##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 2005



OR



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



For the transition period from  to



Commission file number: 1-14601



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Arch Chemicals, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Virginia                                                       |  | 06-1526315                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|501 Merritt 7, Norwalk, CT                                     |  | 06851                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



(203) 229-2900

(Registrants telephone number, including area code)



N/A

(Former Name, Former Address and Former Fiscal Year, If Changed from Last Report)



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



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



As of July 31, 2005, there were 23,640,514 outstanding shares of the
registrants common stock.



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##### Table of Contents

ARCH CHEMICALS, INC.



INDEX



|         |  |                                                                                                       |  |             
|-------- |  | ----------------------------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                                       |  | Page Numbers
|PART I.  |  | FINANCIAL INFORMATION                                                                                 |  |             
|         |  |                                                                                                      
|Item 1.  |  | Financial Statements                                                                                  |  | 2           
|         |  |                                                                                                      
|         |  | Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                       |  | 2           
|         |  |                                                                                                      
|         |  | Condensed Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004 |  | 3           
|         |  |                                                                                                      
|         |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004       |  | 4           
|         |  |                                                                                                      
|         |  | Notes to Condensed Consolidated Financial Statements                                                  |  | 5           
|         |  |                                                                                                      
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 17          
|         |  |                                                                                                      
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 28          
|         |  |                                                                                                      
|Item 4.  |  | Controls and Procedures                                                                               |  | 29          
|         |  |                                                                                                      
|PART II. |  | OTHER INFORMATION                                                                                     |  |             
|         |  |                                                                                                      
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                   |  | 30          
|         |  |                                                                                                      
|Item 5.  |  | Other Information                                                                                     |  | 30          
|         |  |                                                                                                      
|Item 6.  |  | Exhibits                                                                                              |  | 30          
|         |  |                                                                                                      
|         |  | Signatures                                                                                            |  | 31          



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



ARCH CHEMICALS, INC.

Condensed Consolidated Balance Sheets

(In millions, except per share amounts)



|                                                               |  |               |         |   |                   |   |         |  
|-------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                               |  | June 30, 2005 |         |   | December 31, 2004 |  
|                                                               |  | (Unaudited)   |         |   |                   |  
|ASSETS                                                         |  |               |         |   |                   |   |         |  
|Current assets:                                                |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                      |  | $             | 36.4    |   |                   | $ | 74.6    |  
|Accounts receivable, net                                       |  |               | 156.9   |   |                   |   | 125.6   |  
|Short-term investment                                          |  |               | 61.6    |   |                   |   | 53.3    |  
|Inventories, net                                               |  |               | 178.5   |   |                   |   | 151.1   |  
|Other current assets                                           |  |               | 38.2    |   |                   |   | 37.9    |  
|Assets held for sale                                           |  |               | 11.4    |   |                   |   | 15.9    |  
|                                                               |  |               |         |   |                   |   |         |  
|Total current assets                                           |  |               | 483.0   |   |                   |   | 458.4   |  
|Investments and advances - affiliated companies at equity      |  |               | 14.9    |   |                   |   | 15.5    |  
|Property, plant and equipment, net                             |  |               | 193.0   |   |                   |   | 211.6   |  
|Goodwill                                                       |  |               | 197.4   |   |                   |   | 192.4   |  
|Other intangibles                                              |  |               | 142.6   |   |                   |   | 151.2   |  
|Other assets                                                   |  |               | 62.5    |   |                   |   | 70.9    |  
|                                                               |  |               |         |   |                   |   |         |  
|Total assets                                                   |  | $             | 1,093.4 |   |                   | $ | 1,100.0 |  
|                                                               |  |               |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                           |  |               |         |   |                   |   |         |  
|Current liabilities:                                           |  |               |         |   |                   |   |         |  
|Short-term borrowings                                          |  | $             | 9.3     |   |                   | $ | 9.1     |  
|Accounts payable                                               |  |               | 196.1   |   |                   |   | 160.2   |  
|Accrued liabilities                                            |  |               | 95.9    |   |                   |   | 108.1   |  
|Liabilities associated with assets held for sale               |  |               | 12.2    |   |                   |   | 12.2    |  
|                                                               |  |               |         |   |                   |   |         |  
|Total current liabilities                                      |  |               | 313.5   |   |                   |   | 289.6   |  
|Long-term debt                                                 |  |               | 213.4   |   |                   |   | 215.2   |  
|Other liabilities                                              |  |               | 199.7   |   |                   |   | 235.4   |  
|                                                               |  |               |         |   |                   |   |         |  
|Total liabilities                                              |  |               | 726.6   |   |                   |   | 740.2   |  
|Commitments and contingencies                                  |  |               |         |   |                   |   |         |  
|Shareholders equity:                                          |  |               |         |   |                   |   |         |  
|Common stock, par value $1 per share, Authorized 100.0 shares: |  |               |         |   |                   |   |         |  
|23.6 shares issued and outstanding (23.4 in 2004)              |  |               | 23.6    |   |                   |   | 23.4    |  
|Additional paid-in capital                                     |  |               | 421.0   |   |                   |   | 418.2   |  
|Retained earnings                                              |  |               | 36.4    |   |                   |   | 14.8    |  
|Accumulated other comprehensive loss                           |  |               | (114.2  | ) |                   |   | (96.6   | )
|                                                               |  |               |         |   |                   |   |         |  
|Total shareholders equity                                     |  |               | 366.8   |   |                   |   | 359.8   |  
|                                                               |  |               |         |   |                   |   |         |  
|Total liabilities and shareholders equity                     |  | $             | 1,093.4 |   |                   | $ | 1,100.0 |  
|                                                               |  |               |         |   |                   |   |         |  



The accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of the condensed consolidated financial statements.



2



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##### Table of Contents

ARCH CHEMICALS, INC.

Condensed Consolidated Statements of Income

(Unaudited)

(In millions, except per share
amounts)



|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|------------------------------------------------------------------------------------------------------ |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | ---- | ----- |  | - | ----- | -
|                                                                                                       |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                                                                                       |  | 2005                        |       |   | 2004                      |   |       | 2005 |  | 2004 |      
|Sales                                                                                                  |  | $                           | 411.3 |   |                           | $ | 362.0 |      |  | $    | 712.6 |  | $ | 602.3 |  
|Cost of goods sold                                                                                     |  |                             | 294.6 |   |                           |   | 248.1 |      |  |      | 512.2 |  |   | 423.3 |  
|Selling and administration                                                                             |  |                             | 71.1  |   |                           |   | 69.3  |      |  |      | 140.8 |  |   | 124.7 |  
|Research and development                                                                               |  |                             | 5.3   |   |                           |   | 4.0   |      |  |      | 10.3  |  |   | 7.3   |  
|Other (gains) and losses                                                                               |  |                             |      |   |                           |   | (0.1  | )    |  |      |      |  |   | (0.1  | )
|Restructuring                                                                                          |  |                             |      |   |                           |   | 1.7   |      |  |      |      |  |   | 1.7   |  
|Interest expense                                                                                       |  |                             | 6.1   |   |                           |   | 5.5   |      |  |      | 10.6  |  |   | 9.7   |  
|Interest income                                                                                        |  |                             | 0.3   |   |                           |   | 0.1   |      |  |      | 0.4   |  |   | 0.4   |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Income from continuing operations before equity in earnings (losses) of affiliated companies and taxes |  |                             | 34.5  |   |                           |   | 33.6  |      |  |      | 39.1  |  |   | 36.1  |  
|Equity in earnings (losses) of affiliated companies                                                    |  |                             | (0.3  | ) |                           |   | 0.7   |      |  |      | 0.6   |  |   | 1.8   |  
|Income tax expense                                                                                     |  |                             | 9.7   |   |                           |   | 12.3  |      |  |      | 11.6  |  |   | 13.6  |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Income from continuing operations                                                                      |  |                             | 24.5  |   |                           |   | 22.0  |      |  |      | 28.1  |  |   | 24.3  |  
|Income from discontinued operations, net of tax                                                        |  |                             |      |   |                           |   | 3.2   |      |  |      |      |  |   | 3.9   |  
|Gain on sale of discontinued operations, net of tax                                                    |  |                             | 2.9   |   |                           |   |      |      |  |      | 2.9   |  |   |      |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Net income                                                                                             |  | $                           | 27.4  |   |                           | $ | 25.2  |      |  | $    | 31.0  |  | $ | 28.2  |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Basic income per common share:                                                                         |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Continuing operations                                                                                  |  | $                           | 1.04  |   |                           | $ | 0.94  |      |  | $    | 1.19  |  | $ | 1.06  |  
|Income from discontinued operations                                                                    |  |                             |      |   |                           |   | 0.14  |      |  |      |      |  |   | 0.17  |  
|Gain on sale of discontinued operations                                                                |  |                             | 0.12  |   |                           |   |      |      |  |      | 0.12  |  |   |      |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Basic income per common share                                                                          |  | $                           | 1.16  |   |                           | $ | 1.08  |      |  | $    | 1.31  |  | $ | 1.23  |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Diluted income per common share:                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Continuing operations                                                                                  |  | $                           | 1.03  |   |                           | $ | 0.93  |      |  | $    | 1.18  |  | $ | 1.04  |  
|Income from discontinued operations                                                                    |  |                             |      |   |                           |   | 0.14  |      |  |      |      |  |   | 0.17  |  
|Gain on sale of discontinued operations                                                                |  |                             | 0.12  |   |                           |   |      |      |  |      | 0.12  |  |   |      |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Diluted income per common share                                                                        |  | $                           | 1.15  |   |                           | $ | 1.07  |      |  | $    | 1.30  |  | $ | 1.21  |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Weighted average common shares outstanding:                                                            |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Basic                                                                                                  |  |                             | 23.6  |   |                           |   | 23.3  |      |  |      | 23.6  |  |   | 22.9  |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Diluted                                                                                                |  |                             | 23.8  |   |                           |   | 23.6  |      |  |      | 23.8  |  |   | 23.3  |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Dividends declared per share                                                                           |  | $                           | 0.20  |   |                           | $ | 0.20  |      |  | $    | 0.40  |  | $ | 0.40  |  
|                                                                                                       |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  



The accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of the condensed consolidated financial statements.



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##### Table of Contents

ARCH CHEMICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In millions)



|                                                                                                                 |  |                           |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                 |  | Six Months Ended June 30, |       
|                                                                                                                 |  | 2005                      |        |   | 2004 |  
|Operating activities                                                                                             |  |                           |        |   |      |   |        |  
|Net income                                                                                                       |  | $                         | 31.0   |   |      | $ | 28.2   |  
|Adjustments to reconcile net income to net cash and cash equivalents (used in) provided by operating activities: |  |                           |        |   |      |   |        |  
|Income from discontinued operations                                                                              |  |                           | (2.9   | ) |      |   | (3.9   | )
|Equity in (earnings) of affiliates                                                                               |  |                           | (0.6   | ) |      |   | (1.8   | )
|Depreciation and amortization                                                                                    |  |                           | 23.6   |   |      |   | 22.2   |  
|Deferred taxes                                                                                                   |  |                           | 6.7    |   |      |   | 6.1    |  
|Restructuring                                                                                                    |  |                           |       |   |      |   | 1.7    |  
|Restructuring payments                                                                                           |  |                           | (1.1   | ) |      |   | (0.8   | )
|Changes in assets and liabilities, net of purchase and sale of businesses:                                       |  |                           |        |   |      |   |        |  
|Accounts receivable securitization program                                                                       |  |                           | 73.4   |   |      |   | 61.9   |  
|Receivables                                                                                                      |  |                           | (118.2 | ) |      |   | (85.4  | )
|Inventories                                                                                                      |  |                           | (34.5  | ) |      |   | (19.4  | )
|Other current assets                                                                                             |  |                           |       |   |      |   | (1.8   | )
|Accounts payable and accrued liabilities                                                                         |  |                           | 31.7   |   |      |   | 36.4   |  
|Noncurrent liabilities                                                                                           |  |                           | (28.9  | ) |      |   | 1.7    |  
|Other operating activities                                                                                       |  |                           | 1.6    |   |      |   | 5.7    |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Net operating activities from continuing operations                                                              |  |                           | (18.2  | ) |      |   | 50.8   |  
|Change in net assets held for sale                                                                               |  |                           | 4.1    |   |      |   | 2.3    |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Net operating activities                                                                                         |  |                           | (14.1  | ) |      |   | 53.1   |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Investing activities                                                                                             |  |                           |        |   |      |   |        |  
|Capital expenditures                                                                                             |  |                           | (6.4   | ) |      |   | (8.8   | )
|Business acquired in purchase transaction, net of cash acquired                                                  |  |                           | (3.1   | ) |      |   | (205.4 | )
|Cash proceeds (payments) from the sale of a business                                                             |  |                           | (3.9   | ) |      |   |       |  
|Other investing activities                                                                                       |  |                           | (0.8   | ) |      |   | (1.1   | )
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Net investing activities                                                                                         |  |                           | (14.2  | ) |      |   | (215.3 | )
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Financing activities                                                                                             |  |                           |        |   |      |   |        |  
|Long-term debt borrowings                                                                                        |  |                           | 111.0  |   |      |   | 207.0  |  
|Long-term debt repayments                                                                                        |  |                           | (111.1 | ) |      |   | (75.4  | )
|Short-term debt borrowings, net                                                                                  |  |                           | 1.2    |   |      |   | 14.3   |  
|Dividends paid                                                                                                   |  |                           | (9.4   | ) |      |   | (9.1   | )
|Other financing activities                                                                                       |  |                           | 1.0    |   |      |   | 2.8    |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Net financing activities                                                                                         |  |                           | (7.3   | ) |      |   | 139.6  |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                                                     |  |                           | (2.6   | ) |      |   | 1.9    |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                                        |  |                           | (38.2  | ) |      |   | (20.7  | )
|Cash and cash equivalents, beginning of year                                                                     |  |                           | 74.6   |   |      |   | 64.8   |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                                         |  | $                         | 36.4   |   |      | $ | 44.1   |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Supplemental cash flow information                                                                               |  |                           |        |   |      |   |        |  
|Income taxes, net                                                                                                |  | $                         | 2.4    |   |      | $ | 3.9    |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Interest paid                                                                                                    |  | $                         | 11.3   |   |      | $ | 10.2   |  
|                                                                                                                 |  |                           |        |   |      |   |        |  
|Issuance of Arch Common Stock - Avecia acquisition                                                               |  | $                         | 1.7    |   |      | $ | 15.7   |  
|                                                                                                                 |  |                           |        |   |      |   |        |  



The accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of the condensed consolidated financial statements.



