10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

Commission file number 001-12515

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OM GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware	52-1736882
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
127 Public Square,
1500 Key Tower,
Cleveland, Ohio	44114-1221
(Address of principal executive offices)	(Zip Code)

216-781-0083
Registrant’s telephone number, including area code

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer þ Accelerated filer o
Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Act). Yes o No þ

As of July 31, 2007 there were 30,417,186 shares of Common Stock, par value $.01 per share, outstanding.

OM Group, Inc.
TABLE OF CONTENTS

 EX-31.1

 EX-31.2

 EX-32

 EX-99

1

Part I — FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

OM Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2007			2006
(In thousands, except share data)
ASSETS
Current assets
Cash and cash equivalents	$	412,087		$	282,288
Accounts receivable, less allowances		120,336			82,931
Inventories		294,567			216,492
Other current assets		35,175			30,648
Assets of discontinued operations		—			597,682
Total current assets		862,165			1,210,041
Property, plant and equipment, net		203,618			210,953
Goodwill		139,146			137,543
Notes receivable from joint venture partner, less allowance of $5,200 in 2007 and 2006		24,179			24,179
Other non-current assets		36,277			35,508
Total assets	$	1,265,385		$	1,618,224
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term debt	$	327		$	326
Current portion of long-term debt		134			167
Debt to be redeemed		—			402,520
Accounts payable		129,299			90,768
Accrued income taxes		39,670			17,497
Accrued employee costs		19,244			28,806
Other current liabilities		47,171			42,057
Liabilities of discontinued operations		—			167,148
Total current liabilities		235,845			749,289
Long-term debt		1,176			1,224
Deferred income taxes		4,069			4,118
Minority interests		48,716			43,286
Other non-current liabilities		40,853			38,228
Stockholders’ equity:
Preferred stock, $.01 par value:
Authorized 2,000,000 shares, no shares issued or outstanding		—			—
Common stock, $.01 par value:
Authorized 60,000,000 shares; issued 30,092,869 in 2007 and 29,801,334 shares in 2006		301			297
Capital in excess of par value		549,434			533,818
Retained earnings		381,644			221,310
Treasury stock (61,541 shares in 2007 and 2006, at cost)		(2,239	)		(2,239	)
Accumulated other comprehensive income		5,586			28,893
Total stockholders’ equity		934,726			782,079
Total liabilities and stockholders’ equity	$	1,265,385		$	1,618,224

See accompanying notes to unaudited condensed consolidated financial statements.

2

OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Income

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except per share data)	2007			2006			2007			2006
Net sales	$	231,298		$	175,156		$	447,494		$	317,603
Cost of products sold		147,621			124,621			291,573			232,914
Gross profit		83,677			50,535			155,921			84,689
Selling, general and administrative expenses		31,170			27,877			56,602			50,450
Income from operations		52,507			22,658			99,319			34,239
Other income (expense):
Interest expense		(180	)		(9,877	)		(7,285	)		(19,619	)
Loss on redemption of Notes		—			—			(21,733	)		—
Foreign exchange gain		1,316			1,599			1,784			2,261
Gain on sale of investment		—			12,223			—			12,223
Other income, net		5,152			2,045			10,104			3,407
		6,288			5,990			(17,130	)		(1,728	)
Income from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle		58,795			28,648			82,189			32,511
Income tax expense		(9,815	)		(3,324	)		(49,789	)		(5,046	)
Minority partners’ share of income		(4,848	)		(1,239	)		(6,809	)		(636	)
Income from continuing operations before cumulative effect of change in accounting principle		44,132			24,085			25,591			26,829
Discontinued operations
Income from discontinued operations, net of tax		1,904			29,030			62,923			44,172
Gain on sale of discontinued operations, net of tax		(19	)		—			72,270			—
Total income from discontinued operations, net of tax		1,885			29,030			135,193			44,172
Income before cumulative effect of change in accounting principle		46,017			53,115			160,784			71,001
Cumulative effect of change in accounting principle		—			—			—			287
Net income	$	46,017		$	53,115		$	160,784		$	71,288
Net income per common share — basic:
Continuing operations	$	1.48		$	0.82		$	0.86		$	0.92
Discontinued operations		0.06			0.99			4.53			1.50
Cumulative effect of change in accounting principle		—			—			—			0.01
Net income	$	1.54		$	1.81		$	5.39		$	2.43
Net income per common share — assuming dilution:
Continuing operations	$	1.46		$	0.82		$	0.85		$	0.91
Discontinued operations		0.06			0.98			4.48			1.50
Cumulative effect of change in accounting principle		—			—			—			0.01
Net income	$	1.52		$	1.80		$	5.33		$	2.42
Weighted average shares outstanding
Basic		29,900			29,319			29,836			29,316
Assuming dilution		30,266			29,489			30,177			29,412

See accompanying notes to unaudited condensed consolidated financial statements.

3

OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Cash Flows

	Six Months Ended June 30
(In thousands)	2007			2006
Operating activities
Net income	$	160,784		$	71,288
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from discontinued operations		(62,923	)		(44,172	)
Gain on sale of discontinued operations		(72,270	)		—
Income from cumulative effect of change in accounting principle		—			(287	)
Gain on sale of investment		—			(12,223	)
Loss on redemption of Notes		21,733			—
Depreciation and amortization		16,398			15,736
Share-based compensation expense		3,418			2,590
Excess tax benefit on the exercise of stock options		(1,045	)		—
Foreign exchange gain		(1,784	)		(2,261	)
Minority partners’ share of income		6,809			636
Other non-cash items		128			975
Changes in operating assets and liabilities
Accounts receivable		(37,654	)		(13,436	)
Inventories		(78,075	)		6,045
Accounts payable		38,531			13,067
Other, net		4,405			(2,600	)
Net cash provided by (used for) operating activities		(1,545	)		35,358
Investing activities
Expenditures for property, plant and equipment		(7,953	)		(5,288	)
Net proceeds from the sale of the Nickel business		490,036			—
Proceeds from sale of investment		—			12,223
Proceeds from loans to non-consolidated joint ventures		7,568			—
Loans to non-consolidated joint ventures		—			(2,830	)
Acquisition of businesses, net of cash acquired		—			(5,394	)
Expenditures for software		(2,127	)		(1,485	)
Net cash provided by (used for) investing activities		487,524			(2,774	)
Financing activities
Payments of long-term debt		(400,000	)		(17,250	)
Premium for redemption of Notes		(18,500	)		—
Distribution to joint venture partners		(1,350	)		—
Proceeds from exercise of stock options		10,489			345
Excess tax benefit on the exercise of stock options		1,045			—
Net cash used for financing activities		(408,316	)		(16,905	)
Effect of exchange rate changes on cash		4,053			2,742
Cash and cash equivalents
Increase from continuing operations		81,716			18,421
Discontinued operations — net cash provided by operating activities		49,623			43,972
Discontinued operations — net cash used for investing activities		(1,540	)		(8,534	)
Balance at the beginning of the period		282,288			114,618
Balance at the end of the period	$	412,087		$	168,477

See accompanying notes to unaudited condensed consolidated financial statements

4

OM Group, Inc. and Subsidiaries
Unaudited Condensed Statements of Consolidated Stockholders’ Equity

	Six Months Ended June 30,
(In thousands)	2007			2006
Common Stock — Shares Outstanding, net of Treasury Shares
Beginning balance		29,740			29,307
Shares issued under share-based compensation plans		291			18
		30,031			29,325
Common Stock — Dollars
Beginning balance	$	297		$	293
Shares issued under share-based compensation plans		4			—
		301			293
Capital in Excess of Par Value
Beginning balance		533,818			516,510
Shares issued under share-based compensation plans		10,485			345
Excess tax benefit on the exercise of stock options		1,045			—
Share-based compensation		4,086			2,561
		549,434			519,416
Retained Earnings
Beginning balance, as originally reported		221,310			6,811
Adoption of FIN No. 48 in 2007 and EITF 04-6 in 2006		(450	)		(1,574	)
Beginning balance, as adjusted for the adoption of FIN No. 48 and EITF 04-6		220,860			5,237
Net income		160,784			71,288
		381,644			76,525
Treasury Stock
Beginning balance		(2,239	)		(2,226	)
		(2,239	)		(2,226	)
Accumulated Other Comprehensive Income
Beginning balance		28,893			15,145
Foreign currency translation		(13,483	)		2,948
Reclassification of hedging activities into earnings, net of tax		(9,824	)		(954	)
Unrealized gain on cash flow hedges, net of tax expense of $1,741		—			4,953
Reclassification of realized gain on available-for-sale securities into earnings		—			(4,745	)
		5,586			17,347
Total Stockholders’ Equity	$	934,726		$	611,355

See accompanying notes to unaudited condensed consolidated financial statements

5

Notes to Unaudited Condensed Consolidated Financial Statements
OM Group, Inc. and Subsidiaries

(In thousands, except as noted and per share amounts)

Note 1 – Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of OM Group, Inc. and its subsidiaries (the “Company”). These financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of the Company at June 30, 2007 and the results of its operations for the three and six months ended June 30, 2007 and 2006 and its cash flows and changes in stockholders’ equity for the six months ended June 30, 2007 and 2006 have been included. The balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements at that date but does not include all of the information or notes required by U.S. generally accepted accounting principles for complete financial statements. Past operating results are not necessarily indicative of the results which may occur in future periods, and the interim period results are not necessarily indicative of the results to be expected for the full year. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Unless otherwise indicated, all disclosures and amounts in the Notes to Unaudited Condensed Consolidated Financial Statements relate to the Company’s continuing operations.

On November 17, 2006, the Company entered into a definitive agreement to sell its Nickel business to Norilsk Nickel (“Norilsk”). As a result, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Unaudited Condensed Consolidated Financial Statements and accompanying notes reflect the Nickel business as a discontinued operation for all periods presented.

Note 2 — Discontinued Operations and Disposition of Nickel Business

On November 17, 2006, the Company entered into a definitive agreement to sell its Nickel business to Norilsk. The Nickel business consisted of the Harjavalta, Finland nickel refinery, the Cawse, Australia nickel mine and intermediate refining facility, a 20% equity interest in MPI Nickel Pty. Ltd. and an 11% ownership interest in Talvivaara Mining Company, Ltd. The transaction closed on March 1, 2007 and at closing the Company received cash proceeds of $413.3 million. In addition, the agreement provided for a final purchase price adjustment (primarily related to working capital for the net assets sold), which was determined to be $83.2 million, and was paid to the Company in the second quarter of 2007.

The following table sets forth the components of the proceeds from the sale of the Nickel business:

Initial proceeds	$	413.3
Final purchase price adjustment		83.2
Transaction costs		(6.5	)
	$	490.0

The agreement also provided for interest on the working capital adjustment from the transaction closing date. For the three and six months ended June 30, 2007, the Company recorded interest income of $0.6 million and $1.2 million, respectively, which is included in Other income, net on the Unaudited Condensed Statements of Consolidated Income.

The Company recognized a pretax and after-tax gain on the sale of the Nickel business of $77.0 million and $72.3 million, respectively.

Discontinued operations includes share-based incentive compensation expense related to Nickel management that previously had been included in corporate expenses. No interest expense has been allocated to discontinued operations.

6

Income from discontinued operations consisted of the following for the three months ended June 30:

	2007			2006
Net sales	$	—		$	155,008
Income from discontinued operations before income taxes	$	3,105		$	33,217
Income tax expense		1,201			4,187
Income from discontinued operations, net of tax		1,904			29,030
Gain on sale of discontinued operations, net of tax		(19	)		—
Total income from discontinued operations	$	1,885		$	29,030

Income from discontinued operations consisted of the following for the six months ended June 30:

	2007		2006
Net sales	$	193,091	$	307,170
Income from discontinued operations before income taxes	$	83,608	$	52,614
Income tax expense		20,685		8,442
Income from discontinued operations, net of tax		62,923		44,172
Gain on sale of discontinued operations, net of tax		72,270		—
Total income from discontinued operations	$	135,193	$	44,172

Assets and liabilities of discontinued operations at December 31, 2006 were as follows:

	December 31,
	2006
Accounts receivable	$	97,050
Inventories		191,380
Property, plant and equipment, net		149,857
Goodwill		46,481
Other current assets		112,914
Assets of discontinued operations	$	597,682
Accounts payable	$	100,644
Other current liabilities		66,504
Liabilities of discontinued operations	$	167,148

Note 3 – Debt

On March 7, 2007, the Company redeemed the entire $400.0 million of its outstanding 9.25% Senior Subordinated Notes due 2011 (the “Notes”) at a redemption price of 104.625% of the principal amount, or $418.5 million, plus accrued interest of $8.4 million. The loss on redemption of the Notes was $21.7 million, and consisted of the premium of $18.5 million plus related deferred financing costs of $5.7 million less a deferred net gain on terminated interest rate swaps of $2.5 million.

