8 million,
from 1996. The company adjusted its tax provision in the third quarter of 1997
to reflect a legislated increase in the statutory tax rate applicable to its
earnings in France, where the company has significant operations. This
adjustment resulted in an effective tax rate of 33.0% for the full year 1997 as
compared with 31.5% in 1996, after excluding the 1996 gain on investments on
which a 35% tax rate applied. The higher effective tax rate reduced net income
by $3.5 million, or $.06 per share in 1997. The company anticipates that the
1998 consolidated effective tax rate will increase to approximately 34.5%.

Net income in 1997 was $154.9 million, or $2.68 per share. In 1996, net income
was $169.8 million, or $2.80 per share, which included investment gains. After
excluding from 1996 the non-recurring gains, net income in 1997 was 15% higher
than the $135.2 million for 1996. On this same basis, net income per share was
20% higher than the $2.23 per share for 1996, reflecting the company's share
repurchase program.

1996 RESULTS OF OPERATIONS

IN 1996, management of the company took action early in the year to improve its
cost structure as part of its continuing efforts to enhance its efficiency as an
additive supplier. Although revenues in 1996 declined 4% from 1995, this was
offset by the effects of aggressive cost management and management's focus on
strengthening of customer and supplier relationships. In addition, lower working
capital, significantly reduced capital expenditures and the sale of
non-strategic investments resulted in improved cash flow and enabled the company
to repurchase 7% of its common shares outstanding during 1996. As a result, the
company was able to grow net income and net income per share, despite
unfavorable currency effects.

Consolidated revenues were $1.60 billion in 1996, a decrease of $66 million, or
4%, from record 1995 levels. Volume in 1996 was equal with 1995 despite the
introduction of a new industry specification discussed below. Revenues decreased
2% due to price/mix effects and 1% due to unfavorable currency effects. In
addition, the sale of the specialty vegetable oil business in September 1996
reduced consolidated revenues by 1% as compared with 1995.

During 1996, new passenger car engine oil additives were introduced to meet a
new U.S. industry specification. Most of the company's customers converted to
this new specification by September 1996. This new specification required
approximately 10% less additive than the prior specification, and the company
estimates that it negatively impacted annual sales volume in North America by 2%
in 1996 (1% worldwide). However, other volume gains, primarily in heavy duty
engine oils, more than offset the impact from the new specification and overall
volume in North America increased 1% over 1995. Internationally, volume declined
1%, as growth in Asia-Pacific was offset by lower volume in Western Europe.

Gross profit of $509.5 million was $13.5 million, or 3%, lower in 1996 compared
with 1995. Excluding the effects of the $9.5 million asset impairment in 1995
(discussed below), gross profit in 1996 was $23.0 million lower than in 1995.
Unfavorable currency effects accounted for one-half of this decline with the
balance attributable to lower revenues. However, the company aggressively
managed its procurement costs of raw materials and continued its cost management
efforts under the manufacturing rationalization initiative discussed below.
These efforts lowered the cost of production to maintain 1996 gross profit as a
percent of sales at 32.0%, compared to 32.1% in 1995 (excluding asset
impairment).

The company continued to lower its operating costs through aggressive cost
management. This included a worldwide freeze on salary increases and hiring
throughout all of 1996 and the manufacturing rationalization and organizational
realignment initiatives that began in 1993. Employee levels, excluding
acquisitions and divestitures during the year, were reduced by nearly 6% at
December 31, 1996, compared with December 31, 1995, as retiring or departing
employees were not replaced. The company's manufacturing costs and selling,
administrative and technology expenses in 1996 were each lower than in 1995 and,
in the aggregate, declined nearly 6%, or $40 million (excluding the effects of
the 1995 asset impairment). Currency had a favorable effect on costs and
accounted for approximately 25% of this reduction.

Technology expense decreased 10% in 1996 compared with 1995. In addition to the
effects of cost management strategies discussed above, the decrease was due to
reduced testing requirements for product specifications primarily within
driveline and engine oils. The effect of currency on technology expenses was not
significant.

Primarily as a result of the above factors, total costs and expenses declined
$75.0 million in 1996 from 1995 ($65.5 million excluding the asset impairment),
offsetting the revenue decline for the year.

During 1996, the company completed the divestiture of substantially all of its
agribusiness assets comprised of its equity investment in Mycogen Corporation
and the assets of the company's wholly-owned subsidiary, SVO Specialty Products,
Inc. (SVO). These transactions generated cash proceeds of $149.0 million and,
after losses on other investment activity, resulted in the $53.3 million ($34.6
million, or $.57 per share after taxes) gain on investments. (See Note 8 to the
financial statements.) The company has substantially liquidated its
non-strategic investments.

As discussed previously, the company conducts a significant amount of its
business outside of the United States and is subject to certain related risks
including currency fluctuations. The U.S. dollar strengthened during 1996 as
compared with exchange rates in effect during 1995, particularly against the
French franc, German deutsche mark and Japanese yen, causing an unfavorable
effect on 1996 net income of $4.9 million, or $.08 per share.

18
<PAGE> 4
THE LUBRIZOL CORPORATION

Interest expense, net of interest income, declined $2.4 million in 1996 compared
with 1995. Proceeds collected from the sale of investments were used to
temporarily reduce commercial paper borrowings and acquire short-term
investments until used in the company's share repurchase program. The average
daily balance of total debt outstanding during 1996 was $188 million as compared
with $203 million in 1995.

As a result of the factors discussed above, 1996 net income was $169.8 million,
an increase of 12% or $18.2 million from 1995. Net income per share for 1996 was
$2.80, or 18% higher than in 1995 and reflected the impact of the company's
share repurchase program. Excluding the gains on investments from both years and
the provision for asset impairment in 1995, net income increased to $135.2
million from $132.8 million in 1995, a 2% increase. The corresponding net income
per share of $2.23 in 1996 was a 7% increase from the $2.08 earnings per share
in 1995.

1995 RESULTS OF OPERATIONS

In 1995, the company grew revenues but, despite a strong first half, annual
earnings declined compared with 1994. As discussed below, the primary factors
contributing to the 1995 results were lower demand for engine oil additives
particularly during the second half of 1995, the U.S. Government trade
restrictions regarding sales to certain customers in the Middle East and the
inability to maintain profit margins during a period of rising raw material
costs.

Consolidated revenues were $1.66 billion, an increase of $64.6 million, or 4%,
in 1995 compared with 1994. Price increases implemented in early 1995 and a more
favorable product mix increased 1995 revenues by 3% and the translation of
various international currencies, which strengthened during the period when
compared with the U.S. dollar, increased revenues by 3%. Volume declined 2% from
the 1994 level. Sequentially, revenues in the second half of 1995 were 5% lower
than the first half due to lower volume (3%) and unfavorable price/product mix
(2%).

For the year, sales volume declined in 1995 compared with 1994, principally in
international markets. North American volume declined less than 1% from 1994.
International volume declined 3% mainly because of the cessation of spot
business with certain customers in the Middle East due to a U.S. Presidential
Order restricting such trade. Excluding from the comparison this 1994 spot
business, which occurred during the first half of the year, international volume
increased 1%, and worldwide volume in 1995 was even with 1994. Sequentially,
volume declined 3% in North America and 4% internationally in the second half
compared with the first half of 1995 as demand for engine oil lubricants in
North America and Europe weakened, causing lower additive shipment volumes.

Gross profit increased slightly to $522.9 million in 1995 from $520.7 million in
1994. Cost of sales in 1995 included a provision for asset impairment of $9.5
million recorded in the fourth quarter of 1995. This charge related primarily to
an intermediate processing unit that became permanently impaired due to a change
in product formulation caused by a new industry-wide product specification.
Excluding the effect of this asset impairment, the amount of gross profit
increased in 1995, despite lower volume, as higher average selling prices, aided
by favorable currency and mix, more than offset an increase in average material
cost of 9%, over half of which was due to the effects of currency and mix.
However, gross profit as a percent of sales declined to 32.1% (excluding the
asset impairment) in 1995 from 32.7% in 1994 as raw material costs increased
faster than selling prices and, combined with slightly higher manufacturing
costs and lower volumes, negatively impacted margin percentage. Sequentially,
gross profit percentage declined to 30.5% (excluding the asset impairment) in
the second half of 1995 compared with 33.6% in the first half due to the effect
of unfavorable price/mix, less favorable currency, higher raw material costs and
lower volume.

The company's manufacturing rationalization and organizational realignment
initiatives have slowed the rate of increase in the company's cost and expenses.
The company's manufacturing expenses (excluding the asset impairment), as well
as its selling and administrative expenses, increased 3% in 1995 as compared
with 1994. Excluding increases in expenses due to currency translation and an
acquisition made during 1995, manufacturing costs and selling and administrative
expenses were each level with the 1994 amounts.

Technology expenses increased 9% to $179.6 million. Technology expenses
increased, as anticipated, due to worldwide testing programs for the engine
oils, driveline oils and fuel products areas together with a greater emphasis on
longer-term strategic research.

Primarily as a result of the above factors, total cost and expenses increased
$16.5 million ($7.0 million excluding the asset impairment loss) more than the
increase in total revenues in 1995.

The company sold all of its remaining shares of Genentech, Inc. common stock
during the first half of 1995 and realized a pretax gain of $38.5 million ($.39
per share after taxes). During 1994, the company had a pretax gain on the sale
of Genentech common stock of $41.2 million ($.41 per share after taxes).

Other income - net was $7.1 million in 1995 compared with $7.3
million in 1994 (see Note 9 to the financial statements). Other income was
impacted by equity losses recognized from the company's investment in Mycogen
Corporation and by other transactions involving Mycogen. The company recorded
equity losses from Mycogen of $5.4 million in 1995 compared with equity losses
of $.1 million in 1994. In late 1995, the company recognized a noncash gain of
$4.5 million, representing an increase in the value of the company's ownership
interest in the net assets of Mycogen, when Mycogen issued new common shares to
another investor.

Interest expense increased $7.2 million in 1995 over 1994 as a result of higher
average debt outstanding to meet the requirements of the capital expenditure and
share repurchase programs. The average daily balance of total debt outstanding
during 1995 was $203 million as compared with $111 million in 1994.

19
<PAGE> 5
THE LUBRIZOL CORPORATION

lar weakened, primarily against the French franc, German deutsche mark and
Japanese yen, when compared with exchange rates in effect during the year 1994.
This resulted in 1995 net income being favorably impacted by approximately $.20
per share.

As a result of the factors discussed above, income before income taxes decreased
10%, or $25.9 million, from 1994. The company's 1995 effective tax rate was
32.8% as compared with the 1994 rate of 30.2%, which was lower than normal due
to charitable donations of appreciated securities made by the company in 1994.
After application of the 1995 higher effective tax rate, net income was $151.6
million in 1995, a decrease of 14% or $24.0 million from 1994.

