RESULTS OF OPERATIONS

The results of operations exclude the operations of our phenolic antioxidant business, which was sold in January 2003. The earnings results of this business have been removed from net sales and operating profit for all periods covered in this review. These results are included in the Consolidated Statements of Income under “Income from operations of discontinued business.” There was no effect on net income as a result of these reclassifications. In addition, earnings per share amounts have been adjusted for all periods presented to reflect the 1-for-5 reverse stock split.

Net Sales

We continue to grow our business in essentially all areas of the petroleum additives segment following our restructuring in 2001. We have strengthened our product marketing teams and regional management teams. We continue to make a significant investment in research and development to more fully leverage our technology and product portfolio to enhance the sales of our products.

Total net sales were lower in 2002 than either 2001 or 2000. Nonetheless, reflecting the efforts to grow all areas of our petroleum additive business with a focus on profitability instead of market share, 2002 net sales, excluding engine oil additives, were higher in substantially all areas than in 2001 or 2000. We have stabilized our business base in the important engine oil additives area and grew sales 12% in the other petroleum additives businesses compared to 2001 and 14% compared to 2000.

15

Table of Contents

In 2002, net sales to two customers of our petroleum additives segment exceeded 10% of total net sales. Sales to BP amounted to $69 million (11% of total net sales) and sales to Shell amounted to $87 million (13% of total net sales). These net sales represents a wide-range of products sold to these customers in multiple regions of the world.

In 2000, net sales to three customers of our petroleum additives segment exceeded 10% of total net sales. Equilon amounted to $112 million (13% of total net sales), Pennzoil-Quaker State also amounted to $112 million (13% of total net sales), and Exxon Mobil Corporation amounted to $95 million (11% of total net sales). These sales primarily represented engine oil products. In 2001 with conditions in the engine oil market continuing to erode, we attempted certain price increases to improve returns on this product line. This action contributed to the loss of the engine oil business of these three customers in 2001.

No other customer accounted for over 10% of our total net sales in any year.

Our focus on profitability rather than market share has resulted in lower sales of engine oil additives. This resulted in 2002 consolidated net sales, including engine oil additives, being lower than both 2001 and 2000, as reflected in the following table.

Petroleum Additives— Our petroleum additives sales, excluding engine oil additives, improved over both 2001 and 2000. However, total petroleum additives net sales, including engine oil additives, were 6% lower than 2001 and 19% lower than 2000. The decrease in engine oil net sales reflects the impact of the loss of the three high-volume engine oil customers previously discussed. When reading the discussion on sales, the comparisons are somewhat more involved since the business that was lost was such a high revenue business, even though its profit component was much lower in proportion to sales. The business was lost in late 2000, but shipments continued through the second quarter of 2001.

The reduction in net sales from 2001 is the net impact of gaining business across the segment, offset by having the engine oil sales of the customers lost completely out of the 2002 results. The sum of these two offsetting items resulted in lower shipments and an unfavorable impact of $40 million. While shipments in substantially all other areas of petroleum additives were higher than 2001, the reduction in engine oil shipments more than offset the favorable impact of higher shipments of the other petroleum additives products, since the lost revenue was almost twice the business gained. The remaining small change is caused by changes in prices, currency, and the mix of products sold.

The same items discussed above when comparing revenue to 2001 exist when comparing 2002 revenue to 2000. Shipments were lower as compared to 2000 causing an unfavorable impact of $150 million on net sales. Again, the decrease of shipments of engine oil additives of $217 million, more than offset increases in the shipments of $67 million of other petroleum additives products. A change in the mix of products sold and slightly higher selling prices was completely offset by a negative currency impact when compared to 2000.

Tetraethyl Lead —Most of the TEL marketing activity is through the agreements with Octel, under which we do not record the sales transactions. Therefore, TEL net sales reflected in the table above are those made by us in areas not covered by the agreements, as well as sales made to Octel under the terms of the agreements. These sales are very minor compared to the TEL sales made through the marketing agreements (see Note 3).

16

Table of Contents

TEL net sales were down substantially in 2002 when compared to both 2001 and 2000. Sales to Octel were down about $9 million when compared to 2001 and about $15 million when compared to 2000. During the first quarter 2001, Octel purchased substantially all remaining inventory they were required to purchase from us under the agreements. The decrease in TEL sales, excluding Octel, reflects the expected and continuing market decline.