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



1. Basis of Presentation



These condensed consolidated financial statements have been prepared by Arch Chemicals, Inc. (with its consolidated subsidiaries, the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and, in the opinion of the Company, reflect all adjustments (consisting of normal accruals) which are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements, accounting policies and the notes thereto and managements
discussion and analysis of financial condition and results of operations included in the Companys Form 10-K for the year ended December 31, 2004. The Companys Treatment segment is seasonal in nature, in particular its HTH water products
business as its products are primarily used in the U.S. residential pool market. Therefore, the results of operations for the Company, and in particular the HTH water products business, for the three and six months ended June 30, 2005, are not
necessarily indicative of the results to be expected for the entire fiscal year.



2. Earnings Per Share



Basic earnings per
share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflect the dilutive effect of stock options. Stock options of 1.0 million with exercise prices greater than the
average market price of the Companys common stock are not included in the computation of diluted earnings per share for the three and six months ended June 30, 2005 and 2004.



|                                                                            |  |                             |  |                           |  |      |  |     
|--------------------------------------------------------------------------- |  | --------------------------- |  | ------------------------- |  | ---- |  | ----
|                                                                            |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|(in millions)                                                               |  | 2005                        |  | 2004                      |  | 2005 |  | 2004
|Basic                                                                       |  | 23.6                        |  | 23.3                      |  | 23.6 |  | 22.9
|Common equivalent shares from stock options using the treasury stock method |  | 0.2                         |  | 0.3                       |  | 0.2  |  | 0.4 
|                                                                            |  |                             |  |                           |  |      |  |     
|Diluted                                                                     |  | 23.8                        |  | 23.6                      |  | 23.8 |  | 23.3
|                                                                            |  |                             |  |                           |  |      |  |     



3. Accounts Receivable/Short-Term
Investment



On June 27, 2005, the Company entered into a
new accounts receivable securitization program with Three Pillars Funding LLC (Three Pillars), an affiliate of SunTrust Bank, and SunTrust Capital Markets, Inc. to replace the Companys previous accounts receivable securitization
program which had expired on March 30, 2005. Under this new program, the Company sells undivided participation interests in certain domestic trade accounts receivable, without recourse, through its wholly-owned subsidiary, Arch Chemicals Receivables
Corporation (ACRC), a special-purpose entity which is consolidated for financial reporting purposes. At June 30, 2005, the Company, through ACRC, sold $77.0 million of participation interests in $138.6 million of accounts receivable,
which included $3.6 million of receivables related to the chemical management services business. This sale has been reflected as a reduction of receivables in the condensed consolidated balance sheet. ACRC had not sold any participation interests in
its accounts receivable at December 31, 2004 under the prior program. The receivables sold under the securitization program have been accounted for as a sale in accordance with the provisions of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities.



ACRC retains an interest in the pool of receivables purchased from the Company to the extent the receivables are not purchased by Three Pillars. To reflect this interest, which is subordinated, the fair value of the retained undivided
interest of $61.6 million and $53.3 million at June 30, 2005 and December 31, 2004, respectively, was classified separately from Accounts receivable, net as a Short-term investment on the accompanying Condensed Consolidated Balance Sheets. Fair
value of the retained undivided interest included a reserve for credit losses ($2.3 million at June 30, 2005 and December 31, 2004) and had not been discounted due to the short-term nature of the underlying financial assets.



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



The costs of the program for the three and six months ended June 30, 2005 and
2004 of $0.3 million and $0.4 million, and $0.3 million and $0.4 million, respectively, are included in Selling and Administration expenses in the accompanying Condensed Consolidated Statements of Income. The Company had not recorded an asset or
liability related to the servicing responsibility retained as the fees earned for servicing were estimated to approximate fair value.



4. Inventories



|                           |  |               |       |   |                   |   |       |  
|-------------------------- |  | ------------- | ----- | - | ----------------- | - | ----- | -
|($ in millions)            |  | June 30, 2005 |       |   | December 31, 2004 |  
|Raw materials and supplies |  | $             | 57.0  |   |                   | $ | 45.4  |  
|Work in process            |  |               | 9.0   |   |                   |   | 8.1   |  
|Finished goods             |  |               | 156.7 |   |                   |   | 142.0 |  
|                           |  |               |       |   |                   |   |       |  
|Inventories, gross         |  |               | 222.7 |   |                   |   | 195.5 |  
|LIFO reserve               |  |               | (44.2 | ) |                   |   | (44.4 | )
|                           |  |               |       |   |                   |   |       |  
|Inventories, net           |  | $             | 178.5 |   |                   | $ | 151.1 |  
|                           |  |               |       |   |                   |   |       |  



Approximately 45
percent of the Companys inventories are valued by the dollar value last-in, first-out (LIFO) method of inventory accounting. Costs of other inventories are determined principally by the first-in, first-out method. Elements of costs
in inventories include raw materials, direct labor and manufacturing overhead. Inventories under the LIFO method are based on an annual determination of quantities and costs as of the year-end; therefore, the condensed consolidated financial
statements at June 30, 2005 reflect certain estimates relating to projected inventory quantities and costs at December 31, 2005.



5. Assets Held for Sale/Discontinued Operations



CMS Business



Assets held for sale consists of the Companys chemical management services business (CMS), which was retained after the sale of the
microelectronic materials business to Fuji Photo Film Co., Ltd. (Fuji). The Company is pursuing all strategic options for its CMS business, including its sale.



The CMS business, which essentially services the customers of the sold microelectronic materials businesses, no longer has
any connections to any of the retained Arch businesses and the Company began an active program to dispose of the business. As a result and in accordance with the accounting requirements of SFAS 144, the results of operations of the CMS business have
been reported as an asset held for sale and a discontinued operation in the condensed consolidated financial statements. The amounts actually realized by the Company at the time of sale could differ from the current net assets in the condensed
consolidated financial statements. Factors that could influence the ultimate outcome include, but are not limited to, general economic conditions, the Companys ability to dispose of the business within the time, price and manner originally
estimated and the retention of key customers during the divestiture period.



Hickson Organics



On August 11, 2003, the
Company completed the sale of the Hickson organics operations in Castleford, England. The purchase price included two promissory notes aggregating £1.5 million. As of December 31, 2004, the Company had placed a valuation reserve against both
outstanding notes. In April 2005, the purchaser went into receivership and the operations were subsequently shut down. As a result of the receivership proceedings, the Company recovered £1.7 million (approximately $2.9 million) representing
the principal and interest on the two outstanding notes. The Company received the cash payment on July 19, 2005. At June 30, 2005, this gain has been reflected as a gain on the sale of discontinued operations on the Condensed Consolidated Income
Statement.



6



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



Balance Sheet



The major classes of assets and liabilities classified as assets held for sale are as follows:



|                                                       |  |               |      |   |                   |   |     
|------------------------------------------------------ |  | ------------- | ---- | - | ----------------- | - | ----
|($ in millions)                                        |  | June 30, 2005 |      |   | December 31, 2004
|Accounts receivable, net                               |  | $             | 6.3  |   |                   | $ | 9.5 
|Inventory                                              |  |               | 4.1  |   |                   |   | 5.5 
|Other current assets                                   |  |               | 0.3  |   |                   |   | 0.2 
|Property, plant and equipment, net                     |  |               | 0.5  |   |                   |   | 0.6 
|Other assets                                           |  |               | 0.2  |   |                   |   | 0.1 
|                                                       |  |               |      |   |                   |   |     
|Total assets associated with assets held for sale      |  |               | 11.4 |   |                   |   | 15.9
|                                                       |  |              
|Accounts payable and accrued liabilities               |  |               | 12.2 |   |                   |   | 12.2
|                                                       |  |               |      |   |                   |   |     
|Total liabilities associated with assets held for sale |  |               | 12.2 |   |                   |   | 12.2
|                                                       |  |               |      |   |                   |   |     
|Net assets (liabilities) held for sale                 |  | $             | (0.8 | ) |                   | $ | 3.7 
|                                                       |  |               |      |   |                   |   |     



Approximately $3.6
million of accounts receivable related to the CMS business were sold to ACRC as part of the accounts receivable securitization program as of June 30, 2005. No receivables were sold to ACRC as of December 31, 2004.



Income From Discontinued Operations



Income from Discontinued Operations for the three and six months ended June
30, 2005 and 2004 include the following:



|                                                                                        |  |                             |     |                           |   |      |  |      |     |  |   |     
|--------------------------------------------------------------------------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | --- |  | - | ----
|                                                                                        |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|($ in millions)                                                                         |  | 2005                        |     | 2004                      |   | 2005 |  | 2004
|Sales  CMS                                                                             |  | $                           | 2.8 |                           | $ | 2.8  |  | $    | 5.6 |  | $ | 5.5 
|Sales  remaining microelectronic materials businesses                                  |  |                             |    |                           |   | 38.0 |  |      |    |  |   | 73.7
|                                                                                        |  |                             |     |                           |   |      |  |      |     |  |   |     
|Total Sales                                                                             |  | $                           | 2.8 |                           | $ | 40.8 |  | $    | 5.6 |  | $ | 79.2
|                                                                                        |  |                             |     |                           |   |      |  |      |     |  |   |     
|Earnings before interest and taxes  microelectronic materials business (including CMS) |  | $                           |    |                           | $ | 4.4  |  | $    |    |  | $ | 5.4 
|Tax expense                                                                             |  |                             |    |                           |   | 1.2  |  |      |    |  |   | 1.5 
|                                                                                        |  |                             |     |                           |   |      |  |      |     |  |   |     
|Income from discontinued operations                                                     |  | $                           |    |                           | $ | 3.2  |  | $    |    |  | $ | 3.9 
|                                                                                        |  |                             |     |                           |   |      |  |      |     |  |   |     



6. Goodwill and Other Intangibles



The changes in the carrying amount of goodwill for the
six months ended June 30, 2005 are as follows:



|                           |  |                    |      |                                       |   |      |                                         |  |                |      |                       |   |       |  |   |     |  |   |      
|-------------------------- |  | ------------------ | ---- | ------------------------------------- | - | ---- | --------------------------------------- |  | -------------- | ---- | --------------------- | - | ----- |  | - | --- |  | - | -----
|($ in millions)            |  | HTH Water Products |      | Personal Care and Industrial Biocides |   |      | Wood Protection and Industrial Coatings |  | TotalTreatment |      | Performance Urethanes |   | Total
|Balance, December 31, 2004 |  | $                  | 29.0 |                                       | $ | 88.1 |                                         |  | $              | 70.9 |                       | $ | 188.0 |  | $ | 4.4 |  | $ | 192.4
|Foreign exchange and other |  |                    | 0.9  |                                       |   | (3.5 | )                                       |  |                | 7.6  |                       |   | 5.0   |  |   |    |  |   | 5.0  
|                           |  |                    |      |                                       |   |      |                                         |  |                |      |                       |   |       |  |   |     |  |   |      
|Balance, June 30, 2005     |  | $                  | 29.9 |                                       | $ | 84.6 |                                         |  | $              | 78.5 |                       | $ | 193.0 |  | $ | 4.4 |  | $ | 197.4
|                           |  |                    |      |                                       |   |      |                                         |  |                |      |                       |   |       |  |   |     |  |   |      



7



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



The gross carrying amount and accumulated amortization for other intangible
assets as of June 30, 2005 and December 31, 2004 are as follows:



|                                                     |  |                       |       |                          |   |                     |  |                       |       |                          |   |                     |  |   |      |  |   |      
|---------------------------------------------------- |  | --------------------- | ----- | ------------------------ | - | ------------------- |  | --------------------- | ----- | ------------------------ | - | ------------------- |  | - | ---- |  | - | -----
|                                                     |  | June 30, 2005         |       | December 31, 2004       
|($ in millions)                                      |  | Gross Carrying Amount |       | Accumulated Amortization |   | Net Carrying Amount |  | Gross Carrying Amount |       | Accumulated Amortization |   | Net Carrying Amount
|Patents                                              |  | $                     | 0.2   |                          | $ | 0.2                 |  | $                     |      |                          | $ | 0.2                 |  | $ | 0.2  |  | $ |     
|Customer lists                                       |  |                       | 68.5  |                          |   | 10.1                |  |                       | 58.4  |                          |   | 70.8                |  |   | 7.7  |  |   | 63.1 
|Toxicology database                                  |  |                       | 16.4  |                          |   | 1.4                 |  |                       | 15.0  |                          |   | 17.4                |  |   | 0.9  |  |   | 16.5 
|Developed technology                                 |  |                       | 14.0  |                          |   | 0.7                 |  |                       | 13.3  |                          |   | 14.7                |  |   | 0.2  |  |   | 14.5 
|Other                                                |  |                       | 10.4  |                          |   | 4.2                 |  |                       | 6.2   |                          |   | 10.5                |  |   | 3.7  |  |   | 6.8  
|                                                     |  |                       |       |                          |   |                     |  |                       |       |                          |   |                     |  |   |      |  |   |      
|Total amortizable other intangibles                  |  |                       | 109.5 |                          |   | 16.6                |  |                       | 92.9  |                          |   | 113.6               |  |   | 12.7 |  |   | 100.9
|Total non-amortizable other intangibles  trademarks |  |                       | 50.1  |                          |   | 0.4                 |  |                       | 49.7  |                          |   | 50.7                |  |   | 0.4  |  |   | 50.3 
|                                                     |  |                       |       |                          |   |                     |  |                       |       |                          |   |                     |  |   |      |  |   |      
|Total other intangibles                              |  | $                     | 159.6 |                          | $ | 17.0                |  | $                     | 142.6 |                          | $ | 164.3               |  | $ | 13.1 |  | $ | 151.2
|                                                     |  |                       |       |                          |   |                     |  |                       |       |                          |   |                     |  |   |      |  |   |      



The change in the
gross carrying amount is principally due to the effect of foreign exchange.