Excluding the gains realized from sale of Genentech common stock in 1995 and
1994 and the provision for asset impairment in 1995, net income decreased 11% to
$132.8 million in 1995 compared with $148.8 million in 1994. The corresponding
earnings per share of $2.08 in 1995 declined 8% compared with $2.26 in 1994.

RETURN ON AVERAGE SHAREHOLDERS' EQUITY

Return on average shareholders' equity was 19% in 1997, 20% in 1996 (16%
excluding gains on investments) and 18% in 1995.

RETURN ON EQUITY* (percent)
[GRAPHIC]

1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on Equity* (percent) 15% 19% 16% 16% 19%
</TABLE>

(Before investment gains, the 1995 provision for Asset Impairment and the 1993
Special Charge and Accounting Changes.)

WORKING CAPITAL, LIQUIDITY AND
CAPITAL RESOURCES

The company's cash flows for the years 1995 through 1997 are presented in the
consolidated statements of cash flows. Cash provided from operating activities
during 1997 was $234.4 million, a slight increase compared with $231.0 million
in 1996 and a significant improvement over the $187.4 million in 1995. This
improvement was primarily attributable to the benefits of the company's programs
to modify its cost structure and reduce operating costs. In 1997, cash of $13.6
million was used to fund an increase in working capital, primarily receivables
and inventory, to support the company's business growth during the year. During
1997 inventory turns improved significantly as inventory quantities remained
flat compared with the prior year period even with higher sales volumes.
Receivable balances increased in line with the higher revenues of the fourth
quarter of 1997 versus the fourth quarter of 1996. The 1997 increase in accounts
payable and accrued expenses reflects the increased operating activity between
the comparative fourth quarters. In 1996, working capital changes generated cash
from operating activities of $16.2 million, including approximately $24 million
resulting from management efforts to reduce specialty chemical inventory levels
and approximately $22 million related to liquidating inventories and receivables
prior to the sale of the company's former specialty vegetable oil (SVO) business
in September 1996.

Over the past several years the company has divested its marketable securities
and its non-strategic assets, primarily agribusiness assets. The after-tax
proceeds from these activities have generally been used in the company's share
repurchase program discussed below. Proceeds from the sale of investments
received during 1997 reflect $9.6 million from the sale of a non-strategic
investment and $2.5 million collected on a promissory note from the 1996 sale of
certain SVO technology rights. Proceeds from the sale of investments during 1996
were principally comprised of $126.2 million from the sale of Mycogen and $22.8
million from the sale of SVO assets. Proceeds from the sale of investments in
1995 were from the sale of Genentech common stock. (See Note 8 to the financial
statements.)

CASH PROVIDED FROM
OPERATING ACTIVITIES
(millions)
[Graphic]

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash Provided from Operating
Activities (millions)
Cash provided $162.5 $156.8 $187.4 $231.0 $234.4
</TABLE>

The company has begun to implement a global enterprise-wide management
information system and is standardizing its computer equipment among all of its
major facilities. This project supports the company's strategy to improve its
cost structure by reducing complexity and increasing efficiency. The project was
initiated in 1996, and the company estimates it will require approximately four
years to implement the system globally. This system, when fully implemented,
will provide immediate, worldwide access to information so that resources will
be shared and processes will be standardized and integrated across global sites.
During 1997, the principal focus was to design and configure this system for the
U.S. implementation. The company expects the system to become operational in the
first half of 1998 at its major U.S. facilities, in mid-1999 at its major
European facilities and subsequently at its other worldwide facilities. The
return on this investment is expected to be realized, beginning in 1999, by
reducing costs and delivering products and services more cost-effectively to the
company's customers.

Capital expenditures in 1997 were $100.7 million compared with $94.3 million in
1996. Approximately 50% of 1997 (65% of 1996) capital expenditures pertained to
manufacturing plants to enhance or maintain production capabilities, including
maintaining facilities in compliance with environmental and safety regulations.
Capital spending for environmental and safety projects totaled $7 million in
1997, $8 million in 1996 and $37 million in 1995. Approximately one-fourth of
the 1997 capital expenditures pertained to the new enterprise-wide management
information system being implemented by the company (as discussed above).
Capital expenditures during 1995 were abnormally high as the company completed
several large construction projects to enhance or maintain production and
technical capabilities and expand its corporate administrative facilities. The
company estimates capital expenditures for 1998 will approximate the 1997
amounts, including a similar amount for the continuation of the multi-year
project to implement the new enterprise-wide management information system.

CAPITALIZATION (millions)

[GRAPHIC]

1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Capitalization (millions)
Equity $732.2 $832.0 $849.0 $819.4 $815.4
Total Debt 69.6 $167.9 $247.1 $198.5 $220.3
</TABLE>

20
<PAGE> 6
THE LUBRIZOL CORPORATION

During 1997, the company invested $21.5 million in several acquisitions in the
company's existing business areas of metalworking additives and performance
systems. In December 1996, the company acquired a formulator of specialty
synthetic lubricants used by original equipment manufacturers in air and
refrigeration compressors, for $24.6 million. In addition, the company invested
$2.1 million and $2.7 million in 1997 and 1996, respectively, in joint ventures
in China.

The company maintains an active share repurchase program, and in June 1997 the
company's Board of Directors authorized an additional 4 million shares under the
program. During 1997, the company repurchased 1.8 million common shares, or 3%
of its common shares outstanding at the beginning of the year, for $70.1
million. There were 4.7 million common shares remaining under the company's
repurchase authorization at December 31, 1997. In 1996, the share repurchase
program was increased to utilize the after-tax proceeds from the sale of
investments as the company repurchased 4.5 million, or 7%, of its outstanding
shares for $135.2 million. The company intends to repurchase approximately $80
million of its common shares during 1998.

Debt increased during 1997 primarily to finance several acquisitions and the
increase in working capital. During 1996, improved cash flow and lower capital
expenditures enabled the company to have net repayments of short- and long-term
debt of $43.6 million. In June 1995, the company publicly issued $100 million of
7.25%, 30-year debentures and used the net proceeds to repay a portion of the
commercial paper borrowings then outstanding. Debt as a percent of
capitalization (shareholders' equity plus short- and long-term debt) was 21% at
December 31, 1997, compared with 20% at December 31, 1996. The company believes
its percentage of debt to capitalization will increase to 25% to 30% during 1998
in order to fund possible acquisitions and its share repurchase program.

The company's financial position continues to be strong with a ratio of current
assets to current liabilities of 2.5 to 1 at December 31, 1997, compared with
2.6 to 1 at December 31, 1996. At December 31, 1997, the company had unused
revolving credit agreements and other credit lines aggregating $95 million. As
described in Note 5 to the financial statements, the company has the ability to
refinance up to $56.6 million of its outstanding commercial paper on a long-term
basis under existing revolving credit agreements. The company believes its
credit facilities, internally generated funds and ability to obtain additional
financing, if desired, will be sufficient to meet its future capital needs.

The company is involved in patent litigation with Exxon Corporation in various
countries. Refer to Note 18 to the financial statements for further discussion
regarding this litigation.

The company relies on its computer-based management information systems, as well
as computer-based systems used for other purposes, in conducting its normal
business activities. Certain of these computer-based programs may not have been
designed to function properly with respect to the application of dating systems
relating to the Year 2000. The company has a global "Year 2000" compliance
strategy designed so that all of its computer-based systems, including process
control, testing and laboratory equipment and embedded systems, will function
without disruption with respect to dating system applications relating to the
Year 2000. Implementation of the new enterprise-wide management information
system is a key component of the company's strategy for its operation of
particular computer-based systems without disruption in the Year 2000. In
addition, the company is in the process of assessing the actions to be taken
with respect to all of its other systems in order to avoid Year 2000-related
disruptions and is targeting completion of all remedial activities by mid-1999.
The company's compliance strategy includes obtaining assurance from other
entities critical to its business, such as suppliers and customers, regarding
their ability to operate their systems in the Year 2000. Except for expenditures
related to the new enterprise-wide management information system (as discussed
above), the company is not yet able to estimate the total costs of conducting
its Year 2000 remedial activities. However, based upon information developed to
date, the company believes it has adequate liquidity and capital resources to
fund all remediation activities, and that (except for those costs related to the
new enterprise-wide management information system) the total costs of Year 2000
remediation activities will not be material to the company's results of
operations or financial condition. The company expects to complete its Year 2000
activities within a time frame that will enable its computer-based systems to
function without significant disruption in the Year 2000.

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

This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations and the letter "To Our Shareholders" from W.
G. Bares, Chairman, President and Chief Executive Officer of the company,
contains forward-looking statements within the meaning of the federal securities
laws. As a general matter, forward-looking statements are those focused upon
future plans, objectives or performance as opposed to historical items and
include statements of anticipated events or trends and expectations and beliefs
relating to matters not historical in nature. Such forward-looking statements
are subject to uncertainties and factors relating to the company's operations
and business environment, all of which are difficult to predict and many of
which are beyond the control of the company, that could cause actual results of
the company to differ materially from those matters expressed in or implied by
such forward-looking statements.

The company believes that the following factors, among others, could affect its
future performance and cause actual results of the company to differ materially
from those expressed or implied by forward-looking statements made by or on
behalf of the company:

- - the overall demand for lubricant additives on a worldwide basis, which has a
slow growth rate in mature markets such as North America and Europe;

- - the lubricant additive demand in Asia-Pacific and Latin America, which has
been growing at significantly higher rates than mature markets, along with
lubricant additive demand in developing regions such as China and India,
which geographic areas are an announced focus of the company's activities;

- - the effect on the company's business resulting from the economic uncertainty
within certain countries of the Asia-Pacific region;

21
<PAGE> 7
THE LUBRIZOL CORPORATION

- - technology developments that affect longer-term trends for lubricant
additives, such as: improved engine design, fuel economy, longer oil drain
intervals and emission system compatibility;

- - the company's success at continuing to develop proprietary technology to meet
or exceed new industry performance standards and individual customer
expectations;

- - the frequency of change in industry performance standards, which affects the
level and timing of the company's technology costs, the product life cycles
and the relative quantity of additives required for new specifications;

- - the rate of progress in continuing to reduce complexities and conversion
costs and in modifying the company's cost structure to maintain and enhance
its competitiveness;

- - the success of the company in strengthening and retaining relationships with
lubricant additive customers, growing sales at targeted accounts, and
expanding geographically;

- - the extent to which the company is successful in expanding beyond its core
lubricant additives businesses;

- - the recoveries, judgments, costs and future impact of legal proceedings,
including those relating to intellectual property litigation with Exxon
Corporation and its affiliates;

- - the potential impact of consolidation among lubricant additive
manufacturers;

- - the relative degree of price pressure for lubricant additives;

- - the cost, availability and quality of raw materials, including
petroleum-based products, required for the manufacture of lubricant
additives;

- - the effects of fluctuations in currency exchange rates upon the company's
reported results from its international operations, together with non
currency risks of investing in and conducting significant operations in
foreign countries, including those relating to political, social, economic,
and regulatory factors;

- - the ability to achieve and timing of cost efficiencies resulting from the
multi-year program to implement the new enterprise-wide management
information system;

- - the ability of the company to operate its computer-based systems without
significant disruption due to dating systems application in the Year 2000;
and

- - changes in significant government regulations affecting environmental
compliance.