7

Debt consists of the following:

	June 30,		December 31,
	2007		2006
Senior Subordinated Notes	$	—	$	400,000
Notes payable — bank		1,637		1,717
Deferred gain on termination of fair value hedges		—		2,520
		1,637		404,237
Less: Short-term debt		327		326
Less: Current portion of long-term debt		134		167
Less: Debt to be redeemed		—		402,520
Total long-term debt	$	1,176	$	1,224

Note 4 — Inventories

Inventories consist of the following:

	June 30,		December 31,
	2007		2006
Raw materials and supplies	$	159,742	$	138,913
Work-in-process		19,447		17,265
Finished goods		115,378		60,314
	$	294,567	$	216,492

Note 5 – Acquisition and Investment

On March 21, 2006, the Company completed the acquisition of Plaschem Specialty Products Pte Ltd. and its subsidiaries (“Plaschem”). Plaschem develops and produces specialty chemicals for printed circuit board chemistries, semiconductor chemistries and general metal finishing with integrated manufacturing, research and technical support facilities in Singapore and the Shanghai area of China. In connection with the acquisition, the Company paid $5.2 million in cash, net of cash acquired and issued a $0.5 million note payable. The Company incurred fees of approximately $0.2 million associated with this transaction. Additional contingent consideration, up to a maximum of $2.0 million, is due to the seller if certain specified financial performance targets of the acquired business are met over the three-year period following the acquisition. Goodwill of $1.3 million was recognized as a result of this acquisition. Plaschem is included in the Electronic Chemicals product line grouping results of operations since the date of acquisition.

During the second quarter of 2006, the Company sold the outstanding common shares it held in Weda Bay Minerals, Inc. (“Weda Bay”) and received cash proceeds of $12.2 million. The Company recognized a $12.0 million gain, net of $0.2 million tax expense, upon completion of the sale as the net book value of the investment was zero due to an other-than-temporary impairment charge recorded in prior years. The gain is included in Gain on sale of investment in the Unaudited Condensed Statements of Consolidated Income.

Note 6 — Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002.

The Company’s interim income tax provisions are based on the application of an estimated annual effective income tax rate applied to year-to-date pre-tax income. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including forecasts of the Company’s annual earnings, taxing jurisdictions in which the earnings will be generated, the Company’s

8

ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. The tax effects of discrete items, including the effect of changes in tax laws, tax rates, certain circumstances with respect to valuation allowances or other unusual or non-recurring items are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual effective income tax rate.

Income from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle consists of the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
United States	$	(8,090	)	$	(13,204	)	$	(38,629	)	$	(27,640	)
Outside the United States		66,885			41,852			120,818			60,151
	$	58,795		$	28,648		$	82,189		$	32,511

Prior to December 31, 2006, the Company had recorded a valuation allowance against its U.S. net deferred tax assets, primarily related to net operating loss carryforwards, because it was more likely than not that those deferred tax assets would not be realized. However, due primarily to the redemption of the Notes in March 2007, the Company decided to repatriate the undistributed earnings of certain European subsidiaries during the first quarter of 2007. Previously, the Company had planned to permanently reinvest such undistributed earnings overseas. As a result of the plan to repatriate, the Company recorded a deferred tax liability and reversed a portion of the valuation allowance in the fourth quarter of 2006. During the first quarter of 2007, the Company repatriated $528.5 million and recorded an additional tax liability of $38.8 million. The additional $38.8 million tax liability recorded in the first quarter of 2007 was due to the repatriation of the proceeds from the sale of the Nickel business and other cash amounts, which in the aggregate were in excess of undistributed earnings overseas at December 31, 2006.

The Company’s effective income tax rates are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Effective income tax rate		16.7	%		11.6	%		60.6	%		15.5	%

The effective income tax rate for the first six months of 2007 includes the $38.8 million tax expense to repatriate foreign cash in the first quarter of 2007 as described above. The effective income tax rate for the first six months of 2007 also includes a tax benefit of $7.6 million associated with the $21.7 million loss on the redemption of the Notes in the first quarter of 2007. These items were treated as discrete items in the first quarter of 2007.

Excluding the discrete items discussed above, the effective income tax rates for all periods are lower than the United States statutory rate primarily due to a higher proportion of earnings in foreign jurisdictions having lower statutory tax rates than the United States, a tax holiday in Malaysia and in 2007 the tax benefit of domestic losses.

In connection with an investment incentive arrangement, the Company had a “tax holiday” from income taxes in Malaysia that expired on December 31, 2006. During the second quarter of 2007, the Malaysian tax holiday was extended for an additional five years, retroactive to January 1, 2007. The Malaysian tax holiday reduced income tax expense for the three and six months ended June 30, 2007 by $3.6 million, including the reversal of a $0.3 million deferred tax liability recorded in prior periods. Had the tax holiday been granted in the first quarter of 2007, income tax expense for the first quarter would have been lower by $2.7 million. The benefit of the tax holiday on net income per diluted share was approximately $0.12 in the three and six months ended June 30, 2007. The benefit of the tax holiday on net income per diluted share was approximately $0.06 and $0.10 in the three and six months ended June 30, 2006, respectively.

The Company adopted the provisions of Financial Accounting Standards Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes” on January 1, 2007. As a result of the adoption of FIN No. 48, the Company recognized a $0.5 million liability which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. Including reserves for tax contingencies previously recorded, the Company has $2.0 million of uncertain tax positions all of which would affect the Company’s effective income tax rate if recognized, and of which $1.8 million is included as a component of other non-current liabilities and $0.2 million is recorded in other current liabilities on the Unaudited Condensed Consolidated Balance Sheets at June 30, 2007. There were no material changes to the liability for uncertain tax positions in the quarter ended June 30, 2007.

9

The Company accrues interest related to uncertain tax positions and penalties as a component of income tax expense. The Company had $0.6 million and $0.5 million accrued at June 30, 2007 and December 31, 2006, respectively, for the payment of interest and penalties.

Included in the liability for uncertain tax positions at June 30, 2007 and December 31, 2006, is $0.2 million for which it is reasonably possible that the liability will decrease due to settlement with the tax authorities within the next 12 months.

Note 7 — Pension and Other Postretirement Benefit Plans

The Company sponsors a defined contribution plan covering all eligible U.S. employees. To be eligible for the plan, an employee must be a full-time associate and at least 21 years of age. Company contributions are determined by the board of directors annually and are computed based upon participant compensation. Company contributions are directed by the employee into various investment options. The Company also sponsors a non-contributory, nonqualified supplemental executive retirement plan for certain employees, providing benefits beyond those covered in the defined contribution plan.

The Company has a funded non-contributory defined benefit pension plan for certain retired employees in the United States related to the Company’s divested SCM business. Pension benefits are paid to plan participants directly from pension plan assets. The Company also has an unfunded supplemental executive retirement plan (“SERP”) for the former Chief Executive Officer and other unfunded postretirement benefit plans (“OPEB”), primarily health care and life insurance for certain employees and retirees in the United States. The Company uses an October 31 measurement date for both its pension and postretirement benefit plans.

Set forth below is a detail of the net periodic pension expense for the defined benefit:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Pension Benefits
Interest cost	$	334		$	306		$	668		$	612
Amortization of unrecognized net loss		75			67			151			134
Expected return on plan assets		(197	)		(228	)		(394	)		(456	)
Total expense	$	212		$	145		$	425		$	290
Other Postretirement Benefits
Service cost	$	21		$	33		$	41		$	66
Interest cost		66			60			132			120
Amortization of unrecognized prior service cost		10			10			20			20
Total expense	$	97		$	103		$	193		$	206

Note 8 — Earnings Per Share

The following table sets forth the computation of basic and diluted income per common share from continuing operations before cumulative effect of change in accounting principle:

10

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Income from continuing operations before cumulative effect of change in accounting principle	$	44,132	$	24,085	$	25,591	$	26,829
Weighted average shares outstanding		29,900		29,319		29,836		29,316
Dilutive effect of stock options and restricted stock		366		170		341		96
Weighted average shares outstanding — assuming dilution		30,266		29,489		30,177		29,412
Income per common share from continuing operations before cumulative effect of change in accounting principle — basic	$	1.48	$	0.82	$	0.86	$	0.92
Income per common share from continuing operations before cumulative effect of change in accounting principle — assuming dilution	$	1.46	$	0.82	$	0.85	$	0.91

The following table sets forth the computation of basic and diluted net income per common share:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Net income	$	46,017	$	53,115	$	160,784	$	71,288
Weighted average shares outstanding		29,900		29,319		29,836		29,316
Dilutive effect of stock options and restricted stock		366		170		341		96
Weighted average shares outstanding — assuming dilution		30,266		29,489		30,177		29,412
Net income per common share — basic	$	1.54	$	1.81	$	5.39	$	2.43
Net income per common share — assuming dilution	$	1.52	$	1.80	$	5.33	$	2.42

11

Note 9 — Accumulated Other Comprehensive Income

				Unrealized
				Gains and
				Losses, Net						Accumulated
	Foreign			on Cash Flow			Pension and			Other
	Currency			Hedging			Post-Retirement			Comprehensive
	Translation			Derivatives			Obligation			Income (Loss)
Balance at December 31, 2006	$	29,094		$	9,824		$	(10,025	)	$	28,893
Current period credit (charge)		1,996			2,465			—			4,461
Disposal of Nickel business		(15,479	)		(12,289	)		—			(27,768	)
Balance at June 30, 2007	$	15,611		$	—		$	(10,025	)	$	5,586

Comprehensive income, net of related tax effects, for the three months ended June 30, 2007 and 2006 was $47.8 million and $50.5 million, respectively. Comprehensive income, net of related tax effects, for the six months ended June 30, 2007 and 2006 was $137.5 million and $73.5 million, respectively.

Note 10 — Commitments and Contingencies

During the first quarter of 2007, the Company entered into five-year supply agreements with Norilsk for up to 2,500 metric tons per year of cobalt metal, up to 2,500 metric tons per year of cobalt in the form of crude cobalt hydroxide concentrate, up to 1,500 metric tons per year of cobalt in the form of crude cobalt sulfate, up to 5,000 metric tons per year of copper in the form of copper cake and various other nickel-based raw materials used in the Company’s electronic chemicals business. In addition, the Company entered into two-year agency and distribution agreements for nickel salts.

The Division of Enforcement of the Securities and Exchange Commission (the “SEC”) has been conducting an informal investigation resulting from the self reporting by the Company of the internal investigation conducted in 2003 and 2004 by the audit committee of the Company’s board of directors in connection with the previously filed restatement of the Company’s financial results for periods prior to December 31, 2003. On July 18, 2007, without admitting or denying the nonjurisdictional findings by the SEC, the Company consented to an order to cease-and-desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 under the Securities Exchange Act. The SEC considered remedial acts promptly undertaken by the Company and cooperation afforded the SEC staff and did not assess the Company any financial penalties.

During 2005, the Company reversed a $5.5 million tax contingency accrual that was originally established in July 2003 upon the sale of the Company’s Precious Metals Group (“PMG”) as the liability was no longer considered probable. Such amount had previously been included in Retained Liabilities of Businesses Sold. The contingency relates to a tax matter in Brazil for which the Company has indemnified the PMG buyer under terms of the PMG sale agreement. Although the contingency is no longer probable, the likelihood of an unfavorable outcome of this contingency is reasonably possible based on the length of time expected before the matter is closed and the inherent risk of changes in the political or legal situation in Brazil. If the ultimate outcome of this contingency is unfavorable, the loss, based on exchange rates at June 30, 2007, would be $6.3 million and would be recorded in discontinued operations.

During the first six months of 2007, the Company became aware of two additional contingent liabilities related to the Company’s former PMG operations in Brazil. The contingencies, which remain the responsibility of OMG to the extent the matters relate to the period from 2001-2003 during which the Company owned PMG, are potential assessments by Brazilian taxing authorities related to duty drawback tax for items sold by PMG during 2001-2003, and certain VAT and/or Service Tax assessments. The Company has assessed the current likelihood of an unfavorable outcome of these contingencies and concluded that they are reasonably possible but not probable. If the ultimate outcome of these contingencies is unfavorable, the loss, based on exchange rates at June 30, 2007, would be up to $23.0 million and would be recorded in discontinued operations.