Amortization expense for the three and six months ended June 30, 2005 and 2004 was $1.8 million and $3.7 million, and $1.4 million and $1.9 million, respectively. Estimated amortization expense is $7.3 million for the
year ended December 31, 2005, $8.3 million for each of the years ending December 31, 2006 through 2008, and $7.3 million for the year ended December 31, 2009.



In accordance with FASB Statement No. 142, Goodwill and Other Intangibles, the Company has elected to perform its annual goodwill and other
intangibles impairment procedures for all reporting units as of January 1 of each year, or after, if events or circumstances change that could reduce the fair value of a reporting unit below its carrying value. During the first quarter, the Company
completed these procedures and concluded that no impairment existed as of January 1, 2005.



7. Debt



The
Companys revolving credit facility contains a quarterly leverage ratio (debt / EBITDA) not to exceed 3.50 and an interest coverage ratio (EBITDA/total interest expense) covenant not to be less than 3.0. Additionally, the credit facility
restricts the payment of dividends and repurchase of stock to $65.0 million plus 50% of cumulative net income (loss) subject to certain limitations beginning June 20, 2003. This limitation was $55.7 million at June 30, 2005. As of June 30, 2005,
facility fees payable on the credit facility are 0.35%. The facility fees can range from 0.2% to 0.4% depending on the Companys quarterly leverage ratios. The Company may select various floating rate borrowing options, including, but not
limited to, LIBOR plus a spread that can range from 0.55% to 1.35% depending on the Companys quarterly leverage ratios. There were no outstanding borrowings under the credit facility at June 30, 2005.



The Companys senior notes contain a quarterly leverage ratio (debt /
EBITDA) not to exceed 3.50 and a debt to total capitalization ratio of 55%. In addition, the notes contain a covenant that restricts the payment of dividends and repurchases of stock to $65.0 million less cumulative dividends and repurchases of
stock plus 50% of cumulative net income (loss) under certain circumstances beginning January 1, 2002. This limitation was $42.3 million at June 30, 2005.



At June 30, 2005, the Company had $26.7 million of outstanding letters of credit. In addition, the Company has agreed to guarantee 50% or up to $8.5
million of Planar Solutions line of credit, which is provided by the Companys joint venture partner. As of June 30, 2005, the Company had $7.5 million letters of guarantee outstanding for its Planar Solutions joint venture borrowings and
certain equipment leases. The Company would be required to perform under the above guarantee in the case of nonpayment by Planar Solutions. On April 28, 2005, the Board of Directors of the Company approved an extension of this Planar Solutions
guarantee through January 2007.



8



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



8. Derivative Instruments and Hedging



Foreign Currency



The Company uses foreign currency forward contracts as a means of hedging exposure to foreign currency risk. It is the
Companys policy to hedge up to 80% of its anticipated purchase and sales commitments denominated or expected to be denominated in a foreign currency. Accordingly, the Company has purchased forward contracts to hedge its exposure to the
variability of future foreign currency cash flows through December 2005. During the six months ended June 30, 2005 and 2004, the majority of the Companys foreign currency forward contracts qualified as effective cash flow hedges. During the
three and six months ended June 30, 2005 and 2004, the Company recorded a gain (loss) of $0.3 million and $0.5 million, and $0.3 million and $0.1 million, respectively, in Other Comprehensive Income (Loss) related to the change in the fair market
value of the derivatives designated as effective cash flow hedges.



At June 30, 2005, the Company had forward contracts to sell foreign currencies with a U.S. dollar equivalent value of $20.3 million and forward contracts to buy foreign currencies with a U.S. dollar equivalent value of $39.5 million. The
fair value of these forward contracts is included in Other Current Assets and Accrued Liabilities, respectively, on the accompanying Condensed Consolidated Balance Sheets.



Debt and Interest



In May 2003, the Company entered into interest rate swap agreements under which the Company swapped the 7.94% fixed rate interest rate on $80.0 million
principal amount of unsecured senior notes for floating rate interest based on six-month LIBOR plus 5.4539%. The counter parties to these agreements are major financial institutions. The agreements expire in March 2007. The Company has designated
the swap agreements as fair value hedges of the risk of changes in the value of fixed rate debt due to changes in interest rates for a portion of its fixed rate borrowings under SFAS 133. Accordingly, the swap agreements have been recorded at their
fair market value of $2.2 million and $1.6 million at June 30, 2005 and December 31, 2004, respectively, are included in Other Liabilities on the accompanying Condensed Consolidated Balance Sheets, with a corresponding decrease in the carrying
amount of the related debt. No gain or loss has been recorded as the contracts meet the criteria of SFAS 133 to qualify for hedge accounting treatment with no ineffectiveness.



9. Employee Retirement Plans



Arch U.S. Pension and Retirement Plans



As of June 30, 2005 and 2004, the components of net periodic benefit costs for the Arch U.S. Pension and Postretirement Plans were as follows:



|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                  |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                  |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|Arch U.S. Pension Plans                           |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Net Periodic Benefit Expense:                     |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Service cost (benefits earned during the period)  |  | $                           | 1.9  |   |                           | $ | 1.8  |      |  | $ | 3.8  |   |  | $ | 3.5  |  
|Interest cost on the projected benefit obligation |  |                             | 3.6  |   |                           |   | 3.2  |      |  |   | 7.2  |   |  |   | 6.5  |  
|Expected return on plan assets                    |  |                             | (3.4 | ) |                           |   | (2.9 | )    |  |   | (6.3 | ) |  |   | (5.8 | )
|Amortization of prior service cost                |  |                             |     |   |                           |   | 0.2  |      |  |   | 0.1  |   |  |   | 0.4  |  
|Recognized actuarial loss                         |  |                             | 1.1  |   |                           |   | 0.4  |      |  |   | 2.1  |   |  |   | 0.8  |  
|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                         |  | $                           | 3.2  |   |                           | $ | 2.7  |      |  | $ | 6.9  |   |  | $ | 5.4  |  
|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|                                                  |  |                            
|                                                  |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                  |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|Arch U.S. Postretirement Plan                     |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Net Periodic Benefit Expense:                     |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Service cost (benefits earned during the period)  |  | $                           | 0.1  |   |                           | $ | 0.1  |      |  | $ | 0.2  |   |  | $ | 0.3  |  
|Interest cost on the projected benefit obligation |  |                             | 0.3  |   |                           |   | 0.2  |      |  |   | 0.6  |   |  |   | 0.4  |  
|Amortization of prior service cost                |  |                             | 0.1  |   |                           |   | (0.1 | )    |  |   | 0.1  |   |  |   | (0.1 | )
|Recognized actuarial loss                         |  |                             |     |   |                           |   | 0.1  |      |  |   |     |   |  |   | 0.1  |  
|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                         |  | $                           | 0.5  |   |                           | $ | 0.3  |      |  | $ | 0.9  |   |  | $ | 0.7  |  
|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  



9



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



As of June 30, 2005 and 2004, the components of net periodic benefit costs
for the Hickson U.K. and the Hickson U.K. Senior Executive retirement plans were as follows:



|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                  |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                  |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|Net Periodic Benefit Expense:                     |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Service cost (benefits earned during the period)  |  | $                           | 0.2  |   |                           | $ | 0.1  |      |  | $ | 0.3  |   |  | $ | 0.3  |  
|Interest cost on the projected benefit obligation |  |                             | 4.5  |   |                           |   | 4.4  |      |  |   | 9.1  |   |  |   | 8.8  |  
|Expected return on plan assets                    |  |                             | (4.5 | ) |                           |   | (4.6 | )    |  |   | (9.1 | ) |  |   | (9.3 | )
|Recognized actuarial loss                         |  |                             | 1.0  |   |                           |   | 0.6  |      |  |   | 2.1  |   |  |   | 1.3  |  
|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                         |  | $                           | 1.2  |   |                           | $ | 0.5  |      |  | $ | 2.4  |   |  | $ | 1.1  |  
|                                                  |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  



The Companys
minimum pension funding requirements as set forth by ERISA for its U.S. pension plans were expected to be $6.0 million in 2005 and $32.0 million in 2006. The company made a voluntary contribution to its U.S. pension plan of $33.5 million in the
second quarter of 2005, and as a result, there are no further minimum funding requirements expected for 2005 and 2006 under current law. The Company also has minimum funding requirements for its U.K. pension plan, which are expected to be
approximately $10.0 million in 2005 and 2006. As of June 30, 2005, $36.4 million had been contributed for the Arch U.S. pension plans and approximately $4.5 million for its Hickson U.K. and Hickson U.K. Senior Executive retirement plans.



Deferred Compensation Plans



In 2004, the Company established rabbi trusts (collectively, the Rabbi
Trust) for its three deferred compensation plans, namely, the 1999 Stock Plan for Non-employee Directors, the Supplemental Contributing Employee Ownership Plan and the Employee Deferral Plan. At June 30, 2005, the Company had $3.2 million in
Other assets in the Condensed Consolidated Balance Sheets, a deferred compensation liability of $6.2 million in Other liabilities and $2.4 million recorded as a reduction to equity for the Companys stock held in the Rabbi Trust.



10. Comprehensive Income



Comprehensive income includes the change in the cumulative translation
adjustment, minimum pension liability and the change in the fair value of derivative financial instruments, which qualify for hedge accounting. Comprehensive income for the three and six months ended June 30, 2005 and 2004 was as follows:



|                                              |  |                             |      |   |                           |   |      |      |  |   |       |   |  |   |      |  
|--------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                              |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                              |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004  |  
|Net income                                    |  | $                           | 27.4 |   |                           | $ | 25.2 |      |  | $ | 31.0  |   |  | $ | 28.2 |  
|                                              |  |                             |      |  
|Foreign currency translation adjustments      |  |                             | (7.6 | ) |                           |   | (3.5 | )    |  |   | (18.1 | ) |  |   | (5.2 | )
|Net unrealized gain on derivative instruments |  |                             | 0.3  |   |                           |   | 0.3  |      |  |   | 0.5   |   |  |   | 0.1  |  
|                                              |  |                             |      |   |                           |   |      |      |  |   |       |   |  |   |      |  
|Total other comprehensive income (loss)       |  |                             | (7.3 | ) |                           |   | (3.2 | )    |  |   | (17.6 | ) |  |   | (5.1 | )
|                                              |  |                             |      |   |                           |   |      |      |  |   |       |   |  |   |      |  
|Comprehensive income                          |  | $                           | 20.1 |   |                           | $ | 22.0 |      |  | $ | 13.4  |   |  | $ | 23.1 |  
|                                              |  |                             |      |   |                           |   |      |      |  |   |       |   |  |   |      |  



The Company does not
provide for U.S. income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries.



11. Accumulated Net Unrealized Gain (Loss) on Derivative Instruments



Changes in the accumulated net unrealized gain (loss) on derivative instruments for the three and six months ended June 30,
2005 and 2004 are as follows:



|                                                                               |  |                             |     |      |                           |      |      |  |   |      |   |  |   |    
|------------------------------------------------------------------------------ |  | --------------------------- | --- | ---- | ------------------------- | ---- | ---- |  | - | ---- | - |  | - | ---
|                                                                               |  | Three Months Ended June 30, |     |      | Six Months Ended June 30,
|                                                                               |  | 2005                        |     | 2004 |                           |      | 2005 |  |   | 2004
|Beginning balance of accumulated net unrealized loss on derivative instruments |  | $                           |    |      | $                         | (0.2 | )    |  | $ | (0.2 | ) |  | $ |   
|Net gain on cash flow hedges                                                   |  |                             | 0.3 |      |                           | 0.2  |      |  |   | 0.4  |   |  |   |   
|Reclassification into earnings                                                 |  |                             |    |      |                           | 0.1  |      |  |   | 0.1  |   |  |   | 0.1
|                                                                               |  |                             |     |      |                           |      |      |  |   |      |   |  |   |    
|Ending balance of accumulated net unrealized gain on derivative instruments    |  | $                           | 0.3 |      | $                         | 0.1  |      |  | $ | 0.3  |   |  | $ | 0.1
|                                                                               |  |                             |     |      |                           |      |      |  |   |      |   |  |   |    

10



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



The unrealized gains on derivative instruments included in Accumulated Other
Comprehensive Loss are expected to be reclassified into earnings within the next 12 months.