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

INDEPENDENT AUDITORS' REPORT [DELOITTE & TOUCHE LLP LOGO]

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
THE LUBRIZOL CORPORATION

We have audited the accompanying consolidated balance sheets of The Lubrizol
Corporation and its subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Lubrizol Corporation and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.

/s/ Deloitte & Touche LLP

Cleveland, Ohio
February 5, 1998

22
<PAGE> 8
THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------

(In Thousands of Dollars Except Per Share Data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Net sales ................................ $ 1,669,251 $ 1,592,877 $ 1,657,821

Royalties and other revenues ............. 4,531 4,685 5,773
----------- ----------- -----------

Total revenues .................... 1,673,782 1,597,562 1,663,594

Cost of sales ............................ 1,123,602 1,083,394 1,134,875

Selling and administrative expenses ...... 171,244 158,633 163,493

Research, testing and development expenses 146,678 160,978 179,649
----------- ----------- -----------

Total cost and expenses ........... 1,441,524 1,403,005 1,478,017

Gain on investments ...................... 53,280 38,459

Other income - net ....................... 5,104 6,012 7,150

Interest income .......................... 4,588 7,714 4,764

Interest expense ......................... (10,803) (10,955) (10,376)
----------- ----------- -----------

Income before income taxes ............... 231,147 250,608 225,574

Provision for income taxes ............... 76,278 80,806 73,959
----------- ----------- -----------

Net income ............................... $ 154,869 $ 169,802 $ 151,615
=========== =========== ===========

Net income per share ..................... $ 2.68 $ 2.80 $ 2.37
=========== =========== ===========

Net income per share, diluted ............ $ 2.66 $ 2.79 $ 2.37
=========== =========== ===========

Dividends per share ...................... $ 1.01 $ .97 $ .93
=========== =========== ===========
</TABLE>

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

23
<PAGE> 9
THE LUBRIZOL CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31
----------------------------------

(In Thousands of Dollars) 1997 1996
- --------------------------------------------------------------------------------------------------------------

<S> <C> <C>
ASSETS

Cash and short-term investments .......................................... $ 86,504 $ 55,073

Receivables .............................................................. 273,505 238,401

Inventories .............................................................. 260,118 251,905

Other current assets ..................................................... 36,949 39,720
----------- -----------

Total current assets .............................................. 657,076 585,099
----------- -----------

Property and equipment - at cost ......................................... 1,513,824 1,529,187

Less accumulated depreciation ............................................ 821,147 821,873
----------- -----------

Property and equipment - net ...................................... 692,677 707,314
----------- -----------

Investments in nonconsolidated companies ................................. 25,904 29,821

Other assets ............................................................. 86,635 79,881
----------- -----------

TOTAL ...................................................... $ 1,462,292 $ 1,402,115
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Short-term debt and current portion of long-term debt .................... $ 38,095 $ 40,871

Accounts payable ......................................................... 127,347 99,676

Income taxes and other current liabilities ............................... 96,488 86,563
----------- -----------

Total current liabilities ......................................... 261,930 227,110
----------- -----------

Long-term debt ........................................................... 182,165 157,628

Postretirement health care obligation .................................... 105,962 105,463

Noncurrent liabilities ................................................... 42,878 47,284

Deferred income taxes .................................................... 53,909 45,254
----------- -----------

Total liabilities ................................................. 646,844 582,739
----------- -----------

Contingencies and commitments

Preferred stock without par value - unissued

Common shares without par value - outstanding 56,966,894

shares in 1997 and 58,522,676 shares in 1996 .......................... 82,669 78,534

Retained earnings ........................................................ 773,184 744,310

Accumulated other comprehensive income (loss) ............................ (40,405) (3,468)
----------- -----------

Total shareholders' equity ........................................ 815,448 819,376
----------- -----------

TOTAL ...................................................... $ 1,462,292 $ 1,402,115
=========== ===========
</TABLE>

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

24
<PAGE> 10
THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------

(In Thousands of Dollars) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
CASH PROVIDED FROM (USED FOR):

OPERATING ACTIVITIES:

Net income ............................................... $ 154,869 $ 169,802 $ 151,615

Adjustments to reconcile net income to cash provided

by operating activities:

Depreciation and amortization ....................... 87,217 80,964 74,247

Deferred income taxes ............................... 8,585 23,074 16,899

Provision for asset impairments ..................... 9,360 9,489

Gain on investments ................................. (53,280) (38,459)

Change in current assets and liabilities, net of

acquisitions and dispositions:

Receivables ..................................... (47,313) 9,834 (386)

Inventories ..................................... (16,919) 46,658 (7,885)

Accounts payable and accrued expenses ........... 46,524 (38,693) (3,768)

Other current assets ............................ 4,101 (1,610) (175)

Change in noncurrent liabilities .................... (169) (1,317) (2,486)

Other items - net ................................... (11,889) (4,430) (11,729)
--------- --------- ---------

Total operating activities ................. 234,366 231,002 187,362

INVESTING ACTIVITIES:

Proceeds from sale of investments ........................ 12,117 149,603 40,160

Capital expenditures ..................................... (100,700) (94,297) (189,259)

Acquisitions and investments in nonconsolidated companies (23,636) (27,309) (3,521)

Other - net .............................................. 5,164 4,357 3,654
--------- --------- ---------

Total investing activities ................. (107,055) 32,354 (148,966)

FINANCING ACTIVITIES:

Short-term borrowing (repayment) ......................... 26,772 (52,890) (18,676)

Long-term borrowing ...................................... 5,572 28,425 100,064

Long-term repayment ...................................... (4,159) (19,141) (2,746)

Dividends paid ........................................... (58,469) (59,033) (59,414)

Common shares purchased, net of options exercised ........ (63,391) (133,926) (64,792)
--------- --------- ---------

Total financing activities ................. (93,675) (236,565) (45,564)

Effect of exchange rate changes on cash .................. (2,205) (2,297) 1,368
--------- --------- ---------

Net increase (decrease) in cash and short-term investments 31,431 24,494 (5,800)

Cash and short-term investments at the beginning of year . 55,073 30,579 36,379
--------- --------- ---------

Cash and short-term investments at the end of year ....... $ 86,504 $ 55,073 $ 30,579
========= ========= =========
</TABLE>

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

25
<PAGE> 11
THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Shareholders' Equity
--------------------------------------------------

Number of Accumulated Other
Shares Common Retained Comprehensive
(Dollars in Thousands) Outstanding Shares Earnings Income (Loss) Total
- ---------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.............................. 64,844,560 $84,059 $ 734,533 $ 13,447 $ 832,039
---------

Comprehensive income:

Net income 1995...................................... 151,615 151,615

Other comprehensive income (loss).................... (10,465) (10,465)
---------

Comprehensive income.................................... 141,150

Cash dividends.......................................... (59,414) (59,414)

Common shares - treasury:

Shares purchased..................................... (1,982,969) (2,604) (63,987) (66,591)

Shares issued upon exercise of stock options......... 89,697 1,799 1,799
---------- ------- --------- -------- ---------

BALANCE, DECEMBER 31, 1995.............................. 62,951,288 83,254 762,747 2,982 848,983
---------
Comprehensive income:

Net income 1996...................................... 169,802 169,802

Other comprehensive income (loss).................... (6,450) (6,450)
---------

Comprehensive income.................................... 163,352

Cash dividends.......................................... (59,033) (59,033)

Common shares - treasury:...............................

Shares purchased..................................... (4,496,427) (5,982) (129,206) (135,188)

Shares issued upon exercise of stock options......... 67,815 1,262 1,262
---------- ------- --------- -------- ---------

BALANCE, DECEMBER 31, 1996............................. 58,522,676 78,534 744,310 (3,468) 819,376
---------
Comprehensive income:

Net income 1997..................................... 154,869 154,869

Other comprehensive income (loss)................... (36,937) (36,937)
---------

Comprehensive income................................... 117,932

Cash dividends......................................... (58,469) (58,469)

Common shares - treasury:

Shares purchased................................... (1,812,841) (2,538) (67,526) (70,064)

Shares issued upon exercise of stock options....... 257,059 6,673 6,673
---------- ------- --------- -------- ---------

BALANCE, DECEMBER 31, 1997............................ 56,966,894 $82,669 $ 773,184 $(40,405) $ 815,448
========== ======= ========= ======== =========
</TABLE>

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

<PAGE> 12
THE LUBRIZOL CORPORATION

NOTES TO FINANCIAL STATEMENTS

(In Thousands of Dollars Unless Otherwise Indicated)

NOTE 1 - NATURE OF OPERATIONS
The Lubrizol Corporation is a full-service supplier of performance chemicals and
products to diverse markets worldwide. Principally, the company develops,
produces and sells specialty additive packages used in transportation and
industrial finished lubricants such as gasoline and diesel engine lubricating
oils, automatic transmission fluids, gear oils, marine and tractor lubricants,
fuel products and industrial fluids. The company's additive packages are
generally produced in shared manufacturing facilities and sold largely to a
common customer base. These specialty chemical products are created through the
application of advanced chemical and mechanical technologies to enhance the
performance, quality and value of the products in which they are used. The
company also produces and supplies coatings additives, refinery and oil field
chemicals, specialty monomers, process chemicals, synthetic refrigerant
compressor lubricants, fluid metering devices and particulate emission trap
devices.

The company's sales and receivables are concentrated in the oil and chemical
industries. The company's additive customers consist primarily of oil refiners
and independent oil blenders and are located in more than 100 countries.
Approximately 40% of the company's sales are made to customers in North America,
30% in Europe and 30% in Asia-Pacific, the Middle East and Latin America. The
ten largest customers, most of which are international oil companies and a
number of which are groups of affiliated entities, comprised approximately 44%
of consolidated sales in 1997, 1996 and 1995. The largest single customer,
including its affiliated entities, in each year accounted for 10% of sales in
1997, 1996 and 1995.

NOTE 2 - ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
The Lubrizol Corporation and its subsidiaries where ownership is 50% or greater
and the company has effective controlling financial interest. For
nonconsolidated companies (affiliates), the equity method of accounting is used
when ownership, unless temporary, exceeds 20% and when the company has the
ability to exercise significant influence over the policies of the investee.

