**Back
            to Table of Contents**





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





(Mark
                One)x
            
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the quarterly period ended June 30, 2006ORo
            
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the transition period from ________________ to
                ________________





Commission
      file number: **1-14601**





**ARCH
      CHEMICALS, INC.**


(Exact
      name of registrant as specified in its charter)





**Virginia**
            
            **06-1526315**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)**501
                Merritt 7**
            
            **06851****Norwalk,
                CT**
            
            (Zip
                Code)(Address
                of principal executive offices)





**(203)
      229-2900**


(Registrant’s
      telephone number, including area code)





**N/A**


(Former
      name, former address and former fiscal year, if changed since last
      report)





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 o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      accelerated filer o   Accelerated
      filer x  Non-accelerated filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o No x





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at July 31, 2006Common
                Stock, $1 par value per share
            
            24,131,014 shares









**Back
        to Table of Contents**


**ARCH
      CHEMICALS, INC.**





INDEX




Page
                NumbersPART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements
            2Condensed
                Consolidated Balance Sheets as of June 30, 2006 and
                December 31, 2005
            2Condensed
                Consolidated Statements of Income for the three and
                six months ended June 30, 2006 and 2005
            3Condensed
                Consolidated Statements of Cash Flows for the six
                months ended June 30, 2006 and 2005
            4Notes
                to Condensed Consolidated Financial
                Statements
            5Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and
                Results of Operations
            17Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            27Item
                4.
            Controls
                and Procedures
            28PART
                II.
            OTHER
                INFORMATIONItem
                1A.
            Risk
                Factors
            29Item
                2.
            Unregistered
                Shares of Equity Securities and Use of
                Proceeds
            29Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            29Item
                6.
            Exhibits
            30Signatures
            31




-1-
 **Back
          to 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,
              
              December
                  31,2006
              
              2005**ASSETS**
              
              (Unaudited)Current
                  assets:Cash
                  and cash equivalents
              
              $
              49.0
              
              $
              43.1Accounts
                  receivable, net
              
              
              160.3
              
              
              133.1Short-term
                  investment
              
              
              84.0
              
              
              68.4Inventories,
                  net
              
              
              207.0
              
              
              172.0Other
                  current assets
              
              
              37.9
              
              
              39.8Assets
                  held for sale
              
              
              2.8
              
              
              8.3Total
                  current assets
              
              
              541.0
              
              
              464.7Investments
                  and advances - affiliated companies at equity
              
              
              6.1
              
              
              5.7Property,
                  plant and equipment, net
              
              
              185.9
              
              
              191.4Goodwill
              
              
              216.5
              
              
              211.5Other
                  intangibles
              
              
              142.3
              
              
              140.7Other
                  assets
              
              
              51.5
              
              
              47.9Total
                  assets
              
              $
              1,143.3
              
              $
              1,061.9**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  liabilities:Short-term
                  borrowings
              
              $
              7.8
              
              $
              8.5Current
                  portion of long-term debt
              
              
              148.7
              
              
              3.5Accounts
                  payable
              
              
              197.2
              
              
              174.6Accrued
                  liabilities
              
              
              88.5
              
              
              88.9Liabilities
                  associated with assets held for sale
              
              
              2.6
              
              
              9.1Total
                  current liabilities
              
              
              444.8
              
              
              284.6Long-term
                  debt
              
              
              65.4
              
              
              217.8Other
                  liabilities
              
              
              216.2
              
              
              194.5Total
                  liabilities
              
              
              726.4
              
              
              696.9Commitments
                  and contingenciesShareholders'
                  equity:Common
                  stock, par value $1 per share,Authorized
                  100.0 shares:24.0
                  shares issued and outstanding (23.6 in 2005)
              
              
              24.0
              
              
              23.6Additional
                  paid-in capital
              
              
              433.4
              
              
              422.2Retained
                  earnings
              
              
              62.0
              
              
              36.4Accumulated
                  other comprehensive loss
              
              
              (102.5
              )
              
              (117.2
              )Total
                  shareholders' equity
              
              
              416.9
              
              
              365.0Total
                  liabilities and shareholders' equity
              
              $
              1,143.3
              
              $
              1,061.9


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


-2-
 **Back
          to Table of Contents**




**ARCH
                  CHEMICALS, INC.**Condensed
                  Consolidated Statements of
                  Income(Unaudited)(In
                  millions, except per share amounts)
  Three
                  Months
              
              Six
                  MonthsEnded
                  June 30,
              
              Ended
                  June 30,2006
              
              2005
              
              2006
              
              2005Sales
              
              $
              446.1
              
              $
              411.3
              
              $
              763.9
              
              $
              712.6Cost
                  of goods sold
              
              
              317.4
              
              
              294.6
              
              
              547.3
              
              
              512.2Selling
                  and administration
              
              
              74.0
              
              
              71.1
              
              
              143.1
              
              
              140.8Research
                  and development
              
              
              5.3
              
              
              5.3
              
              
              9.9
              
              
              10.3Interest
                  expense
              
              
              5.8
              
              
              6.1
              
              
              11.3
              
              
              10.6Interest
                  income
              
              
              0.3
              
              
              0.3
              
              
              0.5
              
              
              0.4Income
                    from continuing operations before equity in earnings (losses)
                    of
                    affiliated companies and taxes
              
              
              43.9
              
              
              34.5
              
              
              52.8
              
              
              39.1Equity
                  in earnings (losses) of affiliated companies
              
              
              0.3
              
              
              (0.3
              )
              
              0.5
              
              
              0.6Income
                  tax expense
              
              
              14.6
              
              
              9.7
              
              
              17.6
              
              
              11.6Income
                  from continuing operations
              
              
              29.6
              
              
              24.5
              
              
              35.7
              
              
              28.1Loss
                  from discontinued operations, net of tax
              
              
              (0.1
              )
              
              —
              
              
              (0.5
              )
              
              —Gain
                  on sale of discontinued operations, net of tax
              
              
              —
              
              
              2.9
              
              
              —
              
              
              2.9Net
                  income
              
              $
              29.5
              
              $
              27.4
              
              $
              35.2
              
              $
              31.0Basic
                  income per common share:Continuing
                  operations
              
              $
              1.23
              
              $
              1.04
              
              $
              1.49
              
              $
              1.19Loss
                  from discontinued operations
              
              
              —
              
              
              —
              
              
              (0.02
              )
              
              —Gain
                  on sale of discontinued operations
              
              
              —
              
              
              0.12
              
              
              —
              
              
              0.12Basic
                  income per common share
              
              $
              1.23
              
              $
              1.16
              
              $
              1.47
              
              $
              1.31Diluted
                  income per common share:Continuing
                  operations
              
              $
              1.22
              
              $
              1.03
              
              $
              1.47
              
              $
              1.18Loss
                  from discontinued operations
              
              
              —
              
              
              —
              
              
              (0.02
              )
              
              -Gain
                  on sale of discontinued operations
              
              
              —
              
              
              0.12
              
              
              —
              
              
              0.12Diluted
                  income per common share
              
              $
              1.22
              
              $
              1.15
              
              $
              1.45
              
              $
              1.30Weighted
                  average common shares outstanding:Basic
              
              
              24.0
              
              
              23.6
              
              
              24.0
              
              
              23.6Diluted
              
              
              24.3
              
              
              23.8
              
              
              24.2
              
              
              23.8Dividends
                  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.


-3-
 **Back
          to Table of Contents**




**ARCH
                  CHEMICALS, INC.**Condensed
                  Consolidated Statements of Cash
                  Flows(Unaudited)(In
                  millions)
  Six
                  MonthsEnded
                  June 30,2006
              
              2005**Operating
                  activities**Net
                  income
              
              $
              35.2
              
              $
              31.0Adjustments
                  to reconcile net income to net cash andcash
                  equivalents (used in) provided by operating activities:Loss
                  (income) from discontinued operations
              
              
              0.5
              
              
              (2.9
              )Equity
                  in (earnings) of affiliated companies
              
              
              (0.5
              )
              
              (0.6
              )Depreciation
                  and amortization
              
              
              22.4
              
              
              23.6Deferred
                  taxes
              
              
              12.2
              
              
              6.7Restructuring
                  payments
              
              
              (0.2
              )
              
              (1.1
              )Changes
                  in assets and liabilities, net of purchaseand
                  sale of businesses:Accounts
                  receivable securitization program
              
              
              60.0
              
              
              73.4Receivables
              
              
              (97.1
              )
              
              (118.2
              )Inventories
              
              
              (32.9
              )
              
              (34.5
              )Other
                  current assets
              
              
              1.1
              
              
              —Accounts
                  payable and accrued liabilities
              
              
              13.8
              
              
              31.7Noncurrent
                  liabilities
              
              
              9.5
              
              
              (28.9
              )Other
                  operating activities
              
              
              (0.4
              )
              
              1.6Net
                  operating activities from continuing operations
              
              
              23.6
              
              
              (18.2
              )Cash
                  flows of discontinued operations
              
              
              (1.1
              )
              
              4.1Net
                  operating activities
              
              
              22.5
              
              
              (14.1
              )**Investing
                  activities**Capital
                  expenditures
              
              
              (9.3
              )
              
              (6.4
              )Business
                  acquired in purchase transaction, net of cash acquired
              
              
              (2.8
              )
              
              (3.1
              )Cash
                  proceeds (payments) from the sale of a business
              
              
              (0.5
              )
              
              (3.9
              )Cash
                  flows of discontinued operations
              
              
              —
              
              
              —Other
                  investing activities
              
              
              (1.5
              )
              
              (0.8
              )Net
                  investing activities
              
              
              (14.1
              )
              
              (14.2
              )**Financing
                  activities**Long-term
                  debt borrowings
              
