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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

     For the fiscal year ended December 31, 2002

OR

Commission file number 1-5112

ETHYL CORPORATION

Incorporated pursuant to the Laws of the Commonwealth of Virginia

Internal Revenue Service Employer Identification No. 54-0118820

330 South Fourth Street P. O. Box 2189

Richmond, Virginia 23218-2189

804-788-5000

Securities registered pursuant to Section 12(b) of the Act:

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 at least 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.  x

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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x  No  ¨

Aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2002: $54,975,573.75.*

Number of shares of Common Stock outstanding as of February 28, 2003: 16,689,009

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Ethyl Corporation’s definitive Proxy Statement for its 2003 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the Proxy Statement) are incorporated by reference into Part III of this Form 10-K.

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FORM 10-K

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PART I

ITEM 1.     BUSINESS

We are a specialty chemicals company that provides highly formulated packages of lubricant and fuel additives. We develop, manufacture and blend fuel and lubricant additive products and market and sell those products worldwide. We are one of the largest producers of lubricant additives worldwide and offer the broadest line of fuel additives worldwide. Through our marketing agreements with The Associated Octel Company Limited and its affiliates (Octel), we are the only marketer of tetraethyl lead (TEL) outside of North America and one of the primary marketers within North America. Lubricant and fuel additives are necessary products for the maintenance and operation of vehicles and machinery. From additive components to custom-formulated chemical blends, we provide customers with products and solutions that make fuels burn cleaner, engines run smoother and machines last longer.

We have developed long-term relationships with our customers in every major region of the world whom we serve through our six manufacturing facilities in North America, Europe, and South America. We have more than 200 employees dedicated to research and development who work closely with our customers to develop chemical formulations that are tailored to our customers’ and the end-users’ specific needs. Our portfolio of more than 950 technologically advanced, value added products allows us to provide a full line of products and services to our customers.

We were incorporated in 1887 and shares of our common stock have been traded on the New York Stock Exchange since 1965. Our directors, officers and employees own more than 18% of our outstanding shares of common stock. We employed approximately 1,100 people at year-end 2002.

Business Segments

We report our business in two distinct segments: petroleum additives and tetraethyl lead. We divide our business this way due to the operational differences between the two business units. The petroleum additives business operates in a market that we actively review for opportunities, while TEL is a mature product marketed primarily through third-party agreements.

Petroleum Additives—Petroleum additives are used in lubricating oils and fuels to enhance their performance in machinery, vehicles and other equipment. We manufacture component chemicals that are selected to perform one or more specific functions and blend those chemicals with other components to form packages for use in specified end-user applications. The petroleum additives market is an international marketplace, with customers including oil companies and refineries, automobile original equipment manufacturers (OEM), and other specialty chemical companies.

We view the petroleum additives marketplace as being comprised of two product lines: lubricant additives and fuel additives. Lubricant additives are highly formulated chemical products that improve the performance, durability and functionality of oils, thereby enhancing the performance of machinery and engines. Fuel additives are chemical components and products that improve the refining process and performance of gasoline, diesel and other fuels, resulting in lower fuel costs, better fuel performance, and better fuel emissions.

Our success in the petroleum additives segment is due to our strong technical capabilities, our formulation expertise, our close relationships with our customers, our broad differentiated product offerings and our global distribution capabilities. We invest significantly in research and development in order to anticipate our customers’ needs and meet the rapidly changing environment for new and improved products and services.

Lubricant Additives

Lubricant additives are essential ingredients for lubricating oils. Lubricant additives are used in a wide variety of automotive and industrial applications including engine oil, automatic transmission fluids, gear oils, hydraulic oils, turbine oils and in virtually any other application where metal-to-metal moving parts are utilized. Lubricant additives are organic and synthetic chemical components that enhance wear protection, prevent

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deposits, and protect against the hostile operating environment of an engine, transmission, axle, hydraulic pump or industrial machine.

Lubricants are used in nearly every piece of operating machinery from heavy industrial equipment to automobiles. Lubricants provide a layer of insulation and protection between moving mechanical parts. Without this layer of protection, the normal functioning of machinery would not occur. Effective lubricants reduce downtime, prevent accidents, and increase efficiency. Specifically, lubricants serve the following main functions:

The functionality of lubricants is created through an exact balance between a base oil and performance enhancing additives. This balance is the goal of effective formulations achieved by experienced research professionals. We offer a full line of lubricant additive products, each of which is composed of component chemicals specially selected to perform desired functions. We manufacture most of the chemical components and blend these components to create products designed to meet industry and customer specifications. Lubricant additive components are generally classified based upon their intended functionality, including:

We are one of the leading global suppliers of specially formulated lubricant additives that combine some or all of the components described above, and support a line of more than 750 lubricant additive products and formulations. Our products are highly formulated, complex chemical compositions derived from extensive research and testing to ensure all additive components work together to provide the intended results. Our products are engineered to meet specifications prescribed by either the industry generally or a specific customer. Purchasers of lubricant additives tend to be oil companies, distributors and refineries.