The Company is a party to various other legal proceedings incidental to its business and is subject to a variety of environmental and pollution control laws and regulations in the jurisdictions in which it operates. As is the case with other companies in similar industries, the Company faces exposure from actual or potential claims and legal proceedings involving environmental matters. A

12

number of factors affect the cost of environmental remediation, including the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing improvements in remediation techniques. Taking these factors into consideration, the Company has estimated the undiscounted costs of remediation, which will be incurred over several years. The Company accrues an amount consistent with the estimates of these costs when it is probable that a liability has been incurred. At June 30, 2007 and December 31, 2006 the Company has recorded environmental liabilities of $5.5 million and $8.0 million, respectively, primarily related to remediation and decommissioning at the Company’s closed manufacturing sites in Newark, New Jersey and Vasset, France. The Unaudited Condensed Statement of Consolidated Income for the three and six months ended June 30, 2007 includes a $1.1 million charge for an increase in the estimate to complete the remediation at the Newark, New Jersey site.

Although it is difficult to quantify the potential impact of compliance with or liability under environmental protection laws, the Company believes that any amount it may be required to pay in connection with environmental matters, as well as other legal proceedings arising out of operations in the normal course of business, is not reasonably likely to exceed amounts accrued by an amount that would have a material adverse effect upon its financial condition, results of operations or cash flows.

Note 11 — Share-Based Compensation

On May 8, 2007, the stockholders of the Company approved the 2007 Incentive Compensation Plan (the “2007 Plan”). The 2007 Plan supersedes and replaces our 1998 Long-Term Incentive Compensation Plan and our 2002 Stock Incentive Plan. The 1998 Plan and 2002 Plan terminated upon stockholder approval of the 2007 Plan, such that no further grants may be made under either the 1998 Plan or the 2002 Plan. The terminations will not affect awards already outstanding under the 1998 Plan or the 2002 Plan, which consist of options and restricted stock awards. All options outstanding under each of the 1998 Plan and the 2002 Plan have 10-year terms and have an exercise price of not less than the per share fair market value, measured by the average of the high and low price of the Company’s common stock on the NYSE, on the date of grant.

Under the 2007 Plan, the Company may grant stock options, stock appreciation rights, restricted stock awards and phantom stock and restricted stock unit awards to selected employees and non-employee directors. The 2007 Plan also provides for the issuance of common stock to non-employee directors as all or part of their annual compensation for serving as directors, as may be determined by the board of directors. The total number of shares of common stock available for awards under the 2007 Plan (including any annual stock issuances made to non-employee directors) is 3,000,000. The 2007 Plan provides that no more than 1,500,000 shares of common stock may be the subject of awards that are not stock options or stock appreciation rights. In addition, no more than 250,000 shares of common stock may be awarded to any one person in any calendar year, whether in the form of stock options, restricted stock or another form of award. The 2007 Plan provides that all options granted must have an exercise price of not less than the per share fair market value on the date of grant and that no option may have a term of more than ten years.

The Unaudited Condensed Statements of Consolidated Income include share-based compensation expense as a component of selling, general and administrative expenses of $1.9 million and $1.4 million for the three months ended June 30, 2007 and 2006, respectively, and $3.4 million and $2.6 million for the six months ended June 30, 2007 and 2006, respectively. In connection with the sale of the Nickel business, the Company entered into agreements with certain Nickel employees that provided for the acceleration of vesting for all unvested stock options and time-based and performance–based restricted stock previously granted to those employees. The Unaudited Condensed Statements of Consolidated Income include share-based compensation expense as a component of discontinued operations of $0.2 million for the three months ended June 30, 2006 and $0.7 million and $0.3 million for the six months ended June 30, 2007 and 2006, respectively.

The Company adopted SFAS No. 123R on January 1, 2006. The adjustment to apply estimated forfeitures to previously recognized share-based compensation was accounted for as a cumulative effect of a change in accounting principle and increased net income by $0.3 million, or $.01 per basic and diluted share for the six months ended June 30, 2006.

At June 30, 2007, there was $11.5 million of total unrecognized compensation expense related to nonvested share-based awards. That cost is expected to be recognized as follows: $3.4 million in the remaining six months of 2007, $5.1 million in 2008, $2.8 million in 2009 and $0.2 million in 2010. There is no unrecognized compensation expense related to the Nickel business. Unearned compensation expense is recognized over the vesting period for the particular grant. Total unrecognized compensation cost will be adjusted for future changes in actual and estimated forfeitures.

13

The Company received cash payments of $10.5 million and $0.3 million in the first six months of 2007 and 2006, respectively, in connection with the exercise of stock options. SFAS 123R requires that excess tax benefits be recognized as an increase to additional paid-in capital. The exercise of stock options during the first six months of 2007 resulted in a $1.0 million increase in additional paid- in capital. The Company issues new shares to satisfy stock option exercises and restricted stock awards. The Company does not settle share-based payment obligations for cash.

Stock Options

Options granted generally vest in equal increments over a three-year period from the grant date. The Company accounts for options that vest over more than one year as one award and recognizes expense related to those awards on a straight-line basis over the vesting period. During the first six months of 2007, the Company granted stock options to purchase 184,750 shares of common stock. Upon any change in control of the Company, as defined in the applicable plan, the stock options become 100% vested and exercisable.

The fair value of options granted during the first six months of 2007 was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted-average assumptions:

Risk-free interest rate		4.7	%
Dividend yield		—
Volatility factor of Company common stock		0.47
Weighted-average expected option life (years)		6.0
Weighted-average grant-date fair value	$	26.24

The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the term of the options being valued. The dividend yield assumption is zero, as the Company intends to continue to retain earnings for use in the operations of the business and does not anticipate paying dividends in the foreseeable future. Expected volatilities are based on historical volatility of the Company’s common stock. The expected term of options granted is determined using the shortcut method allowed by Staff Accounting Bulletin (“SAB”) No. 107. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.

The following table sets forth the number and weighted-average grant-date fair value:

			Weighted-
			Average Fair
			Value at Grant
	Shares		Date
Non-vested at December 31, 2006		439,008	$	11.60
Non-vested at June 30, 2007		479,007	$	17.15
Granted during the first six months of 2007		184,750	$	26.24
Vested during the first six months of 2007		47,700	$	13.98
Forfeited during the first six months of 2007		—	$	—

The total intrinsic value of options exercised during the first six months of 2007 was $5.8 million. The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option.

14

A summary of the Company’s stock option activity for the first six months of 2007 is as follows:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at January 1, 2007		894,703		$	32.40
Granted		184,750			51.16
Exercised		(285,600	)		36.73
Expired unexercised		(11,000	)		54.76
Forfeited		—			—
Outstanding at June 30, 2007		782,853		$	34.93		8.14	$	14,262,321
Vested or expected to vest at June 30, 2007		763,385		$	34.85		8.13	$	13,979,728
Exercisable at June 30, 2007		303,846		$	31.08		7.23	$	6,817,524

Restricted Stock – Performance-Based Awards

During the first six months of 2007, the Company awarded a total of 86,854 shares of performance-based restricted stock that vest subject to the Company’s financial performance. The total number of shares of restricted stock that ultimately vest is based upon the Company’s achievement of specific measurable performance criteria. A recipient of performance-based restricted stock may earn a total award ranging from 0% to 100% of the initial grant. Of the 86,854 shares awarded during the first six months of 2007, 80,600 shares will vest upon the satisfaction of established performance criteria based on consolidated operating profit and average return on net assets over a three-year performance period ending December 31, 2009. The remaining 6,254 shares will vest if the Company meets an established earnings target for the Specialties business segment during any one of the years in the three-year period ending December 31, 2009.

The value of the performance-based restricted stock awards was based upon the market price of an unrestricted share of the Company’s common stock at the date of grant. The Company recognizes expense related to performance-based restricted stock ratably over the requisite service period based upon the number of shares that are anticipated to vest. The number of shares anticipated to vest is evaluated quarterly and compensation expense is adjusted accordingly. Upon any change in control of the Company, as defined in the plan, the shares become 100% vested. In the event of death or disability, a pro rata number of shares shall remain eligible for vesting at the end of the performance period.

In connection with the sale of the Nickel business, the Company entered into an agreement with a Nickel employee that provided for the acceleration of vesting at the “target” performance level for unvested performance–based restricted stock previously granted to that employee. As a result, during the first six months of 2007, 3,825 shares of performance-based restricted stock vested and 3,825 shares of performance-based restricted shares were cancelled.

A summary of the Company’s performance-based restricted stock awards for the first six months of 2007 is as follows:

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Non-vested at January 1, 2007		95,900		$	28.93
Granted		86,854		$	42.13
Vested		(3,825	)	$	41.57
Cancelled		(3,825	)	$	28.80
Non-vested at June 30, 2007		175,104		$	38.29
Expected to vest at June 30, 2007		124,914

Restricted Stock – Time-Based Awards

15

During the first six months of 2007, the Company awarded 24,360 shares of time-based restricted stock that vest three years from the date of grant subject to the respective recipient remaining employed by the Company on that date. The value of the restricted stock awards, based upon the market price of an unrestricted share of the Company’s common stock at the date of grant, was $1.2 million. Compensation expense is being recognized ratably over the vesting period. Upon any change in control of the Company, as defined in the plan, the shares become 100% vested. A pro rata number of shares will vest in the event of death or disability prior to the stated vesting date.

In connection with the sale of the Nickel business, the Company entered into an agreement with a Nickel employee that provided for the acceleration of vesting, during the first six months of 2007, of 2,100 shares of unvested time–based restricted stock previously granted to that employee.

A summary of the Company’s time-based restricted stock awards for the first six months of 2007 is as follows:

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Nonvested at January 1, 2006		188,494		$	25.39
Granted		24,360		$	51.16
Vested		(2,100	)	$	41.57
Nonvested at June 30, 2007		210,754		$	29.04
Expected to vest at June 30, 2007		209,741

Note 12 — Reportable Segments

As a result of the sale of the Nickel business on March 1, 2007, the Company’s Unaudited Condensed Consolidated Financial Statements, accompanying notes and other information provided in this Form 10-Q reflect the Nickel segment as a discontinued operation for all periods presented. The Nickel business consisted of the Harjavalta, Finland nickel refinery, the Cawse, Australia nickel mine and intermediate refining facility, a 20% equity interest in MPI Nickel Pty. Ltd. and an 11% ownership interest in Talvivaara Mining Company, Ltd.

After reclassifying the Nickel segment to discontinued operations, the Company has one remaining operating segment — Specialties. The Specialties segment includes products manufactured using cobalt and other metals including copper, zinc, manganese, and calcium. In late 2005, the Company began a strategic transformation away from commodity-based businesses and markets to value-added, specialty businesses and markets. The sale of the Company’s Nickel business, discussed above, was part of the transformation. Pursuant to the transformation, the Vice President and General Manager of the Specialties segment organized certain product lines around end markets, thereby creating three business units that represent product line groupings around end markets: Advanced Organics, Inorganics and Electronic Chemicals. The Specialties segment also includes certain other operations, primarily the Democratic Republic of Congo (the “DRC”) smelter operations, which are not classified into one of these groupings. The Company’s products are sold in various forms such as solutions, crystals and powders. The Company’s products are essential components in numerous complex chemical and industrial processes and are used in many end markets.

Corporate is comprised of general and administrative expenses not allocated to Specialties.

While its primary manufacturing site is in Finland, the Company also has manufacturing and other facilities in the United States, Europe, Asia-Pacific and Canada, and the Company markets its products worldwide. Further, approximately 37% of the Company’s investment in property, plant and equipment is located in the DRC, where the Company operates a smelter through a 55% owned joint venture.