              
              40.0
              
              
              111.0Long-term
                  debt repayments
              
              
              (46.5
              )
              
              (111.1
              )Short-term
                  debt borrowings (repayments), net
              
              
              (0.9
              )
              
              1.2Dividends
                  paid
              
              
              (9.6
              )
              
              (9.4
              )Cash
                  flows of discontinued operations
              
              
              —
              
              
              —Proceeds
                  from stock options exercised and other financing
                  activities
              
              
              11.6
              
              
              1.0Net
                  financing activities
              
              
              (5.4
              )
              
              (7.3
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              2.9
              
              
              (2.6
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              5.9
              
              
              (38.2
              )Cash
                  and cash equivalents, beginning of year
              
              
              43.1
              
              
              74.6Cash
                  and cash equivalents, end of period
              
              $
              49.0
              
              $
              36.4**Supplemental
                  cash flow information**Income
                  taxes, net
              
              $
              4.7
              
              $
              2.4Interest
                  paid
              
              $
              12.1
              
              $
              11.3Issuance
                  of Arch Common Stock - Avecia acquisition
              
              $
              —
              
              $
              1.7


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


-4-
 **Back
          to 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, 2005.
      The Company’s Treatment segment is seasonal in nature, in particular its HTH
      water products business as retail sales in the U.S. residential pool market
      are
      concentrated between Memorial Day and the Fourth of July. 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, 2006, are not
      necessarily indicative of the results to be expected for the entire fiscal
      year.





**2.**
            **Share-Based
                Compensation**





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      (SFAS) 123R, “Share-Based Payment,” utilizing the modified prospective method.
      The Company had previously accounted for its stock-based compensation plans
      under the recognition and measurement provisions of APB 25, “Accounting for
      Stock Issued to Employees” and related interpretations as permitted by SFAS 123,
“Accounting for Stock Based Compensation.” SFAS 123R requires all share-based
      payments to employees, including grants of employee stock options, to be
      recognized in the financial statements based on their fair values beginning
      with
      the first annual period after June 15, 2005. Due to the fact that all
      options have vested as of December 31, 2005, there was no related impact on
      the
      Company’s financial statements. In addition, the Company currently does not
      intend to issue any stock options to employees in 2006 or the foreseeable
      future. Under SFAS 123R, actual tax benefits recognized in excess of tax
      benefits previously established upon grant are reported as a financing cash
      inflow. The four stock-based compensation plans are described
      below:





·
            The
                1988 and 1996 Olin Stock Option Plans. At the time of the distribution
                of
                the Company from Olin Corporation, outstanding Olin options were
                converted
                into both an option to purchase Company common stock ("Company Options")
                and an option to purchase Olin common stock ("New Olin Options")
                with the
                same aggregate "intrinsic value" at the time of the Distribution
                as the
                old award. The Company is responsible for delivering shares of Company
                common stock upon exercise of Company Options, and Olin is responsible
                for
                the delivery of shares of Olin Common stock upon exercise of New
                Olin
                Options. Options granted to such employees under the Olin 1988 Stock
                Option Plan or the Olin 1996 Stock Option Plan retained the original
                term
                of the option. Options granted to such employees under the Olin 1996
                Stock
                Option Plan, which were not vested at the time of the Distribution,
                vested
                in accordance with their vesting schedule so long as the optionee
                remained
                employed at the Company. No additional Company Options will be granted
                under the 1988 and 1996 Olin Stock Option
                Plans.





·
            1999
                Long Term Incentive Plan seeks to encourage selected salaried employees
                to
                acquire a proprietary interest in the Company's growth and performance
                and
                to attract and retain qualified individuals. The plan provides for
                the
                ability to issue stock options, restricted stock and restricted stock
                units, and performance awards. The Plan requires that options be
                granted
                at an exercise price representing the fair market value of the common
                stock on the grant date. In general, the employee options vest and
                become
                exercisable within one to three years and all options are exercisable
                up
                to ten years from the date of grant.





·
            1999
                Stock Plan for Nonemployee Directors, is a directors compensation
                plan
                under which stock options and other stock awards may be granted to
                nonemployee directors. The Plan requires that options be granted
                at an
                exercise price representing the fair market value of the common stock
                on
                the grant date. In general, the directors' options are exercisable
                upon
                grant and all options are exercisable up to ten years from the date
                of
                grant.




-5-
 **Back
          to Table of Contents**


**ARCH
        CHEMICALS, INC.**
 Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)


The
      following table summarizes stock option activity for the six months ended June
      30, 2006 (number of options in thousands):





**Stock**
              **Options**
            
            **Weighted**
              **Average**
              **Price**
            
            **Range
                of Prices**Balance,
                December 31, 2005
            
            
            1,873
            
            $
            24.80
            
            $
            16.53
                — 31.92Options
                exercised
            
            
            (426
            )
            
            27.22
            
            
            17.38
                — 31.92Options
                cancelled or forfeited
            
            
            (223
            )
            
            28.84
            
            
            17.38
                — 31.92Balance,
                June 30, 2006
            
            
            1,224
            
            $
            23.23
            
            $
            16.53
                — 31.92





The
      following table summarizes information about stock options outstanding at June
      30, 2006 (number of options in thousands):





**Weighted
                Average****Option
                Exercise Price****Range
                of**
            
            **Number
                Outstanding**
            
            **Remaining**
            
            **Outstanding
                and****Exercise
                Prices**
            
            **And
                Exercisable**
            
            **Contractual
                Life**
            
            **Exercisable**$16.53
                — $23.00
            
            
            817
            
            
            4
                years
            
            $
            19.40$28.58
                — $31.92
            
            
            407
            
            
            1
                year
            
            $
            30.921,224





The
      total
      intrinsic value of stock options exercised during the six months ended June
      30,
      2006 was $1.9 million.




As
      part
      of the 1999 Long Term Incentive Plan, the Company currently grants selected
      executives and other key employees performance awards whose vesting is
      contingent upon meeting various performance measures and contains a retention
      feature. This component of compensation is designed to encourage the long-term
      retention of key executives and to tie a major part of executive compensation
      directly to Company performance and the long-term enhancement of shareholder
      value. The award of performance units was designed to recognize and reward
      targeted return on equity (“ROE”) over a three-year period. The performance
      awards are earned at the end of the three-year period provided the ROE target
      is
      achieved. There is an opportunity for accelerated payout of the performance
      awards if the ROE target is met or exceeded by the end of the second year after
      the grant. If the ROE target is not achieved by the end of year three, 50%
      of
      the performance awards will be forfeited and 50% of the performance awards
      will
      be paid out in cash following the end of year six if the executive is still
      employed at the Company.




The
      performance awards are settled in cash, which is based on the market price
      of
      the Company’s stock at the time of settlement. During the service period,
      compensation cost is recognized proportionately based on the Company’s estimate
      of achieving the financial targets. The performance awards are remeasured to
      reflect the market price of the Company’s stock, at each financial statement
      date until the award is settled. Total compensation expense of $3.0 million
      and
      $4.1 million and $0.2 million and $1.6 million was recognized for the three
      and
      six months ended June 30, 2006 and 2005, respectively. As of June 30, 2006,
      there was $14.5 million of total unrecognized compensation cost related to
      the
      unearned payment arrangements, which is expected to be recognized over a
      weighted-average period of three years based on current financial forecasts
      and
      current stock price.




The
      following table summarizes the performance award activity for the six months
      ended June 30, 2006 (number of awards in thousands):





**Performance****Awards**Balance,
                December 31, 2005
            
            
            724Awarded
            
            
            296Paid
                out
            
            
            (219
            )Cancelled
                or forfeited
            
            
            —Balance,
                June 30, 2006
            
            
            801





As
      of
      June 30, 2006 the closing stock price was $36.05. All performance awards vest
      upon attainment of the various financial targets, or if not met, 50 percent
      vest
      after the retention period. As of June 30, 2006, no outstanding awards have
      vested.


-6-
 **Back
          to Table of Contents**




**ARCH
      CHEMICALS, INC.**


Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)


**3.**
            **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.





**Three
                Months**
            
            **Six
                Months****(in
                millions)**
            
            **Ended
                June 30,**
            
            **Ended
                June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Basic
            
            
            24.0
            
            
            23.6
            
            
            24.0
            
            
            23.6Common
                equivalent shares from stock options
              using
                the treasury stock method
            
            
            0.3
            
            
            0.2
            
            
            0.2
            
            
            0.2Diluted
            
            
            24.3
            
            
            23.8
            
            
            24.2
            
            
            23.8





**4.**
            **Accounts
                Receivable/Short-Term
                Investment**





Under
      the
      Company’s accounts receivable
      securitization program with Three Pillars Funding LLC (“Three Pillars”), an
      affiliate of SunTrust Bank, and SunTrust Capital Markets, Inc., 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, 2006, the Company, through ACRC,
      sold $60.0 million of participation interests in $144.0 million of accounts
      receivable. This sale has been reflected as a reduction of receivables in the
      condensed consolidated balance sheet. At December 31, 2005, the Company, through
      ACRC, had not sold any participation interests in its accounts receivable under
      the 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 the balance of participation interests in the pool of receivables
      purchased from the Company which have not been purchased by Three Pillars.
      To
      reflect this interest, which is subordinated, the fair value of the retained
      undivided interest of $84.0 million and $68.4 million at June 30, 2006 and
      December 31, 2005, 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 ($1.5 million at June 30, 2006 and
      December 31, 2005) and had not been discounted due to the short-term nature
      of the underlying financial assets.




The
      costs
      of the program for the three and six months ended June 30, 2006 and 2005 of
      $0.9 million and $1.3 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.