Lubricant additives are used in a wide variety of automotive and industrial applications including engine oil, automatic transmission fluids, gear oils, hydraulic oils, and turbine oils and virtually any other application where metal-to-metal moving parts are utilized.

Key drivers of lubricant additives demand include total vehicle miles driven, vehicle production, equipment production, the average age of vehicles on the road, new engine and driveline technologies, and drain/refill intervals.

We view the lubricant marketplace as being broken down into two primary components: engine oils and specialty applications.

Engine Oil Additives

The largest submarket within the lubricant additives marketplace is automotive engine oils, which we estimate represents 75% of the overall lubricant additive market volume, yet a much lower percentage of the

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overall market profitability. The engine oil market customers include consumers, service stations and automotive OEMs. The primary functions of engine oil additives are to reduce friction, prevent wear, control formation of sludge and oxidation, and prevent rust. Engine oil additives are typically sold to lubricant manufacturers who combine them with a base oil product to meet internal, industry and OEM specifications.

Key drivers of the engine oils market are the number of vehicles on the road, drain intervals for engine oils, engine and crankcase size, changes in engine design, temperature and specification changes driven by the OEMs. Customer and supplier dynamics have created a difficult marketplace for engine oil additives in recent years. This has resulted in significant pricing pressure felt by engine oil additive companies.

Specialty Additives

The specialty additive submarket is comprised of additives designed for products such as automatic transmission fluids (ATF), gear oils and industrial fluids, which serve both driveline and industrial applications. This submarket comprises approximately 25% of our overall lubricant additives market volume, but a much larger percentage of its overall profitability. Of this submarket, ATFs accounted for approximately 50% of our demand. ATFs primarily serve as the power transmission and heat transfer medium in the area of the transmission where the torque of the drive shaft is transferred to the gears of the automobile. Gear additives lubricate gears, bearings, clutches and bands in the gear-box and are used in automobiles, off-highway, hydraulic and marine equipment. Other products in this area consist of hydraulic transmission fluids, universal tractor fluids, power steering fluids, shock absorber fluids, gear oils, lubricants for heavy machinery and automotive greases. These products must conform to highly prescribed specifications developed by vehicle OEMs for specific models or designs. These additives are generally sold to oil companies and often ultimately to vehicle OEMs for new vehicles (factory-fill). End-products are also sold to service stations for aftermarket servicing (service-fill).

Key drivers of the specialty additives marketplace are the number of vehicles, drain intervals for ATF and gear applications, changes in engine and transmission design / temperatures and specification changes driven by the OEMs.

Fuel Additives

Fuel additives are chemical compounds that are used to improve both the oil refining process and the performance of gasoline, diesel and other fuels. Benefits of fuel additives in the oil refining process include reduced use of crude oil, lower processing costs and improved fuel storage properties. Fuel performance benefits include ignition improvements, emission reductions, fuel economy improvements, and engine cleanliness, and protection against deposits in fuel injectors, intake valves and the combustion chamber. Our fuel additives are extensively tested and designed to meet stringent industry, government and OEM requirements.

Many different types of additives are used in fuels. Their use is generally determined by customer, industry, OEM and government specifications and often differs from country to country. The different types of fuel additives we offer include:

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We offer the broadest line of fuel additives worldwide and sell our products to major fuel marketers and refiners, as well as independent terminals and other fuel blenders.

One of our most notable fuel additives is Methylcyclopentadienyl Manganese Tricarbonyl (MMT). Albemarle Corporation manufactures MMT for us through a long-term, exclusive supply arrangement, and we are the only marketer of MMT worldwide. Since 1995, the number of countries in which we sell MMT has increased from 4 to 25. When used in the refining process, MMT provides octane enhancement while reducing the amount of crude oil necessary to produce gasoline. We believe MMT is 2-3 times more cost-effective for enhancing octane (per unit of octane) of unleaded gasoline than the next best product on the market today. When MMT is used in unleaded gasoline, it reduces tailpipe emissions that are known contributors to urban smog. As a result, MMT is an attractive solution to enhance otherwise low octane levels and to reduce vehicle generated pollution.