Segment Operating Profit (Loss)

We evaluate the performance of petroleum additives and TEL based on segment operating profit. Corporate departments and other expenses outside the control of the segment managers are not allocated to segment operating profit. Depreciation on segment property, plant, and equipment, and amortization of segment intangible assets and the prepayments for services are included in the operating profit of each segment.

The table below reports operating profit (loss) by segment for the last three years.

Petroleum Additives —Petroleum additives operating profit, excluding nonrecurring charges, improved to $52 million in 2002. This is the best operating profit in the segment since 1999 and represents an increase in operating profit on the same basis of 60% from 2001 and 93% from 2000. The improvement over 2001 and 2000 is across all petroleum additive product lines, including engine oil additives.

When compared to 2001 the profits were affected by many factors. Profits were adversely affected since 2002 included no sales of the engine oils business to customers that were lost. The remainder of the business posted higher profits, which were the result of increased shipments of higher margin products, as well as lower manufacturing costs. The lower manufacturing costs include the benefit of our asset utilization improvement efforts, as well as our cost reduction initiatives. While selling, general, and administrative expenses (SG&A) for this segment were about even with 2001, research, development, and testing costs (R&D) were 6% lower than 2001. In addition, although raw material costs have continued to rise through the last part of the year, when compared to 2001 in total, these costs were slightly lower. Foreign exchange also had a negative impact.

When compared to 2000, the significantly higher operating profit, excluding nonrecurring items, reflected improved operating results in most areas of the petroleum additives business. The mix of products sold as compared to 2000 was much improved, predominately as a result of a higher percentage of our revenue coming from products other than engine oils. We also benefited from our cost reduction initiatives, which resulted in lower manufacturing, SG&A, and R&D costs. Average raw material cost for 2002 was about even with 2000.

Total R&D expenses, excluding the 2001 nonrecurring engine oils rationalization charges, were $51 million in 2002, $54 million in 2001, and $72 million in 2000. The decrease in R&D expenses reflects the benefit of our cost reduction initiative undertaken as part of the 2001 engine oil additives rationalization. The decrease in the engine oil area was partially offset by increases in certain other product lines. R&D related to new products and

17

Table of Contents

processes was $30 million in 2002, $33 million in 2001, and $40 million in 2000. All of our R&D expenses were related to petroleum additives.

SG&A for this segment was about even with 2001, but decreased $5 million or 9% from 2000 levels. As a percentage of net sales, SG&A combined with R&D expenses was 15.4% in 2002, 14.8% in 2001, and 15.8% in 2000. The percentage increase over 2001 primarily reflects the reduction in net sales for 2002 as compared to 2001. This was partially offset by lower 2002 R&D costs. The decrease from 2000 levels reflects the effect of significantly lower SG&A and R&D expenses, which was substantially offset by lower 2002 sales. At current sales volumes, we would expect this percentage to remain about the same.

The nonrecurring item for 2002 was for a $1.5 million impairment of goodwill, which was partially offset by a $300 thousand benefit related to a change in estimate of the restructuring accrual for the engine oil additives rationalization. The goodwill write-off was done in accordance with Statement of Financial Accounting Standards No. 142.

The nonrecurring charge of $72 million in 2001 was for costs related to the rationalization of our engine oil additives business of $75.5 million, which was partially offset by a $3 million gain on the sale of certain Bracknell, England assets. The engine oil rationalization included the idling of production and research facilities, as well as a workforce reduction. The charges for the rationalization program included early retirement costs of $23 million, as well as severance and other related expenses of $6 million. Accelerated depreciation was $41 million, shutdown costs were $4 million, and other costs were $2 million. Of these costs, we reported $29 million of severance, early retirement, and other related expenses as a special item. Cost of goods sold included $43 million; selling, general, and administrative expenses included $300 thousand; and research, development, and testing expenses included $3.2 million. Further information on these costs is included in Note 27.

In 2000, petroleum additives operating profit included a nonrecurring charge of $8 million for the write-off of an idled manufacturing facility. This write-off was part of an ongoing plant rationalization effort and improved the petroleum additives cost structure.

Tetraethyl Lead— Results of our TEL segment include the operating profit contribution from our marketing agreements, as well as certain TEL operations not included in the marketing agreements.

The operating profit contribution from our marketing agreements was $26 million in 2002, down from a contribution of $37 million in both 2001 and 2000. This resulted from lower volumes reflecting the declining market for this product. The current year also includes higher amortization of the prepayment for services costs as a result of the increase in the prepayment following the amendment of these agreements (see Note 3), as well as certain other costs. Amortization costs in 2002 were $4 million higher than 2001 and $3 million higher than 2000.