**5.**
            **Inventories**





**June
                30,**
            
            **December 31,****($
                in millions)**
            
            **2006**
            
            **2005**Raw
                materials and supplies
            
            $
            59.5
            
            $
            54.4Work
                in process
            
            
            8.7
            
            
            7.9Finished
                goods
            
            
            187.7
            
            
            159.1Inventories,
                gross
            
            
            255.9
            
            
            221.4LIFO
                reserve
            
            
            (48.9
            )
            
            (49.4
            )Inventories,
                net
            
            $
            207.0
            
            $
            172.0




-7-
 **Back
          to Table of Contents**




**ARCH
        CHEMICALS, INC.**
 Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)




Approximately
      50 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, 2006 reflect certain estimates relating to
      projected inventory quantities and costs at December 31, 2006.





**6.**
            **Assets
                Held for Sale/Discontinued
                Operations**





**CMS
      Business**





Assets
      held for sale consists of the Company’s chemical management services (“CMS”)
      business, which was retained after the sale of the microelectronic materials
      business to Fuji Photo Film Co., Ltd. (“Fuji”). The CMS business, which
      essentially services the customers of the sold business, 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.




During
      the first quarter of 2006, the Company was notified that two of its remaining
      three CMS customers were going to cancel their contracts with the Company.
      Prior
      to the termination of the contracts, the Company was able to sell the remaining
      inventory to the successor of these contracts and transfer most of the business’
employees in the second quarter of 2006. All services and employees related
      to
      the remaining contract are expected to be transitioned to a new provider during
      the third quarter. Included in Loss from discontinued operations for the six
      months ended June 30, 2006 are severance and related costs associated with
      the
      termination of these customer contracts ($0.3 million pre-tax).




The
      amounts actually realized (including future operating results) by the Company
      could differ materially from the amounts estimated 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 transfer of employees to the new service provider.





**Balance
      Sheet**





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





**June
                30,**
              **2006**
            
            **December
                31,**
              **2005********($
                in millions)**Accounts
                receivable, net
            
            $
            1.6
            
            $
            6.1Inventory
            
            
            1.0
            
            
            1.8Other
                current assets
            
            
            0.2
            
            
            0.2Other
                assets
            
            
            —
            
            
            0.2Total
                assets associated with assets held for sale
            
            
            2.8
            
            
            8.3Accounts
                payable and accrued liabilities
            
            
            2.6
            
            
            9.1Total
                liabilities associated with assets held for sale
            
            
            2.6
            
            
            9.1Net
                assets (liabilities) held for sale
            
            $
            0.2
            
            $
            (0.8
            )





**Loss
      from Discontinued Operations**





Loss
      from
      discontinued operations for the three and six months ended June 30, 2006 and
      2005 represent the results of the CMS business as follows:


-8-
 **Back
          to Table of Contents**




**ARCH
      CHEMICALS, INC.**


Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)


**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,********($
                in millions)**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Sales
            
            $
            0.5
            
            $
            2.8
            
            $
            1.4
            
            $
            5.6Loss
                before interest and taxes
            
            $
            (0.2
            )
            $
            —
            
            $
            (0.8
            )
            $
            —Tax
                benefit
            
            
            0.1
            
            
            —
            
            
            0.3
            
            
            —Loss
                from discontinued operations
            
            $
            (0.1
            )
            $
            —
            
            $
            (0.5
            )
            $
            —





**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 2005, the purchaser went into receivership and the Company
      recovered £1.7
      million ( approximately
      $2.9 million pre-tax) related to the two outstanding notes. The Company received
      the cash payment on July 19, 2005. For the three and six months ended June
      30,
      2005, this was reflected as a gain on the sale of discontinued operations on
      the
      Condensed Consolidated Statements of Income.





**7.**
            **Goodwill
                and Other Intangibles**





The
      changes in the carrying amount of goodwill for the six months ended June 30,
      2006 are as follows:





**HTH
                Water****Products**
            
            **Personal
                Care and Industrial****Biocides**
            
            **Wood
                Protection and Industrial****Coatings**
            
            **Total**
              **Treatment**
            
            **Performance****Urethanes**
            
            **Total****($
                in millions)**Balance,
                December 31, 2005
            
            $
            40.7
            
            $
            84.7
            
            $
            81.7
            
            $
            207.1
            
            $
            4.4
            
            $
            211.5Post
                acquisition adjustment
            
            
            0.7
            
            
            —
            
            
            —
            
            
            0.7
            
            
            —
            
            
            0.7Foreign
                exchange and other
            
            
            (0.3
            )
            
            1.9
            
            
            2.7
            
            
            4.3
            
            
            —
            
            
            4.3Balance,
                June 30, 2006
            
            $
            41.1
            
            $
            86.6
            
            $
            84.4
            
            $
            212.1
            
            $
            4.4
            
            $
            216.5




The
      post
      acquisition adjustment for the HTH water products business reflects the
      estimated post-closing working capital payment related to the acquisition of
      the
      remaining 50 percent share of the Company’s water products joint venture,
      Nordesclor.




The
      gross
      carrying amount and accumulated amortization for other intangible assets as
      of
      June 30, 2006 and December 31, 2005 are as follows:





**June
                30, 2006**
            
            **December 31,
                2005****Gross**
              **Carrying**
              **Amount**
            
            **Accumulated****Amortization**
            
            **Net**
              **Carrying**
              **Amount**
            
            **Gross**
              **Carrying**
              **Amount**
            
            **Accumulated****Amortization**
            
            **Net**
              **Carrying**
              **Amount****($
                in millions)**Patents
            
            $
            0.2
            
            $
            0.2
            
            $
            —
            
            $
            0.2
            
            $
            0.2
            
            $
            —Customer
                lists
            
            
            71.8
            
            
            16.0
            
            
            55.8
            
            
            69.0
            
            
            12.8
            
            
            56.2Toxicology
                database
            
            
            16.4
            
            
            2.5
            
            
            13.9
            
            
            15.7
            
            
            2.0
            
            
            13.7Developed
                technology
            
            
            14.0
            
            
            1.7
            
            
            12.3
            
            
            13.5
            
            
            1.2
            
            
            12.3Other
            
            
            9.4
            
            
            3.6
            
            
            5.8
            
            
            10.5
            
            
            4.7
            
            
            5.8Total
                amortizable other
              intangibles
            
            
            111.8
            
            
            24.0
            
            
            87.8
            
            
            108.9
            
            
            20.9
            
            
            88.0Total
                non-amortizable other
              intangibles
                — trademarks
            
            
            54.9
            
            
            0.4
            
            
            54.5
            
            
            53.1
            
            
            0.4
            
            
            52.7Total
                other intangibles
            
            $
            166.7
            
            $
            24.4
            
            $
            142.3
            
            $
            162.0
            
            $
            21.3
            
            $
            140.7




-9-
 **Back
          to Table of Contents**


**ARCH
        CHEMICALS, INC.**
 Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)


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, 2006 and 2005 was
      $2.2 million and $4.3 million, and $1.8 million and $3.7 million,
      respectively. Estimated amortization expense is $8.6 million for the year
      ended December 31, 2006 through 2008, and $7.6 million for the years ended
      December 31, 2009 and 2010.




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, 2006.





**8.**
            **Debt**





On
      June
      15, 2006, the Company entered into an unsecured $350.0 million senior revolving
      credit facility (“credit facility”), which expires in June 2011. It replaced the
      Company’s $210.0 million senior revolving credit facility which was set to
      mature on June 20, 2006. The Company’s new credit facility contains a quarterly
      leverage ratio covenant 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 15, 2006. This limitation was $69.1
      million at June 30, 2006. The facility fees can range from 0.1% to 0.225%
      depending on the Company’s quarterly leverage ratios (facility fees being 0.125%
      at June 30, 2006). The Company may select various floating rate borrowing
      options, including, but not limited to, LIBOR plus a spread that can range
      from
      0.4% to 0.9% depending on the Company’s quarterly leverage ratios. There were no
      outstanding borrowings under the credit facility at June 30,
      2006.




In
      March
      2002, the Company issued $211.0 million of unsecured senior notes to certain
      institutional investors in two series. The Series A notes of $149.0 million
      are
      due in March 2007 and the Series B notes of $62.0 million are due in March
      2009.
      At March 31, 2006, the Series A notes were reclassified to Current portion
      of
      long-term debt in the Condensed Consolidated Balance Sheets. The Company’s
      senior notes contain a quarterly leverage ratio covenant not to exceed 3.50
      and
      a debt to total capitalization ratio not to exceed 55%. In addition, the notes
      contain a fixed coverage ratio covenant of 2.25 and 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 $43.2 million at June 30, 2006.




At
      June 30, 2006, the Company had $44.7 million of outstanding letters of
      credit and no letters of guarantee outstanding.




**9.**
            **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 2006. During the six months ended June
      30, 2006 and 2005, the majority of the Company’s foreign currency forward
      contracts qualified as effective cash flow hedges; the remainder of the foreign
      currency contracts did not meet the criteria of SFAS 133 to qualify for the
      effective hedge accounting.




At
      June
      30, 2006, the Company had forward contracts to sell foreign currencies with
      a
      U.S. dollar equivalent value of $13.8 million and forward contracts to buy
      foreign currencies with a U.S. dollar equivalent value of $11.2 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.


-10-
 **Back
          to Table of Contents**




**ARCH
      CHEMICALS, INC.**


Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)




*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 $2.3 million and $2.5 million at June 30, 2006 and December 31, 2005,
      respectively, and are included in Accrued liabilities and Other liabilities,
      respectively, 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.