Key drivers in the fuel additive marketplace include total vehicle miles driven, the introduction of more sophisticated engines, regulations on emissions (both gasoline and diesel), quality of crude oil slate and performance standards and marketing programs of major oil companies.

Competition

We compete in two distinct segments – petroleum additives and TEL. The petroleum additives segment is further divided into the lubricant additives submarket and the fuel additives submarket. In lubricant additives, the four top suppliers in 2002 supplied over 90% of the market. These suppliers include Lubrizol, Infineum (a joint venture between ExxonMobil and Shell), Oronite (an affiliate of ChevronTexaco) and Ethyl. Several other suppliers comprise the remaining market share. The fuel additives market is fragmented and characterized by more competitors. While we participate in many facets of the fuels market, our competitors tend to be more narrowly focused. In the gasoline detergent market, we compete mainly against BASF, Oronite and Lubrizol; in the cetane improver market, we compete against SNPE of France and Exchem of the U.K; and in the diesel markets, we compete against Lubrizol, Infineum and Octel.

The competition among the participants in these industries is characterized by the need to provide customers with cost effective, technologically capable products that meet industry specifications. The need to continually lower cost through formulation technology and cost improvement programs is vital for success in this environment.

Tetraethyl Lead—TEL is a distinct business segment. TEL is used as an octane enhancer in leaded gasoline to improve ignition qualities and operating performance of fuel. Since the 1920s, TEL has been used to prevent “engine knock,” a condition of poor combustion timing causing loss of engine power. In the 1970s, U.S. automobile manufacturers began including emissions control technology in vehicles to comply with the Federal Clean Air Act. When the surface metal of a catalytic converter in emissions control systems was deemed incompatible with lead, unleaded gasoline became the fuel standard in the United States with other countries following. Octel is now the only manufacturer of TEL worldwide. Through our agreements with Octel, we receive 32% of the net proceeds from the sale of TEL by Octel in all regions of the world except North America. In North America, we continue to purchase a small quantity of TEL from Octel and sell it to selected customers for aviation and racing fuel. Our agreements with Octel expire in 2010, but contain provisions for extensions thereafter.

We expect the market for TEL to continue to decline. The rate of decline will vary from year to year and an exact year on year decline rate is difficult to project. The decline rate will be determined in a large part by major

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customers’ plans to cease using the product. Our marketing agreements with Octel should help us manage this declining market by providing efficiencies of operation while maximizing cash flow.

Raw Materials and Product Supply

We use a variety of raw materials in our manufacturing processes. Base oil, poly isobutylene, olefin copolymers, antioxidants, and alcohols are the most significant of these raw materials. Generally, we purchase major raw materials under long-term contracts with multi-source suppliers and believe the availability of the raw materials is sufficient for our operations. Certain products are obtained through single-source suppliers.

We have the following long-term supply agreements for raw materials and finished products:

Research, Development, and Testing

Our R&D provides the basis for our global petroleum additives technology. Through product development and performance testing, our R&D provides our customers with technology and support to achieve desired product performance.

R&D expenditures, which totaled $51 million in 2002, are expected to grow modestly in 2003 in support of our core technology areas. We are committed to providing some of the most advanced products and comprehensive testing programs in the industry to support our customers worldwide. Our internal mechanical testing and development efforts in our core research areas reached record efficiency levels in 2002. This has allowed us to significantly increase the efficiency of our R&D test spending.

We completed development of several new products during 2002 that either have been commercialized or are ready for commercialization in 2003. These include next generation fill-for-life automatic transmission fluids, new additive packages for continuously variable transmissions, high efficiency factory-fill gear oils and new gear additive formulations targeted for European markets. We also developed gasoline performance additives with enhanced effectiveness in reducing deposits across the engine fueling and combustion system, and fuel additives that improve emissions and combustion efficiency across a broad range of end uses including power generation and advanced diesel engine technologies. New product developments in the industrial fluid areas include an ashless hydraulic additive which responds to a market need for lower metals in waste water streams from manufacturing facilities, technology for environmentally friendly vegetable-based fluids, and high performance wind turbine lubricant technology. Developments for the engine oil product line focused on cost improvements and formulation optimization.