16

The following table reflects the results of the segment:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Business Segment Information
Net Sales
Specialties	$	231,298		$	175,156		$	447,494		$	317,603
Income from operations
Specialties	$	61,140		$	32,691		$	116,303		$	52,345
Corporate		(8,633	)		(10,033	)		(16,984	)		(18,106	)
	$	52,507		$	22,658		$	99,319		$	34,239
Interest expense	$	(180	)	$	(9,877	)	$	(7,285	)	$	(19,619	)
Loss on redemption of Notes		—			—			(21,733	)		—
Foreign exchange gain		1,316			1,599			1,784			2,261
Gain on sale of investment		—			12,223			—			12,223
Other income, net		5,152			2,045			10,104			3,407
	$	6,288		$	5,990		$	(17,130	)	$	(1,728	)
Income from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle	$	58,795		$	28,648		$	82,189		$	32,511
Expenditures for property, plant & equipment
Specialties	$	4,293		$	3,230		$	7,953		$	5,288
Depreciation and amortization
Specialties	$	8,103		$	7,624		$	15,930		$	15,251
Corporate		230			242			468			485
	$	8,333		$	7,866		$	16,398		$	15,736
	June 30,			December 31,
	2007			2006
Total assets
Specialties	$	993,663		$	826,488
Corporate		271,722			194,054
Assets of discontinued operations		—			597,682
	$	1,265,385		$	1,618,224

Note 13 — Recently Issued Accounting Standards

Accounting Standards adopted in 2007:

FIN No. 48: In July 2006, the Financial Accounting Standards Board (“FASB”) issued FIN No. 48. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 on January 1, 2007. The transition provisions require that the effect of applying the provisions of FIN No. 48 be reported as an adjustment to the opening balance of retained earnings in the year of adoption. The effect of adoption was a $0.5 million reduction to retained earnings at January 1, 2007.

17

EITF No. 06-3: In June 2006, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, gross versus net presentation).” EITF No. 06-03 indicates that the income statement presentation of taxes within the scope of the Issue on either a gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to APB No. 22. The Company has historically accounted for such taxes on a net basis and therefore the adoption of EITF No. 06-03 in the first quarter of 2007 had no impact on the Company’s results of operations and financial position.

Accounting Standards Not Yet Adopted

SFAS No. 159: In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). Unrealized gains and losses on items for which the fair value option has been elected are to be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on its results of operations or financial position.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is a leading, vertically integrated international producer and marketer of value-added, metal-based specialty chemicals and related materials. The Company applies proprietary technology to unrefined cobalt and other raw materials to market more than 775 different product offerings to approximately 1,900 customers in over 40 industries.

The Company’s business is critically connected to both the price and availability of raw materials. The primary raw material used by the Company is unrefined cobalt. Cobalt raw materials include ore, concentrates, slag and scrap. The cost of the Company’s raw materials fluctuates due to actual or perceived changes in supply and demand, changes in cobalt reference prices and changes in availability from suppliers. The Company attempts to mitigate changes in availability by maintaining adequate inventory levels and long-term supply relationships with a variety of producers. Fluctuations in the price of cobalt have been significant in the past and the Company believes that cobalt price fluctuations are likely to continue in the future. The Company attempts to pass through to its customers increases in raw material prices by increasing the prices of its products. The Company’s profitability is largely dependent on the Company’s ability to maintain the differential between its product prices and product costs. Certain sales contracts and raw material purchase contracts contain variable pricing that adjusts based on changes in the price of cobalt. During periods of rapidly changing metal prices, however, there may be price lags that can impact the short-term profitability and cash flow from operations of the Company both positively and negatively. Reductions in the price of raw materials or declines in the selling prices of the Company’s finished goods could also result in the Company’s inventory carrying value being written down to a lower market value.

The Company has manufacturing and other facilities in North America, Europe, Africa and Asia-Pacific, and markets its products worldwide. Although most of the Company’s raw material purchases and product sales are based on the U.S. dollar, prices of certain raw materials, non-U.S. operating expenses and income taxes are denominated in local currencies. As such, the results of operations are subject to the variability that arises from exchange rate movements (particularly the Euro). In addition, fluctuations in exchange rates may affect product demand and profitability in U.S. dollars of products provided by the Company in foreign markets in cases where payments for its products are made in local currency. Accordingly, fluctuations in currency prices affect the Company’s operating results.

On March 1, 2007, the Company completed the sale of its Nickel business, as discussed in Note 2 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q. As a result, the Company’s financial statements, accompanying notes and other information provided in this Form 10-Q reflect the Nickel business as a discontinued operation for all periods presented. The Nickel business consisted of the Harjavalta, Finland nickel refinery, the Cawse, Australia nickel mine and intermediate refining facility, a 20% equity interest in MPI Nickel Pty. Ltd. and an 11% ownership interest in Talvivaara Mining Company, Ltd.

After reclassifying the Nickel business to discontinued operations, the Company has one operating segment — Specialties. The Specialties segment includes products manufactured using cobalt and other metals including copper, zinc, manganese, and calcium. In late 2005, the Company began a strategic transformation away from commodity-based businesses and markets to value-added, specialty businesses and markets. Pursuant to the transformation, the Vice President and General Manager of the Specialties segment organized certain product lines around end markets, thereby creating three business units that represent product line groupings around end markets: Advanced Organics, Inorganics and Electronic Chemicals. The Specialties segment also includes certain other operations, primarily the DRC smelter operations, which are not classified into one of these groupings. The Company’s products are sold in various forms such as solutions, crystals and powders. The Company’s products are essential components in numerous complex chemical and industrial processes, and are used in many end markets.

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The following table sets forth information regarding the Company’s product line groupings:

Product Line Grouping	End Markets/Applications	Product Attributes
Advanced Organics	Tires	Promotes bonding of metal-to-rubber in radial tires
	Coatings and paints	Promotes faster drying in such products as house paints (exterior and interior) and industrial and marine coatings
	Printing Inks	Promotes faster drying in various printing inks
	Petrochemical Refining	Catalyzes reduction of sulfur dioxide and nitrogen emissions
	Polyester Resins	Accelerates the curing of polyester resins found in reinforced fiberglass boats, storage tanks, bathrooms, sports equipment, automobile and truck components
Inorganics	Rechargeable Batteries	Improves the electrical conduction of rechargeable batteries used in cellular phones, video cameras, portable computers, power tools and hybrid electric vehicles
	Ceramics and Glassware	Provides color for pigments, earthenware and glass and facilitates adhesion of porcelain to metal
	Catalysts	Reduces emissions from petrochemical refining and enables the production of cleaner-burning fuels
	Construction Equipment and Cutting Tools	Strengthens and adds durability to diamond and machine cutting tools and drilling equipment used in construction, oil and gas drilling, and quarrying
Electronic Chemicals	Memory Disks	Enhances information storage on disks for computers and consumer electronics
	General Metal Finishing	Impart corrosion protection and wear resistance to electrical connectors, microwave housings, valves and pump bodies, printer shafts and hard-drive computer components

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company’s management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Unaudited Condensed Consolidated Financial Statements. In preparing these financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The application of accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates and assumptions, which may impact the comparability of the Company’s results of operations to their businesses. There have been no changes to our critical accounting policies as stated in our Annual Report on Form 10-K for the year ended December 31, 2006 other than the adoption of FIN No. 48, as discussed in Note 13 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.

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Results of Operations

Second Quarter of 2007 Compared With Second Quarter of 2006

Consolidated Results of Operations

	Three Months Ended June 30,
(thousands of dollars & percent of net sales)	2007					2006
Net sales	$	231,298				$	175,156
Cost of products sold		147,621					124,621
Gross profit		83,677		36.2	%		50,535		28.9	%
Selling, general and administrative expenses		31,170		13.5	%		27,877		15.9	%
Income from operations		52,507		22.7	%		22,658		12.9	%
Other income, net (including interest expense)		6,288					5,990
Income tax expense		(9,815	)				(3,324	)
Minority partners’ share of income		(4,848	)				(1,239	)
Income from continuing operations		44,132					24,085
Discontinued operations
Income from discontinued operations, net of tax		1,904					29,030
Gain on sale of discontinued operations, net of tax		(19	)				—
Net income	$	46,017				$	53,115

The following table reflects the sales for the product line groupings in the Specialties segment for the three months ended June 30,

(thousands of dollars)	2007		%			2006		%
Net Sales
Inorganics	$	153,302		67	%	$	110,843		64	%
Advanced organics		48,937		21	%		42,547		24	%
Electronic chemicals		29,059		12	%		21,766		12	%
	$	231,298				$	175,156

The following table reflects the volumes in the Specialties segment for the three months ended June 30,

	2007		2006
Volumes
Inorganics sales volume — metric tons		5,900		7,600
Advanced organics sales volume — metric tons		7,600		7,700
Electronic chemicals sales volume — gallons (thousands)		1,832		1,764
Cobalt refining volume — metric tons		2,100		2,000

21

The following table summarizes the percentage of sales dollars by region for the three months ended June 30:

	2007			2006			Change
Americas		19	%		24	%		-5	%
Asia		45	%		37	%		8	%
Europe		36	%		39	%		-3	%

The following table summarizes the percentage of sales dollars by end market for the second quarter of:

	2007			2006			Change
Batteries		29	%		20	%		9	%
Chemical		18	%		17	%		1	%
Electronic Chemical		13	%		12	%		1	%
Tire		7	%		8	%		-1	%
Powder Metallurgy		10	%		9	%		1	%
Coatings		6	%		8	%		-2	%
Other		17	%		26	%		-9	%

The following table summarizes the average quarterly reference price of 99.3% cobalt:

	2007		2006		2005
First Quarter	$	25.82	$	12.43	$	17.26
Second Quarter	$	28.01	$	14.43	$	15.03
Third Quarter		n/a	$	15.59	$	13.41
Fourth Quarter		n/a	$	18.66	$	12.51
Full Year		n/a	$	15.22	$	14.55

Net sales increased to $231.3 million in the second quarter of 2007 from $175.2 million in the second quarter of 2006, primarily due to increased product selling prices ($81.0 million). The increase in product selling prices was primarily caused by the $13.58 increase in the average cobalt reference price in the second quarter of 2007 compared with the second quarter of 2006. The increase in revenues from higher pricing was partially offset by a change with respect to sales of specialty nickel salts products. In connection with the sale of the Nickel business to Norilsk on March 1, 2007, the Company entered into two-year agency and distribution agreements for certain Specialty Nickel salts products. Under the contracts, the Company now acts as a distributor of these products on behalf of Norilsk and records the related commission revenue on a net basis. Prior to March 1, 2007, the Company, through its Specialties business, was the primary obligor for these sales and recorded the revenue on a gross basis. This change resulted in a $10.3 million decrease in net sales in the second quarter of 2007. Also impacting net sales was a decrease in copper by-product sales ($7.5 million), an unfavorable shift in product mix ($6.2 million) and reduced volume ($3.4 million). Decreased sales volumes in the inorganics and advanced organics product groupings were partially offset by increased sales volume in the electronic chemicals product groupings.

Gross profit was $83.7 million in the second quarter of 2007, compared with $50.5 million in the second quarter of 2006, and as a percentage of net sales increased to 36.2% from 28.9%. The increase was primarily due to the increase in the average cobalt metal price ($34.8 million). Gross profit was also favorably impacted by improved results at the smelter in the DRC ($6.4 million). The increase in profit at the DRC smelter was primarily due to increased shipments and the higher average cobalt reference price. Also included in the DRC results in the second quarter of 2007 is a $1.0 million decrease to the charge recorded in the first quarter of 2007 related to the analysis and valuation of the first quarter theft of material during shipment along supply lines in Africa. These factors were partially offset by the decrease in copper by-product sales ($10.6 million).

Selling, general and administrative (“SG&A”) expenses were $31.2 million in the second quarter of 2007 compared with $27.9 million in the second quarter of 2006. The $3.3 million increase was primarily due to a $2.3 million increase in selling expenses as a result of the increase in sales, $2.0 million in legal fees incurred by Specialties for a lawsuit the Company filed related to the unauthorized use by a third-party of proprietary information and a $1.1 million charge to increase the environmental liability due to a change in the estimate to complete the environmental remediation activities at the Company’s closed Newark, New Jersey site.

22

SG&A expenses in the second quarter of 2006 included a $1.0 million charge to provide an allowance against the note receivable from our joint venture partner in the DRC. Also included in SG&A are corporate expenses for the second quarter of 2007 of $8.6 million compared with $10.0 million in the second quarter of 2006. Corporate expenses consist of unallocated corporate overhead, including legal, finance, human resources, information technology, strategic development and corporate governance activities, as well as share-based compensation. The decrease in corporate expenses was primarily due to a decrease in corporate legal and other professional fees.

Income from operations for the second quarter of 2007 increased to $52.5 million from $22.7 million in the second quarter of 2006 due to the factors impacting gross profit and selling general and administrative expenses discussed above.