**10.**
            **Employee
                Retirement Plans**





As
      of
      June 30, 2006 and 2005, 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,****Arch
                U.S. Pension Plans**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005****Net
                Periodic Benefit Expense:**Service
                cost (benefits earned during the period)
            
            $
            1.9
            
            $
            1.9
            
            $
            3.8
            
            $
            3.8Interest
                cost on the projected benefit obligation
            
            
            3.7
            
            
            3.6
            
            
            7.4
            
            
            7.2Expected
                return on plan assets
            
            
            (3.6
            )
            
            (3.4
            )
            
            (7.2
            )
            
            (6.3
            )Amortization
                of prior service cost
            
            
            —
            
            
            —
            
            
            —
            
            
            0.1Recognized
                actuarial loss
            
            
            1.3
            
            
            1.1
            
            
            2.5
            
            
            2.1Net
                periodic benefit cost
            
            $
            3.3
            
            $
            3.2
            
            $
            6.5
            
            $
            6.9





**Three
                Months**
              **Ended
                June 30,**
            
            **Six
                Months**
              **Ended
                June 30,****Arch
                U.S. Postretirement Plan**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005****Net
                Periodic Benefit Expense:**Service
                cost (benefits earned during the period)
            
            $
            0.2
            
            $
            0.1
            
            $
            0.3
            
            $
            0.2Interest
                cost on the projected benefit obligation
            
            
            0.2
            
            
            0.3
            
            
            0.4
            
            
            0.6Amortization
                of prior service cost
            
            
            (0.1
            )
            
            0.1
            
            
            (0.1
            )
            
            0.1Recognized
                actuarial loss
            
            
            0.1
            
            
            —
            
            
            0.2
            
            
            —Net
                periodic benefit cost
            
            $
            0.4
            
            $
            0.5
            
            $
            0.8
            
            $
            0.9




As
      of
      June 30, 2006 and 2005, 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**
            
            **Six
                Months****Ended
                June 30,**
            
            **Ended
                June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Net
                Periodic Benefit Expense:**Service
                cost (benefits earned during the period)
            
            $
            0.2
            
            $
            0.2
            
            $
            0.4
            
            $
            0.3Interest
                cost on the projected benefit obligation
            
            
            4.9
            
            
            4.5
            
            
            9.2
            
            
            9.1Expected
                return on plan assets
            
            
            (4.2
            )
            
            (4.5
            )
            
            (8.3
            )
            
            (9.1
            )Recognized
                actuarial loss
            
            
            1.5
            
            
            1.0
            
            
            2.9
            
            
            2.1Net
                periodic benefit cost
            
            $
            2.4
            
            $
            1.2
            
            $
            4.2
            
            $
            2.4





There
      are
      no minimum funding requirements anticipated for 2006 for the Company’s U.S.
      pension plans ,
      due
      primarily to the voluntary pension funding made in 2005 of $36.2 million.
      Pension expense is expected to be approximately $1.0 million higher in 2006
      for
      the Company’s U.S. pension plans. The
      Company has minimum funding requirements for its U.K. pension plans of
      approximately $15 million, which is approximately $5 million higher than 2005,
      and pension expense is expected to be $6 million higher in 2006.For the
      six months ending June 30, 2006, there have been no contributions for the
      Arch U.S. pension plans and $3.6 million was contributed to the U.K. pension
      plans.




-11-
 **Back
          to Table of Contents**




**ARCH
        CHEMICALS, INC.**
 Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)


*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, 2006, the Company had $4.7 million in Other
      assets and a deferred compensation liability of $10.0 million in Other
      liabilities in the Condensed Consolidated Balance Sheets. At December 31, 2005,
      the Company had $3.5 million in Other assets and a deferred compensation
      liability of $6.9 million in Other liabilities in the Condensed Consolidated
      Balance Sheets. In addition, at June 30, 2006 and December 31, 2005,
      respectively, the Company had $2.4 million recorded as a reduction to equity
      for
      the Company’s stock held in the Rabbi Trust.





**11.**
            **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, 2006 and 2005 was as follows:





**Three
                Months**
            
            **Six
                Months****Ended
                June 30,**
            
            **Ended
                June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                income
            
            $
            29.5
            
            $
            27.4
            
            $
            35.2
            
            $
            31.0Foreign
                currency translation adjustments
            
            
            14.1
            
            
            (7.6
            )
            
            18.3
            
            
            (18.1
            )Net
                unrealized gain (loss) on derivative instruments
            
            
            (0.3
            )
            
            0.3
            
            
            (0.3
            )
            
            0.5Minimum
              Pension Liability Adjustment
            
            
            (3.3
            )
            
            —
            
            
            (3.3
            )
            
            —Total
                other comprehensive income (loss)
            
            
            10.5
            
            
            (7.3
            )
            
            14.7
            
            
            (17.6
            )Comprehensive
                income
            
            $
            40.0
            
            $
            20.1
            
            $
            49.9
            
            $
            13.4





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.





**12.**
            **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, 2006 and 2005 are as follows:





**Three
                Months**
            
            **Six
                Months****Ended
                June 30,**
            
            **Ended
                June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Beginning
                balance of accumulated net unrealized
              loss
                on derivative instruments
            
            $
            (0.2
            )
            $
            —
            
            $
            (0.2
            )
            $
            (0.2
            )Net
                gain (loss) on cash flow hedges
            
            
            (0.3
            )
            
            0.3
            
            
            (0.3
            )
            
            0.4Reclassification
                into earnings
            
            
            —
            
            
            —
            
            
            —
            
            
            0.1Ending
                balance of accumulated net unrealized
              gain
                (loss) on derivative instruments
            
            $
            (0.5
            )
            $
            0.3
            
            $
            (0.5
            )
            $
            0.3





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


-12-
 **Back
          to Table of Contents**




**ARCH
        CHEMICALS, INC.**
 Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)


**13.**
            **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.




In
      2006,
      the Company has included pension expense associated with the pension obligations
      for retirees assumed with the Hickson acquisition as well as for employees
      subsequently transferred with the related sold businesses in Corporate
      Unallocated expenses that had previously been allocated to the Company’s
      operating segments. The Company has reclassified prior period amounts to conform
      to the current presentation. The amounts previously allocated that are now
      included in Corporate Unallocated for the three months ended March 31, 2006
      was
      $1.6 million. The amounts previously allocated that are now included in
      Corporate Unallocated for the three and six months ended June 30, 2005
      were $1.0 million and $2.0 million, respectively.





**Three
                Months**
              **Ended
                June 30,**
            
            **Six
                Months**
              **Ended
                June 30,****($
                in millions)**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005****Sales:**Treatment
                Products:HTH
                Water Products
            
            $
            197.8
            
            $
            183.2
            
            $
            297.2
            
            $
            274.0Personal
                Care and Industrial Biocides
            
            
            75.5
            
            
            70.6
            
            
            141.9
            
            
            140.4Wood
                Protection and Industrial Coatings
            
            
            102.6
            
            
            101.3
            
            
            189.8
            
            
            188.4Total
                Treatment Products
            
            
            375.9
            
            
            355.1
            
            
            628.9
            
            
            602.8Performance
                Products:Performance
                Urethanes
            
            
            64.9
            
            
            50.9
            
            
            125.3
            
            
            99.8Hydrazine
            
            
            5.3
            
            
            5.3
            
            
            9.7
            
            
            10.0Total
                Performance Products
            
            
            70.2
            
            
            56.2
            
            
            135.0
            
            
            109.8Total
                Sales
            
            $
            446.1
            
            $
            411.3
            
            $
            763.9
            
            $
            712.6**Segment
                Operating Income (Loss), including****Equity
                (Earnings) Losses in Affiliated Companies:**Treatment
                Products:HTH
                Water Products
            
            $
            41.4
            
            $
            23.8
            
            $
            46.2
            
            $
            24.2Personal
                Care and Industrial Biocides
            
            
            11.6
            
            
            11.1
            
            
            22.9
            
            
            23.8Wood
                Protection and Industrial Coatings
            
            
            1.0
            
            
            6.9
            
            
            2.4
            
            
            8.4Total
                Treatment Products
            
            
            54.0
            
            
            41.8
            
            
            71.5
            
            
            56.4Performance
                Products:Performance
                Urethanes
            
            
            5.4
            
            
            3.4
            
            
            9.4
            
            
            4.5Hydrazine
            
            
            0.1
            
            
            0.4
            
            
            (0.1
            )
            
            (0.3
            )Total
                Performance Products
            
            
            5.5
            
            
            3.8
            
            
            9.3
            
            
            4.2Corporate
                Unallocated
            
            
            (9.8
            )
            
            (5.6
            )
            
            (16.7
            )
            
            (10.7
            )Total
                Segment Operating Income, including Equity
                (Earnings) Losses in Affiliated Companies
            
            
            49.7
            
            
            40.0
            
            
            64.1
            
            
            49.9Equity
                in (Earnings) Losses of Affiliated Companies
            
            
            (0.3
            )
            
            0.3
            
            
            (0.5
            )
            
            (0.6
            )Total
                Operating Income
            
            
            49.4
            
            
            40.3
            
            
            63.6
            
            
            49.3Interest
                expense, net
            
            
            (5.5
            )
            
            (5.8
            )
            
            (10.8
            )
            
            (10.2
            )Total
                Income from Continuing Operations before Taxes and Equity (Earnings)
                Losses in Affiliated Companies
            
            $
            43.9
            
            $
            34.5
            
            $
            52.8
            
            $
            39.1




-13-
 **Back
          to Table of Contents**




**ARCH
        CHEMICALS, INC.**
 Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)


**Capital
                Spending:**Treatment
                Products:HTH
                Water Products
            
            $
            1.9
            
            $
            0.7
            
            $
            2.9
            
            $
            1.9Personal
                Care and Industrial Biocides
            
            
            1.9
            
            
            1.4
            
            
            3.2
            
            
            2.3Wood
                Protection and Industrial Coatings
            
            
            1.2
            
            
            1.0
            
            
            1.8
            
            
            1.7Total
                Treatment Products
            
            
            5.0
            
            
            3.1
            
            
            7.9
            
            
            5.9Performance
                Products:Performance
                Urethanes
            
            
            0.9
            
            
            0.2
            
            
            1.4
            
            
            0.5Hydrazine
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                Performance Products
            
            
            0.9
            
            
            0.2
            
            
            1.4
            
            
            0.5Total
                Capital Spending
            
            $
            5.9
            
            $
            3.3
            
            $
            9.3
            
            $
            6.4





Segment
      operating income includes the equity in earnings (losses) of affiliated
      companies and excludes
      restructuring (income) expense and impairment expense, if any .
      Included in the results of Corporate Unallocated is equity income of the Planar
      Solutions joint venture through November 2005, the date of its sale. The
      Company includes the equity earnings (losses) of affiliated companies 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 earnings (losses) 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.