Other TEL operations which were not a part of the marketing agreements were unfavorable $3 million compared with 2001 and $10 million when compared with 2000. The year 2002 included charges related to environmental remediation and premises asbestos liability claims. These charges were partially offset by approximately $2 million resulting from the benefit of a legal settlement for the recovery of operating costs. These same operations in 2001 and 2000 included an earnings benefit from the sale of lead inventory to Octel in accordance with the marketing agreements. In addition, both 2001 and 2000 results benefited from the liquidation of LIFO inventory. The LIFO liquidation was income of $1 million in 2001 and $2 million in 2000.

The nonrecurring charge of $2 million was for the impairment of goodwill upon the adoption of Statement of Financial Accounting Standards No. 142.

While the market for this product is continuing to decline, it still continues to supply Ethyl with strong cash flows.

18

Table of Contents

The following discussion references certain captions on the Consolidated Statements of Income.

Special Items (Expense) Income, Net

Special items (expense) income, net totaled $114 million expense in 2001 and included pension-related charges and engine oil additives rationalization charges which were partially offset by the $3 million gain on the sale of some of the assets in Bracknell, England. The termination of our U.S. salaried pension plan and the subsequent settlement of the pension contracts resulted in a noncash charge of $62 million. The excise tax on the reversion of the pension assets was $26 million. Severance, early retirement, and other expenses amounted to $29 million.

There were $46.5 million engine oil additives-related costs not included in special items of which we reported $43 million in cost of goods sold; $3.2 million in research, development, and testing expenses; and $300 thousand in selling, general, and administrative expenses.

Special items income, net totaled $76 million in 2000. Settlements of pension contracts resulted in the recognition of noncash gains of $81 million. In addition, the demutualization of MetLife, Inc. resulted in $4 million income. These were partly offset by an $8 million charge for the write-off of the idled Orangeburg manufacturing facility in petroleum additives and a special retirement charge of $1 million.

Interest and Financing Expenses

Interest and financing expenses were $26 million in 2002, $33 million in 2001, and $36 million in 2000. Compared to 2001, lower average debt outstanding resulted in a reduction of $4 million, while lower average interest rates resulted in a reduction of $2 million. Amortization of financing costs and fees were $1 million lower than 2001. Compared to 2000, lower debt outstanding resulted in an $11 million decrease in expense in 2002 and lower average interest rates caused a reduction of $4 million. Fees and amortization of financing costs were $5 million higher in 2002 than in 2000.

Interest costs under the credit facility are based on LIBOR plus a premium. In addition, interest and financing costs have decreased due to the significant reduction in outstanding debt. If market rates begin to increase, our interest and financing costs will also rise on most of the remaining debt.

Other Expense, Net

Other expense, net for 2002 was $500 thousand and included charges of $4 million on the impairment of nonoperating assets and $1 million related to debt refinancing activities. These were partially offset by $2 million in interest income from a lawsuit settlement and $1 million interest income from a settlement with the IRS.

Other expense, net for 2001 was $4 million and included expenses of $2.6 million related to the refinancing of our debt, as well as $2 million for our percentage share of losses in equity investments. Also included is a loss on impairments of nonoperating assets of $4 million, which was partially offset by a gain of $1 million on the sale of a nonoperating asset.

The $1 million gain in 2001 on the sale of a nonoperating asset was for the sale of certain real and personal property in King William, Virginia, to Old Town, LLC (Old Town). Old Town is a separate legal entity organized by members of the Gottwald family. The property was sold for its appraised value of $2.9 million. We continue to manage the property for Old Town.

Other expense, net for 2000 was $3 million. The 2000 total included $3 million for our percentage share of losses in equity investments, which was partially offset by a $2 million gain on the sale of nonoperating assets.

19

Table of Contents

Income Taxes

Income taxes were expense of $4 million in 2002, a benefit of $45 million in 2001 and expense of $27 million in 2000. The change in our income (loss) before income taxes resulted in the $49 million increase in income taxes in 2002. The effective tax rate was almost unchanged at 28.3% in 2002 and 29.7% in 2001. While we were able to tax effect most of the large charges in 2001 that resulted in a pretax loss, the $26.2 million excise tax on the pension reversion was not tax deductible. Excluding this item in 2001, the effective tax rate on the pretax loss for the year would have been approximately 36%. The effective tax rate in 2002 reflects certain foreign and other tax benefits.