Intellectual Property

We actively protect our inventions, new technologies, and product developments. We currently own approximately 900 issued United States and foreign patents, with a significant number of additional patents pending. The use of technology covered by some of these patents is licensed to others. In addition, we have acquired the rights under patents and inventions of others through licenses. We take care to respect the intellectual property rights of others and we believe our products do not infringe upon those rights. We vigorously participate in patent opposition proceedings around the world where necessary to secure a technology

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base free of infringement. We believe our patent position is strong, aggressively managed, and sufficient for the conduct of our business.

We also have several hundred trademark registrations throughout the world for our marks including

Ethyl^®, MMT^®, HiTEC^®, and GREENBURN^®, as well as several pending trademark applications.

Commitment to Responsible Care^®

We are committed to supporting the principles of the American Chemistry Council (ACC) Responsible Care program. As part of this commitment, we have established Responsible Care goals. These goals are continuous in nature and are just a portion of the metrics we use to manage the worldwide environmental and safety aspects of our business. The goals are:

In 2002, we had no spills that were reportable to federal agencies. There was one minor spill, reportable to a state agency. The environmental impact of this spill was negligible.

We had no significant process safety incidents in 2002, 2001 or 2000. Significant process safety incidents are fires, explosions and toxic releases which result in a lost-time injury, off-site consequences, or greater than $25 thousand of damages.

Our worldwide recordable rate (which is the number of injuries per 200,000 hours worked) in 2000 was .98. In 2001, it increased to 1.39, and we finished 2002 with a rate of .76. The 2002 performance was outstanding and represents a focused effort by all of our employees. We are pleased that the efforts we have spent to re-establish our commitment in the safety area are showing measurable improvements.

We are extremely proud of our accomplishments in the safety area, especially when compared to safety records in other industries. For example, for 2000, the worldwide recordable rates for the manufacturing industry and for the members of the ACC, respectively, were 9.0 and 2.16. We are committed to the safety of our employees and our neighbors and believe our record demonstrates that commitment.

All of our employees are responsible for environmental and safety excellence, and we accept and demonstrate the type of leadership that will ensure the continued success of our efforts. Responsible Care is a way of life at Ethyl, enhancing operations, the way we work, and the relationships we maintain with our customers and our communities.

Environmental

We operate under policies that comply with federal, state, local, and foreign requirements regarding the handling, manufacture, and use of materials. One or more regulatory agencies may classify some of these materials as hazardous or toxic. We also comply with laws, regulations, statutes, and ordinances protecting the environment, including those related to the discharge of materials. We expect to continue to comply in every material respect.

We regularly review the status of significant existing or potential environmental issues. We accrue and expense our proportionate share of environmental remediation and monitoring costs in accordance with FASB Statement No. 5 and FASB Interpretation No. 14, as clarified by the American Institute of Certified Public Accountants Statement of Position 96-1. As necessary, we adjust our accruals based on additional information.

Total gross liabilities accrued at year-end for environmental remediation were $23 million for 2002 and $26 million for 2001. We recorded expected insurance reimbursement assets for these amounts of $4 million in 2002

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and $6 million in 2001. In addition to the accruals for environmental remediation, we also have accruals for dismantling and decommissioning costs of $13 million at December 31, 2002 and $12 million at December 31, 2001. As new technology becomes available, it may be possible to reduce accrued amounts. While we are currently fully accrued for known environmental issues, it is possible that unexpected future costs could have a significant impact.

We spent $13 million in 2002 for environmental operating and clean-up costs, excluding depreciation of previously capitalized expenditures. We spent $12 million in 2001 and $12.4 million in 2000. Of these amounts, the ongoing costs of operations were $11 million in both 2002 and 2001, and $11.7 million in 2000. The balance represents clean-up, or remediation and monitoring costs. These environmental operating and clean-up expenses are included in cost of goods sold. In the next year, we expect environmental operating and remediation costs to be about the same as 2002.

For capital expenditures on pollution prevention and safety projects, we spent $5 million in 2002, $2 million in 2001, and $3 million in 2000. Over the next few years, we expect capital expenditures to be about the same as 2002.

Our estimate of the effects of complying with governmental pollution prevention and safety regulations is subject to:

We are subject to the federal Superfund law and similar state laws under which we may be designated as a potentially responsible party (PRP). As a PRP, we may be liable for a share of the costs associated with cleaning up hazardous waste sites such as a landfill to which we may have sent waste.

In de minimis PRP matters and in some minor PRP matters, we generally negotiate a consent decree to pay an apportioned settlement. This relieves us of any further liability as a PRP, except for remote contingencies. Costs for a de minimis participant are typically less than $50,000. Costs for a minor participant are typically less than $300,000.