**14.**
            **Commitments
                and Contingencies**




The
      Company was 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 portion of the litigation involving claims by
      individuals was settled and the settlement amount was paid by the Company in
      2004. In 2006, the remaining claims were settled and the case was
      dismissed.




There
      are
      no 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 named. 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 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 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.
      Plaintiffs have amended their complaint to seek punitive damages of $200.0
      million. The Company is effectively self-insured for the first $3.0 million
      and
      for amounts over $303.0 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. Brazilian Tax Authorities notified the Company of claims for
      unpaid state import duties, including interest and potential penalties. Some
      of
      the claims have been settled. The Company has $1.3 million accrued for the
      remaining open tax year as of June 30, 2006. As of June 30, 2006, the
      Company had estimated contingent liabilities related to the claims of
      approximately $0.3 million .


-14-
 **Back
          to Table of Contents**


**ARCH
        CHEMICALS, INC.**
 Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)
  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
          May 2006, such review was requested.
  In
          April
          2005 and following a governmental 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 and
          KAIP
          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
          sought unspecified fines, injunctive relief, and legal costs, among other
          things. In April 2006, the High Court of New Zealand approved the joint
          venture’s proposed settlement with the NZCC. The settlement calls for the
          payment of NZ$3.7 million ($2.2 million) and discontinues the proceedings
          against KANZ, KAIP and the board member. As of June 30, 2006, this penalty
          has
          been paid.
  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 or additional litigation of these matters 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 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.
  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,
          2006.
 -15-
 **Back
              to Table of
              Contents**




**ARCH
        CHEMICALS, INC.**
 Notes
          to
          Condensed Consolidated Financial Statements
 (Unaudited)




**15.**
            **Acquisitions**




On
      December 28, 2005, the Company completed the acquisition of the remaining 50
      percent share of its Nordesclor joint venture. The total purchase price, net
      of
      cash received, was $16.7 million, inclusive of expenses paid and an estimated
      working capital adjustment, which was paid in the first quarter of 2006. The
      purchase price is further subject to a contingent payment of up to $2.0 million
      in cash based on cumulative earnings over the next two years. The allocation
      of
      the purchase price to the acquired net tangible and intangible assets and
      assumed liabilities is based upon preliminary estimates of fair value and is
      subject to change.


-16-
 **Back
          to 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) losses of affiliated
        companies and excludes restructuring (income) expense and impairment expense.
        The Company includes the equity earnings (losses) of affiliated companies
        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 earnings
        (losses) are 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.
  In
        2006,
        the Company has included pension expense associated with the pension obligations
        for retirees assumed with the Hickson acquisition as well as for employees
        subsequently transferred with the related sold businesses in Corporate
        Unallocated expenses that had previously been allocated to the Company’s
        operating segments. The Company has reclassified prior period amounts to
        conform
        to the current presentation. The amount previously allocated that is now
        included in Corporate Unallocated for the three months ended March 31, 2006
        was
        $1.6 million. The amounts previously allocated that are now included in
        Corporate Unallocated for the three and six months ended June 30, 2005 were
        $1.0
        million and $2.0 million, respectively.
  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**
              
              **Six
                  Months****Ended
                  June 30,**
              
              **Ended
                  June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**(In
                  millions, except per share amounts)Sales
              
              $
              446.1
              
              $
              411.3
              
              $
              763.9
              
              $
              712.6Gross
                  margin
              
              $
              128.7
              
              $
              116.7
              
              $
              216.6
              
              $
              200.4Selling
                  and administration
              
              
              74.0
              
              
              71.1
              
              
              143.1
              
              
              140.8Research
                  and development
              
              
              5.3
              
              
              5.3
              
              
              9.9
              
              
              10.3Interest
                  expense, net
              
              
              5.5
              
              
              5.8
              
              
              10.8
              
              
              10.2Equity
                  in earnings (losses) of affiliated companies
              
              
              0.3
              
              
              (0.3
              )
              
              0.5
              
              
              0.6Income
                  tax expense
              
              
              14.6
              
              
              9.7
              
              
              17.6
              
              
              11.6Loss
                  from discontinued operations, net of tax
              
              
              (0.1
              )
              
              -
              
              
              (0.5
              )
              
              -Gain
                  on sale of discontinued operations
              
              
              -
              
              
              2.9
              
              
              -
              
              
              2.9Net
                  Income
              
              $
              29.5
              
              $
              27.4
              
              $
              35.2
              
              $
              31.0Diluted
                  income per common share - continuing operations
              
              $
              1.22
              
              $
              1.03
              
              $
              1.47
              
              $
              1.18
  -17-
 **Back
            to Table of Contents**
 **Management's
          Discussion and Analysis of Financial Condition and Results of Operations
          -
          Continued**
  ***Three
        Months Ended June 30, 2006 Compared to 2005***
  Sales
        increased $34.8 million, or approximately eight percent, due in part to the
        acquisition of the remaining 50 percent share of the Company’s water products
        joint venture, Nordesclor ($6.1 million or approximately one percent). Excluding
        the impact of the acquisition, sales increased $28.7 million, or approximately
        seven percent, due to favorable pricing (approximately five percent) and
        an
        increase in volumes (approximately two percent). The favorable pricing was
        principally driven by HTH water products. The increase in volumes was
        principally in the performance urethanes business due primarily to the
        polyol product lines.
  Gross
        margin percentage was 28.8% and 28.4% for 2006 and 2005, respectively. The
        increase in margin percentage was principally in the HTH water products
        business, which is due to favorable pricing and product mix in North America.
        The increase in gross margin in the HTH water products business was partially
        offset by a decrease in gross margin in the wood protection business primarily
        as a result of increased raw material costs for copper .
  Selling
        and administration expenses as a percentage of sales were 16.6% and 17.3%
        for
        2006 and 2005, respectively. These expenses increased in amount by
        $2.9 million, of which $1.0 million was due to the acquisition of the
        remaining 50 percent share of Nordesclor. In addition,
        higher incentive compensation related costs from the increase in stock price
        for
        the Company's stock-based long-term incentive awards and stock-based deferred
        compensation accounts, was partially offset by lower promotional spending
        for
        the HTH water products business.
  Interest
        expense, net, decreased $0.3 million as a result of lower borrowings slightly
        offset by higher interest rates during the quarter ended June 30, 2006 as
        compared to the quarter ended June 30, 2005.
  Equity
        in
        earnings of affiliated companies increased $0.6 million due primarily to
        the improved operating results of the Koppers joint venture. T he
        Company’s 2005 operating results of the Koppers joint venture were negatively
        affected ($1.5 million) by legal expenses associated with an investigation
        by
        the New Zealand Commerce Commission (“NZCC”) (see Note 14 in the Notes to
        Condensed Consolidated Financial Statements for more information). This
        was
        slightly offset by a decrease from Nordesclor, whose results have been
        consolidated since the date of acquisition (December 2005), as well as Planar
        Solutions as a result of the disposition of this joint venture in November
        2005.
  The
        tax
        rate on net income from continuing operations for the three months ended
        June 30, 2006 and 2005 was 33.0% and 28.4%, respectively. In the second
        quarter of 2005, the Company had reduced its estimated effective tax rate
        for
        the full year to 30% from 35%.
  Income
        (loss) from discontinued operations, net of tax, reflects the results of
        operations for the CMS business.
  Gain
        on
        sale of discontinued operations, net of tax, represents the recovery in 2005
        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 uncertainty concerning the
        collectibility. The Company received the cash payment on July 19, 2005 for
        the
        principal and interest on these two outstanding notes.
 