In comparison to 2000, the decrease in our income before taxes contributed the entire $23 million to the reduction in income taxes. The effective tax rate in 2000 was 32.0% and included the recognition of certain income tax benefits.

While our deferred taxes are in a net asset position, we believe that we will recover the full benefit of our deferred tax assets. See Note 19 in the Notes to Consolidated Financial Statements for details on income taxes.

Income from Operations of Discontinued Business

The income from operations of discontinued business represents the operations of the phenolic antioxidant business, which we sold to Albemarle Corporation on January 21, 2003. The amount is net of income taxes.

Cumulative Effect of Accounting Change

As discussed above in the “Segment Operating Profit (Loss)” section, we wrote-off goodwill of $3.1 million in first quarter 2002 in accordance with Statement of Financial Accounting Standard No. 142 (SFAS 142). Under the undiscounted cash flow model that we used prior to the adoption of SFAS 142, the goodwill was not impaired and therefore, had not been previously written off. On an after-tax basis, the impairment amounted to $2.5 million and is shown as a cumulative effect of accounting change.

Net Income (Loss)

Net income was $10 million in 2002 ($.59 per share) as compared to a net loss of $105 million ($6.29 per share) in 2001 and net income of $61 million ($3.65 per share) in 2000. Included in net income (loss) was $5 million ($.30 per share) in 2002 and $115 million ($6.88 per share) in 2001 for nonrecurring charges, net. Nonrecurring income, net totaled $52 million ($3.14 per share) in 2000. Excluding the nonrecurring items, net income was $15 million ($.89 per share) in 2002; $10 million ($.59 per share) in 2001; and $9 million ($.51 per share) in 2000.

Included in our 2002 results is a decrease in corporate general and administrative expenses of $4 million from 2001 and $11 million from 2000. The decrease includes lower salary and benefit expenses resulting from our cost control initiatives, as well as lower legal costs.

Pension expense on a pre-tax basis for 2002 was $6 million. Pension income (before income taxes and excluding terminations and settlements) was $2 million in 2001 and $10 million in 2000. The significant reduction in noncash pension results from prior years’ levels is caused by lower assets in our current plan than were in the plan that we terminated in 2001.

CASH FLOWS DISCUSSION

We generated cash from operating activities of $83 million in 2002. In 2001 we generated cash amounting to $126 million, including $54 million from the pension asset reversion. The 2000 amount was $89 million.

20

Table of Contents

In 2002, we used cash from operating activities to make net repayments of $45 million on bank debt and $1 million on a capital lease and to pay $2 million in debt issuance costs. We also funded capital expenditures of $13 million and made payments for TEL marketing agreements services of $19 million. Cash and cash equivalents on hand increased $3 million. Our cash from operations included $1 million for deferred rental revenue; $1 million from a settlement with the IRS; and $3 million received from a contract settlement. This contract settlement was related to a dispute associated with a tax issue on the sale of a former subsidiary.

The cash flows from operating activities in 2001 included the net cash benefit of $54 million from the asset reversion of one of our pension plans. In 2001, we combined the cash from operating activities, as well as $11 million from the sale of certain assets to make a net repayment on debt of $107 million and to pay $12 million in debt issuance costs. We also funded capital expenditures of $10 million, as well as a prepayment of TEL marketing agreements services of $2.5 million. Cash and cash equivalents on hand increased $8 million.

In 2000, we used the cash from operating activities, as well as cash-on-hand of $11 million and other proceeds of $3 million to fund the prepayment of TEL marketing agreements services of $39 million and pay dividends of $16 million. In addition, we funded capital expenditures of $14 million, reduced long-term debt $32 million, and spent $4 million on an equity investment.

Cash dividends paid per common share were $0.9375 in 2000. The Board of Directors suspended our dividend on July 27, 2000 to improve our cash flow. In addition, the terms of the Fourth Amendment to Amended and Restated Credit Facility prohibit us from paying dividends. See Note 12.

We expect that cash from operations will continue to be sufficient to cover our operating expenses.

Depreciation and amortization in the Consolidated Statements of Cash Flows for 2001 includes accelerated depreciation of $41 million due to the shortened lives of certain engine oil assets.

FINANCIAL POSITION AND LIQUIDITY

Since 2001, we have had three primary goals. These goals were profitable growth, debt reduction, and ongoing cost management. Solid progress has been made toward each of these goals. Improved earnings, excluding nonrecurring items, were a result of continuing to offer high quality goods and services to our customers through the dedicated efforts of our employees, as well as the benefits of our aggressive debt reduction and cost reduction programs.