ESTIMATES - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions pending completion of related events. These estimates and
assumptions affect the amounts reported at the date of the financial statements
for assets, liabilities, revenues and expenses and the disclosure of
contingencies. Actual results could differ from those estimates.

CASH EQUIVALENTS - The company generally invests its excess cash in short-term
investments with various banks and financial institutions. Short-term
investments are cash equivalents, as they are part of the cash management
activities of the company and are comprised primarily of investments having
maturities of three months or less when purchased.

INVENTORIES - Inventories are stated at cost which is not in excess of market.
Cost of inventories is determined by the first-in, first-out (FIFO) method
except for chemical inventories within the United States, which use the last-in,
first-out (LIFO) method.

DEPRECIATION AND AMORTIZATION - Accelerated depreciation methods are used in
computing depreciation on certain machinery and equipment which comprise
approximately 25% of the depreciable assets. The remaining assets are
depreciated using the straight-line method. The estimated useful lives are 10 to
40 years for buildings and land improvements and range from 3 to 20 years for
machinery and equipment. Amortization of intangible and other assets is on a
straight-line method over periods ranging from 5 to 25 years.

RESEARCH, TESTING AND DEVELOPMENT - Research, testing and development costs are
expensed as incurred. Research and development expenses, excluding testing, were
$88.4 million, $93.4 million and $104.9 million in 1997, 1996 and 1995,
respectively.

FOREIGN CURRENCY TRANSLATION - The assets and liabilities of non-U.S.
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Operating results are translated at weighted average
exchange rates in effect during the period. Net unrealized translation gains
(losses) are recorded as a component of other comprehensive income.

PER SHARE AMOUNTS - Net income per share is computed by dividing net income by
average common shares outstanding during the period. Net income per share,
diluted, includes the dilution effect resulting from outstanding stock options
and stock awards. In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Standards (SFAS) 128 - Earnings Per Share,
which became effective for the company's December 31, 1997, financial
statements. Per share amounts determined in accordance with SFAS 128, which did
not significantly affect previously reported amounts, are computed as follows:

27
<PAGE> 13
THE LUBRIZOL CORPORATION

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------

<S> <C> <C> <C>
Numerator:
Net income available to
common shareholders .......... $154,869 $169,802 $151,615
======== ======== ========
Denominator:
Weighted average common
shares outstanding ........... 57,843 60,694 63,840
Dilutive effect of stock
options and awards .......... 386 109 221
-------- -------- --------
Denominator for net income
per share, diluted ............. 58,229 60,803 64,061
======== ======== ========

Net income per share .............. $ 2.68 $ 2.80 $ 2.37
======== ======== ========

Net income per share,
diluted ........................ $ 2.66 $ 2.79 $ 2.37
======== ======== ========
</TABLE>

SHARE REPURCHASES - The company has an active program to repurchase its common
shares and utilizes the par value method of accounting for its treasury shares.
Under this method, the cost to reacquire shares in excess of paid-in capital
related to those shares is charged against retained earnings.

DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - Under
currently effective accounting standards, the company operates in a single
reportable segment. Information regarding the industry in which the company
operates, its customers and geographic areas is presented in Notes 1 and 14. In
June 1997, the FASB issued SFAS 131 - Disclosures About Segments of an
Enterprise and Related Information, which becomes effective for the company in
1998. SFAS 131 redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a company's
operating segments. The company has not yet completed its analysis of SFAS 131
and accordingly has not yet determined what effect, if any, it may have on
future financial statement disclosures.

NOTE 3 - INVENTORIES

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Finished products ............................ $ 94,010 $ 88,176
Products in process .......................... 67,246 77,910
Raw materials ................................ 81,079 66,590
Supplies and engine test parts ............... 17,783 19,229
-------- --------
$260,118 $251,905
======== ========
</TABLE>

Inventories on the LIFO method were 29% and 25% of consolidated inventories at
December 31, 1997 and 1996, respectively. The current replacement cost of these
inventories exceeded the LIFO cost at December 31, 1997 and 1996, by $43.7
million and $49.1 million, respectively.

NOTE 4 - INVESTMENTS IN
NONCONSOLIDATED COMPANIES

<TABLE>
<CAPTION>
1997 1996
------- -------

<S> <C> <C>
Investments carried at equity ................ $25,039 $22,551
Investments available-for-sale ............... 6,234
Investments carried at cost .................. 865 1,036
------- -------
$25,904 $29,821
======= =======
</TABLE>

At December 31, 1996, the company held an investment in securities of a publicly
traded company which was classified as available-for-sale and whose market value
approximated its costs. In early 1997, these securities were sold, and the
realized pretax gain on sale of these investments of $3.4 million was included
in other income.

NOTE 5 - SHORT-TERM AND LONG-TERM DEBT

<TABLE>
<CAPTION>
1997 1996
--------- ---------

<S> <C> <C>
Long-term debt consists of:
7.25% debentures, due 2025 ................... $ 100,000 $ 100,000
Debt supported by long-term
banking arrangements:
Commercial paper at weighted
average rates of 6.4% ................... 35,000
6.5% Marine terminal refunding
revenue bonds, due 2000 ................. 18,375 18,375
Term loans:
Dollar denominated, at 5.0%,
due 2000 ................................ 5,544
Yen denominated, at 2.0% to 5.8%,
due 1998 - 2002 ......................... 19,450 26,232
Deutsche mark denominated,
at 4.9% due 1999 ........................ 14,460 16,884
Other 4.3%, due 2004 - 2008 .................. 366 403
--------- ---------
193,195 161,894
Less current portion ......................... (11,030) (4,266)
--------- ---------
$ 182,165 $ 157,628
========= =========

Short-term debt consists of:
Commercial paper at weighted
average rates of 6.4% and 6.0% ............ $ 18,900 $ 34,200
Other short-term debt at weighted
average rates of 1.4% and 3.3% ............ 8,165 2,405
Current portion of long-term debt ............ 11,030 4,266
--------- ---------
$ 38,095 $ 40,871
========= =========
</TABLE>

The company publicly issued debentures in June 1995 in the aggregate principal
amount of $100 million. These debentures are unsecured, senior obligations of
the company that mature on June 15, 2025, and bear interest at an annualized
rate of 7.25% payable semi-annually on June 15 and December 15 of each year. The
debentures are not redeemable prior to maturity and are not subject to any
sinking fund requirements.

28
<PAGE> 14
THE LUBRIZOL CORPORATION

Commercial paper debt is due within one year. The company has credit facilities,
which were unused at December 31, 1997, aggregating $95 million, including $75
million in committed revolving credit agreements which would permit the company
to borrow at or below the U.S. prime rate. These facilities permit the company
to refinance for a period beyond one year the amount due under the Marine
Terminal Refunding Revenue Bonds, whose bondholders have the right to put the
bonds back to the company, and up to $56.6 million of commercial paper
borrowings. Accordingly, the company classified the portion of commercial paper
borrowings expected to remain outstanding throughout the following year as
long-term at each balance sheet date.

Amounts due on long-term debt are $11.0 million in 1998, $19.0 million in 1999,
$26.2 million in 2000, $1.4 million in 2001, $35.4 million in 2002 and $100.2
million thereafter.

The company has an interest rate swap agreement that effectively converts
variable rate interest payable on $18.4 million of Marine Terminal Refunding
Revenue Bonds due July 1, 2000, to a fixed rate of 6.5%. The company also has
interest rate swap agreements, which expire in March 2005, that exchange
variable rate interest obligations on a $50 million notional principal amount
for a fixed payment obligation of 7.6% (see Note 15).

Interest paid, net of amounts capitalized, amounted to $10.9 million, $10.4
million and $9.8 million during 1997, 1996 and 1995, respectively. The company
capitalizes interest on qualifying capital projects. The amount of interest
capitalized during 1997, 1996 and 1995 amounted to $2.1 million, $3.0 million
and $4.3 million, respectively.

NOTE 6 - OTHER BALANCE SHEET INFORMATION

<TABLE>
<CAPTION>
Receivables: 1997 1996
-------- --------

<S> <C> <C>
Customers ............................ $243,232 $213,308
Affiliates ........................... 7,727 6,582
Other ................................ 22,546 18,511
-------- --------
$273,505 $238,401
======== ========
</TABLE>

Receivables are net of allowance for doubtful accounts of $1.4 million in 1997
and $1.2 million in 1996.

<TABLE>
<CAPTION>
Property and Equipment: 1997 1996
---------- ----------

<S> <C> <C>
Land and improvements .................... $ 102,831 $ 105,071
Buildings and improvements ............... 270,237 274,420
Machinery and equipment .................. 1,059,575 1,081,850
Construction in progress ................. 81,181 67,846
---------- ----------
$1,513,824 $1,529,187
========== ==========
</TABLE>

In 1996, the company began a multi-year project to implement a new
enterprise-wide management information system to support its global information
processing and access needs. Costs were expensed as incurred during the
assessment and preliminary project design stages of this project. Direct
internal and external costs for qualifying activities during the application
development and implementation stages of this project are capitalized as
property and equipment. Capitalized costs relating to this project were $26.0
million in 1997 and $2.3 million in 1996. Capitalized costs will be amortized
over the estimated useful life of seven years beginning when each respective
site installation is complete and ready for its intended use.

Depreciation and amortization of property and equipment was $82.7 million in
1997, $78.7 million in 1996 and $71.8 million in 1995.

<TABLE>
<CAPTION>
Other Assets: 1997 1996
------- -------

<S> <C> <C>
Goodwill and other intangibles ............... $58,066 $46,585
Deferred income taxes ........................ 2,061 4,149
Other ........................................ 26,508 29,147
------- -------
$86,635 $79,881
======= =======
</TABLE>

During 1997, 1996 and 1995, the company made cash acquisitions of, or
investments in, several companies. These acquisitions were recorded under the
purchase method of accounting, including recognizing goodwill for amounts paid
in excess of the fair value of identifiable assets acquired. The acquired
companies have not had a material effect on the company's consolidated results
of operations during 1997, 1996 or 1995. Accumulated amortization of intangible
and other assets was $16.3 million and $12.2 million at December 31, 1997 and
1996, respectively.

<TABLE>
<CAPTION>
Income Taxes and Other Current Liabilities: 1997 1996
------- -------

<S> <C> <C>
Employee compensation ...................... $34,757 $35,463
Income taxes ............................... 25,509 12,914
Taxes other than income .................... 12,105 10,893
Other ...................................... 24,117 27,293
------- -------
$96,488 $86,563
======= =======

<CAPTION>
Noncurrent Liabilities: 1997 1996
------- -------

<S> <C> <C>
Employee benefits .......................... $27,867 $33,239
Other ...................................... 15,011 14,045
------- -------
$42,878 $47,284
======= =======
</TABLE>

29
<PAGE> 15
THE LUBRIZOL CORPORATION

NOTE 7 - SHAREHOLDERS' EQUITY
The company has 147 million authorized shares consisting of 2 million shares of
serial preferred stock, 25 million shares of serial preference shares and 120
million common shares, each of which is without par value. Common shares
outstanding exclude common shares held in treasury of 29,229,000 and 27,673,218
at December 31, 1997 and 1996, respectively.