 ***Six
        Months Ended June 30, 2006 Compared to 2005***
  Sales
        increased $51.3 million, or seven percent, due in part to the acquisition
        of the remaining 50 percent share of the Company’s water products joint venture,
        Nordesclor ($16.4 million or approximately two percent). Excluding the impact
        of
        the acquisition, sales increased $34.9 million, or five percent, due to
        favorable pricing. The increase in volumes (approximately one percent) was
        offset by unfavorable foreign exchange (approximately one percent). The
        favorable pricing was primarily in the HTH water products business. In addition,
        performance urethanes benefited from favorable pricing that successfully
        mitigated higher raw material costs.
  Gross
        margin percentage was 28.4% and 28.1% for 2006 and 2005, respectively. The
        increase in margin percentage was principally in the HTH water products
        business, which is due to favorable pricing and product mix in North America.
        The increase in gross margin in the HTH water products business was slightly
        offset by a decrease in gross margin in the wood protection business primarily
        the result of increased raw material costs for copper .
 -18-
 **Back
            to Table of Contents**
 **Management's
          Discussion and Analysis of Financial Condition and Results of Operations
          -
          Continued**
 Selling
        and administration expenses as a percentage of sales were 18.7% and 19.8%
        for
        2006 and 2005, respectively. These expenses increased in amount by
        $2.3 million. Selling and administration costs related to the acquisition
        of the remaining 50 percent share of the Company’s water products joint venture,
        Nordesclor, were $2.2 million. Excluding the impact of the acquisition, these
        expenses were comparable to the prior year period. The higher pension expense
        for the Company’s U.K. based plans and incentive compensation related costs, due
        to the increase in stock price for the Company’s stock-based long-term incentive
        awards and stock-based deferred compensation accounts, was offset by lower
        promotional spending and legal costs for the HTH water products
        business.
  Interest
        expense, net, increased $0.6 million as a result of higher interest rates
        during the period ended June 30, 2006 as compared to interest rates during
        the
        period ended June 30, 2005.
  Equity
        in
        earnings of affiliated companies was comparable to the prior year period.
        T he
        operating results of the Company’s Koppers joint venture improved $1.1 million
        in comparison to the 2005 results which were negatively affected ($1.8 million)
        by legal expenses associated with an investigation by the NZCC (see Note
        14 in
        the Notes to Condensed Consolidated Financial Statements for more information). This
        was
        offset by a decrease from Nordesclor, whose results have been consolidated
        since
        the date of acquisition (December 2005), as well as Planar as a result of
        the
        disposition of the joint venture in November 2005.
  The
        tax
        rate on net income from continuing operations for the six months ended
        June 30, 2006 and 2005 was 33.0% and 29.3%, respectively.
  Income
        (loss) from discontinued operations, net of tax, reflects the results of
        operations for the CMS business. Included in the results for the six months
        ended June 30, 2006, are severance and related costs associated with the
        termination of certain service contracts of $0.3 million ($0.2 million
        after-tax).
  Gain
        on
        sale of discontinued operations, net of tax, represents the recovery in 2005
        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 uncertainty concerning the
        collectibility. The Company received the cash payment on July 19, 2005 for
        the
        principal and interest for these two outstanding notes.
 
 ***Third
        Quarter and Full Year Outlook***
 
 The
        Company anticipates earnings from continuing operations in the third quarter
        2006 to be in the $0.20 to $0.30 per share range, compared to $0.28 for the
        prior-year quarter. For full year 2006, sales are now expected to increase
        approximately seven to nine percent over prior year and earnings per share
        from
        continuing operations are expected to range from $1.60 to $1.70. The
        Company now forecasts HTH water products total year sales of approximately
        $475
        million, compared to its previous guidance of approximately $460 million,
        and
        operating margins are expected to be in the 7.5 to 8.5 percent range, up
        from
        its earlier guidance in the seven to eight percent range.  This
        improvement is expected to offset the adverse impact in the wood protection
        business from persistently high copper raw material costs. Depreciation
        and amortization is estimated to be approximately $45 million. Capital
        spending is anticipated to be approximately $30 to $35 million range.
        Pension expense is expected to increase by approximately $7 million from
        2005 and the effective tax rate is assumed to be 33 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 and impairment expense . 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.
 -19-
 **Back
            to Table of Contents**
  Management's Discussion and Analysis of Financial
          Condition and Results of Operations - Continued
 
 The
        Company includes the equity earnings (losses) of affiliated companies 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.
  In
        2006,
        the Company has included pension expense associated with pension obligations
        for
        retirees assumed with the Hickson acquisition as well as for employees
        subsequently transferred with the related sold businesses in Corporate
        Unallocated expenses that had previously been allocated to the Company’s
        operating segments. The Company has reclassified prior period amounts to
        conform
        to the current presentation. The amount previously allocated that is now
        included in Corporate Unallocated for the three months ended March 31, 2006
        was
        $1.6 million. The amounts previously allocated that are now included in
        Corporate Unallocated for the three and six months ended June 30, 2005 were
        $1.0
        million and $2.0 million, respectively.
 
 **Treatment
        Products**
 
 **Three
                  Months**
              
              **Six
                  Months****Ended
                  June 30,**
              
              **Ended
                  June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****($
                  in millions)****Results
                  of Operations:**SalesHTH
                  Water Products
              
              $
              197.8
              
              $
              183.2
              
              $
              297.2
              
              $
              274.0Personal
                  Care & Industrial Biocides
              
              
              75.5
              
              
              70.6
              
              
              141.9
              
              
              140.4Wood
                  Protection & Industrial Coatings
              
              
              102.6
              
              
              101.3
              
              
              189.8
              
              
              188.4Total
                  Treatment Products
              
              $
              375.9
              
              $
              355.1
              
              $
              628.9
              
              $
              602.8Operating
                  IncomeHTH
                  Water Products
              
              $
              41.4
              
              $
              23.8
              
              $
              46.2
              
              $
              24.2Personal
                  Care & Industrial Biocides
              
              
              11.6
              
              
              11.1
              
              
              22.9
              
              
              23.8Wood
                  Protection & Industrial Coatings
              
              
              1.0
              
              
              6.9
              
              
              2.4
              
              
              8.4Total
                  Treatment Products
              
              $
              54.0
              
              $
              41.8
              
              $
              71.5
              
              $
              56.4
 
 **Three
        Months Ended June 30, 2006 Compared to 2005**
 
 Sales
        increased $20.8 million or approximately six percent and operating income
        increased $12.2 million. The increase in sales is due to favorable pricing
        (approximately five percent) and an increase in volumes (approximately one
        percent). The increase in volumes is due to the acquisition of the remaining
        50
        percent share of the Company’s HTH water products joint venture, Nordesclor
        ($6.1 million or approximately two percent).
  The
        increase in operating results is due to the improved operating results of
        the
        HTH water products business.
 
 ***HTH
        Water Products***
 
 Sales
        increased $14.6 million, or approximately eight percent, principally due
        to
        favorable pricing (approximately eight percent) for both branded and non-branded
        pool treatment products in the North American market. The increase in volumes
        due to the acquisition of the remaining 50 percent share of the Company’s water
        products joint venture, Nordesclor ($6.1 million or approximately three percent)
        was more than offset by a decrease in volumes from shedding unprofitable
        business in the North American market.
  -20-
 **Back
            to Table of Contents**
 **Management's
          Discussion and Analysis of Financial Condition and Results of Operations
          -
          Continued**
 Operating
        income increased $17.6 million primarily as a result of the improved pricing
        for
        the North American product lines. In addition, operating results benefited
        from
        favorable product mix, cost containment initiatives and positive contribution
        of
        the acquired business. HTH water products also achieved lower freight and
        distribution expenses in 2006 as a result of actions taken that addressed
        the inefficiencies in the distribution channels which negatively impacted
        2005.
  ***Personal
        Care and Industrial Biocides***
  Sales
        increased $4.9 million, or approximately seven percent, due to higher
        volumes. The higher volumes are attributable to continued strong demand for
        biocides used in antidandruff products and to a lesser extent in marine
        antifouling paints. Higher pricing in the building products and metalworking
        fluids markets to mitigate higher raw material costs were mostly offset by
        competitive pressures in the emulsions and in-can preservation
        markets.
  Operating
        income increased $0.5 million, primarily due to improved margins from the
        higher sales volumes, partially offset by higher raw material costs.
  ***Wood
        Protection and Industrial Coatings***
  Sales
        increased $1.3 million, or approximately one percent, due to improved
        pricing (approximately two percent) partially offset by unfavorable foreign
        exchange (approximately one percent). The improved pricing is the result
        of
        price increases to mitigate higher raw material costs for Wolman ® E
        products used in residential applications in the wood protection business
        as
        well as higher raw material costs principally for polyurethane and other
        solvent-based products in the industrial coatings business. An increase in
        wood
        protection’s volumes of Tanalith ® E
        products used in residential applications in Europe was offset by a decrease
        in
        volumes in the Italian domestic market in the industrial coatings
        business.
  Operating
        income decreased $5.9 million over the prior year primarily for the wood
        protection business and to a lesser extent the industrial coatings business.
        The
        lower operating results were due to the higher raw material costs which
        negatively impacted both businesses. This was partially offset by an increase
        in
        wood protection’s equity
        in earnings of the Koppers joint venture that were negatively impacted in
        2005
        by legal expenses associated with an investigation by the NZCC for a case
        that
        had been filed against its joint venture KANZ ($1.5
        million). See Note 14 in the Notes to the Condensed Consolidated Financial
        Statements for more information.
  **Six
        Months Ended June 30, 2006 Compared to 2005**
  Sales
        increased $26.1 million or approximately four percent, which is due to
        favorable pricing primarily in the HTH water products business. Higher volumes
        (approximately one percent) were offset by unfavorable foreign exchange
        (approximately one percent). The higher volumes were due to the acquisition
        of
        the remaining 50 percent share of the Company’s HTH water products joint
        venture, Nordesclor ($16.4 million or approximately three percent), which
        was
        slightly offset by a decrease in volumes principally due to shedding
        unprofitable business in the HTH water products business.
  Operating
        income increased $15.1 million due to the HTH water products
        business.
  ***HTH
        Water Products***
  Sales
        increased $23.2 million, or approximately eight percent, due to favorable
        pricing for both branded and non-branded pool treatment products in the North
        American market. Volumes were comparable to the prior year period as the
        increase in volumes attributable to the acquisition of the remaining 50 percent
        share of the Company’s water products joint venture, Nordesclor ($16.4 million
        or approximately six percent) was offset by lower volumes in the North American
        market from shedding unprofitable product lines and to a lesser extent lower
        demand in the South American and European markets.
 -21-
 **Back
            to Table of Contents**
 **Management's
          Discussion and Analysis of Financial Condition and Results of Operations
          -
          Continued**
 Operating
        income increased by $22.0 million principally due to favorable pricing. In
        addition, operating results benefited from favorable product mix, cost
        containment initiatives and the positive contribution of the acquired business.
  ***Personal
        Care and Industrial Biocides***
  Sales
        were comparable to the prior year period, as the increase in volumes was
        offset by unfavorable foreign exchange. The increase in volumes was due to
        strong demand for biocides used in personal care products, principally
        antidandruff products, which has been offset by competitive pressures within
        the
        building products market.
  Operating
        income decreased by $0.9 million primarily as a result of a decrease in gross
        margins due to higher raw material costs in the industrial biocides business
        as
        operating expenses were comparable to the prior year period.
  ***Wood
        Protection and Industrial Coatings***
  Sales
        were comparable to the prior year period as higher volumes (approximately
        two
        percent) and favorable pricing (approximately one percent) were offset by
        unfavorable foreign exchange (approximately three percent). The higher sales
        volumes are due primarily to Tanalith ® E
        products used in residential applications in Europe and to a lesser extent
        increased demand, particularly in the Eastern European market, for the
        industrial coatings business. The improved pricing is a result of price
        increases to mitigate higher raw material costs primarily for Wolman ® E
        products used in residential applications in the wood protection business.
  Operating
        income decreased $6.0 million over the prior year, principally due to
        unfavorable operating results in the wood protection business as a result
        of
        higher raw material costs which negatively impacted the business. This was
        partially offset by improved operating
        results of wood protection’s Koppers joint venture that were negatively affected
        in 2005 by legal expenses associated with an investigation by the NZCC for
        a
        case that had been filed against its joint venture KANZ ($1.8
        million). See Note 14 in the Notes to the Condensed Consolidated Financial
        Statements for more information.
 