We are also a PRP at some Superfund sites where our liability may be in excess of de minimis or minor PRP levels. Most Superfund sites where we are a PRP represent environmental issues that are quite mature. The sites have been investigated, and in many cases, the remediation methodology, as well as the proportionate shares of each PRP have been established. Other sites are not as mature, which makes it more difficult to reasonably estimate our share of the future clean-up or remediation costs. We have previously accrued the estimated expense of the remediation and monitoring of these sites. Generally, remediation and monitoring will go on for an extended period.

During 2000, the Environmental Protection Agency (EPA) named us as a PRP under Superfund law for the clean-up of soil and groundwater contamination at the Sauget Area 2 Site in Sauget, Illinois. Without admitting any fact, responsibility, fault, or liability in connection with this site, we are participating with other PRPs in site investigations and feasibility studies. We are responsible for 6.47% of the study cost and have accrued for these estimated expenses. Because of the early stage, we cannot make a reasonable estimate of the total cost of our share of responsibilities related to any site remediation or clean-up.

At another United States site, Ethyl and the other PRPs had previously appointed a management company to facilitate the remediation and monitoring of the site. During 2000, the management company informed us of a favorable change in the necessary work at the site. As compared to 2000, this change resulted in 40% lower costs

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in 2002 and 30% lower costs in 2001. This should continue to result in significantly lower monitoring costs in the future.

We also own several other environmental sites where we are in the process of remediation and monitoring. At one of our major sites in the United States, we have substantially completed remediation and will be monitoring the site for an extended period. In addition, we substantially completed dismantling and remediation on TEL bulk storage facilities in Europe and Singapore in 2001.

Geographic Areas

We have operations in the United States, Europe, Asia, and Latin America, as well as in Australia and Canada. The economies are stable in most of the countries where we operate. In countries with more political or economic uncertainty, we generally minimize our risk of loss by utilizing U.S. dollar denominated transactions, letters of credit, and prepaid transactions. We have also participated in selective foreign currency forward contracts in previous years. Our foreign customers mainly consist of financially viable government organizations and large companies.

Venezuela, where we sell certain petroleum additive products, is currently experiencing political instability and economic problems. Venezuela also purchases TEL through our marketing agreements with Octel. We continue to closely monitor the situation in this country.

The table below reports net sales and long-lived assets by geographic area. No transfers occurred between segments during the three years shown. Except for the United States and Canada, no country exceeded 10% of net sales. The United States was the only country that exceeded 10% of long-lived assets in any year. We allocated revenues to geographic areas based on the location to which the product was shipped. The reduction in net sales in the United States in 2001 is primarily the result of the loss of our engine oil additives position with three major customers, which is discussed more fully in Item 7.

Geographic Areas

Other Matters

On January 21, 2003, we completed the sale of our phenolic antioxidant business to Albemarle Corporation. Following an extensive assessment, we concluded this business was not part of our future core business or

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growth goals. This is another strategic step in fulfilling our goals of reducing debt, strengthening our balance sheet and allowing us to focus more closely on our core businesses.

During the third quarter 2002, we received a copy of the Alliance of Automobile Manufacturers (AAM) fleet test report on manganese-based gasoline additives (MMT), which we market. The report alleges that MMT significantly raises vehicle emissions, increases fuel consumption, and impairs the proper operation of vehicle emission control systems. We responded to this allegation at a Society of Automotive Engineers (SAE) meeting in October 2002 in San Diego. The AAM fleet test was designed as a durability test under extremely severe conditions. There was not a single failure on any emission control device on the fleet. The MMT fleet met EPA in-use emission requirements. Our belief was that the test was not designed as a fuel economy test and the test protocol was not stringent enough to yield meaningful results on fuel economy. Discussions with customers and automakers continue. The EPA and the Canadian government have extensively studied the product and have determined that MMT does not harm vehicle emission systems. The additive is an environmentally beneficial product that has proven its effectiveness in real-world use.

On June 4, 2002, our shareholders approved a 1-for-5 reverse stock split of our common stock. This action had been unanimously approved and recommended by our Board of Directors.

In February 2002, our Board of Directors terminated the existing bonus plan. The Board further directed the Bonus, Salary and Stock Option Committee to implement an interim bonus arrangement for 2002 and develop a new bonus plan for future years. In April 2002, Ethyl’s Bonus, Salary and Stock Option Committee approved an interim bonus pool arrangement for officers and other key employees pursuant to which the Committee approved lump sum payments in the aggregate amount of $1.4 million. Bonus payments were made in May 2002 and expensed to operations. A new bonus plan has been developed and is included in this filing as Exhibit 10.9.