12. Segment Reporting



The Company has organized its business portfolio into two operating segments to reflect the Companys business strategy. The two segments are treatment products and performance products. The treatment products segment includes three
reportable business units: the HTH water products business, the personal care and industrial biocides business, and the wood protection and industrial coatings business.



As a result of the sale of the majority of the microelectronic materials businesses on November 30, 2004, the Company has
restated its prior year condensed consolidated financial statements to include the results of the microelectronic materials businesses sold as a component of discontinued operations in accordance with SFAS 144. The Company has retained its 50
percent interest in Planar Solutions, LLC, its joint venture with Wacker Chemical Holding Corporation, which is included in Corporate Unallocated. In addition, as a result of the sale, the Company has reallocated certain centralized service costs to
the Companys segments that were previously allocated to the microelectronic materials segment for 2004.



|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                      |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|($ in millions)                                                                                       |  | 2005                        |       |   | 2004                      |   |       | 2005 |  |   | 2004  |  
|Sales:                                                                                                |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Treatment Products:                                                                                   |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|HTH Water Products                                                                                    |  | $                           | 183.2 |   |                           | $ | 162.5 |      |  | $ | 274.0 |   |  | $ | 232.5 |  
|Personal Care and Industrial Biocides                                                                 |  |                             | 70.6  |   |                           |   | 65.8  |      |  |   | 140.4 |   |  |   | 107.4 |  
|Wood Protection and Industrial Coatings                                                               |  |                             | 101.3 |   |                           |   | 95.5  |      |  |   | 188.4 |   |  |   | 181.6 |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Treatment Products                                                                              |  |                             | 355.1 |   |                           |   | 323.8 |      |  |   | 602.8 |   |  |   | 521.5 |  
|Performance Products:                                                                                 |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Performance Urethanes                                                                                 |  |                             | 50.9  |   |                           |   | 32.6  |      |  |   | 99.8  |   |  |   | 66.0  |  
|Hydrazine                                                                                             |  |                             | 5.3   |   |                           |   | 5.6   |      |  |   | 10.0  |   |  |   | 14.8  |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Performance Products                                                                            |  |                             | 56.2  |   |                           |   | 38.2  |      |  |   | 109.8 |   |  |   | 80.8  |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Sales                                                                                           |  | $                           | 411.3 |   |                           | $ | 362.0 |      |  | $ | 712.6 |   |  | $ | 602.3 |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Segment Operating Income (Loss), including Equity Income (Loss) in Affiliated Companies:              |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Treatment Products:                                                                                   |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|HTH Water Products                                                                                    |  | $                           | 23.5  |   |                           | $ | 27.9  |      |  | $ | 23.5  |   |  | $ | 30.2  |  
|Personal Care and Industrial Biocides                                                                 |  |                             | 10.8  |   |                           |   | 12.9  |      |  |   | 23.3  |   |  |   | 21.2  |  
|Wood Protection and Industrial Coatings                                                               |  |                             | 6.6   |   |                           |   | 10.4  |      |  |   | 7.9   |   |  |   | 13.6  |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Treatment Products                                                                              |  |                             | 40.9  |   |                           |   | 51.2  |      |  |   | 54.7  |   |  |   | 65.0  |  
|Performance Products:                                                                                 |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Performance Urethanes                                                                                 |  |                             | 3.3   |   |                           |   | (1.9  | )    |  |   | 4.2   |   |  |   | (5.3  | )
|Hydrazine                                                                                             |  |                             | 0.4   |   |                           |   | (1.3  | )    |  |   | (0.3  | ) |  |   | 0.1   |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Performance Products                                                                            |  |                             | 3.7   |   |                           |   | (3.2  | )    |  |   | 3.9   |   |  |   | (5.2  | )
|Corporate Unallocated                                                                                 |  |                             | (4.6  | ) |                           |   | (6.6  | )    |  |   | (8.7  | ) |  |   | (10.9 | )
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Segment Operating Income, including Equity Income (Loss) in Affiliated Companies                |  |                             | 40.0  |   |                           |   | 41.4  |      |  |   | 49.9  |   |  |   | 48.9  |  
|Equity in Earnings (Losses) of Affiliated Companies                                                   |  |                             | 0.3   |   |                           |   | (0.7  | )    |  |   | (0.6  | ) |  |   | (1.8  | )
|Restructuring                                                                                         |  |                             |      |   |                           |   | (1.7  | )    |  |   |      |   |  |   | (1.7  | )
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Operating Income                                                                                |  |                             | 40.3  |   |                           |   | 39.0  |      |  |   | 49.3  |   |  |   | 45.4  |  
|Interest expense, net                                                                                 |  |                             | (5.8  | ) |                           |   | (5.4  | )    |  |   | (10.2 | ) |  |   | (9.3  | )
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Income from Continuing Operations before Taxes and Equity Income (Loss) in Affiliated Companies |  | $                           | 34.5  |   |                           | $ | 33.6  |      |  | $ | 39.1  |   |  | $ | 36.1  |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Capital Spending:                                                                                     |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Treatment Products:                                                                                   |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|HTH Water Products                                                                                    |  | $                           | 0.7   |   |                           | $ | 0.9   |      |  | $ | 1.9   |   |  | $ | 1.9   |  
|Personal Care and Industrial Biocides                                                                 |  |                             | 1.4   |   |                           |   | 1.1   |      |  |   | 2.3   |   |  |   | 2.3   |  
|Wood Protection and Industrial Coatings                                                               |  |                             | 1.0   |   |                           |   | 1.6   |      |  |   | 1.7   |   |  |   | 3.2   |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Treatment Products                                                                              |  |                             | 3.1   |   |                           |   | 3.6   |      |  |   | 5.9   |   |  |   | 7.4   |  
|Performance Products:                                                                                 |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Performance Urethanes                                                                                 |  |                             | 0.2   |   |                           |   | 0.2   |      |  |   | 0.5   |   |  |   | 0.5   |  
|Hydrazine                                                                                             |  |                             |      |   |                           |   | 0.7   |      |  |   |      |   |  |   | 0.9   |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Performance Products                                                                            |  |                             | 0.2   |   |                           |   | 0.9   |      |  |   | 0.5   |   |  |   | 1.4   |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Total Capital Spending                                                                                |  | $                           | 3.3   |   |                           | $ | 4.5   |      |  | $ | 6.4   |   |  | $ | 8.8   |  
|                                                                                                      |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



Segment operating income includes the equity in earnings (losses) of
affiliated companies and excludes restructuring (income) expense, impairment expense and certain unallocated expenses of the corporate headquarters. The Company includes the equity income (loss) of affiliates in its segment operating results as it
believes it to be relevant and useful information for investors as these affiliates are the means by which certain segments participate in certain geographic regions. Furthermore, the Company includes equity income (loss) as a component of segment
operating results because the Company includes it to measure the performance of the segment. Other gains and (losses) that are directly related to the segments are included in segment operating results. The Company believes the exclusion of
restructuring and impairment expenses from segment operating income provides additional perspective on the Companys underlying business trends and provides useful information to investors by excluding amounts from the Companys results
that the Company believes are not indicative of ongoing operating results.



13. Restructuring



Amounts related to the
Companys previous restructuring programs were essentially complete as of December 31, 2004, except for the 2004 program and the restructuring associated with the acquisition of the Avecia pool & spa and protection & hygiene businesses.
The following table summarizes activity related to the 2004 restructuring program for severance related headcount costs in the hydrazine business due to the expiration of the government contract:



|                                                 |  |                 |    
|------------------------------------------------ |  | --------------- | ---
|($ in millions)                                  |  | Severance Costs
|2004 Activity:                                   |  |                 |    
|Provision                                        |  | $               | 2.1
|Payments                                         |  |                 | 0.6
|Reclass postemployment and insurance liabilities |  |                 | 0.7
|                                                 |  |                 |    
|Balance at December 31, 2004                     |  |                 | 0.8
|2005 Activity:                                   |  |                 |    
|Payments                                         |  |                 | 0.4
|                                                 |  |                 |    
|Balance at June 30, 2005                         |  | $               | 0.4
|                                                 |  |                 |    



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



As a result of the acquisition of the Avecia pool & spa and protection
& hygiene businesses, the Company incurred $4.6 million for headcount reductions at the U.S. and U.K. locations and office closure costs in the U.S. which has been included as a component of goodwill. The following table summarizes activity
related to this plan:



|                             |  |                 |     |            |   |       |  |   |    
|---------------------------- |  | --------------- | --- | ---------- | - | ----- |  | - | ---
|($ in millions)              |  | Severance Costs |     | OtherItems |   | Total
|2004 Activity:               |  |                 |     |            |   |       |  |   |    
|Provision                    |  | $               | 4.1 |            | $ | 0.5   |  | $ | 4.6
|Payments                     |  |                 | 3.2 |            |   |      |  |   | 3.2
|                             |  |                 |     |            |   |       |  |   |    
|Balance at December 31, 2004 |  |                 | 0.9 |            |   | 0.5   |  |   | 1.4
|2005 Activity:               |  |                 |     |            |   |       |  |   |    
|Payments                     |  |                 | 0.5 |            |   | 0.2   |  |   | 0.7
|                             |  |                 |     |            |   |       |  |   |    
|Balance at June 30, 2005     |  | $               | 0.4 |            | $ | 0.3   |  | $ | 0.7
|                             |  |                 |     |            |   |       |  |   |    



As of June 30, 2005,
all employees have been notified of their termination; of these some are still receiving severance benefits and fewer than five have not reached their termination date. At June 30, 2005, $1.1 million of restructuring reserves was included in Accrued
liabilities in the accompanying Condensed Consolidated Balance Sheets.



14.
Commitments and Contingencies



In connection with the
acquisition of Hickson, the Company assumed certain legal obligations, including a trial court judgment, in favor of a railroad, of approximately $8.5 million plus interest in a lawsuit associated with a wood preservative ingredient spillage in
1994. In 2002, a new trial resulted in a judgment of $2.6 million plus interest. The judgment was affirmed on appeal in February 2005 and is now final. The judgment and related interest is included in Accrued liabilities in the accompanying
Condensed Consolidated Balance Sheets. In July 2005, the Company made a payment of $3.1 million in full settlement of such obligation which had been fully accrued.



The Company is a co-defendant in consolidated litigation arising from a fire in August 2000, which destroyed a warehouse in
which the Companys water treatment products were stored. The parties have reached an agreement to settle a portion of the litigation that involves claims by plaintiffs who are individuals. This agreement has received court approval and the
settlement amount has been paid by the Company. The balance of the litigation primarily involves claims by a number of businesses for property damage. The Company has provided for its exposure in this litigation, $3.0 million, including the amount
of its participation in the settlement, and does not expect any final resolution of these cases, net of an expected insurance recovery, to have a material adverse effect on results of operations or financial position of the Company. Given that the
Companys applicable insurance policies provide coverage on a reimbursement basis, there may be a lag between any payment ultimately paid to the remaining plaintiffs by the Company and reimbursement of such payment from the Companys
insurers.



There are no longer any CCA-related putative class
action lawsuits pending against the Company or its subsidiaries, and there are fewer than ten other CCA-related personal injury lawsuits in which the Company and/or one or more of the Companys subsidiaries is involved. Individuals in these
lawsuits allege injury occurred as a result of exposure to CCA-treated wood. The Company and its subsidiaries deny the material allegations of all the various CCA-related claims and have vigorously defended and will continue to vigorously defend
them. As a result, legal defense and related costs associated with these cases were significant in 2004, and may be significant in the future. Based on the information currently available to the Company, the Company does not believe the resolution
of these cases is likely to have a material adverse effect on its consolidated financial condition, cash flow or results of operations.



In April 2004, the Company was served with a complaint by two parents, their minor child and the parents acting as personal representatives of the estates
of their two other children. In the complaint, which was initially filed in Oregon state court against the Company, two of its subsidiaries, and others, plaintiffs allege that a fire caused



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



by a spontaneous exothermic chemical reaction of the Companys pool chlorination
products with other common household products erupted in the parents vehicle while occupied by the family. Plaintiffs ask for damages, including non-economic damages of $40.0 million per plaintiff. The Company is effectively self-insured for
the first $3.0 million in this case, regardless of the number of plaintiffs. The case was removed to the U.S. district court in Oregon by the Company but the U.S. district court ultimately returned the case to state court. The Company has provided
$3.0 million of self-insurance reserves related to its potential exposure in this case and does not expect any final resolution of these cases, net of an expected insurance recovery, to have a material adverse effect on results of operations or
financial position of the Company. Given that the Companys applicable insurance policies provide coverage on a reimbursement basis, there may be a lag between any payment ultimately paid to the plaintiffs by the Company and reimbursement of
such payment from the Companys insurers.