The company has a shareholder rights plan under which one right to buy one-half
common share has been distributed for each common share held. The rights may
become exercisable under certain circumstances involving actual or potential
acquisitions of 20% or more of the common shares by a person or affiliated
persons who acquire such stock without complying with the requirements of the
company's articles of incorporation. The rights would entitle shareholders,
other than such person or affiliated persons, to purchase common shares of the
company or of certain acquiring persons at 50% of then current market value. At
the option of the directors, the rights may be exchanged for common shares, and
may be redeemed in cash, securities or other consideration. The rights will
expire in 2007 unless earlier redeemed.

In June 1997, FASB issued SFAS 130 - Reporting Comprehensive Income, which
becomes effective in 1998; however, earlier application is permitted. SFAS 130
requires presentation of comprehensive income (net income plus all other changes
in net assets from non owner sources) and its components in the financial
statements. The company elected to early adopt SFAS 130 and has changed the
format of its consolidated statements of shareholders' equity to present
comprehensive income.

Components of other comprehensive income (loss) consists of the following:

1997 1996 1995
-------- -------- --------

<S> <C> <C> <C>
Foreign currency translation
adjustments .................... $(36,941) $ (6,663) $ 12,957
Change in unrealized gains
on marketable securities ....... (35,645)
Income tax benefit ................ 4 213 12,223
-------- -------- --------
Other comprehensive
income (loss) .................. $(36,937) $ (6,450) $(10,465)
======== ======== ========
</TABLE>

The change in unrealized gain on marketable securities during 1995 includes
reclassification adjustments for $38.5 million of gains realized in income from
the sale of the securities. The 1995 income tax benefit includes a benefit of
$12.5 million related to the change in unrealized gain (including $13.5 million
for reclassification of realized gains). Accumulated other comprehensive income
or loss shown in the consolidated statements of shareholders' equity at December
31, 1997, 1996 and 1995 is solely comprised of the accumulated foreign currency
translation adjustment, net of tax effects.

NOTE 8 - GAIN ON INVESTMENTS
In 1996, the company sold its investments in Mycogen Corporation and
Agrigenetics, Inc., for cash of $126.2 million. The company also sold certain
rights to its SVO oilseed technology for $8.0 million, of which $2.0 million was
collected in 1996, $2.5 million collected in 1997 and $3.5 million collected in
January 1998. Also, in September 1996, the company sold substantially all the
remaining assets of SVO for cash of $20.8 million. These transactions resulted
in pretax gains of $57.3 million. Losses on other investment activity reduced
the gain on investments to $53.3 million. On an after-tax basis, these gains
contributed $.57 to 1996 net income per share.

During the first half of 1995, the company sold all of its remaining shares of
Genentech Inc. common stock and received proceeds of $40.2 million, generating
gross realized gains of $38.5 million. On an after-tax basis these gains
contributed $.39 to 1995 net income per share. The company determined the gross
realized gains using the average cost method.

The investment in Genentech was reported at fair value in the company's balance
sheets, until sold, as investments available-for-sale, with changes in
unrealized gains recorded as a component of other comprehensive income in
shareholders' equity.

NOTE 9 - OTHER INCOME
Other income - net consists of the following:

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------

<S> <C> <C> <C>
Equity earnings (losses) of
nonconsolidated
companies ........................ $ 4,804 $ 4,350 $(2,081)
Gain on investee
stock issuance ................... 4,530
Other - net ......................... 300 1,662 4,701
------- ------- -------
$ 5,104 $ 6,012 $ 7,150
======= ======= =======
</TABLE>

Other income in 1995 reflects equity losses from Mycogen of $5.4 million and
preferred dividend income of $1.5 million. Gains on investee stock issuance
represents a noncash gain, from the increase in the value of the company's
ownership interest in the net assets of Mycogen, due to Mycogen's issuance of
new shares at a price in excess of the company's carrying value per share.

30
<PAGE> 16
THE LUBRIZOL CORPORATION

NOTE 10 - INCOME TAXES
The provision for income taxes is based upon income before tax for financial
reporting purposes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the tax bases
of assets and liabilities and their carrying values for financial reporting
purposes. In estimating future tax consequences, the company considers
anticipated future events, except changes in tax laws or rates, which are
recognized when enacted.

Income before income taxes consists of the following:

1997 1996 1995
-------- -------- --------

United States ............... $154,589 $196,390 $136,801
Foreign ..................... 76,558 54,218 88,773
-------- -------- --------
Total ....................... $231,147 $250,608 $225,574
======== ======== ========

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------

<S> <C> <C> <C>
Current:
United States .............. $ 35,556 $ 39,688 $ 28,294
Foreign .................... 32,137 18,044 28,766
-------- -------- --------
67,693 57,732 57,060
-------- -------- --------
Deferred:
United States .............. 8,784 16,842 8,334
Foreign .................... (199) 6,232 8,565
-------- -------- --------
8,585 23,074 16,899
-------- -------- --------
Total ...................... $ 76,278 $ 80,806 $ 73,959
======== ======== ========
</TABLE>

Foreign taxes include withholding taxes. The United States tax provision
includes the U.S. tax on foreign income distributed to the company. The company
increased its 1997 tax provision by approximately $3.5 million primarily to
reflect a legislated increase in the statutory tax rate applicable to its
earnings in France, where the company has significant operations. The
differences between the provision for income taxes at the U.S. statutory rate
and the tax shown in the consolidated statements of income are summarized as
follows:

1997 1996 1995
-------- -------- --------

<S> <C> <C> <C>
Tax at statutory rate of 35% ...... $ 80,901 $ 87,713 $ 78,951
Foreign sales
corporation earnings ........... (4,704) (3,477) (4,389)
Equity income ..................... (2,775) (1,324) (856)
Other - net ....................... 2,856 (2,106) 253
-------- -------- --------
Provision for income taxes ........ $ 76,278 $ 80,806 $ 73,959
======== ======== ========
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are
as follows:

<TABLE>
<CAPTION>
1997 1996
--------- ---------

<S> <C> <C>
Deferred tax assets:
Accrued compensation and benefits ........... $ 43,251 $ 39,522
Intercompany profit in inventory ............ 13,223 13,107
Net operating losses carried forward ........ 15,217 13,131
Other ....................................... 4,045 4,949
--------- ---------
Total gross deferred tax assets ................ 75,736 70,709
Less valuation allowance ....................... (4,179) (4,239)
--------- ---------
Net deferred tax assets ........................ 71,557 66,470
Deferred tax liabilities:
Depreciation and other
basis differences ......................... 90,151 75,869
Undistributed foreign equity income ......... 3,626 4,672
Inventory basis differences ................. 2,588 3,920
Other ....................................... 4,657 3,804
--------- ---------
Total gross deferred tax liabilities ........... 101,022 88,265
--------- ---------
Net deferred tax assets (liabilities) .......... $ (29,465) $ (21,795)
========= =========
</TABLE>

At December 31, 1997, certain foreign subsidiaries have net operating loss
carryforwards of $40.6 million for income tax purposes, of which $8.8 million
expires in years 2000 through 2004 and $31.8 million has no expiration. After
evaluating tax planning strategies and historical and projected profitability, a
valuation allowance has been recognized to reduce the deferred tax assets
related to those carryforwards to the amount expected to be realized. The net
change in the total valuation allowance for the years ended December 31, 1997,
1996 and 1995, was a decrease of $.1 million, an increase of $.7 million and an
increase of $3.6 million, respectively.

U.S. income taxes or foreign withholding taxes are not provided on undistributed
earnings of foreign subsidiaries, which are considered to be indefinitely
reinvested in the operations of such subsidiaries. The amount of such earnings
was approximately $376.8 million at December 31, 1997. Determination of the net
amount of unrecognized U.S. income tax with respect to these earnings is not
practicable.

Income taxes paid during 1997, 1996 and 1995 amounted to $53.0 million, $55.0
million and $56.9 million, respectively.

NOTE 11 - PENSION AND PROFIT SHARING PLANS
The company has noncontributory defined benefit pension plans covering most
employees. Pension benefits under these plans are based on years of service and
the employee's compensation. The company's funding policy in the United States
is to contribute amounts to satisfy the Internal Revenue Service funding
standards and elsewhere to fund amounts in accordance with local regulations.
Several defined benefit plans are unfunded. Plan assets are invested principally
in marketable equity securities and fixed income instruments.

31
<PAGE> 17
THE LUBRIZOL CORPORATION

Net periodic pension cost of defined benefit plans consists of:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------

<S> <C> <C> <C>
Service cost - benefits earned
during period ................... $ 10,270 $ 11,097 $ 10,089
Interest cost on projected
benefit obligation .............. 17,704 17,690 17,804
Actual return on plan assets ....... (45,407) (33,585) (47,965)
Net amortization and deferral ...... 23,835 14,229 31,833
-------- -------- --------
Net periodic pension cost .......... $ 6,402 $ 9,431 $ 11,761
======== ======== ========
</TABLE>

The weighted average assumptions used at December 31 were:

1997 1996 1995
---- ---- ----

<S> <C> <C> <C>
Discount rate for determining
funded status ..................... 6.9% 7.5% 7.3%
Compensation increase ................ 4.0% 4.5% 4.8%
Return on plan assets ................ 8.8% 8.9% 8.8%
</TABLE>

The funded status of such defined benefit pension plans and the amounts
recognized in the consolidated balance sheets at December 31 are as follows:

<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
Assets Accum. Assets Accum.
Exceed Benefits Exceed Benefits
Accum. Exceed Accum. Exceed
Benefits Assets Benefits Assets
--------- --------- --------- ---------

<S> <C> <C> <C> <C>
Fair value of
plan assets ......... $ 291,885 $ 6,245 $ 264,949 $ 6,431
Projected benefit
obligation .......... (228,764) (25,497) (217,173) (31,448)
--------- --------- --------- ---------
Plan assets in
excess of
(less than)
projected benefit
obligation .......... 63,121 (19,252) 47,776 (25,017)
Unrecognized
net transition
obligation
(asset) ............. (10,093) 3,242 (11,833) 3,882
Unrecognized
net loss (gain) ..... (45,239) 2,410 (28,162) 845
Unrecognized prior
service cost ........ 9,022 1,792 10,091 2,689
Minimum liability
adjustment .......... (54) (2,005) (1,699)
--------- --------- --------- ---------
Accrued pension
asset (liability) ... $ 16,757 $ (13,813) $ 17,872 $ (19,300)
========= ========= ========= =========

Accumulated
benefit
obligation .......... $ 171,388 $ 19,104 $ 155,071 $ 24,702
========= ========= ========= =========

Vested benefits ........ $ 164,411 $ 15,177 $ 149,318 $ 20,442
========= ========= ========= =========
</TABLE>

The company also has defined contribution retirement plans, principally
involving profit sharing plans and a 401(k) savings plan, covering most
employees in the United States and at certain non-U.S. subsidiaries. Expense for
all defined contribution plans was $9.9 million in 1997, $10.2 million in 1996
and $8.9 million in 1995.