Other income, net (including interest expense) increased to $6.3 million in the second quarter of 2007 compared with $6.0 million in the second quarter of 2006. The following table summarizes the components of Other income, net:

	Three Months Ended June 30,
(In thousands)	2007			2006
Interest expense	$	(180	)	$	(9,877	)
Interest income		5,404			1,774
Foreign exchange gain		1,316			1,599
Gain on sale of investment		—			12,223
Other income, net		(252	)		271
	$	6,288		$	5,990

The $9.7 million decrease in interest expense in the second quarter of 2007 is primarily due to the redemption on March 7, 2007 of the $400.0 million of 9.25% Senior Subordinated Notes due 2011(the “Notes”). The second quarter of 2007 was also favorably impacted by a $3.6 million increase in interest income due to the higher average cash balance and interest earned on the working capital adjustment related to the Norilsk transaction. The second quarter of 2006 included the $12.2 million gain related to the sale of the Company’s investment in Weda Bay (See Note 5 to the Unaudited Condensed Consolidated Financial Statements).

Income tax expense in the second quarter of 2007 was $9.8 million on pre-tax income of $58.8 million, or 16.7%, compared to 11.6% in the second quarter of 2006. The effective income tax rates are lower than the U.S. statutory rate due primarily to income earned in foreign tax jurisdictions with lower statutory tax rates than the U.S., a tax holiday in Malaysia, and the recognition of tax benefits for domestic losses in 2007. The amount in the 2007 second quarter also reflects the extension of the tax holiday in Malaysia retroactive to January 1, 2007, which resulted in a reduction in income tax expense in the second quarter of $3.6 million, of which $2.7 million relates to and would have been recorded in the first quarter of 2007 if the extension had been granted during the first quarter of 2007. The Malaysian tax holiday resulted in a $1.8 million tax benefit in the second quarter of 2006. Based on the current forecast, the 2007 full year benefit of the Malaysian tax holiday is expected to be $7 to $8 million.

Minority partners’ share of income relates to the Company’s 55%-owned smelter joint venture in the DRC. The increase in the minority partner’s income in the second quarter of 2007 compared with the second quarter of 2006 is primarily due to increased shipments and higher cobalt prices.

Income from continuing operations was $44.1 million in the second quarter of 2007 compared with income from continuing operations of $24.1 million in the second quarter of 2006 due primarily to the aforementioned factors.

Income from discontinued operations of $1.9 million for the second quarter of 2007 is primarily due to a favorable German tax ruling related to the Company’s former Precious Metals Group, which was sold in 2003. Income from discontinued operations of $29.0 million for the second quarter of 2006 primarily related to the operations of the Nickel business.

Net income was $46.0 million, or $1.52 per diluted share, in the second quarter of 2007 compared with net income of $53.1 million, or $1.80 per diluted share, in the second quarter of 2006, due primarily to the aforementioned factors.

First Six Months of 2007 Compared With First Six Months of 2006

Consolidated Results of Operations

23

	Six Months Ended June 30,
(thousands of dollars & percent of net sales)	2007					2006
Net sales	$	447,494				$	317,603
Cost of products sold		291,573					232,914
Gross profit		155,921		34.8	%		84,689		26.7	%
Selling, general and administrative expenses		56,602		12.6	%		50,450		15.9	%
Income from operations		99,319		22.2	%		34,239		10.8	%
Other expense, net (including interest expense)		(17,130	)				(1,728	)
Income tax expense		(49,789	)				(5,046	)
Minority partners’ share of income		(6,809	)				(636	)
Income from continuing operations		25,591					26,829
Discontinued operations
Income from discontinued operations, net of tax		62,923					44,172
Gain on sale of discontinued operations, net of tax		72,270					—
Total income from discontinued operations, net of tax		135,193					44,172
Income before cumulative effect of change in accounting principle		160,784					71,001
Cumulative effect of change in accounting principle		—					287
Net income	$	160,784				$	71,288

The following table reflects the sales for the product line groupings in the Specialties segment for the six months ended June 30,

(thousands of dollars)	2007		%			2006		%
Net Sales
Inorganics	$	302,779		68	%	$	198,373		63	%
Advanced organics		89,643		20	%		79,850		25	%
Electronic chemicals		55,072		12	%		39,380		12	%
	$	447,494				$	317,603

The following table reflects the volumes in the Specialties segment for the six months ended June 30,

	2007		2006
Volumes
Inorganics sales volume — metric tons		12,100		13,300
Advanced organics sales volume — metric tons		14,800		14,400
Electronic chemicals sales volume — gallons (thousands)		3,595		3,052
Cobalt refining volume — metric tons		4,300		4,200

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The following table summarizes the percentage of sales dollars by region for the six months ended June 30:

	2007			2006			Change
Americas		19	%		25	%		-6	%
Asia		47	%		40	%		7	%
Europe		34	%		35	%		-1	%

The following table summarizes the percentage of sales dollars by end market for the six months ended June 30:

	2007			2006			Change
Batteries		30	%		24	%		6	%
Chemical		18	%		15	%		3	%
Electronic Chemical		13	%		13	%		—
Tire		7	%		9	%		-2	%
Powder Metallurgy		9	%		9	%		—
Coatings		6	%		8	%		-2	%
Other		17	%		22	%		-5	%

The following table summarizes the average quarterly reference price of 99.3% cobalt:

	2007		2006		2005
First Six Months	$	26.89	$	13.40	$	16.12

Net sales increased to $447.5 million in the first six months of 2007 from $317.6 million in the first six months of 2006, primarily due to increased product selling prices ($137.7 million). The increase in product selling prices was primarily caused by the $13.49 increase in the average cobalt reference price in the first half of 2007 compared with the first half of 2006. The increase in revenues from higher pricing was partially offset by a change with respect to sales of specialty nickel salts products as discussed above. This change resulted in a $1.7 million decrease in net sales in the six months of 2007. Net sales were also impacted by an unfavorable shift in product mix ($12.2 million).

Gross profit increased to $155.9 million in the first six months of 2007, compared with $84.7 million in the first six months of 2006, and as a percentage of net sales increased to 34.8% from 26.7%. Gross profit in the first six months of 2007 was higher due to the impact of both the higher reference price and the sale into a higher price environment of finished products that were manufactured using cobalt raw material that was purchased at lower prices ($53.3 million). Gross profit was also favorably impacted by improved operating results at the smelter in the DRC ($9.3 million). The increase in profit at the DRC smelter was primarily due to increased shipments and the higher average cobalt reference price, partially offset by an adjustment of $3.3 million due to loss of cobalt inventory as a result of theft during shipment along supply lines in Africa. The Company’s 55% share of this loss is $1.8 million. The Company is seeking insurance recovery for this loss and will record any recovery when received. These increases to gross profit were partially offset by an unfavorable shift in product mix ($10.5 million) and the decrease in copper by-product sales ($8.1 million).

Selling, general and administrative expenses were $56.6 million in the first six months of 2007 compared with $50.5 million in the first six months of 2006. The $6.1 million increase was primarily due to increased selling expenses as a result of the increase in sales, $2.0 million in legal fees incurred by Specialties for a lawsuit the Company filed related to the use by a third-party of proprietary information, and a $1.1 million charge to increase the environmental liability due to a change in the estimate to complete the environmental remediation activities at the Company’s closed Newark, New Jersey site. In addition, the first six months of 2007 included a full six months of expense relating to Plaschem, which was acquired on March 21, 2006. SG&A expenses in the first six months of 2006 included a $1.0 million charge to provide an allowance against the note receivable from our joint venture partner in the DRC. Included in SG&A are corporate expenses for the first six months of 2007 of $17.0 million compared with $18.1 million in the first six months of 2006. Corporate expenses consist of unallocated corporate overhead, including legal, finance, human resources, information technology, strategic development and corporate governance activities, as well as share-based compensation. The decrease in corporate expenses was primarily due to a $1.4 million decrease in information technology expense, as a higher percentage of these costs were allocated to Specialties in 2007, and a $0.8 million decrease in corporate legal and other professional fees. These

25

decreases to corporate expenses were partially offset by a $1.1 million increase in employee compensation primarily due to a $0.8 million increase in share-based compensation expense.

Income from operations for the first six months of 2007 increased to $99.3 million from $34.2 million in the first six months of 2006 due to the factors impacting gross profit and selling, general and administrative expenses discussed above.

Other expense, net (including interest expense) for the first six months of 2007 increased to $17.1 million from $1.7 million in the first six months of 2006. The following table summarizes the components of Other income, net:

	Six Months Ended June 30,
(In thousands)	2007			2006
Interest expense	$	(7,285	)	$	(19,619	)
Interest income		10,603			3,054
Loss on redemption of Notes		(21,733	)		—
Foreign exchange gain		1,784			2,261
Gain on sale of investment		—			12,223
Other income, net		(499	)		353
	$	(17,130	)	$	(1,728	)

The $15.4 million increase in Other expense, net in the first six months of 2007 compared with the first six months of 2006 is primarily due to the loss on redemption of the $400.0 million Notes. The Notes were redeemed on March 7, 2007, at a redemption price of 104.625% of the principal amount, or $418.5 million, plus accrued interest of $8.4 million. The loss on redemption of the Notes was $21.7 million which includes the premium of $18.5 million plus related deferred financing costs of $5.7 million less a deferred net gain on terminated interest rate swaps of $2.5 million. The loss on redemption of the Notes was partially offset by a $12.3 million decrease in interest expense. In addition, the first six months of 2007 was also favorably impacted by a $7.5 million increase in interest income due to the higher average cash balance and interest earned on the working capital adjustment related to the Norilsk transaction. The first six months of 2006 included the $12.2 million gain related to the sale of the Company’s investment in Weda Bay (See Note 5 to the Unaudited Condensed Consolidated Financial Statements).

Income tax expense for the first six months of 2007 was $49.8 million on pre-tax income of $82.2 million, or 60.6%, compared to 15.5% in the 2006 period. The higher effective income tax rate in 2007 is due primarily to two discrete items. The Company recorded U.S. income tax expense of $38.8 million on the repatriation of foreign earnings. This expense was partially offset by a $7.6 million income tax benefit related to the $21.7 million loss on redemption of the Notes. Excluding these discrete items, the effective income tax rate would have been 16.5% in the first half of 2007 compared to 15.5% in the first half of 2006. These rates are lower than the U.S. statutory rate due primarily to income earned in foreign tax jurisdictions with lower statutory tax rates than the U.S., a tax holiday in Malaysia and the recognition of tax benefits for domestic losses in 2007.

Minority partners’ share of income relates to the Company’s 55%-owned smelter joint venture in the DRC. The increase in the minority partner’s income in the first six months of 2007 compared with the first six months of 2006 is primarily due to increased production and shipments and higher cobalt prices.

Income from continuing operations was $25.6 million in the first six months of 2007 compared with income from continuing operations of $26.8 million in the first six months of 2006 due primarily to the aforementioned factors.

Income from discontinued operations for the first six months of 2007 and 2006 primarily related to the Nickel business.

Total income from discontinued operations for the first six months of 2007 also included the $72.3 million gain on the sale of the Nickel business.

Net income was $160.8 million, or $5.33 per diluted share, in the first six months of 2007 compared with net income of $71.3 million, or $2.42 per diluted share, in the first six months of 2006, due primarily to the aforementioned factors.

Liquidity and Capital Resources

26

The Company’s cash flows from operating, investing and financing activities, as reflected in the Unaudited Condensed Statements of Consolidated Cash Flows, are summarized in the following table (in thousands):

	Six months ended
	June 30,
	2007			2006			Change
Cash Flow Summary
Net cash provided by (used for):
Operating activities	$	(1,545	)	$	35,358		$	(36,903	)
Investing activities		487,524			(2,774	)		490,298
Financing activities		(408,316	)		(16,905	)		(391,411	)
Effect of exchange rate changes on cash		4,053			2,742			1,311
Discontinued operations-operating activities		49,623			43,972			5,651
Discontinued operations-investing activities		(1,540	)		(8,534	)		6,994
Net change in cash and cash equivalents	$	129,799		$	53,859		$	75,940

The $36.9 million decrease in net cash provided by operating activities was primarily due to the negative impact ($84.1 million) of an increase in inventories during the first six months of 2007 compared with a decrease in inventories during the first six months of 2006. The increase in inventories in the first six months of 2007 was primarily due to higher cobalt metal prices and increased inventory levels in the first half of 2007 compared to the first half of 2006. Income from continuing operations before cumulative effect of change in accounting principle was comparable in the first half of 2007 and 2006; however, the first half of 2007 included a $21.7 million non-cash charge related to the redemption of the Notes while the first six months of 2006 included the impact of the $12.2 million gain on the sale of the Company’s investment in Weda Bay. The receipt of the Weda Bay proceeds are included as a component of investing activities.