In Brazil, the
Company uses a third-party agent to process and pay certain state import duties. The Company was notified of claims for unpaid state import duties, including interest and potential penalties. The Company has accrued for the estimated taxes and the
related interest for the claims, approximately $2.9 million. As of June 30, 2005, the Company had estimated contingent liabilities related to the claims up to $1.8 million.



In May 2004, the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC)
initiated antidumping duty investigations of Chinese and Spanish suppliers of chlorinated isocyanurates and related chemicals as a result of petitions filed by domestic producers who asserted that these products were being imported and sold in the
U.S.A. at prices below normal value. One of the suppliers being investigated is a major supplier of chlorinated isocyanurates to the Company. In May 2005, the DOC issued its final determinations and found margins ranging from approximately 76% to
286% for Chinese producers and approximately 25% for Spanish producers, with a margin of approximately 76% applicable to the Companys primary Chinese supplier. In June 2005, the ITC found that the imports caused injury to the domestic industry
following which the DOC issued antidumping orders incorporating the ITCs findings. As a result of the orders, the Company started to make cash deposits of antidumping duties at the rate of 76% of the value of the product imported. The
producers and importers, such as the Company, may request annually a review of the orders which may result in a further adjustment of the final duties to be assessed. In July 2005, the domestic producers filed with the Court of International Trade
notices of their intent to challenge the DOCs order as it relates to the margins assessed against the Chinese producers.



In April 2005 and following an investigation, Koppers Arch Wood Protection (NZ) Limited (KANZ), a New Zealand joint venture company in which
the Company owns indirectly a 49% interest, was named as a defendant in a civil suit filed by the New Zealand Commerce Commission (NZCC) regarding industry competitive practices. A number of other companies and individuals, including
Koppers Arch Investments Pty Limited (KAIP), an Australian entity in which the Company owns indirectly a 49% interest, and a current KANZ Board member, and certain unrelated entities, were also named as defendants. KANZ manufactures and
markets wood preservative products throughout New Zealand and KAIP is a holding company for related joint venture companies. The NZCC seeks unspecified fines, injunctive relief, and legal costs, among other things. The NZCC has the authority to
assess fines from each corporate defendant equal to the highest of (i) NZ$10 million (approximately US$7 million), (ii) three times the commercial gain from any contravention or (iii) 10% of the sales of the defendant. Penalties, if assessed, could
have a material adverse effect on KANZs and KAIPs business, financial condition, cash flows and results of operations. During the second quarter of 2005, the joint venture recorded a reserve of approximately $2.0 million related to its
potential exposure for this case and as a result the Companys equity in earnings (losses) was impacted by approximately $1.0 million.



Similarly, Koppers Arch Wood Protection (Aust) Pty Ltd (KAWP), an Australian joint venture company in which the Company owns indirectly a 49%
interest and the majority shareholder of KANZ, has made an application for leniency under the Australian Competition and Consumer Commissions (ACCC) policy for cartel conduct. The ACCC has granted immunity to KAWP, subject to
fulfillment of certain conditions. If conditions are not fulfilled, the ACCC may penalize KAWP for any violations of the competition laws of Australia. Such penalties, if assessed against KAWP, could have a material adverse effect on KAWPs
business, financial condition, cash flows and results of operations.



As a result of the Companys ownership in such Australian and New Zealand entities, an unfavorable resolution could have a material adverse effect on equity in earnings of affiliated companies and dividends received.



In 1999, Olin and the Company entered into an agreement, which specifies that
the Company is only responsible



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



for certain environmental liabilities at the Companys current operating plant sites and
certain offsite locations. Olin retained the liability for all former Olin plant sites and former waste disposal sites. In connection with the acquisition of Hickson, the Company acquired certain environmental exposures and potential liabilities of
current and past operating sites all of which have been accrued for in the accompanying condensed consolidated financial statements.



Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from
investigatory studies and remedial activities, advances in technology, changes in environmental laws and regulations and their application, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and
financial capability of other potentially responsible parties and the Companys ability to obtain contributions from other parties and the length of time over which site remediation occurs. It is possible that some of these matters (the
outcomes of which are subject to various uncertainties) may be resolved unfavorably against the Company.



As part of the Hickson organics disposition in August 2003, the Company continues to be responsible for known environmental matters at the Castleford,
England site. Such matters have previously been accrued for in its environmental reserve included in the consolidated financial statements. Additionally, regarding any unknown environmental matters that are identified subsequent to the sale of this
business, the Company had agreed to share responsibility with the purchaser over a seven-year period, with the Companys share decreasing to zero over the seven-year period with a maximum liability for such unknown environmental matters of
£5.0 million. However, in April 2005, the purchaser went into receivership and is highly unlikely to be able to honor its environmental indemnification commitments to the Company. The receiver is in the process of selling off purchasers
assets and has recently sold the purchasers ownership interest in the former land and equipment of the Hickson plant site in Castleford, England. The Company does not believe there has been any change in its environmental exposure at the site.



There are a variety of non-environmental legal proceedings
pending or threatened against the Company. There have been no significant changes in status of such items, other than those described above, during the six months ended June 30, 2005.



New U.K. tax legislation rules have been enacted that will affect a wide range of financing structures that U.S. groups have
commonly used to invest in the U.K. The rules are complex and areas of uncertainty exist at this time. These new rules could increase the Companys effective tax rate by limiting its ability to obtain a U.K. tax deduction for certain of its
U.K. interest expense. The Company has a deferred tax asset for this accrued interest of approximately $6.0 million as of December 31, 2004. Depending on the application of these new rules, this deferred tax asset may not be recoverable and
therefore, would increase the Companys effective tax rate.



15. Avecia
Acquisition



On April 2, 2004, the Company completed the
acquisition of Avecias pool and spa and protection and hygiene businesses for $230.8 million. The purchase price was further subject to a contingent payment of up to $5.0 million in cash based upon earnings attributable to North American sales
of certain acquired products. An interim payment of $2.5 million was made in April 2005 based on 2004 results. In addition, since the unfunded pension liability in the U.K. pension plan was less than $10.0 million, the purchase price was adjusted
upwards by the difference between $10.0 million and the unfunded liability, with the consideration to be split equally between a contingent cash payment and up to 223,250 additional shares of the Companys common stock. The share consideration
component of this adjustment was 74,788 shares of common stock, which were issued in January 2005 with a value of $1.7 million. The contingent cash payment will be a maximum of $1.7 million and earned based upon cumulative global net sales of
certain products through 2005. An interim payment of $0.5 million was made in April 2005 based on 2004 results. For additional information concerning the acquisition see the Companys Form 10-K for the year ended December 31, 2004 as well as
the Form 8-K/A filed by the Company on June 16, 2004.



Supplemental Pro
Forma Information



The table below presents unaudited pro
forma financial information in connection with the Avecia acquisition as if it had occurred on January 1, 2004.



15



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



The unaudited pro forma information below reflects pro forma adjustments
which are based upon currently available information and certain estimates and assumptions, and therefore the actual results may have differed from the pro forma results. However, management believes that the assumptions provide a reasonable basis
for presenting the significant effects of the transaction, and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the pro forma financial information. This information should be read in
conjunction with the Form 8-K/A, filed by the Company on June 16, 2004, in connection with the Avecia acquisition, which contains unaudited pro forma combined condensed financial statements.



The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results that would have occurred if the acquisition had been completed at the dates indicated. The information does not necessarily indicate the future operating results or financial
position of the Company. The Avecia pool & spa business is seasonal in nature as its products are primarily used in the U.S. residential pool market.



|                                          |  |                                |      
|----------------------------------------- |  | ------------------------------ | -----
|($ in millions, except per share amounts) |  | Six Months Ended June 30, 2004
|Sales                                     |  | $                              | 641.4
|Income from continuing operations         |  |                                | 27.0 
|Net Income                                |  | $                              | 30.9 
|Basic income per common share:            |  |                                |      
|Continuing operations                     |  | $                              | 1.17 
|Net Income                                |  | $                              | 1.34 
|Diluted income per common share:          |  |                                |      
|Continuing operations                     |  | $                              | 1.15 
|Net Income                                |  | $                              | 1.32 



16. Hydrazine Propellants Supply
Contract



On March 29, 2005, the Company was
notified by the U.S. Defense Energy Support Center (DESC) that it had been awarded a 20-year contract for approximately $149 million for the production, storage, distribution and handling of hydrazine propellants for the U.S. government. Subsequent
to the awarding of the contract, the Company was notified by the DESC that a competing bidder had filed a protest with the DESC regarding the award and consequently, contract performance was suspended pending final resolution of the protest. On
April 21, 2005, the Company was notified that the DESC denied the protest filed by a competing bidder. Consequently, the suspension of the contract has been lifted, and the Company has been instructed to re-initiate contract performance.



Under this new, long-term contract, full-scale production is not scheduled
to begin until 2007. Since there are no revenues and only minimal incremental costs associated with the awarding of this contract in the current year, the Company does not expect this action to have a significant impact on Archs financial
performance in 2005.



16



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##### Table of Contents

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



Overview



In analyzing the results of operations for the Company and its segments, the following matters should be considered. The Companys Treatment segment
is seasonal in nature, in particular the HTH water products business. Historically, approximately 40  50% of the sales in the HTH water products business occur in the second quarter of the fiscal year, as retail sales in the U.S. residential
pool market are concentrated between Memorial Day and the Fourth of July. Accordingly, results of operations for the periods presented are not necessarily indicative of the results to be expected for an entire fiscal year. Segment operating income
includes the equity in earnings of affiliated companies and excludes certain unallocated expenses of the corporate headquarters. The Company includes the equity income (loss) of affiliates in its segment operating results as it believes it to be
relevant and useful information for investors as these affiliates are the means by which certain segments participate in certain geographic regions. Furthermore equity income (loss) is included as a component of segment operating results because the
Company includes it to measure the performance of the segment. Other gains and (losses) that are directly related to the segments are included in segment operating results.



As a result of the sale of the majority of the microelectronic materials businesses as of November 30, 2004, the Company has
restated its prior year condensed consolidated financial statements to include the results of the microelectronic materials businesses sold and the loss on the disposition as a component of discontinued operations in accordance with the Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). The Company has retained its 50 percent interest in Planar Solutions, LLC, its joint venture with Wacker
Chemical Holding Corporation for the production and sale of chemical mechanical polarization (CMP) slurries and its chemical management services (CMS) business. The Company will pursue all strategic options for the CMS business, including its sale.
As a result, and in accordance with the accounting requirements of SFAS 144, the CMS business is reported as an asset held for sale and the results of operations are included in discontinued operations in the condensed consolidated financial
statements.



The term Company as used in Item 2 of
this Report means Arch Chemicals, Inc. and its consolidated subsidiaries unless the context indicates otherwise.



Results of Operations



Consolidated



|                                                           |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|---------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | ---- | ----- |  | - | ----- | -
|                                                           |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|(In millions, except per share amounts)                    |  | 2005                        |       |   | 2004                      |   |       | 2005 |  | 2004 |      
|Sales                                                      |  | $                           | 411.3 |   |                           | $ | 362.0 |      |  | $    | 712.6 |  | $ | 602.3 |  
|                                                           |  |                             |       |  
|Gross margin                                               |  | $                           | 116.7 |   |                           | $ | 113.9 |      |  | $    | 200.4 |  | $ | 179.0 |  
|Selling and administration                                 |  |                             | 71.1  |   |                           |   | 69.3  |      |  |      | 140.8 |  |   | 124.7 |  
|Research and development                                   |  |                             | 5.3   |   |                           |   | 4.0   |      |  |      | 10.3  |  |   | 7.3   |  
|Other (gains) and losses                                   |  |                             |      |   |                           |   | (0.1  | )    |  |      |      |  |   | (0.1  | )
|Restructuring                                              |  |                             |      |   |                           |   | 1.7   |      |  |      |      |  |   | 1.7   |  
|Interest expense, net                                      |  |                             | 5.8   |   |                           |   | 5.4   |      |  |      | 10.2  |  |   | 9.3   |  
|Equity in earnings (losses) of affiliated companies        |  |                             | (0.3  | ) |                           |   | 0.7   |      |  |      | 0.6   |  |   | 1.8   |  
|Income tax expense                                         |  |                             | 9.7   |   |                           |   | 12.3  |      |  |      | 11.6  |  |   | 13.6  |  
|                                                           |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Income from continuing operations                          |  |                             | 24.5  |   |                           |   | 22.0  |      |  |      | 28.1  |  |   | 24.3  |  
|                                                           |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  
|Diluted income per common share from continuing operations |  | $                           | 1.03  |   |                           | $ | 0.93  |      |  | $    | 1.18  |  | $ | 1.04  |  
|                                                           |  |                             |       |   |                           |   |       |      |  |      |       |  |   |       |  



17



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



Three Months Ended June 30, 2005 Compared to 2004



Sales increased $49.3 million, or 13.6%, due to an
increase in volumes (approximately seven percent), favorable pricing (approximately five percent) and foreign exchange (approximately two percent). Sales were higher in HTH water products due to an increase in residential swimming pool volumes of
branded chlorinated isocyanurates as well as branded and non-branded calcium hypochlorite. Additionally, sales were higher in the performance urethanes business due to an increase in overall volumes across all product lines and improved pricing that
successfully mitigated higher raw material costs. The sales increase attributable to favorable foreign exchange was principally in the HTH water products and industrial coatings businesses.