NOTE 12 - POSTRETIREMENT HEALTH CARE
The company provides certain postretirement benefits other than pensions,
primarily health care and life insurance plans, for retired employees.
Currently, substantially all of the company's full-time employees in the U.S.
become eligible for these benefits after attaining specified years of service
and age 55 at retirement. Participants contribute a portion of the cost of such
benefits. The company's postretirement health care plans are not funded.

The status of the U.S. postretirement health care and life insurance plans at
December 31 is as follows:

1997 1996
-------- --------

<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees ........................................... $ 29,709 $ 29,794
Fully eligible active plan participants ............ 12,658 14,385
Other active plan participants ..................... 16,319 19,776
-------- --------
Total accumulated postretirement
benefit obligation .............................. 58,686 63,955
Unrecognized net gain .............................. 9,816 652
Unrecognized net reduction in
prior service costs ............................. 33,838 37,056
-------- --------
Accrued postretirement
health care costs ............................... $102,340 $101,663
======== ========
</TABLE>

Unrecognized net reduction in prior service costs results from plan amendments.
These reductions in prior service costs do not immediately reduce the accrued
postretirement liability, but are amortized as a reduction of expense over the
participant's average future service period to full eligibility (remaining
amortization period at December 31, 1997, of approximately 11 years). The
company revised its assumed ultimate health care cost trend rate from 6% to 5%
during 1997. This revision reduced the accumulated postretirement benefit
obligation at December 31, 1997, by $8.9 million. This gain will be amortized
beginning in 1998 over the average remaining service period of participants.

32
<PAGE> 18
THE LUBRIZOL CORPORATION

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation at December 31, 1997, was 8.25% (9.00% at
December 31, 1996), with subsequent annual decrements of .75% to an ultimate
trend rate of 5%. A one-percentage-point increase in the assumed health care
cost trend rate for each year would increase the accumulated postretirement
benefit obligation by approximately 15% and the aggregate of the service and
interest cost components of net postretirement health care cost by approximately
19%. Discount rates of 7.25% and 7.50%, respectively, were used in determining
the accumulated postretirement benefit obligations at December 31, 1997 and
1996.

Net postretirement benefit cost consists of the following components for the
company's U.S. plans:

1997 1996 1995
------- ------- -------

<S> <C> <C> <C>
Service cost - benefits
earned during the year ......... $ 1,350 $ 1,501 $ 1,361
Interest cost on accumulated
postretirement benefit
obligation ..................... 4,800 4,817 6,066
Amortization of
unrecognized net gains ......... (3,218) (3,218) (1,766)
------- ------- -------
Net postretirement
health care cost ............... $ 2,932 $ 3,100 $ 5,661
======= ======= =======
</TABLE>

The company also provides postretirement health care benefits at several of its
international locations. Accumulated benefits and net postretirement health care
costs for these locations were not significant.

NOTE 13 - LEASES
The company has commitments under operating leases primarily for office space,
terminal facilities, land, railroad tank cars and various computer and office
equipment. Rental expense was $13.8 million in 1997, $16.9 million in 1996 and
$19.5 million in 1995. Future minimum rental commitments under operating leases
having initial or remaining noncancelable lease terms exceeding one year are
$14.5 million in 1998, $11.1 million in 1999, $9.4 million in 2000, $5.8 million
in 2001, $5.3 million in 2002 and $20.8 million thereafter.

NOTE 14 - OPERATIONS IN GEOGRAPHIC AREAS
Financial data by geographic area, based on the location of the subsidiary which
shipped and billed the product, is as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------

<S> <C> <C> <C>
Revenues from customers:

United States ............... $ 735,315 $ 711,781 $ 722,879
Europe ...................... 462,356 480,250 533,920
Far East .................... 275,407 229,659 225,773
Other ....................... 200,704 175,872 181,022
----------- ----------- -----------
1,673,782 1,597,562 1,663,594

Intercompany transfers:
United States ............... 343,120 318,492 319,671
Europe ...................... 34,214 26,364 37,556
Far East .................... 206 182 301
Other ....................... 21,678 22,507 30,905
----------- ----------- -----------
399,218 367,545 388,433
----------- ----------- -----------

Gross revenues ................. 2,073,000 1,965,107 2,052,027
Less: Intercompany transfers ... (399,218) (367,545) (388,433)
----------- ----------- -----------
Consolidated revenues .......... $ 1,673,782 $ 1,597,562 $ 1,663,594
=========== =========== ===========

Operating profit:
United States ............... $ 195,177 $ 162,090 $ 128,909
Europe ...................... 23,918 27,746 51,172
Far East .................... 12,679 9,078 9,731
Other ....................... 18,243 13,178 17,476
Eliminations ................ 1,241 (671) (2,555)
----------- ----------- -----------
251,258 211,421 204,733

General corporate expenses ..... (19,000) (16,864) (19,156)
Gain on investments ............ 53,280 38,459
Other income - net ............. 5,104 6,012 7,150
Interest - net ................. (6,215) (3,241) (5,612)
----------- ----------- -----------
Income before income taxes ..... $ 231,147 $ 250,608 $ 225,574
=========== =========== ===========

Identifiable assets:
United States ............... $ 841,547 $ 796,154 $ 804,045
Europe ...................... 374,234 400,639 395,053
Far East .................... 151,826 151,015 154,992
Other ....................... 101,141 91,768 82,708
Eliminations ................ (111,462) (114,546) (82,310)
----------- ----------- -----------
1,357,286 1,325,030 1,354,488

Corporate assets ............... 105,006 77,085 137,532
----------- ----------- -----------
Total assets ................... $ 1,462,292 $ 1,402,115 $ 1,492,020
=========== =========== ===========
</TABLE>

Notes:

A. Intercompany transfers are made at prices comparable to normal unaffiliated
customer sales for similar products.
B. Affiliated companies are not allocated to geographic segments.
C. Corporate assets consist of short-term investments and investments in
affiliated companies.

33
<PAGE> 19
THE LUBRIZOL CORPORATION

Export sales from the United States to customers, primarily in Asia and Latin
America, were $132 million, $144 million and $138 million during 1997, 1996 and
1995, respectively.

Net assets of non-U.S. subsidiaries at December 31, 1997 and 1996, were $488
million and $487 million, respectively. Net income of these subsidiaries was $43
million in 1997, $29 million in 1996 and $52 million in 1995; and dividends
received from the subsidiaries were $7 million, $18 million and $7 million,
respectively.

NOTE 15 - FINANCIAL INSTRUMENTS
The company has various financial instruments, including cash and short-term
investments, investments in nonconsolidated companies, foreign currency forward
contracts, interest rate swaps and short- and long-term debt. The company has
determined the estimated fair value of these financial instruments by using
available market information and generally accepted valuation methodologies. The
use of different market assumptions or estimation methodologies could have a
material effect on the estimated fair value amounts. The estimated fair value of
the company's debt instruments at December 31, 1997, approximates $227.5 million
compared with the carrying value of $220.3 million. The company believes the
carrying values of its other financial instruments approximate their fair
values, except for certain interest rate swap agreements discussed below. The
company uses derivative financial instruments only to manage well-defined
foreign currency and interest rate risks. The company does not use derivative
financial instruments for trading purposes.

The company is exposed to the effect of changes in foreign currency rates on its
earnings and cash flow as a result of doing business internationally. In
addition to working capital management, pricing and sourcing, the company
selectively uses foreign currency forward contracts to lessen the potential
effect of currency changes. Such contracts are generally in connection with
transactions with maturities of less than one year. The maximum amount of
foreign currency forward contracts outstanding at any one time was $58.4 million
in 1997, $41.2 million in 1996 and $16.6 million in 1995. At December 31, 1997,
the company had short-term forward contracts to sell currencies at various dates
during 1998 for $38.9 million. Realized and unrealized gains or losses on these
contracts are recorded in the statement of income, or in the case of
transactions designated as hedges of net foreign investments, in the foreign
currency translation adjustment account in other comprehensive income.
Additionally, foreign currency forward contract gains and losses on certain
future transactions may be deferred until the future transaction is recorded.
Deferred currency gains on foreign exchange contracts at December 31, 1997, were
not significant.

The company is exposed to market risk from changes in interest rates. The
company's policy is to manage interest rate cost using a mix of fixed and
variable rate debt. To manage this mix in a cost- efficient manner, the company
may enter into interest rate swaps, in which the company agrees to exchange, at
specified intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed upon notional principal amount. The company
has entered into interest rate swap agreements to convert variable rate debt to
fixed rates (see Note 5). Interest payments receivable and payable under the
terms of the interest rate swap agreements are accrued over the period to which
the payment relates and the net difference is treated as an adjustment of
interest expense related to the underlying liability. Changes in the underlying
market value of the remaining swap payments are recognized in income when the
underlying liability being hedged is extinguished or partially extinguished to a
level less than the notional amount of the interest rate swaps. Consequently,
market value losses of $1.0 million and $1.1 million were recognized in 1997 and
1996, respectively. The company would have paid approximately $6.3 million,
including accrued interest of $.8 million, if it had terminated these interest
rate swap agreements at December 31, 1997.

NOTE 16 - STOCK COMPENSATION PLANS
The 1991 Stock Incentive Plan provides for granting of restricted and
unrestricted shares and options to buy common shares intended either to qualify
as "incentive stock options" under the Internal Revenue Code or "non-statutory
stock options" not intended to so qualify, 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. Under the 1991 Plan, options generally become exercisable 50%
one year after grant, 75% after two years, 100% after three years, and expire up
to ten years after grant. "Reload options," which are options to purchase
additional shares if a grantee uses already-owned shares to pay for an option
exercise, are granted automatically under the 1991 Plan and may be granted at
the discretion of the administering committee under the 1985 Employee Stock
Option Plan. The 1991 Plan generally supersedes the 1985 Plan, although options
outstanding under the 1985 Plan remain exercisable until the expiration dates.
The option price under both plans is the fair market value of the shares on the
date of grant. Both plans permit or permitted the granting of stock appreciation
rights in connection with the grant of options. In addition, the 1991 Plan
provides to each outside director of the company an automatic annual grant of an
option to purchase 2,000 common shares, with terms generally comparable to
employee stock options.