 **Performance
        Products**
 
 **Three
                  Months**
              
              **Six
                  Months****Ended
                  June 30,**
              
              **Ended
                  June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****($
                  in millions)**
              
              **($
                  in millions)****Results
                  of Operations**SalesPerformance
                  Urethanes
              
              $
              64.9
              
              $
              50.9
              
              $
              125.3
              
              $
              99.8Hydrazine
              
              
              5.3
              
              
              5.3
              
              
              9.7
              
              
              10.0Total
                  Performance Products
              
              $
              70.2
              
              $
              56.2
              
              $
              135.0
              
              $
              109.8Operating
                  income (loss)Performance
                  Urethanes
              
              $
              5.4
              
              $
              3.4
              
              $
              9.4
              
              $
              4.5Hydrazine
              
              
              0.1
              
              
              0.4
              
              
              (0.1
              )
              
              (0.3
              )Total
                  Performance Products
              
              $
              5.5
              
              $
              3.8
              
              $
              9.3
              
              $
              4.2
 
 **Three
        Months Ended June 30, 2006 Compared to 2005**
 
 Sales
        increased $14.0 million, or approximately 25 percent, and operating results
        increased $1.7 million from prior year. The increase in sales is due to
        higher volumes (approximately 19 percent) and improved pricing
        (approximately six percent).
 -22-
 **Back
            to Table of Contents**
 **Management's
          Discussion and Analysis of Financial Condition and Results of Operations
          -
          Continued**
 ***Performance
        Urethanes***
  Performance
        urethanes sales increased approximately 28 percent over the prior year due
        to
        higher volumes (approximately 22 percent) and improved pricing (approximately
        six percent). The increase in volumes was across most product lines,
        particularly in specialty polyols due to new business. The improved pricing
        was
        principally due to successful price increases that mitigated higher raw material
        costs. Operating income improved $2.0 million as a result of higher
        sales volumes and improved margins from the higher pricing, as operating
        expenses were comparable.
  ***Hydrazine***
  Hydrazine
        sales were comparable to the prior year period as lower volumes of Ultra
        Pure TM Hydrazine were offset by facility fees from the new U.S. government contract.
        Operating income decreased $0.3 million primarily as a result of
        unfavorable product mix.
  **Six
        Months Ended June 30, 2006 Compared to 2005**
  Sales
        increased $25.2 million, or approximately 23 percent, and operating results
        increased $5.1 million from prior year. The increase in sales is due to
        higher volumes (approximately 14 percent) and improved pricing (approximately
        nine percent).
  ***Performance
        Urethanes***
  Performance
        urethanes sales increased approximately 26 percent over the prior year due
        to
        higher volumes (approximately 17 percent) and improved pricing (approximately
        nine percent). The increase in volumes was principally due to stronger market
        demand in the polyol product lines. The improved pricing was principally
        due to
        successful price increases that mitigated higher raw material costs. Operating
        results improved $4.9 million as a result of higher sales volumes and
        improved margins from the higher pricing, as operating expenses were
        comparable.
  ***Hydrazine***
  Hydrazine
        sales were comparable to the prior year period as lower volumes of Ultra
        Pure TM Hydrazine were offset by facility fees from the new U.S. government contract.
        Operating results improved slightly due to improved margins from higher
        hydrazine hydrate pricing.
 
 **Corporate
        Expenses (Unallocated)**
 
 **Three
                  Months**
              
              **Six
                  Months****Ended
                  June 30,**
              
              **Ended
                  June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****($
                  in millions)****Results
                  of Operations**Unallocated
                  Corporate Expenses
              
              $
              (9.8
              )
              $
              (5.6
              )
              $
              (16.7
              )
              $
              (10.7
              )
 
 ***Three
        Months Ended June 30, 2006 Compared to 2005***
  The
        increase in unallocated corporate expenses is principally due to higher
        compensation related costs from the increase in stock price for the
        Company’s stock-based long-term incentive awards and stock-based deferred
        compensation accounts. In addition, the Company incurred increased costs
        associated with its U.K. pension plans and accounts receivable securitization
        program.
 -23-
 **Back
            to Table of Contents**
 **Management's
          Discussion and Analysis of Financial Condition and Results of Operations
          -
          Continued**
 ***Six
        Months Ended June 30, 2006 Compared to 2005***
  The
        increase in unallocated corporate expenses is principally due to higher
        compensation related costs from the increase in stock price for the
        Company’s stock-based long-term incentive awards and stock-based deferred
        compensation accounts. In addition, the Company incurred increased costs
        associated with its U.K. pension plans and accounts receivable securitization
        program.
 
 **Liquidity,
        Investment Activity, Capital Resources and Other Financial
        Data**
  **Six
                  Months****Ended
                  June 30,****Cash
                  Flow Data**
              
              **2006**
              
              **2005****($
                  in millions)****Provided
                  By (Used In)**Accounts
                  receivable securitization program
              
              $
              60.0
              
              $
              73.4Change
                  in working capital
              
              
              (115.1
              )
              
              (121.0
              )Net
                  operating activities from continuing operations
              
              
              23.6
              
              
              (18.2
              )Capital
                  expenditures
              
              
              (9.3
              )
              
              (6.4
              )Business
                  acquired in purchase transaction
              
              
              (2.8
              )
              
              (3.1
              )Cash
                  proceeds (payments) from the sale of a business
              
              
              (0.5
              )
              
              (3.9
              )Net
                  investing activities
              
              
              (14.1
              )
              
              (14.2
              )Debt
                  (repayments) borrowing, net
              
              
              (7.4
              )
              
              1.1Net
                  financing activities
              
              
              (5.4
              )
              
              (7.3
              )
 
 ***Six
        Months Ended June 30, 2006 Compared to 2005***
  For
        the
        six months ended June 30, 2006, $23.6 million was provided by
        operating activities from continuing operations compared to $18.2 million
        used in operating activities from continuing operations for the six months
        ended June 30, 2005. 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. Excluding the voluntary pension contribution, cash provided
        by
        operating activities from continuing operations in 2005 was $15.3 million.
        The
        increase in cash provided by continuing operations is primarily due to higher
        net income.
  Capital
        expenditures for the six months of 2006 were $2.9 million higher than 2005
        due to higher capital expenditures across all businesses. Capital expenditures
        for 2006 are expected to be in the $30 to $35 million range.
  The
        cash
        paid for businesses acquired are contingent payments related to the Avecia
        acquisition of the pool & spa and protection & hygiene business based
        upon the unfunded
        pension liability position of the U.K. pension plan ($0.5 million) and a
        payment based upon earnings attributable to North American sales of certain
        acquired products ($1.6 million). In addition, the Company made an estimated
        working capital payment related to the Nordesclor acquisition. For
        additional information concerning the acquisitions, see the Company's Form
        10-K
        for the year ended December 31, 2005.
  Cash
        payments from the sale of a business in 2006 and 2005 relate to certain expenses
        from the sale of the microelectronic materials business to Fuji Photo Film
        Co.,
        Ltd., which occurred in November 2004. The 2005 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 2006 was $5.4 million.
        Dividends paid to shareholders of $9.6 million as well as net repayments
        of debt
        during the period were partially offset by proceeds from stock options
        exercised.
 -24-
 **Back
            to Table of Contents**
 **Management's
          Discussion and Analysis of Financial Condition and Results of Operations
          -
          Continued**
 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.
  On
        June
        15, 2006, the Company entered into an unsecured $350.0 million senior revolving
        credit facility (“credit facility”), which expires in June 2011. The credit
        facility replaced the Company’s previous credit facility that expired on June
        20, 2006. The Company’s new credit facility contains a quarterly leverage ratio
        (debt / EBITDA) covenant 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 15, 2006. This limitation was
        $69.1 million at June 30, 2006. The facility fees can range from 0.1% to
        0.225% 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 0.4% to 0.9% depending on the Company’s
        quarterly leverage ratios. At
        June
        30, 2006, the Company had $347.2 million of available borrowings under the
        credit facility .
  The
        Company’s senior notes contain a quarterly leverage ratio (debt / EBITDA)
        covenant not to exceed 3.50 and a debt to total capitalization ratio covenant
        not to exceed 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 $43.2 million at June 30, 2006.
  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 $2.3 million at
        June 30, 2006 and are included in Accrued 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.
  Under
        the
        Company’s accounts receivable securitization program, certain accounts
        receivable are sold, without recourse, through its wholly-owned subsidiary,
        Arch
        Chemicals Receivables Corp., a special-purpose corporation. At June 30, 2006,
        Arch Chemicals Receivables Corp. had sold $60.0 million of participation
        interests in $144.0 million of accounts receivable. The Company had not sold
        any
        participation interests in such accounts receivable at December 31, 2005 (see
        Note 4 of Notes to Condensed Consolidated Financial Statements) .
  At
        June
        30, 2006, the Company had $44.7 million of outstanding letters of credit
        and no letters of guarantee outstanding.
  The
        Company believes that the $350.0 million revolving credit facility and cash
        provided by operations are adequate to satisfy its liquidity needs for the
        near
        future. However, if Company earnings were to fall 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, 2006,
        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.
  There
        are
        no minimum funding requirements anticipated for the Company’s U.S. pension plans
        for 2006. The minimum funding requirements for its U.K. pension plans are
        currently expected to be approximately $15 million in 2006.
 -25-
 **Back
            to Table of Contents**
 **Management's
          Discussion and Analysis of Financial Condition and Results of Operations
          -
          Continued**
 On
        July 27, 2006, 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
        11, 2006, to shareholders of record at the close of business on August 10,
        2006.
 