In March 2002, our Board of Directors, as permitted under the terms of the Incentive Stock Option Plan, approved an amendment to the Incentive Stock Option Plan to extend the duration of this plan to March 2, 2004. As amended, no option or stock appreciation right may be granted under the Incentive Stock Option Plan after March 2, 2004; however, options and stock appreciation rights granted before this date will remain valid in accordance with their terms.

Availability of Reports Filed with the Securities and Exchange Commission

Our Internet website address is www.ethyl.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.

ITEM 2.    PROPERTIES

Our principal operating properties are shown below. Unless indicated, we own the research, development, and testing facilities and manufacturing properties, which primarily support the petroleum additives business segment.

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We own our corporate headquarters located in Richmond, Virginia, and generally lease our regional and sales offices located in a number of areas worldwide.

Production Capacity

We believe our plants and supply agreements are sufficient to meet expected sales levels. Operating rates of the plants vary with product mix and normal sales swings. Our facilities are well maintained and in good operating condition.

In February 2001, we announced a new business strategy related to our engine oil additives business. As part of this business plan, we idled engine oil additive units in our Houston, Texas plant and one of the units at our plant in Brazil. We also idled a smaller plant in Natchez, Mississippi. We evaluated all engine oil additive assets for impairment. The positive cash flows being generated by these assets continue to support their value on our balance sheet. The assets that were idled in 2001 were fully depreciated by their closure date.

During 2000, we permanently idled a facility in Orangeburg, South Carolina and wrote its value down to zero. We concluded that the market for the product that was produced at the facility had not grown as anticipated and that available supply and production facilities were adequate for demand of the product. This facility was sold in January, 2003.

ITEM 3.    LEGAL PROCEEDINGS

We were served as a defendant in two cases filed in the Circuit Court for Baltimore City, Maryland, in September 1999. Both cases claimed damages attributable to lead. One case was dismissed in its entirety, the plaintiffs did not appeal, and the case has ended. The other, Smith, et al. v. Lead Industries Association, Inc., et al., alleged personal injuries for seven children from lead exposure arising from lead paint and dust from tailpipe emissions due to leaded gasoline. The Court dismissed Ethyl and some other defendants from the case in February 2002 and granted summary judgment to other defendants in November 2002. The plaintiffs have appealed both decisions. We believe we have strong defenses and will continue to vigorously defend the case.

Ethyl and our subsidiaries are involved in other legal proceedings. These legal proceedings are incidental to our business and include administrative or judicial actions seeking remediation under environmental laws such as Superfund. These proceedings also include product liability cases.

Like many other companies, Ethyl is also a defendant in personal injury lawsuits involving exposure to asbestos. These cases involve exposure to asbestos in premises owned or operated, or formerly owned or operated, by Ethyl. Ethyl has never manufactured, sold or distributed products that contain asbestos. Nearly all of these cases are pending in Texas or Louisiana and involve multiple defendants. We maintain a reserve for these proceedings. In addition, Ethyl believes that Albemarle Corporation is responsible for certain premises asbestos liabilities pursuant to an indemnification agreement between the companies dated as of February 28, 1994.

While it is not possible to predict or determine the outcome of any legal proceeding, it is our opinion that Ethyl and our subsidiaries have adequate reserves and insurance coverage such that the outcome of these legal proceedings, individually or in the aggregate, would not result in a material adverse effect on Ethyl.

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

There were no issues submitted to a vote of security holders during the fourth quarter of 2002.

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PART II

ITEM 5.    MARKE T FOR REGISTRANT’S EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the New York and Pacific stock exchanges under the symbol EY.

Effective July 1, 2002, there was a 1-for-5 reverse stock split of our common stock and the number of authorized shares of common stock was reduced from 400 million to 80 million. There were 16,689,009 shares outstanding as of December 31, 2002. The registered shareholders were 10,265 at December 31, 2002 and 10,945 at December 31, 2001.

The following table shows the high and low prices of our common stock each quarter. The prices prior to July 1, 2002 have been adjusted to reflect the 1-for-5 reverse stock split.