We reduced our debt $46 million in 2002. This comes after having reduced the debt by $107 million in 2001. Our debt-to-earnings statistics are in a much-improved position as we enter 2003, and we no longer consider ourselves highly leveraged. In 2003, we plan to use most of our free cash flow to pay down debt.

We believe the initiatives on which we are focused will continue to improve our profitability. The future remains a challenge, as the petroleum additives market is still highly competitive and the engine oils market continues to reflect weak margins. The many years of work to reduce our high debt levels have paid off and our “target” debt levels appear within our reach.

In March 2002, prior to the August 2002 maturity date of our previous credit agreement, we entered into the Fourth Amendment to Amended and Restated Credit Agreement with our lenders. That facility included certain key provisions, which are detailed in Note 12, “Long-Term Debt”, in the Notes to Consolidated Financial Statements. Borrowings were to have matured on March 31, 2003 and were classified as a current liability during 2002.

Subsequently, we met all of the provisions to have this facility extended to March 31, 2004 and have done so. As such, all debt, except that which is due in the next twelve months, has been classified as a noncurrent liability. The extended facility contains all of the same terms and conditions. We are required to make principal reduction payments of $10 million per quarter with all outstanding balances due on March 31, 2004.

21

Table of Contents

We continue to make debt repayment a high priority near term so that we will have more flexibility in the future. Part of that improved flexibility includes a current initiative of providing a long-term debt structure for us. While a longer-term structure would initially result in higher interest costs on outstanding debt, it would also provides us with certain other advantages. While there is no complete assurance that we will achieve this long-term debt structure, it is a priority initiative this year.

Our cash flows from operations remain strong and we will continue to minimize working capital requirements, as well as sell nonstrategic assets when appropriate.

Cash

At December 31, 2002, we had cash and cash equivalents of $15 million as compared to $12 million at the end of 2001.

We also had restricted cash of $700 thousand at year-end 2002 and $1 million at year-end 2001. This was a portion of the funds we received from the demutualization of MetLife, Inc. in 2000. We are using this cash to offset the employee portion of retiree health benefit costs.

Debt

During 2002, we paid down total debt by $46 million. This included payments of $73 million on the term loan, $4 million on the new term loan, and $1 million on a capital lease. These payments were offset by an increase on the revolving credit agreement of $13 million and additional private borrowing of $19 million. The private borrowing was from Bruce C. Gottwald. All of our debt is discussed more fully in Note 12.

In 2001, our $107 million debt repayment included $97 million on the term loan, $24 million on the new term loan, and $7 million on medium-term notes. These payments were partially offset by an increase of $21 million on our revolving credit agreement.

As a percentage of total capitalization, our total debt decreased from 69.8% at the end of 2001 to 65.5% at the end of 2002. The decrease reflects the reduction in total debt. Normally, we repay long-term debt with cash from operations as well as with proceeds from occasional sales of business units, plant sites, or other assets.

Working Capital

At December 31, 2002, we had working capital of $143 million, resulting in a current ratio of 2.10 to 1. Our working capital at year-end 2001 was $125 million resulting in a current ratio of 1.79 to 1. The change in working capital was primarily the result of a reduction in accounts payable, accrued expenses, and income taxes payable, as well as an increase in cash, accounts receivable, and deferred taxes. These items were partially offset by decreases in inventories and the TEL marketing agreements receivable, as well as an increase in the current portion of long-term debt.

Capital Expenditures

We expect capital expenditures will be about $15 million in 2003. Capital spending for environmental and safety projects will be about the same as 2002. We will continue to finance capital spending through cash provided from operations.

22

Table of Contents

We have a commitment to pay up to $3 million under the TEL marketing agreements. This payment is discussed more fully in Note 3. In addition, we have contractual obligations for the construction of assets, as well as purchases of property and equipment of $400 thousand related to petroleum additives. Our lease commitments are shown in Notes 12 and 16.

Under the TEL Marketing Agreements, we are required to provide approximately one-third of the cost of product sold to customers in the territory from our inventory or post an equivalent dollar value deposit with Octel. The value of our available inventory fell below the requirement at year-end 2000 and was substantially depleted at year-end 2001 as it was utilized for sales under the agreements. The dollar value requirement was $13 million at December 31, 2002 and $14 million at December 31, 2001. We now cover this requirement of the marketing agreements through the value of the long-term receivable from Octel. This receivable is being paid to us as the requirement decreases and will be paid in full at the end of the agreements. These amounts have been recorded in other assets and deferred charges.