Gross margin percentage was 28.4% and 31.5% for 2005 and 2004, respectively.
The decrease in margin percentage was principally in the HTH water products, industrial coatings and wood protection businesses. The decrease in margin in the HTH water products business was driven by unfavorable product mix as well as higher
product sourcing costs related to its chlorinated isocyanurates product. In the industrial coatings and wood protection businesses the decrease in gross margin is primarily the result of increased raw materials costs for copper metal,
monoethanolamine (MEA), chromic acid and resins.



Selling and administration expenses as a percentage of sales were 17.3% and 19.1% for 2005 and 2004, respectively. These expenses increased in amount by $1.8 million, due to the higher compensation and benefits-related costs across all
businesses and unfavorable foreign exchange. These factors were partially offset by lower costs associated with the conversion of customers to CCA-replacement preservatives in the wood protection business. In 2004, the personal care business
benefited ($3 million) from a $6.1 million settlement of a favorable judgment obtained against a former owner of an acquired company, which was offset by higher self-insurance reserves ($3 million) for HTH water products.



Interest expense, net, increased $0.4 million as a result of higher interest
rates during the quarter ended June 30, 2005 as compared to those in the quarter ended June 30, 2004.



Equity in earnings of affiliated companies decreased $1.0 million due primarily to lower operating results of the Koppers joint venture. The
Companys results of equity in earnings (losses) of the Koppers joint venture were negatively impacted by $1.5 million, which included applicable legal expenses, related to a potential exposure for a case that has been filed against its joint
venture Koppers Arch Wood Protection (NZ) Limited (KANZ), which the Company owns indirectly a 49% interest (see Note 14 in the Notes to Condensed Consolidated Financial Statements for more information). This was slightly offset by the
improved operating results of the Companys Planar Solutions joint venture due to higher sales and lower operating costs. The operating costs in 2004 were higher mainly due to the start-up of the new manufacturing facility at Mesa, Arizona.



The tax rate on net income from continuing operations for the
three months ended June 30, 2005 and 2004 was 28.4% and 35.7%, respectively. In the second quarter, the Company reduced its estimated effective tax rate for the full year to 30% from 35% primarily as a result of lower foreign source income taxes and
to a lesser extent an adjustment of prior year taxes.



Income
from discontinued operations, net of tax, represents break-even results in 2005 for the CMS business compared to the results of operations of the sold microelectronics materials business in 2004.



Gain on sale of discontinued operations, net of tax, represents the recovery
of £1.7 million (approximately $2.9 million) related to two outstanding notes from the sale of the Hickson organics Castleford operations, that were previously reserved as of December 31, 2004 due to the significant uncertainty concerning the
collectibility. The Company received the cash payment on July 19, 2005, for the principal and interest on these two outstanding notes.



18



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



Six Months Ended June 30, 2005 Compared to 2004



Sales increased $110.3 million, or 18.3%, due in part
to the acquisition of Avecias pool & spa and protection & hygiene businesses and two small acquisitions of Latin American water products distributors ($34.9 million or approximately six percent). Excluding the impact of acquisitions,
sales increased $75.4 million, or 12.5%, due to increase in volumes (approximately six percent), favorable pricing (approximately five percent) and foreign exchange (approximately two percent). Sales were higher in the performance urethanes business
due to an overall increase in volumes across all product lines and improved pricing that successfully mitigated higher raw material costs. Additionally, sales were higher for HTH water products due to an increase in volumes of branded chlorinated
isocyanurates and branded and non-branded calcium hypochlorite as well as higher volumes in the South African market. The sales increase attributable to favorable foreign exchange was principally in the HTH water products and industrial coatings
businesses.



Gross margin percentage was 28.1% and 29.7% for
2005 and 2004, respectively. The decrease in margin percentage was in the HTH water products and industrial coatings businesses and to a lesser extent in the wood protection business. The decrease in margin in the HTH water products business was
driven by unfavorable product mix, higher product sourcing costs related to the branded chlorinated isocyanurates product and increased freight and distribution costs. In the industrial coatings and wood protection businesses the decrease in gross
margin is primarily the result of increased raw materials costs for copper metal, monoethanolamine (MEA), chromic acid and resins and to a lesser extent the effect of competitive pressures within the coatings market.



Selling and administration expenses as a percentage of sales were 19.8% and
20.7% for 2005 and 2004, respectively. These expenses increased in amount by $16.1 million, primarily due to the acquisition of Avecias pool & spa and protection & hygiene businesses (approximately $10 million). In addition, the
increase in expense is due to unfavorable foreign exchange as well as higher compensation and benefit-related costs across all businesses. These factors were partially offset by lower costs associated with the conversion of customers to
CCA-replacement preservatives in the wood protection business. In 2004, the personal care business benefited ($3 million) from a $6.1 million settlement of a favorable judgment obtained against a former owner of an acquired company, which was offset
by higher self-insurance reserves ($3 million) for HTH water products.



Interest expense, net, increased $0.9 million as a result of higher interest rates during the period ended June 30, 2005 as compared to those during the period ended June 30, 2004.



Equity in earnings of affiliated companies decreased $1.2 million due
primarily to lower operating results of the Koppers joint venture. The Companys results of equity in earnings (losses) of the Koppers joint venture were negatively impacted by $1.8 million, which included applicable legal expenses, related to
a potential exposure for a case that has been filed against its joint venture KANZ, which the Company owns indirectly a 49% interest (see Note 14 in the Notes to Condensed Consolidated Financial Statements for more information). This was partially
offset by higher profits for the Planar Solutions joint venture due to higher sales and lower operating costs. The operating costs in the first quarter of 2004 were higher mainly due to the start-up of the new manufacturing facility at Mesa,
Arizona.



The tax rate on net income from continuing operations
for the six months ended June 30, 2005 and 2004 was 29.3% and 35.8%, respectively. In the second quarter, the Company reduced its estimated effective tax rate for the full year to 30% from 35% primarily as a result of lower foreign source income
taxes and to a lesser extent an adjustment of prior year taxes.



Income from discontinued operations, net of tax, reflects break-even results in 2005 for the CMS business compared to the results of operations of the sold microelectronics materials business in 2004.



Gain on sale of discontinued operations, net of tax, represents the recovery
of £1.7 million (approximately $2.9 million) related to two outstanding notes from the sale of the Hickson organics Castleford operations, that were previously reserved as of December 31, 2004 due to the significant uncertainty concerning the
collectibility. The Company received the cash payment on July 19, 2005, for the principal and interest on these two outstanding notes.



19



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



Third Quarter and Full Year Outlook



The Company anticipates earnings from continuing
operations in the third quarter 2005 to be in the $0.15 to $0.25 per share range, compared to $0.07 for the prior-year quarter. For full year 2005, sales are expected to increase approximately twelve to fifteen percent and earnings per share from
continuing operations are expected to range from $1.20 to $1.30, compared to $0.74 for the prior year, which included $0.12 of restructuring expense and an impairment charge. Depreciation and amortization is estimated to be approximately $45
million. Capital spending is anticipated to be approximately $20 million. Pension expense is expected to increase by approximately $5 million and the effective tax rate is assumed to be 30 percent. See Cautionary Statement under Federal
Securities Laws below.



Segment Information



The Company has organized its business portfolio into
two operating segments to reflect the Companys business strategy. The two segments are treatment products and performance products. The treatment products segment includes three reportable business units: the HTH water products business, the
personal care and industrial biocides businesses, and the wood protection and industrial coatings businesses. Segment operating income includes the equity in earnings of affiliated companies and excludes restructuring (income) expense, impairment
expense and certain unallocated expenses of the corporate headquarters. The Company believes the exclusion of restructuring and impairment expenses from segment operating income provides additional perspective on the Companys underlying
business trends and provides useful information to investors by excluding amounts from the Companys results that the Company believes are not indicative of ongoing operating results.



The Company includes the equity income (loss) of affiliates in its segment
operating results as it believes it to be relevant and useful information for investors as these affiliates are the means by which certain segments participate in certain geographic regions. Furthermore, the Company includes it to measure the
performance of the segments. Other gains and (losses) that are directly related to the segments are included in segment operating results.



As a result of the sale of the majority of the microelectronic materials businesses on November 30, 2004, the Company has restated its prior year
condensed consolidated financial statements to include the results of the microelectronic materials businesses sold as a component of discontinued operations in accordance with SFAS 144. The Company has retained its 50 percent interest in Planar
Solutions, LLC, its joint venture with Wacker Chemical Holding Corporation for the production and sale of CMP slurries and its CMS business. As a result, and in accordance with the accounting requirements of SFAS 144, the CMS business is reported as
an asset held for sale and the results of operations are included in discontinued operations in the condensed consolidated financial statements. The results of its CMP joint venture have been included in General Corporate Expenses. In addition, as a
result of the sale, the Company has reallocated certain centralized service costs to the Companys segments that were previously allocated to the microelectronic materials segment for 2004.



Treatment Products



|                                      |  |                             |       |                           |   |       |  |      |       |  |   |      
|------------------------------------- |  | --------------------------- | ----- | ------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                      |  | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                      |  | 2005                        |       | 2004                      |   | 2005  |  | 2004
|                                      |  | ($ in millions)            
|Results of Operations:                |  |                             |       |                           |   |       |  |      |       |  |   |      
|Sales                                 |  |                             |       |                           |   |       |  |      |       |  |   |      
|HTH Water Products                    |  | $                           | 183.2 |                           | $ | 162.5 |  | $    | 274.0 |  | $ | 232.5
|Personal Care & Industrial Biocides   |  |                             | 70.6  |                           |   | 65.8  |  |      | 140.4 |  |   | 107.4
|Wood Protection & Industrial Coatings |  |                             | 101.3 |                           |   | 95.5  |  |      | 188.4 |  |   | 181.6
|                                      |  |                             |       |                           |   |       |  |      |       |  |   |      
|Total Treatment Products              |  | $                           | 355.1 |                           | $ | 323.8 |  | $    | 602.8 |  | $ | 521.5
|                                      |  |                             |       |                           |   |       |  |      |       |  |   |      
|Operating Income                      |  |                             |       |                           |   |       |  |      |       |  |   |      
|HTH Water Products                    |  | $                           | 23.5  |                           | $ | 27.9  |  | $    | 23.5  |  | $ | 30.2 
|Personal Care & Industrial Biocides   |  |                             | 10.8  |                           |   | 12.9  |  |      | 23.3  |  |   | 21.2 
|Wood Protection & Industrial Coatings |  |                             | 6.6   |                           |   | 10.4  |  |      | 7.9   |  |   | 13.6 
|                                      |  |                             |       |                           |   |       |  |      |       |  |   |      
|Total Treatment Products              |  | $                           | 40.9  |                           | $ | 51.2  |  | $    | 54.7  |  | $ | 65.0 
|                                      |  |                             |       |                           |   |       |  |      |       |  |   |      



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



Three Months Ended June 30, 2005 Compared to 2004



Sales increased $31.3 million or approximately ten
percent and operating income decreased $10.3 million. Sales increased due to higher volumes (approximately six percent), favorable foreign exchange (approximately two percent), and favorable pricing (approximately two percent).



HTH Water Products



Sales increased $20.7 million, or approximately 13 percent. The sales
increase is due to higher volumes (approximately ten percent), favorable foreign exchange (approximately two percent) and favorable pricing (approximately one percent). The increase in sales volumes is due to higher North American residential
swimming pool volumes that resulted from higher demand from existing and new customers for branded chlorinated isocyanurates (Pace®) and calcium hypochlorite (HTH®) as well
as pool maintenance products and accessories.



Operating income
decreased $4.4 million primarily as a result of lower gross margin due to an increase in cost of sales which was driven by unfavorable product mix, higher product sourcing costs and an increase in freight and distribution costs. The unfavorable mix
is the result of higher volumes of chlorinated isocyanurates and lower volumes of non-chlorine branded products. The higher product sourcing costs were a result of new import duties and utilization of an alternative supplier for chlorinated
isocyanurates due to strong demand. The higher freight and distribution costs were due to higher volumes and inefficiencies encountered in the distribution channels. These increases were slightly offset by a decrease in operating expenses which is
primarily due to the higher self-insurance reserves ($3 million) recorded in 2004, partially offset by increased compensation and benefit-related costs for the three months ended June 30, 2005.



Personal Care and Industrial Biocides



Sales increased $4.8 million, or approximately seven percent, due to higher
volumes (approximately six percent) and favorable foreign exchange (approximately one percent). The higher volumes are attributable to continued strong demand for biocides used in personal care products, including antidandruff products, and in
industrial applications, including marine antifouling paints.



Operating income decreased $2.1 million. The three months ended June 2004 operating results benefited ($3 million) from a $6.1 million settlement of a favorable judgment obtained against a former owner of an acquired company. Excluding the
favorable judgment in 2004, operating income improved by $0.9 million due to higher sales volumes.



Wood Protection and Industrial Coatings



Sales increased $5.8 million, or approximately six percent, due to the favorable effect of pricing (approximately four percent) and favorable foreign
exchange primarily in the industrial coatings business (approximately two percent). The improved pricing is the result of price increases to mitigate higher raw material costs principally for polyurethane and water based products in the industrial
coatings business as well as higher raw material costs for Wolman® E (CCA-replacement) products in the wood protection business.