Under the 1991 Stock Incentive Plan, the company granted to certain executive
officers 65,000 performance share stock awards in March 1997, all of which are
outstanding at December 31, 1997. Common shares equal to the number of
performance share stock awards granted will be issued if the market price of the
company's common stock reaches $45.00 per common share for ten consecutive
trading days or after six years from date of grant, whichever occurs first. The
mar-
34
<PAGE> 20
THE LUBRIZOL CORPORATION

ket value of the company's common shares at date of grant of the performance
hare stock awards was $33.75 per share. The company accrues compensation
xpense related to performance share stock awards ratably over the projected
esting period. Compensation costs accrued for performance share stock awards
as $.5 million in 1997.

FAS 123 encourages the fair-value based method of accounting for stock
ompensation plans under which the value of stock-based compensation is
stimated at the date of grant using valuation formulas, but permits the
ontinuance of intrinsic-value accounting. The company accounts for its stock
compensation plans using the intrinsic-value accounting method (measured as the
difference between the exercise price and the market value of the stock at date
of grant). If the fair value method to measure compensation cost for the
company's stock compensation plans had been used, the company's net income would
have been reduced by $2.6 million in 1997, $2.0 million in 1996 and $1.7 million
in 1995 with a corresponding reduction in net income per share of $.05 in 1997
and $.03 for both 1996 and 1995.

Disclosures under the fair value method are estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for grants
of stock options in the following years:

1997 1996 1995
---- ---- ----

<S> <C> <C> <C>
1985 Plan:
Risk-free interest rate ........... 5.7% 6.6% 7.1%
Dividend yield .................... 2.7% 3.4% 3.4%
Volatility ........................ 20% 23% 23%
Expected life (years) ............. 3.1 3.7 8.6
1991 Plan:
Risk-free interest rate ........... 5.8% 6.3% 7.0%
Dividend yield .................... 2.7% 3.4% 3.4%
Volatility ........................ 22% 23% 23%
Expected life (years) ............. 9.9 8.8 8.2
</TABLE>

The fair value of the performance share stock awards granted in 1997 was $31.80
per share using the following assumptions: risk-free interest rate of 5.7%;
volatility of 20%; and expected life of three years. Dividends do not accumulate
on performance share stock awards.

Information regarding these option plans, excluding the performance share stock
awards, follows:

<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
--------- ------

<S> <C> <C>
Outstanding, January 1, 1997 ................... 3,248,113 $30.93
Granted ........................................ 417,561 35.07
Exercised ...................................... (361,179) 25.85
Forfeited ...................................... (92,338) 35.88
---------
Outstanding, December 31, 1997 ................. 3,212,157 $31.88
========= ======

Options exercisable,
December 31, 1997 ........................... 2,590,556 $31.67
========= ======

Weighted-average fair value of options
granted during the year ..................... $ 9.37
======
Outstanding, January 1, 1996 ................... 2,958,416 $30.70
Granted ........................................ 497,566 29.96
Exercised ...................................... (99,427) 18.25
Forfeited ...................................... (108,442) 31.86
---------
Outstanding, December 31, 1996 ................. 3,248,113 $30.93
========= ======

Options exercisable,
December 31, 1996 ........................... 2,574,762 $30.57
========= ======
Weighted-average fair value of options
granted during the year ..................... $ 8.05
======
Outstanding, January 1, 1995 ................... 2,583,721 $29.28

Granted ........................................ 528,210 35.12
Exercised ...................................... (148,887) 21.57
Forfeited ...................................... (4,628) 34.56
---------
Outstanding, December 31, 1995 ................. 2,958,416 $30.70
========= ======

Options exercisable,
December 31, 1995 ........................... 1,975,878 $28.77
========= ======

Weighted-average fair value of options
granted during the year ..................... $10.05
======
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1997:

Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
----------- ---------------- -------------- ----------- --------------

<S> <C> <C> <C> <C> <C>
$13 - $19 ................... 78,423 2.1 Years $16.66 78,423 $16.66
19 - 25 ................... 89,375 1.3 21.91 89,375 21.91
25 - 31 ................... 1,205,571 4.7 28.89 1,013,029 28.69
31 - 38 ................... 1,772,454 5.3 34.70 1,343,395 34.93
38 - 45 ................... 66,334 2.7 42.09 66,334 42.09
--------- ---------
3,212,157 4.8 $31.88 2,590,556 $31.67
========= === ====== ========= ======
</TABLE>

35
<PAGE> 21
THE LUBRIZOL CORPORATION

NOTE 17 - ASSET IMPAIRMENT AND SPECIAL CHARGE
In 1997, the company provided $9.4 million for the impairment of long-lived
assets. This included $6.3 million to reduce the carrying value of certain
computer equipment and software made obsolete prior to expiration of their
original estimated useful lives due to new systems being implemented. Also,
during the fourth quarter the company decided to utilize a toll processor,
beginning in 1998, rather than to produce an intermediate internally. This
decision resulted in the permanent impairment of a production unit, and a
provision of $3.1 million was recorded to reduce the asset carrying value to its
estimated fair value. Fair value was determined by estimating the present value
of future cash flows. These impairment losses are reflected in the consolidated
statements of income for the year ended December 31, 1997, as follows: cost of
sales - $4.4 million; research, testing and development expenses - $.9 million;
selling and administrative expenses - $1.8 million and other income (net) - $2.3
million.

During the fourth quarter of 1995, the company recorded a provision of $9.5
million for the write-down of assets to their fair value. This charge was
primarily related to an intermediate processing unit that became permanently
impaired due to product formulation changes caused by a new industry-wide
specification. This charge, originally presented as a separate line on the 1995
consolidated statement of income, has been reclassified to cost of sales, in
order to be consistent with the form of presentation used for the year ended
December 31, 1997.

In 1993, the company recorded an $86.3 million special charge related to its
manufacturing rationalization and organizational realignment initiatives. It was
originally estimated that these initiatives would take approximately three years
to fully implement and would reduce the number of the company's production units
by up to one-third and the number of employees by approximately 5%. Originally,
30% of the special charge was for employee reductions; 55% was for asset
write-downs primarily related to manufacturing assets and Agribusiness
investments; and 15% was for tank cleaning and dismantling, lease exit costs and
other transitional costs.

The company substantially completed its planned activities under the special
charge initiatives by December 31, 1996. The total number of production units
was reduced by nearly 30%, and comparable worldwide employment was reduced by
approximately 9%, or over 400 employees, through early retirements, separations
and attrition. Although there was no change in the aggregate amount of the
special charge, certain components were revised as actual costs to implement
became known. Approximately 45% of the special charge related to employee
separations; 40% to asset write-downs and 15% to other areas. Costs for employee
reductions were greater than originally estimated due to the greater number of
employee separations. Asset write-offs decreased due to lower than originally
estimated net book values of the assets removed from service. Cash outlays for
the special charge were approximately $50 million, including $4 million in 1997,
$9 million in 1996 and $14 million in 1995.

NOTE 18 - LITIGATION
The company has filed claims against Exxon Corporation and/or its affiliates
relating to various commercial matters, including alleged infringements by Exxon
of certain of the company's patents. These suits are pending in the United
States (in Ohio), Canada and the United Kingdom.

The company has prevailed in a case brought in Canada against Exxon's Canadian
affiliate, Imperial Oil, Ltd., for infringement of the company's patent
pertaining to dispersants, the largest additive component used in motor oils. A
1990 trial court verdict in favor of the company regarding the issue of
liability was upheld by the Federal Court of Appeals of Canada in December 1992,
and in October 1993, the Supreme Court of Canada dismissed Imperial Oil's appeal
of the Court of Appeals' decision. The case has been returned to the trial court
for an assessment of compensation damages, but no date has been set for a
determination of such damages. In October 1994, the trial court judge determined
that Imperial Oil had violated an earlier injunction for the manufacture or sale
of the dispersant which is the subject of this case. The determination of
penalty damages, if any, on account of this violation will be made after the
compensation damages for patent infringement have been determined by the court.

In November 1996, a patent trial court in London declared a Lubrizol United
Kingdom patent invalid, which patent is the subject of litigation brought by the
company against Exxon in that country. The company is appealing this decision,
which appeal is expected to be heard in March 1998. Although the trial court
decision does not involve any damage payments, the court awarded Exxon its
recoverable legal costs in the case, as is customary under U.K. practice. Exxon
has filed with the court a request for legal costs of approximately $12 million.
The determination of which of those costs may be recoverable will be subject to
a separate proceeding. The company has obtained a stay of this separate
proceeding pending the outcome of the appeal of the trial court decision. As a
court-ordered condition to obtain the stay, the company made a $3.0 million
contingent payment to Exxon in July 1997. This amount was fully expensed in
1997. Management believes that the November 1996 trial court decision will not
be upheld in its present form on appeal, in which case the recoverable legal
costs would be reduced or eliminated, and amounts paid contingently by the
company could be refunded in whole or in part.

A reasonable estimation of the company's potential recovery relating to the
Exxon litigation referenced above can not be made at this time, and no recovery
amounts have been recorded in the company's financial statements.

36
<PAGE> 22
THE LUBRIZOL CORPORATION

QUARTERLY FINANCIAL DATA (UNAUDITED)

Three Months Ended
- ---------------------------------------------------------------------------------------------------------------------------

March 31 June 30 Sept. 30 Dec. 31
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars Except Per Share Data)
<S> <C> <C> <C> <C>
1997

Net sales ....................................... $387,749 $432,556 $426,824 $422,122
Gross profit .................................... 129,642 149,543 136,540 129,924
Net income ...................................... 38,861 46,900 38,652 30,456
Net income per share ............................ $.66 $.81 $.67 $.53
Net income per share - diluted .................. $.66 $.80 $.66 $.53

1996

Net sales ....................................... $405,412 $420,531 $392,114 $374,820
Gross profit .................................... 131,817 132,007 124,931 120,728
Gain on investments (net of tax) ................ 34,632
Net income ...................................... 71,236 38,070 31,733 28,763
Net income per share ............................ $1.14 $.63 $.53 $.49
Net income per share - diluted .................. $1.14 $.62 $.53 $.48
</TABLE>

37
<PAGE> 23
THE LUBRIZOL CORPORATION

HISTORICAL SUMMARY

(In Millions, Except Shareholders, Employees and Per Share Data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
OPERATING RESULTS:

Revenues ........................................... $1,673.8 $1,597.6 $1,663.6
Total cost and expenses ............................ 1,441.5 1,403.0 1,478.0
Other income (charges) ............................. (1.1) 56.1 40.0

Net income ......................................... 154.9 169.8 151.6
- Before unusual items and accounting changes ... 154.9 135.2 132.8

Net income per share ............................... 2.68 2.80 2.37
- Before unusual items and accounting changes ... 2.68 2.23 2.08

FINANCIAL RATIOS:

Gross profit percentage ............................ 32.7 32.0 31.5
Percent of revenues:
Selling and administrative expenses ............. 10.2 9.9 9.8
Research and testing expenses ................... 8.8 10.1 10.8