Pension and Post-Retirement Benefit Plans

We apply Statement of Financial Accounting Standard No. 87, “Employers’ Accounting for Pensions” (SFAS 87) and Statement of Financial Accounting Standard No. 106, “Employers’ Accounting for Post-retirement Benefits Other Than Pensions” (SFAS 106) to account for our pension and post-retirement plans. We use a December 31 measurement date to determine our pension and post-retirement expenses and related financial disclosure information.

Investment Return Assumptions under SFAS 87 and Asset Allocation —We periodically review our assumptions for the long-term expected return on pension plan assets. As part of the review and to develop expected rates of return, our independent consulting actuaries performed a stochastic analysis of expected returns based on the plans’ asset allocation as of both January 1, 2002 and January 1, 2003. This forecast reflects the actuarial firm’s expected long-term rates of return for each significant asset class or economic indicator. As of January 1, 2003, the firm’s expected rates were 9.8% for US large cap stocks, 6.0% for US long-term corporate bonds, and 2.4% for inflation. The range of returns developed relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class.

While the expected investment return assumption is long-term in nature, the range of reasonable returns has dropped over the past few years as a consequence of lower inflation and lower bond yields. Nevertheless, because our asset allocation is predominantly weighted toward equities, we have maintained our expected long-term rate of return at 9% for the last several years.

Significant actuarial losses, where the actual return was less than the expected return, resulted during the 2001 and 2002 stock market decline. The one-year investment return was substantially lower than the long-term assumption by about $17 million in 2002 and about $34 million in 2001 for all of our domestic pension plans. These losses enter earnings on an amortized basis and amounted to increased expense of $300 thousand in 2002 and an expected $700 thousand increased expense in 2003. We expect that there will be continued volatility in pension expense as actual investment returns vary from the expected return, but we continue to believe the risk premium for equity investment justifies the volatility.

23

Table of Contents

Pension expense is very sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return by 25 basis points to 8.75% (while holding other assumptions constant) would increase the forecasted 2003 expense for our domestic pension plans by about $150 thousand. Similarly, a 25 basis point increase in the expected rate of return to 9.25% (while holding other assumptions constant) would reduce forecasted 2003 pension expense by about $150 thousand.

Discount Rate Assumption under SFAS 87 and SFAS 106 —In accordance with SFAS 87 and SFAS 106, we set the discount rate for our retirement plans by reference to investment grade bond yields. We use Moody’s published AA yield for long-term corporate bonds for the last day of December as an index, and our discount rate will be within 25 basis points of the index. Moody’s AA yield dropped from 7.08% for December, 2001 to 6.52% for December, 2002. Accordingly, we reduced our discount rate for all domestic plans from 7.00% as of December 31, 2001 to 6.75% as of December 31, 2002.

Pension expense is also very sensitive to changes in the discount rate. For example, decreasing the discount rate by 25 basis points to 6.5% (while holding other assumptions constant) would increase the forecasted 2003 expense for our domestic pension plans by about $300 thousand. A 25 basis point increase in the discount rate to 7.0% would reduce forecasted 2003 pension expense by about $300 thousand.

Liquidity —Cash contribution requirements to the pension plan are sensitive to changes in assumed interest rates in the same manner as pension expense. We have traditionally contributed the maximum tax-deductible amount to the pension plans each year. We do expect that our cash contribution requirements will increase in 2003 and future years because of the recent poor stock market performance, as well as the reduced level of assets in the U.S. salaried plan as compared to the salaried plan which was terminated in 2000. We expect our aggregate cash contributions, before income taxes, will be in the range of $2 million to $4 million in 2003.

Other Assumptions under SFAS 106 —During 2002, we reviewed our assumption for the health care cost trend rate under SFAS 106. This review was done with reference to cost increases in our own plans, as well as broader market increases in employer-provided health care costs and observations of SFAS 106 assumptions used by other large employers. Consequently, as of December 31, 2002, we increased our assumption for the health care cost trend rate substantially to a rate of 11% in 2002 scaling down to 5.5% over the next ten years. Previously, the health care cost trend rate was 6% to 7%. The assumption of declining inflation is consistent with the expectation that medical cost increases will abate after several years of double-digit growth.

The expected long-term rate of return on our post-retirement plans is 7%. This rate varies from the pension rate of 9% primarily because of the difference in investment of assets. The assets of the post-retirement plan are held in an insurance contract, which results in a lower assumed rate of investment return.