Net cash provided by investing activities increased $490.3 million in the first six months of 2007 compared with the first six months of 2006 primarily due to the $490.0 million of net proceeds related to the sale of the Nickel business and $7.6 million of proceeds from the repayment of a loan made to a former Nickel joint venture partner. The first six months of 2006 included proceeds of $12.2 million from the sale of the Company’s investment in Weda Bay, a $5.4 million payment for the Plaschem acquisition and a $2.8 million loan to a former Nickel joint venture partner.

Net cash used in financing activities increased $391.4 million in the first six months of 2007 compared with the first six months of 2006 primarily due to the $418.5 million payment to redeem the Notes partially offset by a $10.1 million increase in proceeds from the exercise of stock options.

Debt and Other Financing Activities

On March 7, 2007, the Company redeemed the entire $400.0 million of its outstanding Notes at a redemption price of 104.625% of the principal amount, or $418.5 million, plus accrued interest of $8.4 million. The premium amount of $18.5 million plus related deferred financing costs of $5.7 million less the deferred net gain on terminated interest rate swaps of $2.5 million is included in the Loss on redemption of Notes in the Unaudited Condensed Statements of Consolidated Income.

The Company has a Revolving Credit Agreement (the “Revolver”) with availability of up to $100.0 million, including up to the equivalent of $25.0 million in Euros or other foreign currencies. The Revolver includes an “accordion” feature under which the Company may increase the availability by $50.0 million to a maximum of $150.0 million subject to certain conditions. Obligations under the Revolver are guaranteed by each of the Company’s U.S. subsidiaries and are secured by a lien on the assets of the Company and such subsidiaries. The Revolver provides for interest-only payments during its term, with principal due at maturity. The Company has the option to specify that interest be calculated based either on LIBOR, plus a calculated margin amount, or a base rate. The applicable margin for the LIBOR rate ranges from 0.50% to 1.00%. The Revolver also requires the payment of a fee of 0.125% to 0.25% per annum on the unused commitment. The margin and unused commitment fees are subject to quarterly adjustment based on a certain debt to adjusted earnings ratio. The Revolver matures on December 20, 2010 and contains various affirmative and negative covenants. At June 30, 2007, there were no borrowings outstanding under the Revolver and the Company was in compliance with all covenants.

27

The Company has two term loans outstanding that expire in 2008 and 2019 and require monthly principal and interest payments. The balance of these term loans was $1.3 million at June 30, 2007 and $1.4 million at December 31, 2006. At June 30, 2007 and December 31, 2006, the Company also had a $0.3 million short-term note payable.

The Company believes that it will have sufficient cash provided by operations and available from its credit facility to provide for its working capital, debt service and capital expenditure requirements during 2007.

Capital Expenditures

Capital expenditures in the first six months of 2007 were $8.0 million, related primarily to ongoing projects to maintain current operating levels, and were funded through cash flows from operations. The Company forecasts to incur capital spending of approximately $20.0 million for the remainder of 2007 primarily for projects at the Kokkola refinery to expand capacity in selected product lines, maintain and improve throughput with outlays for sustaining operations, and for expenditures related to environmental, health & safety compliance, and also for other fixed asset additions at existing facilities.

During 2005, the Company initiated a multi-year Enterprise Resource Planning (“ERP”) project that is expected to be implemented worldwide to achieve increased efficiency and effectiveness in supply chain, financial processes and management reporting. The new ERP system will replace or complement existing legacy systems and standardize the global business processes across the enterprise. The system was implemented at one location in the first quarter of 2007. The Company will continue to implement the ERP system at additional locations in a phased approach, including a location that began using the new system on July 1, 2007. The Company anticipates that the ERP system implementation will be substantially complete by the end of the first half of 2009.

28

Contractual Obligations

On March 1, 2007, the Company entered into five-year supply agreements with Norilsk for up to 2,500 metric tons per year of cobalt metal, up to 2,500 metric tons per year of cobalt in the form of crude cobalt hydroxide concentrate, up to 1,500 metric tons per year of cobalt in the form of crude cobalt sulfate, up to 5,000 metric tons per year of copper in the form of copper cake and various other nickel-based raw materials used in the Company’s electronic chemicals business. In addition, the Company entered into two-year agency and distribution agreements for nickel salts.

Since December 31, 2006, there have been no significant changes in the total amount of contractual obligations or the timing of cash flows in accordance with those obligations, as reported in the Company’s Form 10-K for the year ended December 31, 2006.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

A discussion of market risk exposures is included in Part II, Item 7a, “Quantitative and Qualitative Disclosure About Market Risk,” of the Company’s 2006 Annual Report on Form 10-K. There have been no material changes from December 31, 2006 to June 30, 2007.

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Management of the Company, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2007. As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures include components of the Company’s internal control over financial reporting.

Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2007 solely because of the material weakness identified as of December 31, 2006 relating to accounting for income taxes, as summarized in the Form 10-K for the year ended December 31, 2006. In light of this material weakness, the Company performed additional analysis and post-closing procedures as deemed necessary to ensure that the accompanying Unaudited Condensed Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, management believes that the Unaudited Condensed Consolidated Financial Statements included in this report present fairly, in all material respects, the Company’s financial position as of June 30, 2007, and the results of its operations, cash flows and changes in stockholders’ equity for the three and six months then ended.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As of December 31, 2006, management identified inadequate controls over the Company’s accounting for income taxes. Management believes that the Company has made progress in addressing this material weakness by identifying additional enhancements to the related control procedures and by hiring a third-party service provider to review the Company’s tax provision. However, the improvements in controls have not all been operating effectively for a period of time sufficient for the Company to fully evaluate their design and operating effectiveness.

The Company continues to review, revise and improve the effectiveness of its internal control over financial reporting including the controls over accounting for income taxes discussed above. There were no other changes in the Company’s internal control over financial reporting in connection with the Company’s second quarter 2007 evaluation, or subsequent to such evaluation, that would materially affect, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

29

PART II — OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 except as discussed below:

§

The risks associated with any failures or delays in satisfying closing conditions for the sale of the Company’s Nickel business are no longer applicable, as the sale of the Nickel business was consummated on March 1, 2007.

§

The risks associated with the SEC’s Division of Enforcement informal investigation are no longer applicable, as the Company consented to an order to cease-and-desist from committing or causing any violations and any future violations of various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and various rules under the Securities Exchange Act. The SEC considered remedial acts promptly undertaken by the Company and cooperation afforded the SEC staff and did not assess the Company any financial penalties.

Item 4. Submission of Matters to a Vote of Security Holders

The following matters were submitted to a vote of security holders at the Annual Meeting of Stockholders held May 8, 2007:

Description	For		Withheld
1. Election of Directors:
For terms expiring in 2010
Katharine L. Plourde		23,184,737		4,559,162
David L. Pugh		24,702,197		3,041,702
For a term expiring in 2009
Gordon A. Ulsh		24,763,272		2,980,627

	For		Against		Abstentions		Broker Non-votes
2. Proposal to adopt the 2007 Incentive Compensation Plan:
		19,120,377		5,159,745		42,961		3,420,818

	For		Against		Abstentions
3. Confirmation of the appointment of Ernst & Young LLP:		27,404,382		322,305		17,214

30

Item 6. Exhibits

Exhibits are as follow:

31.1	Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification by Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act (18 U.S.C. Section 1350)
99	OM Group, Inc. 2007 Incentive Compensation Plan

31

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	OM GROUP, INC.
Dated August 2, 2007	By:
	/s/ Kenneth Haber
	Kenneth Haber
	Chief Financial Officer
	(Principal Financial and Accounting
	Officer and Duly Authorized Officer)

32

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Joseph M. Scaminace, certify that:

1.	I have reviewed this report on Form 10-Q of OM Group, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 2, 2007	/s/ Joseph M. Scaminace
	Joseph M. Scaminace
	Chairman of the Board and
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Kenneth Haber, certify that:

1.	I have reviewed this report on Form 10-Q of OM Group, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 2, 2007

/s/ Kenneth Haber

Kenneth Haber

Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SEC. 1350, AS ADOPTED PURSUANT TO
SEC. 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the filing with the Securities and Exchange Commission of the Quarterly Report on Form 10-Q of OM Group, Inc. (the “Company”) for the quarter ended June 30, 2007 (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 2, 2007

/s/ Joseph M. Scaminace

Joseph M. Scaminace

Chairman of the Board and

Chief Executive Officer

/s/ Kenneth Haber

Kenneth Haber

Chief Financial Officer

EX-99

EXHIBIT 99

2007 Incentive Compensation Plan

1.   Purpose

The purpose of this 2007 Incentive Compensation Plan (the “Plan”) is to advance the long-term interests of OM Group, Inc. (the “Corporation”) by

(i) motivating key personnel by means of incentive compensation,

(ii) furthering the identity of interests of participants with those of the stockholders of the Corporation through the ownership and performance of the common stock of the Corporation, and

(iii) permitting the Corporation to attract and retain key personnel and directors whose judgment is important to the successful conduct of the business of the Corporation.

Toward this objective, the Committee may grant awards to key personnel of the Corporation and its subsidiaries and to non-employee directors of the Corporation, on the terms and subject to the conditions set forth in this Plan.

2.   Definitions

2.1  “Award” means any form of stock option, stock appreciation right, restricted stock award, phantom stock or restricted stock unit award, or performance bonus granted pursuant to the provisions of this Plan.

2.2  “Award Agreement” means a written document evidencing an Award granted pursuant to this Plan and establishing the terms, conditions, restrictions and limitations applicable to such Award. To the extent an Award Agreement is inconsistent with the terms of this Plan, this Plan shall govern the rights of the Participant.

2.3  “Board” means the Board of Directors of the Corporation.

2.4  “Change in Control” means any one or more of the following:

(i) The Corporation is merged, consolidated or reorganized into or with another corporation or other legal person, and immediately after such merger, consolidation or reorganization less than fifty percent (50%) of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held directly or indirectly in the aggregate by the holders of voting shares of the Corporation immediately prior to such transaction;

(ii) The Corporation sells all or substantially all of its assets to any other corporation or other legal person, and less than fifty percent (50%) of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale are held directly or indirectly in the aggregate by the holders of voting shares of the Corporation immediately prior to such sale;

(iii) Any person or group of persons (as the term “person” is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), becomes the beneficial owner (as the term “beneficial owner” is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities (a) representing 50% or more of the issued and outstanding shares of the Corporation or (b) possessing the power to elect a majority of the Board of the Corporation, except that any acquisition directly from the Corporation, any acquisition by the Corporation, or any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any Subsidiary shall not constitute a Change in Control;

(iv) The Corporation files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to an item of Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a Change in Control of the Corporation has occurred;

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(v) The stockholders of the Corporation approve the liquidation or dissolution of the Corporation; or

(vi) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority of the Board, provided that each director who is first elected, or first nominated for election by the Corporation’s stockholders, by a vote of at least two-thirds of the directors of the Corporation (or a committee of the Board) then still in office who were directors of the Corporation at the beginning of any such period will be deemed to have been a director of the Corporation at the beginning of such period.

Notwithstanding anything else in this Plan, a “Change in Control” shall not include any change for reasons of bankruptcy, insolvency, or otherwise for the benefit of the creditors of the Corporation or, if applicable, a Subsidiary of the Corporation.

2.5  “Change in Control Price” means the higher of (i) the mean of the high and low trading prices for the Corporation’s Common Stock on the Stock Exchange on the date of the Change in Control or (ii) the highest price per share actually paid for the Common Stock in connection with the Change in Control of the Corporation.

2.6  “Code” means the Internal Revenue Code of 1986, as amended from time to time.

2.7  “Committee” means the Compensation Committee of the Board, or such other committee designated by the Board, authorized to administer the Plan, composed of not fewer than two directors, each of whom shall be “a Non-Employee Director” under Rule 16b-3 of the Exchange Act or any successor rule or statute and shall be an “outside director” for purposes of Section 162(m) of the Code or any successor rule or statute.

2.8  “Common Stock” means common stock, par value $.01, of the Corporation.

2.9  “Exchange Act” means the Securities Exchange Act of 1934, as amended.

2.10  “Key Employee” means an employee of the Corporation or a Subsidiary who holds a position of responsibility in a managerial, administrative or professional capacity and whose performance, as determined by the Committee in the exercise of its sole and absolute discretion, makes appropriate the grant of an Award under this Plan.

2.11  “Non-Employee Director” means any director of the Corporation who is not an employee of the Corporation.

2.12  “Participant” means any individual to whom an Award has been granted by the Committee under this Plan.