Operating income decreased $3.8 million over the prior year primarily in the wood protection business and to a lesser extent the industrial coatings
business. The lower operating results in the wood protection business were due to the higher raw material costs which negatively impacted the business. In addition, wood protections equity in earnings (losses) of the Koppers joint venture were
negatively impacted by $1.5 million,



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



which included applicable legal expenses, related to a potential exposure
for a case that has been filed against its joint venture KANZ (see Note 14 in the Notes to Condensed Consolidated Financial Statements for more information). Unfavorable operating results of the industrial coatings business were driven by increased
raw material costs and unfavorable legal costs related to an employment dispute that was slightly offset by the favorable effect of foreign exchange.



Six Months Ended June 30, 2005 Compared to 2004



Sales increased $81.3 million or approximately 16 percent and operating income decreased $10.3 million. A portion of the increase in sales is due to the
acquisition of Avecias pool & spa and protection & hygiene businesses and two small acquisitions of Latin American water products distributors ($34.9 million or approximately seven percent). Excluding the impact of acquisitions, sales
increased approximately nine percent due to higher volumes (approximately six percent), favorable foreign exchange (approximately two percent) and favorable pricing (approximately one percent).



HTH Water Products



Sales increased $41.5 million, or approximately 18 percent. The sales
increase is partly due to the acquisition of the Avecia pool & spa business and two small acquisitions of Latin American water products distributors ($10.8 million or approximately five percent). Excluding the effect of the acquisitions, sales
increased $30.7 million or 13 percent, due to higher volumes (approximately nine percent), favorable foreign exchange (approximately three percent), and favorable pricing (approximately one percent). The increase in sales volumes is due to higher
North American residential swimming pool volumes that resulted from higher demand from existing and new customers for branded chlorinated isocyanurates (Pace®), branded and non-branded calcium-hypochlorite and pool maintenance products and accessories. In addition, sales were higher in the
South African market due to increased demand.



Operating income
decreased by $6.7 million primarily as a result of lower gross margins due to an increase in overall cost of sales which was driven by unfavorable product mix, higher product sourcing costs and an increase in freight and distribution costs. The
unfavorable mix is the result of higher volumes of chlorinated isocyanurates and lower volumes of non-chlorine branded products. The higher product sourcing costs were due to an increase in raw material costs as a result of import duties and
utilization of an alternative supplier for chlorinated isocyanurates due to strong demand. The higher freight and distribution costs were due to higher volumes and inefficiencies experienced in the distribution channels. Operating expenses increased
slightly due to higher selling and administration expenses related to pool dealer integration costs, as well as higher compensation and benefit-related costs. This increase was partially offset by the higher self-insurance reserves ($3 million) in
2004.



Personal Care and Industrial Biocides



Sales increased $33.0 million, or approximately 31
percent, principally due to the acquisition of Avecias protection & hygiene business ($24.1 million or approximately 23 percent). Excluding the effect of the acquisition, sales increased $8.9 million or approximately eight percent, due to
higher volumes (approximately seven percent) and favorable foreign exchange (approximately one percent). The higher volumes are attributable to continued strong demand for biocides used in personal care products, including antidandruff products, and
in industrial applications, including marine antifouling paints.



Operating income increased $2.1 million as a result of the positive contribution from the acquisition and the higher sales levels. Lower legal expenses were partially offset by an increase in selling and administration costs to support
growth initiatives and one-time costs related to an abandoned acquisition. In addition, the six months ended June 2004 operating results benefited ($3 million) from a $6.1 million settlement of a favorable judgment obtained against a former owner of
an acquired company.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



Wood Protection and Industrial Coatings



Sales increased $6.8 million, or approximately four
percent, due to the favorable effect of foreign exchange (approximately three percent) and improved pricing (approximately two percent), partly offset by lower volumes (approximately one percent). The improved pricing is a result of price increases
to mitigate higher raw material costs primarily for polyurethane and water based products in the industrial coatings business and to a lesser extent higher raw material costs for Wolman® E (CCA-replacement) products in the wood protection
business. Higher sales volumes of CCA-replacement products in Europe in the wood protection business were more than offset by lower sales volumes in the industrial coatings business due to weakness in the European furniture market and the loss of
certain customers due to competitive pressures as well as lower volumes of CCA-replacement products in North America.



Operating income decreased $5.7 million over the prior year. Unfavorable operating results in the industrial coatings business were driven by increased
raw material costs as well as reduced demand in several core European furniture markets due to depressed market conditions and competitive pressures. The lower operating results in the wood protection business were due to the higher raw material
costs which negatively impacted the business. In addition, wood protections equity in earnings (losses) of the Koppers joint venture were negatively impacted by $1.8 million, which included applicable legal expenses, related to a potential
exposure for a case that has been filed against its joint venture KANZ (see Note 14 in the Notes to Condensed Consolidated Financial Statements for more information).



Performance Products



|                           |  |                             |      |      |                           |      |      |  |   |       |   |  |   |      |  
|-------------------------- |  | --------------------------- | ---- | ---- | ------------------------- | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                           |  | Three Months Ended June 30, |      |      | Six Months Ended June 30, |     
|                           |  | 2005                        |      | 2004 |                           |      | 2005 |  |   | 2004  |  
|                           |  | ($ in millions)             |      |      | ($ in millions)           |     
|Results of Operations      |  |                             |      |      |                           |      |      |  |   |       |   |  |   |      |  
|Sales                      |  |                             |      |      |                           |      |      |  |   |       |   |  |   |      |  
|Performance Urethanes      |  | $                           | 50.9 |      | $                         | 32.6 |      |  | $ | 99.8  |   |  | $ | 66.0 |  
|Hydrazine                  |  |                             | 5.3  |      |                           | 5.6  |      |  |   | 10.0  |   |  |   | 14.8 |  
|                           |  |                             |      |      |                           |      |      |  |   |       |   |  |   |      |  
|Total Performance Products |  | $                           | 56.2 |      | $                         | 38.2 |      |  | $ | 109.8 |   |  | $ | 80.8 |  
|                           |  |                             |      |      |                           |      |      |  |   |       |   |  |   |      |  
|Operating income (loss)    |  |                             |      |      |                           |      |      |  |   |       |   |  |   |      |  
|Performance Urethanes      |  | $                           | 3.3  |      | $                         | (1.9 | )    |  | $ | 4.2   |   |  | $ | (5.3 | )
|Hydrazine                  |  |                             | 0.4  |      |                           | (1.3 | )    |  |   | (0.3  | ) |  |   | 0.1  |  
|                           |  |                             |      |      |                           |      |      |  |   |       |   |  |   |      |  
|Total Performance Products |  | $                           | 3.7  |      | $                         | (3.2 | )    |  | $ | 3.9   |   |  | $ | (5.2 | )
|                           |  |                             |      |      |                           |      |      |  |   |       |   |  |   |      |  



Three Months
Ended June 30, 2005 Compared to 2004



Sales increased
$18.0 million, or approximately 47 percent, and operating results increased $6.9 million from prior year. The increase in sales is due to improved pricing (approximately 30 percent) and higher volumes (approximately 17 percent).



Performance Urethanes



Performance urethanes sales increased approximately 56 percent over the
prior year due to improved pricing and higher volumes. The improved pricing was principally due to successful price increases that mitigated higher raw material costs. The increase in volumes was due to stronger demand across all product lines,
particularly in glycols, specialty polyol products and higher contract manufacturing business. Operating results improved $5.2 million as a result of higher sales volumes and improved margins from the higher pricing, which were slightly offset by
increased compensation and benefits-related costs.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



Hydrazine



Hydrazine sales decreased approximately five percent due primarily to lower
propellant revenues, resulting from the expiration of the prior government contract in April 2004, which were slightly offset by higher pricing for hydrazine hydrates and increased pricing of Ultra PureTMHydrazine. Operating results increased $1.7 million primarily as a result of cost-reduction efforts within the business due to the reduction in work force
from last year.



Six Months Ended June 30, 2005 Compared
to 2004



Sales increased $29.0 million, or
approximately 36 percent, and operating results increased $9.1 million from prior year. The increase in sales is due to improved pricing (approximately 27 percent) and higher volumes (approximately nine percent).



Performance Urethanes



Performance urethanes sales increased approximately 51 percent over the
prior year due to improved pricing and higher volumes. The increase in volumes was due to stronger demand across all product lines, particularly in glycols, specialty polyol products and higher contract manufacturing business. The improved pricing
was principally due to successful price increases that mitigated higher raw material costs. Operating results improved $9.5 million as a result of higher sales volumes and improved margins from the higher pricing, which were slightly offset by
increased compensation and benefits-related costs.



Hydrazine



Hydrazine sales decreased
approximately 32 percent due primarily to lower propellant revenues resulting from the expiration of the prior government contract in April 2004 and lower government campaign sales. This was slightly offset by higher pricing for hydrazine hydrates
and increased pricing and volumes of Ultra PureTMHydrazine. Operating results decreased $0.4 million as a result of
the lower sales, which were slightly offset by cost-reduction efforts within the business due to the reduction in work force from last year.



On March 29, 2005, the Company was notified by the U.S. Defense Energy Support Center (DESC) that it had been awarded a 20-year contract for approximately
$149 million for the production, storage, distribution and handling of hydrazine propellants for the U.S. government. Under this new, long-term contract, full-scale production is not scheduled to begin until 2007.



The Company is currently evaluating a decision to start up the hydrazine
hydrates plant which is currently idle. The carrying value of such plant is approximately $5 million. If the Company decides not to start up the hydrates plant, the Company may incur a non-cash impairment charge and related shutdown costs. Any
cash-related shutdown costs are expected to be less than $1 million.



Corporate Expenses (Unallocated)



|                               |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |       |  
|------------------------------ |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ----- | -
|                               |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                               |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|                               |  | ($ in millions)             |     
|Results of Operations          |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |       |  
|Unallocated Corporate Expenses |  | $                           | (4.6 | ) |                           | $ | (6.6 | )    |  | $ | (8.7 | ) |  | $ | (10.9 | )



Three Months
Ended June 30, 2005 Compared to 2004



The decrease in
unallocated corporate expenses is principally due to lower incentive compensation related costs, due to the change in stock price for the Companys long-term incentive plan.



Six Months Ended June 30, 2005 Compared to 2004



The decrease in unallocated corporate expenses is principally due to lower incentive compensation related costs, due to the
change in stock price for the Companys long-term incentive plan. In addition, 2005 benefited from the favorable operating results of the Planar Solutions joint venture due to higher sales and lower operating costs.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



Liquidity, Investment Activity, Capital Resources and Other
Financial Data



|                                                     |  |                           |        |   |      |   |        |  
|---------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                     |  | Six Months Ended June 30, |       
|                                                     |  | 2005                      |        |   | 2004 |  
|                                                     |  | ($ in millions)           |       
|Cash Flow Data                                       |  |                           |        |  
|                                                     |  |                          
|Provided By (Used For)                               |  |                           |        |   |      |   |        |  
|Accounts receivable securitization program           |  | $                         | 73.4   |   |      | $ | 61.9   |  
|Change in working capital                            |  |                           | (121.0 | ) |      |   | (70.2  | )
|Net operating activities from continuing operations  |  |                           | (18.2  | ) |      |   | 50.8   |  
|Capital expenditures                                 |  |                           | (6.4   | ) |      |   | (8.8   | )
|Business acquired in purchase transaction            |  |                           | (3.1   | ) |      |   | (205.4 | )
|Cash proceeds (payments) from the sale of a business |  |                           | (3.9   | ) |      |   |       |  
|Net investing activities                             |  |                           | (14.2  | ) |      |   | (215.3 | )
|Debt borrowing, net                                  |  |                           | 1.1    |   |      |   | 145.9  |  
|Net financing activities                             |  |                           | (7.3   | ) |      |   | 139.6  |  



Six Months Ended
June 30, 2005 Compared to 2004



For the six months
ended June 30, 2005, $18.2 million was used for operating activities from continuing operations compared to $50.8 million provided by operating activities from continuing operations for the six months ended June 30, 2004. This was primarily
attributable to a voluntary contribution that was made to the Companys pension plan of $33.5 million during the second quarter of 2005. The use of working capital for both periods is due to the seasonality of the businesses. The increase in
the use of cash from working capital was principally due to higher receivable balances as a result of increased sales for the three months ended June 30, 2005 and the seasonal build of the Avecia pool & spa business during 2005. These were
slightly offset by the incremental benefit from the sale of the accounts receivable program.



Capital expenditures for the six months of 2005 were $2.4 million lower than 2004 due to lower capital expenditures for the wood protection and hydrazine businesses. Capital expenditures for 2005 are expected to be
$20 million.



On April 2, 2004, the Company completed the
acquisition of Avecias pool & spa and protection & hygiene businesses for $230.8 million. The purchase price was further subject to a contingent payment of up to $5.0 million in cash based upon earnings attributable to North American
sales of certain acquired products. An interim payment of $2.5 million was made in April 2005 based on 2004 results. In addition, since the unfunded pension liability in the U.K. pension plan was less than $10.0 million, the purchase price was
adjusted upwards by the difference between $10.0 million and the unfunded liability, with the consideration to be split equally between a contingent cash payment and up to 223,250 additional shares of the Companys common stock. The share
consideration component of this adjustment was 74,788 shares of common stock, which were issued in January 2005 with a value of $1.7 million. The contingent cash payment will be a maximum of $1.7 million and earned based upon cumulative global net
sales of certain products through 2005. An interim payment of $0.5 million was made in April 2005 based on 2004 results. For additional information concerning the acquisition see the Companys Form 10-K for the year ended December 31, 2004 as
well as the Form 8-K/A filed by the Company on June 16, 2004.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



Cash payments from the sale of a business in 2005 relate
to certain expenses related to the sale of the microelectronic materials business to Fuji Photo Film Co., Ltd., which occurred in November 2004. These expenses included the reimbursement of a working capital adjustment of $1.1 million as well as
other disposition costs.