Termination of U.S. Salaried Pension Plan —At December 31, 2000, we terminated an overfunded U.S. salaried employee pension plan. We received regulatory approval for the plan termination in the second quarter 2001. The proceeds from the terminated plan amounted to $179 million. After fully funding a new pension plan for U.S. salaried employees which has comparable provisions and benefit formula, we received $131 million in the third quarter 2001 which represented the reversion of pension assets. The reversion amount was subject to the usual corporate income taxes, as well as a 20% federal excise tax. Total federal income, state income, and excise taxes amounted to $77 million. Most of these taxes were paid in the second half of 2001. The net cash received, after taxes, was $54 million and was used to pay down our debt. In 2002, as well as the next several years, Ethyl will report noncash pension expense, since the market value of assets has declined and the amount of surplus in the new pension plan is less than that in the terminated plan.

RELATED PARTY TRANSACTIONS

Thomas E. Gottwald, our Chief Executive Officer and a director, is a son of Bruce C. Gottwald, our Chairman of the Board of Directors and our former Chief Executive Officer. The members of the family of Bruce C. Gottwald may be deemed to be control persons of Ethyl.

24

Table of Contents

In April 2001, we sold certain real and personal property located in King William, Virginia consisting of approximately 1,600 acres to Old Town, LLC. Old Town, LLC, which is owned by Bruce C. Gottwald and his brother, Floyd D. Gottwald, Jr., a beneficial owner of more than 5% of the outstanding voting shares of the Corporation, paid $2.9 million in cash for the property based on independent appraisals. We continue to manage the property for Old Town, LLC.

On February 1, 2002, Bruce C. Gottwald made a loan to Ethyl in the amount of $18.6 million for a three-year term at an interest rate of 8.5%. The monthly payments are interest only during the term of the loan, with the principal amount coming due at maturity. We used the proceeds of the loan to pay down existing debt. The loan is non-recourse to Ethyl and is secured by a first deed of trust on the three buildings at 330 South Fourth Street, Richmond, Virginia that constitute our principal offices. An independent appraiser valued the three buildings at $18.6 million. At the end of the loan term, we have the option to either convey the property to the lender in satisfaction of the debt or repay the debt. Should we fail to repay the debt, the lender has the right to require that we convey the property to him in satisfaction of the debt.

Ethyl and Albemarle Corporation (Albemarle) have agreements to coordinate certain facilities and services, including the production of MMT (Methylcyclopentadienyl Manganese Tricarbonyl). In connection with these agreements, Albemarle billed us approximately $23 million in 2002, $24 million in 2001, and $28 million in 2000. In addition, the two companies have agreements that describe the conditions under which Albemarle must reimburse Ethyl for tax, environmental and certain other liabilities. Generally, Albemarle is responsible for tax, environmental and certain other exposures related to its operations before February 28, 1994, which was the date Ethyl completed the spin-off of Albemarle. We believe that Albemarle has the ability to comply with this indemnification agreement. Further information, including comments regarding a $3.7 million receivable we have established from Albemarle, is in Note 16.

On January 21, 2003, we completed the sale of our phenolic antioxidants business to Albemarle. The decision to sell the phenolic antioxidants business followed an extensive strategic assessment of our business assets. The phenolic antioxidants business was not a material part of our business and was not a future strategic focus.

CRITICAL ACCOUNTING POLICIES

It is our goal to clearly present our financial information in a manner that enhances the understanding of our sources of earnings and our financial condition. We do this by including the information required by the Securities and Exchange Commission, as well as additional information that gives further insight into our financial operations.

Our financial report includes a discussion of our accounting principles, as well as methods and estimates used in the preparation of our financial statements. We believe these discussions and statements fairly represent the financial position and operating results of our company. The purpose of this portion of our discussion is to further emphasize some of the more critical areas where a significant change in facts and circumstances in our operating and financial environment might cause a change in reported financial results.

As discussed in various sections of our report, we have made certain payments related to our TEL marketing agreements and will make an additional payment of $3 million in 2003. The unamortized total, including the payments being made in 2003, is $40 million. We are amortizing these costs on an accelerated basis using a declining balance method over the life of the contracts. We feel this is the appropriate methodology and time period for this amortization based on the facts and circumstances of our TEL operations and the estimated product life of TEL. The customer base of TEL is significantly concentrated in a few countries and if conditions change that cause a shorter product life or other restrictions outside of our control, the amortization period would have to be adjusted accordingly. Any adjustment to the amortization period would impact earnings, but would have no effect on cash flows. While we feel the basis being used is appropriate, we continue to keep our accounting for this issue current with the business conditions.