2.13  “Stock Exchange” means the New York Stock Exchange or, if the Common Stock is no longer traded on the New York Stock Exchange, such other market price reporting system on which the Common Stock is traded or quoted and is designated by the Committee after it determines that such other exchange is both reliable and reasonably accessible.

2.14  “Subsidiary” means a corporation or other business entity in which the Corporation directly or indirectly has an ownership interest of fifty percent or more.

3.   Administration

The Plan shall be administered by the Committee except as otherwise expressly provided in this Plan. Subject to the express provisions of this Plan, the Committee shall have the conclusive authority to construe and interpret this Plan and any Award Agreement under this Plan and to establish, amend and rescind policies and procedures for the administration of this Plan and shall have such additional authority as the Board may from time to time determine to be necessary or desirable.

In addition, in order to enable employees who are foreign nationals or employed outside the United States, or both, to receive Awards under this Plan, the Committee may adopt such policies and subplans as are necessary or advisable, in the opinion of the Committee, to effectuate the purposes of the Plan.

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4.   Eligibility

Any Key Employee or Non-Employee Director is eligible to become a Participant in this Plan.

5.   Available Shares

5.1  Aggregate Number of Shares.  The aggregate number of shares of Common Stock of the Corporation as to which Awards may be made under this Plan (including any annual stock issuances made to Non-Employee Directors pursuant to Section 11) shall be 3,000,000, subject to adjustment as provided in this Plan. Such shares may be made available from authorized and unissued shares of the Corporation or from shares that have been reacquired by the Corporation and held as treasury shares.

Notwithstanding the foregoing, subject to adjustment as provided in this Plan,

(i) the number of shares subject to Awards made to any one person in any calendar year shall not exceed 250,000; and

(ii) the total number of shares subject to Awards that are other than stock option and stock appreciation rights Awards made under this Plan shall not exceed 1,500,000.

5.2  Shares Covered by Awards.  For purposes of calculating the number of shares of Common Stock deemed to be granted under this Plan, each Award, in whatever form, shall be deemed to be a grant of a number of shares of Common Stock equal to the number of shares represented by the stock options, stock appreciation rights, shares of restricted stock, shares of phantom stock or restricted stock units set forth in the Award, except that:

(i) in the case of any Award as to which the exercise of one right nullifies the exercisability of another, the number of shares deemed to have been granted shall be the maximum number of shares (and/or cash equivalents) that could have been acquired upon the maximum exercise or settlement of the Award; and

(ii) in the case of any performance-based restricted stock Award that provides for payments in excess of 100% of the number of shares set forth in the Award Agreement, the number of shares granted shall be deemed to be the maximum number of shares (and/or the cash equivalent) issuable under the Award at the highest level of performance.

5.3  Use and Re-grant Availability of Shares.  For purposes of calculating the number of shares of Common Stock available for Awards under this Plan,

(i) any Award or portion of an Award that has been settled by the payment of cash shall be deemed to have used the number of shares covered by the Award; and

(ii) any shares subject to any Award that is forfeited or otherwise terminated without the issuance of shares or payment of other consideration shall again be available for issuance under this Plan.

6.   Participation

The Committee shall select, from time to time, those Key Employees and Non-Employee Directors who shall be Participants in the Plan and shall determine the type or types of Awards to be made to each Participant. The terms, conditions and restrictions of each Award shall be set forth in an Award Agreement in a form approved by the Committee.

7.   Stock Options

7.1  Grants.  Awards may be granted in the form of stock options. Stock options may be incentive stock options within the meaning of Section 422 of the Code or non-statutory stock options (i.e., stock options that are not incentive stock options), or a combination of both, or any particular type of tax-advantaged option authorized by the Code from time to time.

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7.2  Terms and Conditions of Options.  An option shall be exercisable in whole or in such installments and at such times as may be determined by the Committee, provided that no stock option shall be exercisable more than ten years after the date of grant. The exercise price of a stock option shall be established by the Committee, but such price shall not be less than the per share fair market value of the Common Stock, as determined by the Committee, on the date of the grant of the stock option, subject to adjustment as provided in Sections 17 and 18.

7.3  Restrictions Relating to Incentive Stock Options.  Stock options issued in the form of incentive stock options shall, in addition to being subject to all applicable terms, conditions, restrictions and limitations established by the Committee, comply with Section 422 of the Code. Incentive stock options shall be granted only to full-time employees of the Corporation and its Subsidiaries within the meaning of Section 424 of the Code. The aggregate fair market value (determined as of the date the option is granted) of shares with respect to which incentive stock options are exercisable for the first time by an individual during any calendar year (under this Plan or any other plan of the Corporation or any Subsidiary that provides for the granting of incentive stock options) may not exceed $100,000 or such other number as may be applicable under the Code from time to time. Any incentive stock option that is granted to any employee who is, at the time the option is granted, deemed for purposes of Section 422 of the Code or any successor provision, to own shares of the Corporation possessing more than ten percent of the total combined voting power of all classes of shares of the Corporation or of a parent or subsidiary of the Corporation, shall have an option exercise price that is at least 110% of the fair market value of the shares at the date of grant and shall not be exercisable after the expiration of five years from the date it is granted.

7.4  Additional Terms and Conditions.  The Board may, in the Award Agreement or otherwise, establish such other terms, conditions, restrictions or limitations on any stock option Award as it considers appropriate, provided they are not inconsistent with this Plan, including provisions relating to:

(i) the vesting of such option;

(ii) payments to be made by the Participant at the time of exercise of such option relating to any taxes associated with such exercise;

(iii) any requirement imposed on the Participant to retain the Common Stock acquired upon exercise of such option; and

(iv) the exercisability of such options upon the cessation of employment or service as a director.

7.5  Payment.  Upon exercise, a participant may pay the exercise price of a stock option in cash or shares of Common Stock, or a combination of cash and shares of Common Stock, or such other consideration as the Committee may deem appropriate. The Committee shall establish appropriate methods for accepting Common Stock and may impose such conditions as it deems appropriate on the use of such Common Stock to exercise a stock option.

8.   Stock Appreciation Rights

8.1  Grants.  Awards may be granted in the form of stock appreciation rights (“SARs”). SARs shall entitle the recipient to receive a payment equal to the appreciation in market value of a stated number of shares of Common Stock from the price stated in the Award Agreement (which price may not be less than the fair market value of the Common Stock on the date of grant of the SAR) to the market value of the Common Stock on the date of exercise or surrender. An SAR may be granted in tandem with all or a portion of a related stock option under the Plan (“Tandem SARs”) or may be granted separately (“Freestanding SARs”).

8.2  Terms and Conditions of Tandem SARs.  Subject to the limitations contained in the preceding paragraph, a Tandem SAR shall be exercisable to the extent, and only to the extent, that the related stock option is exercisable. Upon exercise of a Tandem SAR as to some or all of the shares covered by an Award, the related stock option shall be cancelled automatically to the extent of the number of SARs exercised, and such shares shall not be eligible for re-grant under this Plan.

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8.3  Terms and Conditions of Freestanding SARs.  Freestanding SARs shall be exercisable in whole or in such installments and at such times as may be determined by the Committee, provided that no Freestanding SAR shall be exercisable more than ten years after the date of grant. The base price of a Freestanding SAR also shall be determined by the Committee, provided that such price shall not be less that the fair market value of the Common Stock, as determined by the Committee, on the date of the grant of the Freestanding SAR.

8.4  Deemed Exercise.  The Committee may provide that an SAR shall be deemed to be exercised at the close of business on the scheduled expiration date of such SAR, if at such time the SAR by its terms is otherwise exercisable and, if so exercised, would result in a payment to the Participant.

8.5  Additional Terms and Conditions.  The Committee may, in the Award Agreement or otherwise, establish such other terms, conditions, restrictions or limitations on any SAR Award as it considers appropriate, provided that they are not inconsistent with this Plan.

9.   Restricted Stock Awards

9.1  Grants.  Awards may be granted in the form of restricted stock Awards, in such numbers and at such times as the Committee shall determine.

9.2  Award Restrictions.  Restricted stock Awards shall be subject to such terms, conditions, restrictions or limitations as the Committee deems appropriate, provided they are not inconsistent with this Plan, including restrictions on vesting and transferability, forfeiture provisions, requirements of continued employment or service as a director, individual performance or the financial performance of the Corporation or a segment or identified business of the Corporation. Notwithstanding the foregoing, the vesting schedule for restricted stock Awards must at a minimum be (i) for three years for shares that vest based upon continued employment or service as a director, and (ii) for one year for shares that vest based upon the financial performance of the Corporation or a segment or identified business of the Corporation in accordance with performance criteria established by the Committee as described in Section 9.5 of this Plan.

9.3  Rights as Shareholders.  During the period in which any shares of Common Stock are subject to any of the conditions, restrictions or limitations referenced in the preceding paragraph, the Committee may, in its discretion, grant to the Participant to whom such restricted shares have been awarded all or any of the rights of a stockholder with respect to such shares, including the right to vote such shares and to receive dividends paid on shares of Common Stock.

9.4  Evidence of Award.  Any restricted stock Award granted under this Plan may be evidenced in such manner as the Committee deems appropriate, including book-entry registration or issuance of a stock certificate or certificates.

9.5  Performance Criteria.  In the event that restricted stock Awards are granted subject to the financial performance of the Corporation, such restricted stock Awards shall be earned upon the satisfaction of such performance targets related to such performance periods as are established by the Committee at the time of grant. The Committee may establish performance targets in terms of any or all of the following:  sales, sales growth, gross margins, operating profit, operating profit growth, net income, net income growth, earnings per share, growth in earnings per share, EBITDA, cash flow per share, total stockholder returns, return on equity, return on invested capital, return on net assets employed, common stock price or common stock price appreciation. Performance targets may utilize various combinations of or changes in any of the above measures, or may utilize any one or more of the above measures as relates to an identified business or segment of the Corporation’s operations or as relates to the performance of the Corporation as compared to other entities. Performance targets applicable to restricted stock Awards may vary from Award to Award and from Participant to Participant. When determining whether performance targets have been attained, the Committee shall have the discretion to make adjustments to take into account extraordinary or nonrecurring items or events, or unusual nonrecurring gains or losses identified in the Corporation’s financial statements, provided such adjustments are made in a manner consistent with Section 162(m) of the Code (to the extent applicable). To the extent appropriate, restricted stock Awards that are made to Participants subject to Section 162(m) of

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the Code are intended to qualify under Section 162(m) and the Committee shall interpret the terms of such Awards in a manner consistent with that intent.

10.   Phantom Stock and Restricted Stock Units

10.1  Grants.  Awards may be granted in the form of phantom stock or restricted stock unit Awards. Such Awards shall entitle the Participant to receive the market value or the appreciation in value of an equivalent number of shares of Common Stock on a settlement date determined by the Committee.

10.2  Additional Terms and Conditions.  The Committee may, in the Award Agreement or otherwise, establish such other terms, conditions, restrictions or limitations on any Award of phantom stock or restricted stock units as it considers appropriate, provided they are not inconsistent with this Plan, including restrictions on vesting and transferability, forfeiture provisions, requirements of continued employment or service as a director, individual performance or the financial performance of the Corporation or a segment or identified business of the Corporation. Notwithstanding the foregoing, the minimum vesting schedule requirements set forth in Section 9.2 of this Plan shall apply to any time-based or performance-based phantom stock or restricted stock unit Awards. The provisions of Section 9.5 of this Plan shall be applicable to phantom stock or restricted stock unit Awards that are subject to the financial performance of the Corporation or a segment or identified business of the Corporation.

11.   Annual Stock Issuance to Non-Employee Directors

Each Non-Employee Director may receive all or any portion of his or her annual compensation as a Non-Employee Director in the form of Common Stock, as determined annually by the Board. The Board shall have the absolute discretion to determine the amount, if any, of Non-Employee Director annual compensation that shall be paid in the form of Common Stock in any year, which may vary from year to year. Any shares of Common Stock that are determined by the Board to be issuable pursuant to this Section shall be issued to Non-Employee Directors as promptly as practicable following the measurement date for any installment(s) of such annual compensation being paid in whole or in part in Common Stock, as determined by the Board. The measurement date should be the last business day of the relevant quarter for which compensation is being paid in Common Stock, and for purposes of determining the number of shares of Common Stock to be issued, shares shall be valued at the average of the high and low sale price of Common Stock on the New York Stock Exchange on the applicable measurement date for such installment or installments. No fractional shares of Common Stock shall be issued, and any fractional shares so calculated shall be paid in cash. No Award Agreement need be executed with respect to any stock issuances to Non-Employee Directors pursuant to this Section.