Return on average shareholders' equity (%) ......... 19.0 20.4 18.0
- Before unusual items and accounting changes (%) 19.0 16.2 15.8
Debt to capitalization (%) ......................... 21.3 19.5 22.5
Current ratio ...................................... 2.5 2.6 2.4

OTHER INFORMATION:

Dividends declared per share ....................... $ 1.01 $ .97 $ .93
Average common shares outstanding .................. 57.8 60.7 63.8
Capital expenditures ............................... $ 100.7 $ 94.3 $ 189.3
Depreciation expense ............................... 82.7 78.7 71.8

At Year End:
Total assets .................................... $1,462.3 $1,402.1 $1,492.0
Total debt ...................................... 220.3 198.5 247.1
Total shareholders' equity ...................... 815.4 819.4 849.0
Shareholders' equity per share .................. 14.31 14.00 13.48
Common share price .............................. 36.88 31.00 27.75

Number of shareholders .......................... 5,661 5,764 6,304
Number of employees ............................. 4,291 4,358 4,601
</TABLE>

38
<PAGE> 24
THE LUBRIZOL CORPORATION

1994 1993 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,599.0 $1,525.5 $1,552.2 $1,476.3 $1,452.7 $1,227.9 $1,125.7 $1,022.3
1,397.0 1,362.2 1,390.5 1,308.7 1,288.4 1,109.7 1,009.9 916.4
49.4 (43.6) 15.4 10.5 106.9 19.5 69.9 23.3

175.6 45.6 124.6 123.7 190.0 94.0 140.0 81.3
148.8 113.5 124.6 123.7 133.5 94.0 88.4 73.7

2.67 .67 1.81 1.79 2.67 1.26 1.81 1.03
2.26 1.67 1.81 1.79 1.87 1.26 1.14 .94

32.7 32.0 31.7 32.4 30.3 29.2 29.9 29.6

10.0 10.4 11.7 11.7 10.9 10.8 10.5 10.8
10.3 11.2 10.0 9.8 8.5 9.2 9.6 9.1

22.5 5.9 15.4 16.2 27.2 14.2 21.8 13.6
19.0 14.6 15.4 16.2 18.0 14.2 13.7 12.0
16.8 8.7 5.6 7.9 8.3 8.5 8.4 10.1
2.5 2.5 2.9 2.7 2.7 3.0 3.1 3.0

$ .89 $ .85 $ .81 $ .77 $ .73 $ .69 $ .65 $ .61
65.7 67.7 69.0 69.3 71.1 74.7 77.4 79.1
$ 160.5 $ 127.9 $ 95.8 $ 82.4 $ 77.4 $ 64.7 $ 54.6 $ 42.0
63.9 59.6 58.4 54.6 54.0 48.7 46.6 47.2

$1,394.4 $1,182.6 $1,127.1 $1,171.7 $1,114.6 $ 960.2 $ 970.7 $ 939.4
167.9 69.6 48.4 67.8 66.6 61.2 60.8 69.7
832.0 732.2 819.4 794.5 736.2 663.3 664.3 621.6
12.83 11.00 11.97 11.51 10.61 8.96 8.74 7.98
33.88 34.13 27.25 28.25 23.63 18.75 17.75 16.44

6,494 6,616 6,822 6,767 6,692 7,370 7,782 8,335
4,520 4,613 4,609 5,299 5,169 5,030 4,781 4,817

</TABLE>

<PAGE> 1
EXHIBIT 21

THE LUBRIZOL CORPORATION

% OF STATE/COUNTRY
PRINCIPAL SUBSIDIARIES OWNERSHIP OF INCORPORATION

Lubrizol do Brasil Aditivos, Ltda. 100% Brazil
Lubrizol Canada Limited 100% Canada
Lubrizol de Chile Limitada 100% Chile
Lubrizol China, Inc. 100% Ohio
Lubrizol Coating Additives Company
G.m.b.H. 100% Germany
Lubrizol Espanola, S.A. 100% Spain
Lubrizol Europe B.V. 100% The Netherlands
Lubrizol France S.A. 99.995% France
Lubrizol Gesellschaft m.b.H. 100% Austria
Lubrizol G.m.b.H. 100% Germany
Lubrizol International Inc. 100% Cayman Islands
Lubrizol International Management
Corporation 100% Nevada
Lubrizol Italiana, S.p.A. 100% Italy
Lubrizol Japan Limited 100% Japan
Lubrizol Limited 100% United Kingdom
Lubrizol Metalworking Additives
Company, Inc. 100% Nevada
Lubrizol de Mexico, S. de R.L. 100% Mexico
Lubrizol de Mexico Comercial S. de R.L.
de C.V. 100% Mexico
Lubrizol Overseas Trading Corporation 100% Delaware
Lubrizol Scandinavia AB 100% Sweden
Lubrizol Servicios Tecnicos S. de R.L. 100% Mexico
Lubrizol South Africa (Pty.) Limited 100% South Africa
Lubrizol Southeast Asia (Pte.) Ltd. 100% Singapore
Lubrizol de Venezuela C.A. 99.9% Venezuela
CPI Engineering Services, Inc. 100% Michigan
Engine Control Systems, Ltd. 100% Canada
Gate City Equipment Company, Inc. 100% Georgia
Gateway Additive Company 100% Pennsylvania
Hyrolec Technical Services Limited 100% United Kingdom

AFFILIATES

Industrias Lubrizol S.A. de C.V. 40% Mexico
Lanzhou Lubrizol - Lanlian Additive
Co., Ltd. 50.05% China
Lubrizol India Limited 40% India
Lubrizol Transarabian Company Limited 49% Saudi Arabia
Solub Limited 40% Russia
Tianjin Lubrizol - Lanlian Additive
Co., Ltd. 50.05% China

<PAGE> 1
EXHIBIT 23

INDEPENDENT AUDITORS' CONSENT
-----------------------------

THE LUBRIZOL CORPORATION

We consent to the incorporation by reference in Registration Statement
No. 2-99983 on Form S-8, in Registration Statement No. 33-61091 on Form S-8 and
in Registration Statement No. 33-42211 on Form S-8 of our report dated February
5, 1998, incorporated by reference in this Annual Report on Form 10-K of The
Lubrizol Corporation for the year ended December 31, 1997.

/s/ Deloitte & Touche LLP
- ------------------------------------

DELOITTE & TOUCHE LLP
Cleveland, Ohio
March 23, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000060751
<NAME> THE LUBRIZOL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.0
<CASH> 86,504
<SECURITIES> 0
<RECEIVABLES> 244,605
<ALLOWANCES> 1,373
<INVENTORY> 260,118
<CURRENT-ASSETS> 657,076
<PP&E> 1,513,824
<DEPRECIATION> 821,147
<TOTAL-ASSETS> 1,462,292
<CURRENT-LIABILITIES> 261,930
<BONDS> 182,165
0
0
<COMMON> 82,669
<OTHER-SE> 732,779
<TOTAL-LIABILITY-AND-EQUITY> 1,462,292
<SALES> 1,669,251
<TOTAL-REVENUES> 1,673,782
<CGS> 1,123,602
<TOTAL-COSTS> 1,123,602
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 337
<INTEREST-EXPENSE> 10,803
<INCOME-PRETAX> 231,147
<INCOME-TAX> 76,278
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,869
<EPS-PRIMARY> 2.68
<EPS-DILUTED> 2.66

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000060751
<NAME> THE LUBRIZOL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 SEP-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 74,764 92,196
<SECURITIES> 0 0
<RECEIVABLES> 259,034 254,186
<ALLOWANCES> 1,247 1,237
<INVENTORY> 256,306 253,698
<CURRENT-ASSETS> 647,179 659,442
<PP&E> 1,526,584 1,543,127
<DEPRECIATION> 828,662 841,246
<TOTAL-ASSETS> 1,454,157 1,473,568
<CURRENT-LIABILITIES> 274,883 294,838
<BONDS> 159,694 157,291
0 0
0 0
<COMMON> 80,399 83,055
<OTHER-SE> 743,350 740,635
<TOTAL-LIABILITY-AND-EQUITY> 1,454,157 1,473,568
<SALES> 820,305 1,247,129
<TOTAL-REVENUES> 822,530 1,250,266
<CGS> 541,120 831,404
<TOTAL-COSTS> 541,120 831,404
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 80 132
<INTEREST-EXPENSE> 5,033 7,873
<INCOME-PRETAX> 127,054 185,691
<INCOME-TAX> 41,293 61,278
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 85,761 124,413
<EPS-PRIMARY> 1.47 2.14
<EPS-DILUTED> 1.46 2.13

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000060751
<NAME> THE LUBRIZOL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 41,294 60,690
<SECURITIES> 0 0
<RECEIVABLES> 242,124 239,082
<ALLOWANCES> 1,212 1,262
<INVENTORY> 297,364 267,814
<CURRENT-ASSETS> 642,507 632,578
<PP&E> 1,457,444 1,474,658
<DEPRECIATION> 777,615 792,572
<TOTAL-ASSETS> 1,429,743 1,419,177
<CURRENT-LIABILITIES> 243,664 220,716
<BONDS> 152,358 184,947
0 0
0 0
<COMMON> 81,618 80,365
<OTHER-SE> 772,321 754,494
<TOTAL-LIABILITY-AND-EQUITY> 1,429,743 1,419,177
<SALES> 405,412 825,943
<TOTAL-REVENUES> 407,101 828,470
<CGS> 273,595 562,119
<TOTAL-COSTS> 273,595 562,119
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 36 62
<INTEREST-EXPENSE> 3,094 5,408
<INCOME-PRETAX> 106,717 162,293
<INCOME-TAX> 35,481 52,987
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 71,236 109,306
<EPS-PRIMARY> 1.14 1.77
<EPS-DILUTED> 1.14 1.77

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000060751
<NAME> THE LUBRIZOL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 30,579
<SECURITIES> 0
<RECEIVABLES> 222,784
<ALLOWANCES> 2,198
<INVENTORY> 310,539
<CURRENT-ASSETS> 639,694
<PP&E> 1,447,051
<DEPRECIATION> 770,235
<TOTAL-ASSETS> 1,492,020
<CURRENT-LIABILITIES> 265,591
<BONDS> 194,423
0
0
<COMMON> 83,254
<OTHER-SE> 765,729
<TOTAL-LIABILITY-AND-EQUITY> 1,492,020
<SALES> 1,657,821
<TOTAL-REVENUES> 1,663,594
<CGS> 1,134,875
<TOTAL-COSTS> 1,134,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (372)
<INTEREST-EXPENSE> 10,376
<INCOME-PRETAX> 225,574
<INCOME-TAX> 73,959
<INCOME-CONTINUING> 151,615
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,615
<EPS-PRIMARY> 2.37
<EPS-DILUTED> 2.37

</TABLE>