Cash used in financing activities for
the first six months of 2005 was $7.3 million which was primarily the result of the dividends paid to shareholders of $9.4 million during the first six months of 2005.



Cash provided by financing activities in 2004 was primarily due to increased borrowings related to the acquisition of the
Avecia pool & spa and protection & hygiene business; this was partially offset by the dividends paid to shareholders of $9.1 million during the first six months of 2004.



The Companys revolving credit facility contains a quarterly leverage ratio (debt / EBITDA) not to exceed 3.50 and an
interest coverage ratio (EBITDA/total interest expense) covenant not to be less than 3.0. Additionally, the credit facility restricts the payment of dividends and repurchase of stock to $65.0 million plus 50% of cumulative net income (loss) subject
to certain limitations beginning June 20, 2003. This limitation was $55.7 million at June 30, 2005. As of June 30, 2005, facility fees payable on the credit facility are 0.35%. The facility fees can range from 0.2% to 0.4% depending on the
Companys quarterly leverage ratios. The Company may select various floating rate borrowing options, including, but not limited to, LIBOR plus a spread that can range from 0.55% to 1.35% depending on the Companys quarterly leverage
ratios. At June 30, 2005, the Company had $207.2 million of available borrowings under the credit facility.



The Companys senior notes contain a quarterly leverage ratio (debt / EBITDA) not to exceed 3.50 and a debt to total capitalization ratio of 55%. In
addition, the notes contain a covenant that restricts the payment of dividends and repurchases of stock to $65.0 million less cumulative dividends and repurchases of stock plus 50% of cumulative net income (loss) under certain circumstances
beginning January 1, 2002. This limitation was $42.3 million at June 30, 2005.



In May 2003, the Company entered into interest rate swap agreements under which the Company swapped the 7.94% fixed interest rate on $80.0 million principal amount of unsecured senior notes for floating rate interest
based on six-month LIBOR plus 5.4539%. The counter parties to these agreements are major financial institutions. The agreements expire in March 2007. The Company has designated the swap agreements as fair value hedges of the risk of changes in the
value of fixed rate debt due to changes in interest rates for a portion of its fixed rate borrowings under SFAS 133. Accordingly, the swap agreements have been recorded at their fair market value of $2.2 million and $1.6 million at June 30, 2005 and
December 31, 2004, respectively, and are included in Other Liabilities on the accompanying Condensed Consolidated Balance Sheet, with a corresponding decrease in the carrying amount of the related debt. No gain or loss has been recorded as the
contracts meet the criteria of SFAS 133 to qualify for hedge accounting treatment with no ineffectiveness.



On June 27, 2005, the Company entered into a new accounts receivable securitization program with Three Pillars Funding LLC and SunTrust Capital Markets,
Inc. to replace the Companys previous accounts receivable securitization program which had expired. Under this program certain accounts receivable were sold, without recourse, through its wholly-owned subsidiary, Arch Chemicals Receivables
Corp., a special-purpose corporation. At June 30, 2005, Arch Chemicals Receivables Corp. had sold $77.0 million of participation interests, which included $3.6 million of receivables related to the CMS business, in $138.6 million of accounts
receivable. The Company had not sold any participation interests in such accounts receivable at December 31, 2004 (see Note 3 of Notes to Condensed Consolidated Financial Statements).



At June 30, 2005, the Company had $26.7 million of outstanding letters of credit. In addition, the Company has agreed to
guarantee 50% or up to $8.5 million of Planar Solutions line of credit, which is provided by the Companys joint venture partner. As of June 30, 2005, the Company had $7.5 million letters of guarantee outstanding for its Planar Solutions
joint venture borrowings and certain equipment leases. On April, 28, 2005, the Board of Directors of the Company approved an extension of this Planar Solutions guarantee through January 2007.



The Company believes that the credit facility, accounts receivable
securitization program and cash provided by operations are adequate to satisfy its liquidity needs for the near future. However, if Company earnings were to fall



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations - Continued



significantly below current expectations, a risk exists that the Company
would not meet its quarterly leverage, interest coverage, fixed charge coverage or debt to total capitalization ratio covenants which could trigger a default condition under its debt agreements.



The Company is a co-defendant and/or defendant in several cases at June 30,
2005, and has provided for its exposure for these cases. The Company does not expect any final resolution of these cases, net of an expected insurance recovery, to have a material adverse effect on results of operations or financial position of the
Company. However, given that the Companys applicable insurance policies provide coverage on a reimbursement basis, there may be a lag between any payment ultimately paid by the Company and reimbursement of such payment from the Companys
insurers.



In July 2005, the Company made a payment of $3.1
million in full settlement for a trial court judgment, in favor of a railroad, in a lawsuit associated with a wood preservative ingredient spillage in 1994, which had been fully accrued for in the Condensed Consolidated Balance Sheets.



The Companys minimum pension funding requirements as set forth by
ERISA for its U.S. pension plans was expected to be $6.0 million in 2005 and $32.0 million in 2006. The company made a voluntary contribution to its U.S. pension plan of $33.5 million in the second quarter of 2005, and as a result, there are no
further minimum funding requirements expected for 2005 and 2006 under current law. The Company also has minimum funding requirements for its U.K. pension plan, which are expected to be approximately $10.0 million in 2005 and 2006.



On August 4, 2005, the Company declared a quarterly dividend of $0.20 on each
share of the Companys common stock. The dividend will be payable on September 12, 2005, to shareholders of record at the close of business on August 15, 2005.



Cautionary Statement under Federal Securities Laws



Except for historical information contained herein, the information set forth in this communication may contain
forward-looking statements that are based on managements beliefs, certain assumptions made by management and managements current expectations, outlook, estimates and projections about the markets and economy in which the Company and its
various businesses operate. Words such as anticipates, believes, estimates, expects, forecasts, opines, plans, predicts, projects,
should, targets and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties
and assumptions (Future Factors), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward-looking statements. The Company undertakes no obligation
to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. Future Factors which could cause actual results to differ materially from those discussed include but are not limited to: general
economic and business and market conditions; lack of moderate growth or recession in U.S. and European economies; increases in interest rates; economic conditions in Asia; worsening economic and political conditions in Venezuela; changes in foreign
currencies against the U.S. dollar; customer acceptance of new products; efficacy of new technology; changes in U.S. laws and regulations; increased competitive and/or customer pressure; the Companys ability to maintain chemical price
increases; higher-than-expected raw material costs for certain chemical product lines; an increase in anti-dumping duties on certain products; increased foreign competition in the calcium hypochlorite markets; unfavorable court, arbitration or jury
decisions or tax matters; the supply/demand balance for the Companys products, including the impact of excess industry capacity; failure to achieve targeted cost-reduction programs; capital expenditures in excess of those scheduled;
environmental costs in excess of those projected; the occurrence of unexpected manufacturing interruptions/outages at customer or company plants; reduction in expected government contract orders and/or the overturning of the award to the Company of
the new U.S. government contract for hydrazine propellants; a decision by the Company not to start up the hydrates manufacturing facility; unfavorable weather conditions for swimming pool use; inability to expand sales in the professional pool
dealer market; and gains or losses on derivative instruments.



27



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##### Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk



Interest Rate Risk



The
Company is exposed to interest rate risk on approximately 40 percent of its outstanding borrowings that are subject to floating rates. Based on the Companys expected 2005 borrowing levels, an increase in interest rates of 100 basis points
would decrease the Companys results of operations and cash flows by approximately $0.5 million to $1.0 million.



Foreign Currency Risk



At June 30, 2005, the Company had forward contracts to sell foreign currencies with a U.S. dollar equivalent value of $20.3 million and forward contracts
to buy foreign currencies with notional amounts of $39.5 million. The fair value of these forward contracts is included in Other Current Assets and Accrued Liabilities, respectively.



Holding all other variables constant, if there were a 10 percent change in foreign currency exchange rates, the net effect
on the Companys annual cash flows would be an increase (decrease) of between $1.0 million to $2.0 million related to the unhedged portion, as any increase (decrease) in cash flows resulting from the Companys hedge forward contracts would
be offset by an equal (decrease) increase in cash flows on the underlying transaction being hedged. The application of SFAS 133 may cause increased volatility in the Companys results of operations for interim periods in the future, if the
Company changes its policies, or if some of the derivative instruments do not meet the requirements for hedge accounting.



Commodity Price Risk



The Company is exposed to commodity price risk related to the price volatility of natural gas utilized at certain manufacturing sites. Depending on market
conditions, the Company may purchase derivative commodity instruments to minimize the risk of price fluctuations. It is the Companys policy to hedge up to 80 percent of its natural gas purchases during a calendar year. At June 30, 2005, the
Company had no forward contracts to purchase natural gas. In addition, the Company is exposed to price risk related to the price volatility of certain other raw materials including the ongoing purchase of propylene, copper metal, monoethanolamine
(MEA) and resins. Holding other variables constant, a 10 percent adverse change in the price of propylene would decrease the Companys results of operations and cash flows by approximately $4 million. Holding other variables
constant, a 10 percent adverse change in the price of copper metal, MEA, resins and natural gas would decrease the Companys results of operations and cash flows between $1 million to $2 million each.



See the Companys Form 10-K for the year ended December 31, 2004 for
additional information on the above items.



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##### Table of Contents

Item 4. Controls and Procedures



As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Companys chief executive officer and chief financial officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on this evaluation, the Companys
chief executive officer and chief financial officer concluded that as of the end of such period such disclosure controls and procedures (i) were reasonably designed to ensure that information required to be disclosed by the Company in reports it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission and (ii) were effective. The Company also has investments in
certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily more limited than those it maintains with respect to its consolidated
subsidiaries.



There have not been any changes in the
Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



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



The Company held its Annual Meeting of Shareholders on April 28, 2005. Of the 23,601,612 shares of common stock entitled to vote at such meeting, at least 21,471,418 shares were present for purposes of a quorum. At
the meeting, shareholders elected to the Board of Directors Michael E. Campbell, H. William Lichtenberger and John P. Schaefer as Class III directors with a term expiring in 2008 and Daniel S. Sanders as a Class I director with a term expiring in
2006. Votes cast for and votes withheld in the election of Directors were as follows:



|                         |  |            |  |         
|------------------------ |  | ---------- |  | --------
|                         |  | FOR        |  | WITHHELD
|Michael E. Campbell      |  | 20,942,338 |  | 529,080 
|H. William Lichtenberger |  | 21,118,064 |  | 353,354 
|John P. Schaefer         |  | 21,117,421 |  | 353,997 
|Daniel S. Sanders        |  | 21,119,917 |  | 351,501 



There were no abstentions or broker
non-votes. The shareholders also ratified the appointment of KPMG LLP as independent auditors for the Company for 2005. Voting for the resolution ratifying the appointment were 20,974,917 shares. Voting against were 405,802 shares. Abstaining were
90,699 shares. There were no broker non-votes.



Item 5. Other Information



In Item 15 of
the Companys Form 10-K for the period ending December 31, 2004, the Company reported that it was appealing within the staff a Securities and Exchange Commission (SEC) staff position that the Company file audited financial
statements for the fiscal year ended March 31, 2003 and unaudited financial statements for the fiscal year ended March 31, 2002 for the Companys former FUJIFILM joint venture which was sold in connection with the sale of the majority of its
microelectronic materials business in 2004. That appeal was successful; however, the SEC staff requested that the Company file as an amendment to its 2004 Form 10-K, audited financial statements of the former FUJIFILM joint venture for the period
ending March 31, 2005. After further discussion with the SEC staff, the Company has agreed to file such statements.



Item 6. Exhibits



|            |  |                                                                                                                                                                                                                                                                                                                      
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                          
|10.         |  | Amendment No. 1, dated July 28, 2005, to the Receivables Sale Agreement, dated as of June 27, 2005, by and among Arch Chemicals, Inc., Arch Chemicals Specialty Products, Inc., Arch Treatment
Technologies, Inc., Arch Wood Protection, Inc., Arch Personal Care Products, L.P. and Arch Chemicals Receivables Corp.
|            | 
|31.1        |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                              
|            | 
|31.2        |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                              
|            | 
|32.         |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350.                                                                                                                                                                                                                     



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##### Table of Contents

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.



|               |  |                                   |  |                                                                      
|-------------- |  | --------------------------------- |  | ---------------------------------------------------------------------
|               |  | ARCH CHEMICALS, INC. (Registrant)
|               |  |                                  
|August 9, 2005 |  | By:                               |  | /s/ Louis S. Massimo                                                 
|               |  |                                   |  | Louis S. Massimo Executive Vice President and Chief Financial Officer



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                      
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                          
|10.         |  | Amendment No. 1, dated July 28, 2005, to the Receivables Sale Agreement, dated as of June 27, 2005, by and among Arch Chemicals, Inc., Arch Chemicals Specialty Products, Inc., Arch Treatment
Technologies, Inc., Arch Wood Protection, Inc., Arch Personal Care Products, L.P. and Arch Chemicals Receivables Corp.
|            | 
|31.1        |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                              
|            | 
|31.2        |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                              
|            | 
|32.         |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350.