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ITEM 6.    SELECTED FINANCIAL DATA

ETHYL CORPORATION & SUBSIDIARIES

Five Year Summary

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Notes to the Five Year Summary

The special items in 2000 include a benefit of $81 million ($51 million after income taxes) related to settlements of certain pension contracts resulting in the recognition of noncash gains and a $4 million benefit ($3 million after income taxes) related to the demutualization of MetLife, Inc. These items were partially offset by an $8 million charge ($5 million after income taxes) for the write-off of plant assets and a $1.4 million special retirement charge ($900 thousand after income taxes). The special item in 1999 consists of a supply contract amendment of $7 million income ($4 million after income taxes). The special items in 1998 consist of a benefit of $9 million, net of related expenses, ($6 million after income taxes) due to a settlement with the Canadian government, which was partially offset by a charge related to an enhanced retirement offer of $4 million ($3 million after income taxes).

The 2001 amount includes $3 million of expenses related to the refinancing of our debt. Also included is a net charge related to nonoperating assets of $3 million ($2 million after income taxes) resulting from impairment losses of $4 million, which was partially offset by a gain on a sale of $1 million. Other (expense) income, net for 2000 includes a $3 million charge for our percentage share of losses in equity investments ($2 million after income taxes) offset by a $2 million gain ($1 million after income taxes) on the sale of a nonoperating asset. Other income for 1998 includes a $15 million ($9 million after income taxes) gain on the sale of a nonoperating asset and $8 million ($6 million after income taxes) income related to the settlement of a federal income tax audit.

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ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward-Looking Statements

The following discussion contains statements about future events and expectations, or forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future results. When we use words in this document, such as “anticipates,” “intends,” “plans,” “believes,” “estimates,” “expects,” and similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include statements we make regarding future prospects of growth in the petroleum additive market, the level of future declines in the market for tetraethyl lead, and other trends in the petroleum additive market, our ability to maintain or increase our market share and our future capital expenditure levels.

We believe our forward-looking statements are based on reasonable expectations and assumptions, within the bounds of what we know about our business and operations. However, we offer no assurance that actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict and beyond our control.

These factors include, but are not limited to, timing of sales orders, gain or loss of significant customers, competition from other manufacturers, a significant rise in interest rates, resolution of environmental liabilities, or changes in the demand for our products. Other factors include significant changes in new product introduction, increases in product cost, the impact of fluctuations in foreign exchange rates on reported results of operations, changes in various markets, geopolitical risks in certain of the countries in which we conduct business, and the impact of consolidation of the petroleum additives industry. In addition, certain risk factors are also discussed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

You should keep in mind that any forward-looking statement made by us in this discussion or elsewhere speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this discussion or elsewhere might not occur.

OVERVIEW

We have been a provider to the petroleum additives market for over 28 years. We were instrumental in the consolidation of the industry from eight major participants in 1992 (Ethyl, Lubrizol, Oronite, Paramins, Amoco, Texaco, Adibis, and Shell) to the current level of four major suppliers (Ethyl, Lubrizol, Oronite & Infineum). Our consolidation efforts included the purchase of Nippon Cooper and the additives business of Amoco in 1992, and the additives business of Texaco in 1996.

As a result of our repurchasing almost 35 million shares of our outstanding common stock and our acquisition activities, we had accumulated total debt of $641 million by the end of 1997. At the time of taking on this debt, each of our businesses was earning a satisfactory return and debt repayment on a rapid schedule seemed reasonable. Immediately after the stock buyback, each of our two segments began to experience what turned out to be a long-term decline in profitability.

TEL’s rate of decline of profit accelerated due to many market and competitive forces that existed in the 1997 to 1998 timeframe.

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The profitability in the engine oil additives business of the petroleum additives segment began a rapid decline due, in part, to:

Profitability in the other businesses within our petroleum additives segment had grown, but was overwhelmed by the profitability declines in engine oils, which comprised over 60% of net sales and approximately 40% of petroleum additives operating profits in 1998.

In late 2000, the margins in the high-volume engine oil business had become unacceptable. During that period we took actions which would have led to improvements in the overall business, or would have resulted in us pursuing an alternate path. The first plan was not successful. In 2001, we announced a new plan of operating in this business. We lost a significant volume of marginal profit business as a consequence of our actions and set about to restructure the company. The restructuring plan involved significant reductions in manufacturing, research and other support areas that serviced the engine oil business. We changed our focus from growing overall market share to growing profitability in higher-margin markets. These efforts have resulted in lower fixed costs and higher capacity utilization, allowing us to compete more effectively within the realities of today’s petroleum additives marketplace.