12.   Annual Incentive Awards

The Committee is responsible for administering the annual incentive program of the Corporation, which provides annual bonus opportunities to certain employees of the Corporation and its Subsidiaries. The Committee shall select, from time to time, those employees of the Corporation and its Subsidiaries who shall participate in the annual incentive program for a particular year and shall determine the annual bonus opportunity available for each employee so selected. Annual bonus opportunities shall be based upon such factors and subject to such terms and conditions as shall be provided in the annual incentive program for a particular year, which may include satisfaction of corporate performance goals, segment or identified business performance goals and individual objectives. To the extent that annual bonus opportunities are determined for any employee to be subject to the financial performance of the Corporation or a segment or identified business of the Corporation (a “performance bonus”), such performance bonus shall be earned upon the satisfaction of such performance targets as are established by the Committee in its administration of the annual incentive program, which performance targets shall be one or more of the performance targets set forth in Section 9.5 of this Plan. The provisions of Section 9.5 of this Plan shall be applicable to annual bonus opportunities that are subject to the financial performance of the Corporation or a segment or identified business of the Corporation, such that performance bonus awards made to employees subject to Section 162(m) of the Code are intended to qualify under Section 162(m) to the extent appropriate. The Committee shall interpret the terms of such

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awards in a manner consistent with that intent to the extent appropriate. The maximum dollar amount of any performance bonus payable to an employee in any calendar year is $10,000,000.

13.   Payment of Awards

Except as otherwise provided in this Plan, Award Agreements may provide that, at the discretion of the Committee, payment of Awards may be made in cash, Common Stock, a combination of cash and Common Stock, or any other form of property as the Committee shall determine. Further, the terms of Award Agreements may provide for payment of Awards in the form of a lump sum or installments, as determined by the Committee. All payments of Awards shall be made in a manner consistent with the requirements of Section 409A of the Code.

14.   Dividends and Dividend Equivalents

If an Award is granted in the form of a restricted stock Award or a phantom stock or restricted stock unit Award, the Committee may choose, at the time of the grant of the Award, to include as part of such Award an entitlement to receive dividends or dividend equivalents, subject to such terms, conditions, restrictions or limitations as the Committee may establish. Dividends and dividend equivalents shall be paid in such form and manner and at such times as the Committee shall determine. All dividends or dividend equivalents that are not paid currently may, at the Committee’s discretion, accrue interest or be reinvested into additional shares of Common Stock.

15.   Termination of Employment or Service as Director

The Committee may adopt administrative policies and procedures and/or provide in Award Agreements with respect to the rights under an Award of a Participant who ceases to be employed by either the Corporation or a Subsidiary or ceases to be a director of the Corporation, whether because of death, disability, resignation, termination or retirement pursuant to an established retirement plan or policy of the Corporation or of the applicable Subsidiary. All such administrative policies and procedures shall comply with the requirements of Section 409A of the Code.

16.   Assignment and Transfer

The rights and interests of a Participant under the Plan or an Award may not be assigned, encumbered or transferred other than, in the event of the death of a Participant, by will or the laws of descent and distribution.

17.   Adjustments Upon Changes in Capitalization

In the event of any change in the outstanding shares of Common Stock by reason of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure or shares of the Corporation, the maximum aggregate number and class of shares as to which Awards may be granted under the Plan (as well as the limitations upon the number of shares that may be the subject of Awards to any individual in a calendar year and the aggregate number of shares subject to Awards other than stock options and SARs) and the number and class of shares issuable pursuant to then-outstanding Awards (together with the exercise price of any outstanding stock option or SAR) shall be appropriately adjusted by the Committee, whose determination shall be final.

18.   Extraordinary Distributions and Pro Rata Repurchases

In the event the Corporation shall at any time when an Award is outstanding make an Extraordinary Distribution (as defined below) in respect of Common Stock or effect a Pro Rata Repurchase of Common Stock (as defined below), the Committee shall consider the economic impact of the Extraordinary Distribution or Pro Rata Repurchase on Participants and make such adjustments as it deems equitable under the circumstances. The determination of the Committee shall, subject to revision by the Board, be final and binding upon all Participants.

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As used in this Plan, the term “Extraordinary Distribution” means any dividend or other distribution of

(i) cash, where the aggregate amount of such cash dividend or distribution together with the amount of all cash dividends and distributions made during the preceding twelve months, when combined with the aggregate amount of all Pro Rata Repurchases (for this purpose, including only that portion of the aggregate purchase price of such Pro Rata Repurchases that is in excess of the fair market value of the Common Stock repurchased during such twelve-month period), exceeds ten percent of the aggregate fair market value of all shares of Common Stock outstanding on the record date for determining the stockholders entitled to receive such Extraordinary Distribution, or

(ii) any shares of capital stock of the Corporation (other than shares of Common Stock), other securities of the Corporation, evidences of indebtedness of the Corporation or any other person or any other property (including shares of any Subsidiary of the Corporation), or any combination of such items.

As used in this Plan, “Pro Rata Repurchase” means any purchase of shares of Common Stock by the Corporation or any Subsidiary pursuant to any tender offer or exchange offer, whether or not subject to Section 13(e) of the Exchange Act or any successor provision of law, or pursuant to any other offer available to substantially all holders of Common Stock, provided that no purchase of shares of Common Stock made by the Corporation or any Subsidiary in open market transactions shall be deemed to be a Pro Rata Repurchase.

19.   Withholding Taxes

The Corporation or the applicable Subsidiary shall be entitled to deduct from any payment under this Plan, regardless of the form of such payment, the amount of all applicable income and employment taxes required by law to be withheld with respect to such payment or may require the Participant to pay to it such taxes prior to and as a condition of the making of such payment. The Committee may allow a Participant to pay the amount of taxes required by law to be withheld from an Award by withholding from any payment of Common Stock due as a result of such Award, or by permitting the Participant to deliver to the Corporation, shares of Common Stock having a fair market value, as determined by the Committee, equal to the amount of such required withholding taxes.

20.   Noncompetition Provision

Unless the Award Agreement specifies otherwise, a Participant shall forfeit all unexercised, unearned or unvested Awards if

(i) in the opinion of the Committee, the Participant, without the written consent of the Corporation, engages directly or indirectly in any manner or capacity as principal, agent, partner, officer, director, employee or otherwise in any business or activity competitive with the business conducted by the Corporation or any Subsidiary; or

(ii) the Participant performs any act or engages in any activity that in the opinion of the Committee is detrimental to the best interests of the Corporation.

21.   Regulatory Approvals and Listings

Notwithstanding anything contained in this Plan to the contrary, the Corporation shall have no obligation to issue or deliver certificates of Common Stock evidencing restricted stock Awards or any other Award payable in Common Stock prior to

(i) the obtaining of any approval from any governmental agency that the Corporation shall, in its sole discretion, determine to be necessary or advisable,

(ii) the admission of such shares to listing on the Stock Exchange, and

(iii) the completion of any registration or other qualification of such shares under any state or federal law or ruling of any governmental body that the Corporation shall, in its sole discretion, determine to be necessary or advisable.

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22.   No Right to Continued Employment or Grants

Participation in this Plan shall not give any Key Employee any right to remain in the employ of the Corporation or any Subsidiary. The Corporation or, in the case of employment with a Subsidiary, the Subsidiary, reserves the right to terminate the employment of any Key Employee at any time. The adoption of this Plan shall not be deemed to give any Key Employee or any other individual any right to be selected as a Participant, to be granted any Awards under this Plan or if granted an Award in any year, to receive Awards in any subsequent year.

23.   Amendment

The Board reserves the right to amend, suspend or terminate this Plan at any time, subject to any applicable requirements for stockholder approval imposed by the Stock Exchange or any law or regulation. The Committee may amend the terms of any outstanding Award, but no such amendment may impair the rights of any Participant without his or her consent or amend the terms of any Award that is intended to qualify as performance-based compensation under Section 162(m) of the Code so as to increase the amount otherwise payable under the Award.

24.   Governing Law

The Plan shall be governed by and construed in accordance with the laws of the State of Ohio.

25.   Change in Control

25.1  Stock Options.  In the event of a Change in Control, stock options not otherwise exercisable at the time of the Change in Control shall become fully exercisable upon such Change in Control.

25.2  Stock Appreciation Rights.  In the event of a Change in Control, Tandem SARs not otherwise exercisable at the time of the Change in Control shall become exercisable to the extent that the related Stock Option is exercisable. Freestanding SARs not otherwise exercisable at the time of a Change in Control also shall become fully exercisable upon such Change in Control. In the event of a Change in Control:

(i) the Corporation shall make payment to Participants with respect to SARs in cash in an amount equal to the appreciation in the value of the SAR from the base price specified in the Award Agreement to the Change in Control Price;

(ii) such cash payments to Participants shall be due and payable, and shall be paid by the Corporation, immediately upon the occurrence of such Change in Control; and

(iii) after the payment provided for in (ii) above, Participants shall have no further rights under SARs outstanding at the time of such Change in Control.

25.3  Restricted Stock Awards.  In the event of a Change in Control, all restrictions and conditions (including performance targets, at the target level) previously established with respect to restricted stock Awards shall conclusively be deemed to have been satisfied. Participants shall be entitled to have issued to them the shares of Common Stock described in the applicable Award Agreements, free and clear of any restriction or restrictive legend, except that if upon the advice of counsel to the Corporation, shares of Common Stock cannot lawfully be issued without restriction, then the Corporation shall make payment to Participants in cash in an amount equal to the Change in Control Price of the Common Stock that otherwise would have been issued. In such event:

(i) such cash payments to Participants shall be due and payable, and shall be paid by the Corporation, immediately upon the occurrence of such Change in Control; and

(ii) after the payment provided for in (i) above, Participants shall have no further rights under restricted stock Awards outstanding at the time of such Change in Control.

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25.4  Phantom Stock or Restricted Stock Units.  In the event of a Change in Control:

(i) all restrictions and conditions (including any performance targets, at the target level) previously established with respect to phantom stock or restricted stock unit Awards shall conclusively be deemed to have been satisfied and Participants shall be entitled to receive cash in satisfaction of their rights under phantom stock or restricted stock unit Awards in accordance with the amounts otherwise payable by the Corporation pursuant to the Award Agreement;

(ii) such cash payments to Participants shall be due and payable, and shall be paid by the Corporation, immediately upon the occurrence of such Change in Control; and

(iii) after the payment provided for in (ii) above, Participants shall have no further rights under phantom stock or restricted stock unit Awards outstanding at the time of such Change in Control.

25.5  Annual Incentive Awards.  To the extent that the Committee has determined bonus opportunities for employees under the annual incentive program of the Corporation based upon the financial performance of the Corporation or a segment or identified business of the Corporation, in the event of a Change in Control, all performance targets shall conclusively be deemed to have been satisfied at the target level. In addition, all individual objectives related to bonus opportunities shall conclusively be deemed to have been satisfied. In the event of a Change in Control:

(i) employees participating in the annual incentive program shall be entitled to receive payment of bonuses on the basis described above, and such bonuses shall be paid by the Corporation immediately upon the occurrence of such Change in Control; and

(ii) after the payment provided for in (i) above, such employees shall have no further rights to bonus payments under such annual incentive plan.

25.6  Miscellaneous.  Upon a Change in Control, no action shall be taken that would adversely affect the rights of any Participant or the operation of this Plan with respect to any Award to which the Participant may have become entitled under this Plan on or prior to the date of the Change in Control or to which the Participant may become entitled as a result of such Change in Control.

26.   No Rights as Stockholder or Interest in Corporation Assets

No Participant shall have any rights as a stockholder as a result of participation in this Plan except as provided in this Plan. To the extent any person acquires a right to receive payments from the Corporation under this Plan, such rights shall be no greater than the rights of an unsecured creditor of the Corporation.

27.   Payment by Subsidiaries

Settlement of Awards to employees of Subsidiaries shall be made by and at the expense of such Subsidiary. Except as prohibited by law, if any portion of an Award is to be settled in shares of Common Stock, the Corporation shall sell and transfer to the Subsidiary, and the Subsidiary shall purchase, the number of shares necessary to settle that portion of the Award.

28.   Term of Plan

This Plan shall become effective upon adoption of the Plan by the Board, provided that such effectiveness shall be subject to the approval of the stockholders of the Corporation. Awards may be granted under this Plan at any time prior to ten years from the adoption of the Plan by the Board, at which time the Plan shall expire but without affecting any Awards then outstanding.

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