25

Table of Contents

We also have certain identifiable intangibles amounting to $64 million at year-end 2002 that are discussed in Note 10 of this report. These intangibles relate to our petroleum additives business and are being amortized over periods with up to thirteen years of remaining life. We continue to assess the market related to these intangibles, as well as their specific values, and conclude the amortization periods and values are appropriate. We also evaluate these intangibles for any potential impairment. These evaluations continue to support the value at which these identifiable intangibles are carried on our financial statements. However, if conditions were to substantially deteriorate in this market, it could possibly cause a reduction in the periods of this amortization charge or could possibly result in a noncash write-off of a portion of the intangibles’ carrying value. A reduction in the amortization period would have no cash effect. While we do not anticipate such a change in the market conditions, this disclosure is provided to enhance the understanding of the factors involved.

We have made disclosure of our environmental issues in Part I, Item I of this report, as well as in the Notes to Consolidated Financial Statements. We feel our environmental accruals are appropriate for the exposures and regulatory guidelines under which we currently operate. While we currently do not anticipate significant changes to the many factors that could impact our environmental requirements, we continue to keep our accruals consistent with these requirements as they change.

Also, as noted in the discussion of Legal Proceedings in Item 3, while it is not possible to predict or determine the outcome of any legal proceeding, it is our opinion that we will not experience materially adverse effects on our results of operations or financial condition as a result of any pending or threatened proceeding.

We use significant assumptions to record the impact of the pension and post-retirement plans in the financial statements. These assumptions include the discount rate, expected long-term rate of return, rate of compensation increase, and health care cost trend rate. A change in any one of these assumptions could result in significantly different results for the plans. We develop these assumptions after considering advice from a major global actuarial consulting firm. Information is provided on the pension and post-retirement plans in Note 17. In addition, further disclosure on the effect of changes in these assumptions is provided in the “Financial Position and Liquidity” section of Item 7.

We believe the preceding discussion of some of the more critical accounting policies and assumptions will enhance the understanding of certain issues related to our efforts to provide an informative financial report.

RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) has issued several new Statements of Financial Accounting Standards (SFAS) which we will implement during 2003.

SFAS 143 “Accounting for Asset Retirement Obligations” was issued in August 2001. This statement addresses the obligations and asset retirement costs associated with the retirement of tangible long-lived assets. It requires that the fair value of the liability for an asset retirement obligation be recorded when incurred instead of over the life of the asset. The asset retirement costs must be capitalized as part of the carrying value of the long-lived asset. If the liability is settled for an amount other than the recorded balance, either a gain or loss will be recognized at settlement. This statement is effective for fiscal years beginning after June 15, 2002. While we have not fully completed the analysis, we estimate the implementation of the statement will result in the recognition of approximately $1 million of net income, which will be reported as a cumulative effect of an accounting change. In addition, we do not expect a significant impact on future earnings. There will be no cash impact upon the adoption of this statement.

SFAS 146 “Accounting for Exit or Disposal Activities” was issued in June 2002 and is effective for exit or disposal activities that are begun after December 31, 2002. The statement addresses the recognition, measurement, and reporting of costs that are associated with these activities. The statement will affect any future disposal activities that we initiate.

26

Table of Contents

SFAS 148 “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123” was issued in December 2002. The statement amends SFAS 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary adoption of the fair-value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 by mandating information be provided in both annual and interim financial statements about the method of accounting for stock-based employee compensation, as well as the effect on reported results of the method used.

The FASB has also issued two FASB interpretations. FASB Interpretation Number 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” was released in November 2002. This interpretation requires that guarantees issued or modified after December 31, 2002 be recorded at fair value. FIN 45 further elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and is effective for interim or annual periods ending after December 15, 2002.

FASB Interpretation Number 46 (FIN 46), “Consolidation of Variable Interest Entities,” was released in January 2003. FIN 46 expands existing accounting guidance that specifies when a company should include the assets, liabilities, and activities of another entity in the company’s financial statements. Generally, the interpretation requires that a variable interest entity be consolidated if the company has the majority of either the risk of loss or benefit of returns of the variable interest entity’s activities. Certain of the requirements of FIN 46 are effective immediately. All of the requirements are effective for interim or annual periods beginning after June 15, 2003.

We do not expect either interpretation to have a significant impact on Ethyl.