 **New
        Accounting Pronouncement**
 
 In
        June
        2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes - an interpretation of FASB Statement No. 109,” (FIN
        48). 
FIN 48 clarifies the accounting for uncertainty in tax positions and requires
        that a Company recognize in its financial statements the impact of a tax
        position, if that position is more likely than not of being sustained on
        audit,
        based on the technical merits of the position.  The provisions of FIN 48
        are effective for fiscal years beginning after December 15, 2006.  The
        Company is currently evaluating the impact of adopting this
        interpretation.
 
 **Cautionary
        Statement under Federal Securities Laws**
 
 Except
        for historical information contained herein, the information set forth in
        this
        Form 10-Q contains 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; recession or lack of moderate
        growth 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
        and
        availability 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
        unfavorable 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; changes in assumptions regarding pension expense
        and
        funding; 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; 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 .
 -26-
 **Back
            to 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 2006 borrowing levels, an increase in interest rates of 100
        basis points would decrease the Company’s results of operations and cash flows
        by approximately $0.6 million.
 
 **Foreign
        Currency Risk**
 
 At
        June
        30, 2006, the Company had forward contracts to sell foreign currencies with
        a
        U.S. dollar equivalent value of $13.8 million and forward contracts to buy
        foreign currencies with a U.S. dollar equivalent value of
        $11.2 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, 2006, the Company has purchase commitments but 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, chromic acid, 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 $3 million. Holding other variables constant, a
        10 percent adverse change in the price of copper, chromic acid, 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, 2005 for additional
        information on the above items.
 -27-
 **Back
            to 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.
 -28-
 **Back
            to Table of
            Contents**




**PART
      II.  OTHER INFORMATION**


**Item
        1A. Risk Factors**
 
 As
        a
        result of the new Credit Agreement that the Company entered into in June
        2006,
        the paragraphs entitled “We are subject to liquidity risks” and “Our ability to
        pay dividends on our shares of Common Stock is subject to compliance with
        certain debt covenants” appearing in Item 1A of the Company’s Form 10-K for the
        year ending December 31, 2005 are revised and updated to read as
        follows:
 
 **We
        are subject to liquidity risks.**
 
 In
        June
        2006, the Company entered into an unsecured $350 million senior revolving
        credit
        facility which expires in June 2011. When it borrows from time to time under
        this facility, the Company is required to certify that certain representations
        and warranties are true. It also must comply with covenants including certain
        financial ratios. If the Company were not able to make representation or
        failed
        to comply a covenant, it may not be able to borrow under the facility. If
        the
        Company were unable to borrow under this facility for any reason, the Company
        could experience liquidity difficulties which would have a material adverse
        effect on its ability to finance its seasonal peak working capital needs.
 
 **Our
        ability to pay dividends on our shares of Common Stock is subject to compliance
        with certain debt covenants.**
 
 The
        Company has entered into a credit facility with lenders which permits the
        payment of dividends and repurchases of shares based to a financial formula.
        At
        June 30, 2006, dividends and share repurchases were limited to approximately
        $69.1 million under this facility. In addition, our senior unsecured notes
        issued in March 2002 contain dividend restrictions which limit dividends
        and
        repurchases to $43.2 million as of June 30, 2006. These limits are adjusted
        quarterly pursuant to a formula that is increased by earnings and decreased
        by
        losses, dividends paid and share repurchases. If the Company suffers losses
        or
        write-offs or lacks earnings, these covenants may limit or eliminate the
        Company’s ability to pay dividends. The Company paid approximately $19 million
        in dividends in 2005.
 
 **Item 2.
        Unregistered Sales of Equity Securities and Use of
        Proceeds**
  In
        May
        2006, an employee delivered to the Company 2,000 shares of the Company's
        Common
        Stock as payment for the exercise price of an outstanding employee stock
        option
        under the 1999 Long Term Incentive Plan as indicated in the table
        below.
 
 **Period**
              
              **(a)**
                **Total Number of**
                **Shares (or Units)**
                **Purchased**
              
              **(b)**
                **Weighted Average**
                **Price
                  Paid per**
                **Share
                  (or Unit)**
              
              **(c)**
                **Total Number of**
                **Shares
                  (or units)**
                **Purchased as Part of**
                **Publicly
                  Announced**
                **Plans
                  or Programs**
              
              **(d)**
                **Maximum Number (or**
                **Approximate
                  Dollar**
                **Value)
                  of Shares (or**
                **Units) that May Yet Be**
                **Purchased
                  Under the**
                **Plans
                  or Programs**April
                  1, 2006 throughApril
                  30, 2006
              
              
              
              
              
              0
              
              
              
              
              
              N/A
              
              
              
              
              
              0
              
              
              
              
              
              N/AMay
                  1, 2006 throughMay
                  31, 2006
              
              
              
              
              
              2,000
              
              
              
              
              $
              32.46
              
              
              
              
              
              0
              
              
              
              
              
              N/AJune
                  1, 2006 throughJune
                  30, 2006
              
              
              
              
              
              0
              
              
              
              
              
              N/A
              
              
              
              
              
              0
              
              
              
              
              
              N/ATotal
              
              
              
              
              
              2,000
              
              
              
              
              $
              32.46
              
              
              
              
              
              0
              
              
              
              
              
              N/A
 
 **Item
        4. Submission of Matters to a Vote of Security
        Holders**
  The
        Company held its Annual Meeting of Shareholders on April 27, 2006. Of the
        23,953,809 shares of common stock entitled to vote at such meeting, at least
        22,401,523 shares were present for purposes of a quorum. At the meeting,
        shareholders elected to the Board of Directors Daniel S. Sanders and Janice
        J.
        Teal as Class I directors with terms expiring in 2009. Votes cast for and
        votes
        withheld in the election of Directors were as follows:
  **FOR**
              
              **WITHHELD**Daniel
                  S. Sanders
              
              22,207,798
              
              193,725Janice
                  J. Teal
              
              22,230,144
              
              171,379
  There
        were no abstentions or broker non-votes.
 
 The
        shareholders also ratified the appointment of KPMG LLP as independent auditors
        for the Company for 2006. Voting for the
 -29-
 **Back
              to Table of
              Contents**
  resolution
        ratifying the appointment were 21,988,064 shares. Voting against were 359,871
        shares. Abstaining were 53,588 shares. There were no broker
        non-votes.
  **Item
        6. Exhibits**
 **Exhibit No.**
              
              **Description**4.
              
              Second
                  Amendment, dated as of May 12, 2006, to Note Purchase Agreement,
                  dated as
                  of March 20, 2002,among
                  the Company and the purchasers named therein, relating to the Company’s
                  $149,000,000 Senior Notes, Series A, due March 20, 2007 and $62,000,000
                  Senior Notes, Series B, due March 20, 2009.31.1
              
              Certification
                  of Principal Executive Officer Pursuant to Rules 13a-14(a) and
                  15d-14(a).31.2
              
              Certification
                  of Principal Financial Officer Pursuant to Rules 13a-14(a) and
                  15d-14(a).32.
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. 1350.
  -30-
 **Back
            to 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
                  2, 2006
              
              By:
              
              /s/
                  Louis S. MassimoLouis
                  S. Massimo
                Executive
                  Vice President and Chief Financial
                  Officer
  -31-
 **Back
            to Table of Contents**
  EXHIBIT
        INDEX
 **Exhibit No.**
              
              **Description**4.
              
              Second
                  Amendment, dated as of May 12, 2006, to Note Purchase Agreement,
                  dated as
                  of March 20, 2002,among
                  the Company and the purchasers named therein, relating to the Company’s
                  $149,000,000 Senior Notes, Series A, due March 20, 2007 and $62,000,000
                  Senior Notes, Series B, due March 20, 2009.31.1
              
              Certification
                  of Principal Executive Officer Pursuant to Rules 13a-14(a) and
                  15d-14(a).31.2
              
              Certification
                  of Principal Financial Officer Pursuant to Rules 13a-14(a) and
                  15d-14(a).32.
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. 1350.
  -32-