Since 2000, our non-engine oil business within our petroleum additives segment has continued to grow, and we have contributed increased resources and focus to that growth. Continually since 1997, we have focused our efforts on reducing our overall leverage through asset sales, recapture of excess assets in our U.S. salaried pension fund, and the overall cash generating ability of our businesses.

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.

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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.

Net Sales By Segment

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).

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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.

Segment Operating Profit (Loss)

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

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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.

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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.

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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.

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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.

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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.

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Commitments

The table below shows our year-end contractual obligations, excluding long-term debt, by year due.

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.

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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.

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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.

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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.

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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.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to many market risk factors including fluctuations in interest and foreign currency rates, as well as changes in the cost of raw materials and marketable security prices. These risk factors may affect our results of operations, cash flows, and financial position.

We manage these risks through regular operating and financing methods, including the use of derivative financial instruments. When we have had derivative instruments, they have been with major financial institutions and were not for speculative or trading purposes. Also, as part of our financial risk management, we regularly review significant contracts for embedded derivatives. Based on our review, we have no contracts with a built-in derivative.

The following analysis presents the effect on our earnings, cash flows, and financial position as if the hypothetical changes in market risk factors occurred at year-end 2002, 2001, and 2000. We analyzed only the potential impacts of our hypothetical assumptions. This analysis does not consider other possible effects that could impact our business.

Interest Rate Risk

Of our $290 million of debt at December 31, 2002, $266 million of that was at variable interest rates. Holding all other variables constant, if our weighted-average interest rates hypothetically increased 10% (approximately 60 basis points), the effect on our earnings and cash flows would be higher interest expense of $1.7 million.

At year-end 2001, we had $336 million of debt with $330 million of that total at variable interest rates. At the end of 2000, $430 million of our $443 million total debt was at variable rates. A hypothetical 10% increase in the weighted-average interest rates would have resulted in higher interest expense of $2.5 million in 2001 and $3 million in 2000.

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A hypothetical 10% decrease in interest rates, holding all other variables constant, would not materially affect the fair value of outstanding debt at year-end 2002, 2001, or 2000.

Foreign Currency Risk

We sell to customers in foreign markets through our foreign operations, as well as through export sales from our plants in the U.S. These transactions are often denominated in currencies other than the U.S. dollar. Our primary currency exposures are the Euro, Japanese Yen, and Canadian Dollar.

In the past, we minimized our foreign currency risk by matching cash flow exposures in major currencies. However, as we consolidated manufacturing operations, that became more difficult. Therefore, we sometimes enter into forward contracts to minimize the risk of foreign currency denominated sales. We did not enter into any forward contracts during 2002 or 2001. Although during 2000, we had a series of Japanese Yen forward sale contracts in effect, we did not have any outstanding forward contracts at year-end 2000.

Raw Material Price Risk

We utilize a variety of raw materials in the manufacture of our products, including base oil, poly isobutylene, olefin copolymers, antioxidants and alcohols. Our profitability is sensitive to changes in the costs of these materials caused by changes in supply, demand or other market conditions, over which we have little or no control. If we experience sudden or sharp increases in the cost of our raw materials, we may not be able to pass on these increases in whole or in part to our customers. Political and economic conditions in the Middle East and Latin America have caused and may continue to cause the cost of our raw materials to fluctuate. War, armed hostilities, terrorist acts, civil unrest or other incidents may also cause a sudden or sharp increase in the cost of our raw materials. If we cannot pass on to our customers any future increases in raw material costs in the form of price increases for our products, there will be a negative impact on operating profit.

Marketable Security Price Risk

At December 31, 2002, we recorded our marketable securities at a fair value of $6 million, including net unrealized losses of $1 million. The estimated loss in the fair value resulting from a hypothetical 10% decrease in price would have been $600 thousand.

The fair value of our marketable securities at December 31, 2001 was $14 million. The estimated loss in the fair value of these securities from a hypothetical 10% decrease in price is $1 million.

At year-end 2000, our marketable securities had a fair value of $26 million, including net unrealized gains of $5 million. The estimated loss in the fair value resulting from a hypothetical 10% decrease in the price would have been $3 million.

Since the securities are classified as “available for sale,” adjustments to fair value of a temporary nature are reported in accumulated other comprehensive loss, and would not impact our results of operations or cash flows until such time that the securities are sold or that the impairment is determined to be other than temporary in nature.

Other Risk Factors

Our business is subject to many factors that could affect our future performance and cause our actual results to differ materially from those expressed or implied by forward-looking statements made in this annual report. Those risk factors are outlined below:

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ETHYL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME