##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2004



OR



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



For the transition period from
 to



Commission file number: 1-14601



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Arch Chemicals, Inc.

(Exact name of registrant as specified in its charter)



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



(203) 229-2900

(Registrants telephone number, including area code)



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



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



As of October 31, 2004, there were 23,463,149 outstanding shares of the registrants common stock.



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##### Table of Contents

ARCH CHEMICALS, INC.



INDEX



|         |  |                                                                                                             |  |             
|-------- |  | ----------------------------------------------------------------------------------------------------------- |  | ------------
|         |  |                                                                                                             |  | Page Numbers
|         |  |                                                                                                            
|PART I.  |  | FINANCIAL INFORMATION                                                                                       |  |             
|         |  |                                                                                                            
|Item 1.  |  | Financial Statements                                                                                        |  | 2           
|         |  |                                                                                                            
|         |  | Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003                        |  | 2           
|         |  |                                                                                                            
|         |  | Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2004 and 2003 |  | 3           
|         |  |                                                                                                            
|         |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003       |  | 4           
|         |  |                                                                                                            
|         |  | Notes to Condensed Consolidated Financial Statements                                                        |  | 5           
|         |  |                                                                                                            
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 19          
|         |  |                                                                                                            
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 32          
|         |  |                                                                                                            
|Item 4.  |  | Controls and Procedures                                                                                     |  | 33          
|         |  |                                                                                                            
|PART II. |  | OTHER INFORMATION                                                                                           |  |             
|         |  |                                                                                                            
|Item 6.  |  | Exhibits                                                                                                    |  | 34          
|         |  |                                                                                                            
|         |  | Signatures                                                                                                  |  | 35          



1



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##### Table of Contents



PART I. FINANCIAL INFORMATION

|Item 1. | Financial Statements
|------- | --------------------



ARCH CHEMICALS, INC.

Condensed Consolidated Balance Sheets

(In millions, except per share amounts)



|                                                                           |  |                   |         |   |                  |   |       |  
|-------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ----- | -
|                                                                           |  | September 30,2004 |         |   | December 31,2003 |  
|                                                                           |  | (Unaudited)       |         |   |                  |  
|ASSETS                                                                     |  |                   |         |   |                  |   |       |  
|Current assets:                                                            |  |                   |         |   |                  |   |       |  
|Cash and cash equivalents                                                  |  | $                 | 38.7    |   |                  | $ | 64.8  |  
|Accounts receivable, net                                                   |  |                   | 152.1   |   |                  |   | 124.9 |  
|Short-term investment                                                      |  |                   | 14.1    |   |                  |   | 43.3  |  
|Inventories, net                                                           |  |                   | 172.8   |   |                  |   | 141.6 |  
|Other current assets                                                       |  |                   | 26.1    |   |                  |   | 27.9  |  
|                                                                           |  |                   |         |   |                  |   |       |  
|Total current assets                                                       |  |                   | 403.8   |   |                  |   | 402.5 |  
|Investments and advances - affiliated companies at equity                  |  |                   | 41.0    |   |                  |   | 38.2  |  
|Property, plant and equipment, net                                         |  |                   | 290.5   |   |                  |   | 281.4 |  
|Goodwill                                                                   |  |                   | 204.4   |   |                  |   | 137.3 |  
|Other intangibles                                                          |  |                   | 154.0   |   |                  |   | 61.1  |  
|Other assets                                                               |  |                   | 55.2    |   |                  |   | 55.9  |  
|                                                                           |  |                   |         |   |                  |   |       |  
|Total assets                                                               |  | $                 | 1,148.9 |   |                  | $ | 976.4 |  
|                                                                           |  |                   |         |   |                  |   |       |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                       |  |                   |         |   |                  |   |       |  
|Current liabilities:                                                       |  |                   |         |   |                  |   |       |  
|Short-term borrowings                                                      |  | $                 | 19.4    |   |                  | $ | 0.7   |  
|Accounts payable                                                           |  |                   | 164.1   |   |                  |   | 139.9 |  
|Accrued liabilities                                                        |  |                   | 99.5    |   |                  |   | 88.5  |  
|                                                                           |  |                   |         |   |                  |   |       |  
|Total current liabilities                                                  |  |                   | 283.0   |   |                  |   | 229.1 |  
|Long-term debt                                                             |  |                   | 291.2   |   |                  |   | 218.5 |  
|Other liabilities                                                          |  |                   | 202.9   |   |                  |   | 191.1 |  
|                                                                           |  |                   |         |   |                  |   |       |  
|Total liabilities                                                          |  |                   | 777.1   |   |                  |   | 638.7 |  
|Commitments and contingencies                                              |  |                   |         |   |                  |   |       |  
|Shareholders equity:                                                      |  |                   |         |   |                  |   |       |  
|Common stock, par value $1 per share,                                      |  |                   |         |   |                  |   |       |  
|Authorized 100.0 shares: 23.4 shares issued and outstanding (22.5 in 2003) |  |                   | 23.4    |   |                  |   | 22.5  |  
|Additional paid-in capital                                                 |  |                   | 416.6   |   |                  |   | 398.2 |  
|Retained earnings                                                          |  |                   | 33.4    |   |                  |   | 13.4  |  
|Accumulated other comprehensive loss                                       |  |                   | (101.6  | ) |                  |   | (96.4 | )
|                                                                           |  |                   |         |   |                  |   |       |  
|Total shareholders equity                                                 |  |                   | 371.8   |   |                  |   | 337.7 |  
|                                                                           |  |                   |         |   |                  |   |       |  
|Total liabilities and shareholders equity                                 |  | $                 | 1,148.9 |   |                  | $ | 976.4 |  
|                                                                           |  |                   |         |   |                  |   |       |  



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



2



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##### Table of Contents



ARCH CHEMICALS, INC.

Condensed Consolidated Statements of Income

(Unaudited)

(In millions, except per share amounts)



|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                    |  | Three MonthsEnded September 30, |       |   | Nine MonthsEnded September 30, |  
|                                                                                                    |  | 2004                            |       |   | 2003                           |   |       | 2004 |  |   | 2003  |  
|Sales                                                                                               |  | $                               | 316.7 |   |                                | $ | 256.2 |      |  | $ | 998.2 |   |  | $ | 789.0 |  
|Cost of goods sold                                                                                  |  |                                 | 231.4 |   |                                |   | 182.8 |      |  |   | 712.7 |   |  |   | 560.4 |  
|Selling and administration                                                                          |  |                                 | 68.3  |   |                                |   | 66.0  |      |  |   | 209.7 |   |  |   | 181.2 |  
|Research and development                                                                            |  |                                 | 6.2   |   |                                |   | 5.8   |      |  |   | 19.3  |   |  |   | 17.4  |  
|Equity in (earnings) of affiliated companies                                                        |  |                                 | (5.0  | ) |                                |   | (3.4  | )    |  |   | (13.3 | ) |  |   | (7.5  | )
|Other (gains) and losses                                                                            |  |                                 | 1.5   |   |                                |   | (2.5  | )    |  |   | 1.2   |   |  |   | (2.5  | )
|Restructuring                                                                                       |  |                                 |      |   |                                |   |      |      |  |   | 1.7   |   |  |   | 0.6   |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Income from continuing operations before interest, taxes and cumulative effect of accounting change |  |                                 | 14.3  |   |                                |   | 7.5   |      |  |   | 66.9  |   |  |   | 39.4  |  
|Interest expense                                                                                    |  |                                 | 5.6   |   |                                |   | 4.3   |      |  |   | 15.3  |   |  |   | 13.0  |  
|Interest income                                                                                     |  |                                 | 0.3   |   |                                |   | 0.1   |      |  |   | 0.7   |   |  |   | 0.4   |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Income from continuing operations before taxes and cumulative effect of accounting change           |  |                                 | 9.0   |   |                                |   | 3.3   |      |  |   | 52.3  |   |  |   | 26.8  |  
|Income tax expense                                                                                  |  |                                 | 3.2   |   |                                |   | 1.2   |      |  |   | 18.3  |   |  |   | 9.6   |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Income from continuing operations before cumulative effect of accounting change                     |  |                                 | 5.8   |   |                                |   | 2.1   |      |  |   | 34.0  |   |  |   | 17.2  |  
|Income (loss) from discontinued operations, net of tax                                              |  |                                 |      |   |                                |   | 0.6   |      |  |   |      |   |  |   | (1.8  | )
|Gain (loss) on sales of discontinued operations, net of tax                                         |  |                                 | (0.2  | ) |                                |   | 15.0  |      |  |   | (0.2  | ) |  |   | 15.0  |  
|Cumulative effect of accounting change, net of tax                                                  |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   | (0.4  | )
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Net income                                                                                          |  | $                               | 5.6   |   |                                | $ | 17.7  |      |  | $ | 33.8  |   |  | $ | 30.0  |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Basic income (loss) per common share:                                                               |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Continuing operations before cumulative effect of accounting change                                 |  | $                               | 0.25  |   |                                | $ | 0.09  |      |  | $ | 1.47  |   |  | $ | 0.76  |  
|Income (loss) from discontinued operations                                                          |  |                                 |      |   |                                |   | 0.03  |      |  |   |      |   |  |   | (0.08 | )
|Gain (loss) on sales of discontinued operations                                                     |  |                                 | (0.01 | ) |                                |   | 0.66  |      |  |   | (0.01 | ) |  |   | 0.66  |  
|Cumulative effect of accounting change                                                              |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   | (0.02 | )
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Basic income per common share                                                                       |  | $                               | 0.24  |   |                                | $ | 0.78  |      |  | $ | 1.46  |   |  | $ | 1.32  |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Diluted income (loss) per common share:                                                             |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Continuing operations before cumulative effect of accounting change                                 |  | $                               | 0.25  |   |                                | $ | 0.09  |      |  | $ | 1.45  |   |  | $ | 0.76  |  
|Income (loss) from discontinued operations                                                          |  |                                 |      |   |                                |   | 0.03  |      |  |   |      |   |  |   | (0.08 | )
|Gain (loss) on sales of discontinued operations                                                     |  |                                 | (0.01 | ) |                                |   | 0.66  |      |  |   | (0.01 | ) |  |   | 0.66  |  
|Cumulative effect of accounting change                                                              |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   | (0.02 | )
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Diluted income per common share                                                                     |  | $                               | 0.24  |   |                                | $ | 0.78  |      |  | $ | 1.44  |   |  | $ | 1.32  |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Weighted average common shares outstanding:                                                         |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Basic                                                                                               |  |                                 | 23.4  |   |                                |   | 22.6  |      |  |   | 23.1  |   |  |   | 22.6  |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Diluted                                                                                             |  |                                 | 23.7  |   |                                |   | 22.7  |      |  |   | 23.4  |   |  |   | 22.6  |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Dividends declared per share                                                                        |  | $                               | 0.20  |   |                                | $ | 0.20  |      |  | $ | 0.60  |   |  | $ | 0.60  |  
|                                                                                                    |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  



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



3



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##### Table of Contents



ARCH CHEMICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In millions)



|                                                                                                                 |  |                                |        |   |      |   |       |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ----- | -
|                                                                                                                 |  | Nine MonthsEnded September 30, |       
|                                                                                                                 |  | 2004                           |        |   | 2003 |  
|Operating activities                                                                                             |  |                                |        |   |      |   |       |  
|Net income                                                                                                       |  | $                              | 33.8   |   |      | $ | 30.0  |  
|Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities: |  |                                |        |   |      |   |       |  
|Loss from discontinued operations                                                                                |  |                                |       |   |      |   | 1.8   |  
|(Gain) loss on sale of discontinued operations                                                                   |  |                                | 0.2    |   |      |   | (15.0 | )
|Cumulative effect of accounting change                                                                           |  |                                |       |   |      |   | 0.4   |  
|Equity in earnings of affiliates                                                                                 |  |                                | (13.3  | ) |      |   | (7.5  | )
|Other (gains) and losses                                                                                         |  |                                | 1.2    |   |      |   | (2.5  | )
|Depreciation and amortization                                                                                    |  |                                | 43.3   |   |      |   | 39.1  |  
|Deferred taxes                                                                                                   |  |                                | 6.1    |   |      |   |      |  
|Restructuring                                                                                                    |  |                                | 1.7    |   |      |   | 0.6   |  
|Restructuring payments                                                                                           |  |                                | (3.3   | ) |      |   | (4.0  | )
|Changes in assets and liabilities, net of purchase and sales of businesses                                       |  |                                |        |   |      |   |       |  
|Accounts receivable securitization program                                                                       |  |                                | 49.2   |   |      |   | (33.5 | )
|Receivables                                                                                                      |  |                                | (18.5  | ) |      |   | (30.0 | )
|Inventories                                                                                                      |  |                                | (4.6   | ) |      |   | 16.4  |  
|Other current assets                                                                                             |  |                                | (0.2   | ) |      |   | 1.4   |  
|Accounts payable and accrued liabilities                                                                         |  |                                | 11.4   |   |      |   | (1.3  | )
|Noncurrent liabilities                                                                                           |  |                                | 0.9    |   |      |   | 1.6   |  
|Other operating activities                                                                                       |  |                                | 9.9    |   |      |   | 6.3   |  
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Net operating activities from continuing operations                                                              |  |                                | 117.8  |   |      |   | 3.8   |  
|Change in net assets held for sale                                                                               |  |                                |       |   |      |   | (13.5 | )
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Net operating activities                                                                                         |  |                                | 117.8  |   |      |   | (9.7  | )
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Investing activities                                                                                             |  |                                |        |   |      |   |       |  
|Capital expenditures                                                                                             |  |                                | (13.5  | ) |      |   | (12.4 | )
|Business acquired in purchase transaction, net of cash acquired                                                  |  |                                | (215.9 | ) |      |   | (2.5  | )
|Proceeds from sales of businesses                                                                                |  |                                |       |   |      |   | 61.5  |  
|Proceeds from sales of building and land                                                                         |  |                                | 1.2    |   |      |   | 2.0   |  
|Other investing activities                                                                                       |  |                                | (0.2   | ) |      |   | 1.6   |  
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Net investing activities                                                                                         |  |                                | (228.4 | ) |      |   | 50.2  |  
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Financing activities                                                                                             |  |                                |        |   |      |   |       |  
|Long-term debt borrowings                                                                                        |  |                                | 207.0  |   |      |   | 15.0  |  
|Long-term repayments                                                                                             |  |                                | (132.5 | ) |      |   | (15.8 | )
|Short-term debt borrowings (repayments), net                                                                     |  |                                | 18.6   |   |      |   | 1.2   |  
|Dividends paid                                                                                                   |  |                                | (13.8  | ) |      |   | (13.5 | )
|Other financing activities                                                                                       |  |                                | 3.6    |   |      |   | 6.7   |  
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Net financing activities                                                                                         |  |                                | 82.9   |   |      |   | (6.4  | )
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Effect of exchange rate changes on cash and cash equivalents                                                     |  |                                | 1.6    |   |      |   | 1.2   |  
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Net increase in cash and cash equivalents                                                                        |  |                                | (26.1  | ) |      |   | 35.3  |  
|Cash and cash equivalents, beginning of year                                                                     |  |                                | 64.8   |   |      |   | 12.2  |  
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Cash and cash equivalents, end of period                                                                         |  | $                              | 38.7   |   |      | $ | 47.5  |  
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Supplemental cash flow information                                                                               |  |                                |        |   |      |   |       |  
|Taxes paid (refunds), net                                                                                        |  | $                              | 6.8    |   |      | $ | 5.3   |  
|                                                                                                                 |  |                                |        |   |      |   |       |  
|Interest paid                                                                                                    |  | $                              | 20.3   |   |      | $ | 17.1  |  
|                                                                                                                 |  |                                |        |   |      |   |       |  



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



4



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##### Table of Contents



ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



1. Basis of Presentation



These condensed consolidated financial statements have been prepared by Arch Chemicals, Inc. (including 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 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, 2003. The results of the recently acquired Avecia pool & spa and protection & hygiene businesses (Avecia) have been reflected in the Companys condensed consolidated financial statements beginning on April 2, 2004 (see
Note 16). The Companys treatment products segment is seasonal in nature, in particular its HTH water products business which includes the newly acquired pool & spa business, as its products are primarily used in the U.S. residential pool
market. Therefore, the results of operations for the Company and in particular the HTH water products business for the three and nine months ended September 30, 2004, are not necessarily indicative of the results to be expected for the entire fiscal
year.



2. Earnings per Share



Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share reflect the dilutive effect of stock options. Stock options with exercise prices greater than the average market price of the Companys common stock of approximately 1.0
million and 1.0 million, and 1.0 million and 1.5 million for the three and nine months ended September 30, 2004 and 2003, respectively, are not included in the computation of diluted earnings per share.



|                                                                            |  |                                 |  |                                |  |      |  |     
|--------------------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ---- |  | ----
|                                                                            |  | Three MonthsEnded September 30, |  | Nine MonthsEnded September 30,
|                                                                            |  | 2004                            |  | 2003                           |  | 2004 |  | 2003
|Basic                                                                       |  | 23.4                            |  | 22.6                           |  | 23.1 |  | 22.6
|Common equivalent shares from stock options using the treasury stock method |  | 0.3                             |  | 0.1                            |  | 0.3  |  |    
|                                                                            |  |                                 |  |                                |  |      |  |     
|Diluted                                                                     |  | 23.7                            |  | 22.7                           |  | 23.4 |  | 22.6
|                                                                            |  |                                 |  |                                |  |      |  |     



3. Stock Options



The Company accounts for stock-based compensation under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). As allowed under SFAS 123, the Company has chosen to measure and recognize stock-based compensation cost using the intrinsic value
method, in accordance with APB No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized for stock-based compensation plans.



The fair value of each Arch option granted was estimated on the date of grant using the Black-Scholes option pricing model.
There have been no options granted during 2004. Had compensation expense for the Companys stock option plans been determined based on the fair value at the date of the grant, the Companys pro forma net income and basic and diluted
earnings per share are listed below:



|                                                      |  |                                  |      |      |                                 |      |      |  |      |      |  |   |      |  
|----------------------------------------------------- |  | -------------------------------- | ---- | ---- | ------------------------------- | ---- | ---- |  | ---- | ---- |  | - | ---- | -
|                                                      |  | Three Months Ended September 30, |      |      | Nine Months Ended September 30, |     
|                                                      |  | 2004                             |      | 2003 |                                 |      | 2004 |  | 2003 |     
|Net income, as reported                               |  | $                                | 5.6  |      | $                               | 17.7 |      |  | $    | 33.8 |  | $ | 30.0 |  
|Stock-based employee compensation expense, net of tax |  |                                  |     |      |                                 | (0.2 | )    |  |      |     |  |   | (0.6 | )
|                                                      |  |                                  |      |      |                                 |      |      |  |      |      |  |   |      |  
|Pro forma net income                                  |  | $                                | 5.6  |      | $                               | 17.5 |      |  | $    | 33.8 |  | $ | 29.4 |  
|                                                      |  |                                  |      |      |                                 |      |      |  |      |      |  |   |      |  
|Earnings per share:                                   |  |                                  |      |      |                                 |      |      |  |      |      |  |   |      |  
|Basic  as reported                                   |  | $                                | 0.24 |      | $                               | 0.78 |      |  | $    | 1.46 |  | $ | 1.32 |  
|Basic  pro forma                                     |  | $                                | 0.24 |      | $                               | 0.77 |      |  | $    | 1.46 |  | $ | 1.30 |  
|Diluted  as reported                                 |  | $                                | 0.24 |      | $                               | 0.78 |      |  | $    | 1.44 |  | $ | 1.32 |  
|Diluted  pro forma                                   |  | $                                | 0.24 |      | $                               | 0.77 |      |  | $    | 1.44 |  | $ | 1.30 |  



5



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



4. Accounts Receivable/Short-Term Investment



In March 2002, the Company completed arrangements to sell, without recourse, certain accounts receivable through its
wholly-owned subsidiary, Arch Chemicals Receivables Corp., a special-purpose corporation. As of September 30, 2004, the Company had sold $49.2 of participation interests in $63.3 of accounts receivable. The Company had not sold any participation
interests in such accounts receivable at December 31, 2003. The fair value of the retained undivided interest of $14.1 and $43.3 at September 30, 2004 and December 31, 2003, respectively, is classified as a held-to-maturity debt security and is
reflected as Short-term investment on the accompanying Condensed Consolidated Balance Sheet. The proceeds of the sale were used to fund seasonal working capital needs. The costs of the program for the three and nine months ended September 30, 2004
and 2003 of $0.3 and $0.7, and $0.2 and $0.7, respectively, are included in Selling and Administration expenses in the accompanying Condensed Consolidated Statements of Income. Fair value of the retained undivided interest includes a reserve for
credit losses and has not been discounted due to the short-term nature of the underlying financial assets. The Company has not recorded an asset or liability related to the servicing responsibility retained as the fees earned for servicing are
estimated to approximate fair value.



5. Inventories



|                           |  |                   |       |   |                  |   |       |  
|-------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                           |  | September 30,2004 |       |   | December 31,2003 |  
|Raw materials and supplies |  | $                 | 53.1  |   |                  | $ | 43.7  |  
|Work in process            |  |                   | 14.9  |   |                  |   | 14.7  |  
|Finished goods             |  |                   | 147.2 |   |                  |   | 123.5 |  
|                           |  |                   |       |   |                  |   |       |  
|Inventories, gross         |  |                   | 215.2 |   |                  |   | 181.9 |  
|LIFO reserve               |  |                   | (42.4 | ) |                  |   | (40.3 | )
|                           |  |                   |       |   |                  |   |       |  
|Inventories, net           |  | $                 | 172.8 |   |                  | $ | 141.6 |  
|                           |  |                   |       |   |                  |   |       |  



Approximately 45
percent of the Companys inventories are valued by the dollar value last-in, first-out (LIFO) method of inventory accounting. Costs of other inventories are determined principally by the first-in, first-out method. Elements of costs
in inventories include raw materials, direct labor and manufacturing overhead. Inventories under the LIFO method are based on an annual determination of quantities and costs as of the year-end; therefore, the condensed consolidated financial
statements at September 30, 2004 reflect certain estimates relating to projected inventory quantities and costs at December 31, 2004.



6. Investments and Advances  Affiliated Companies at Equity



Summarized unaudited financial information for FUJIFILM Arch is as follows:



|                                  |  |                                  |      |                                 |   |      |  |      |       |  |   |      
|--------------------------------- |  | -------------------------------- | ---- | ------------------------------- | - | ---- |  | ---- | ----- |  | - | -----
|                                  |  | Three Months Ended September 30, |      | Nine Months Ended September 30,
|                                  |  | 2004                             |      | 2003                            |   | 2004 |  | 2003
|Results of Operations             |  |                                  |      |                                 |   |      |  |      |       |  |   |      
|Sales                             |  | $                                | 77.3 |                                 | $ | 56.5 |  | $    | 220.0 |  | $ | 140.5
|Income from operations before tax |  |                                  | 12.3 |                                 |   | 6.7  |  |      | 30.7  |  |   | 12.4 
|Net Income                        |  |                                  | 7.7  |                                 |   | 3.8  |  |      | 18.0  |  |   | 7.0  



6



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



7. Goodwill and Other Intangibles



The changes in the carrying amount of goodwill for the nine months ended September 30, 2004 are as follows:



|                            |  |                  |      |                                    |   |      |                                       |  |                        |      |  |                          |       |                      |  |       |      |  |   |     |  |   |       |  
|--------------------------- |  | ---------------- | ---- | ---------------------------------- | - | ---- | ------------------------------------- |  | ---------------------- | ---- |  | ------------------------ | ----- | -------------------- |  | ----- | ---- |  | - | --- |  | - | ----- | -
|                            |  | HTHWaterProducts |      | PersonalCare andIndustrialBiocides |   |      | WoodProtection and IndustrialCoatings |  | TotalTreatmentProducts |      |  | MicroelectronicMaterials |       | Performance Products |  | Total |     
|Balance, December 31, 2003  |  | $                | 2.4  |                                    | $ | 30.3 |                                       |  | $                      | 73.4 |  | $                        | 106.1 |                      |  | $     | 26.8 |  | $ | 4.4 |  | $ | 137.3 |  
|Avecia acquisition          |  |                  | 28.9 |                                    |   | 41.0 |                                       |  |                        |     |  |                          | 69.9  |                      |  |       |     |  |   |    |  |   | 69.9  |  
|Foreign Exchange & Other    |  |                  |     |                                    |   | (2.8 | )                                     |  |                        |     |  |                          | (2.8  | )                    |  |       |     |  |   |    |  |   | (2.8  | )
|                            |  |                  |      |                                    |   |      |                                       |  |                        |      |  |                          |       |                      |  |       |      |  |   |     |  |   |       |  
|Balance, September 30, 2004 |  | $                | 31.3 |                                    | $ | 68.5 |                                       |  | $                      | 73.4 |  | $                        | 173.2 |                      |  | $     | 26.8 |  | $ | 4.4 |  | $ | 204.4 |  
|                            |  |                  |      |                                    |   |      |                                       |  |                        |      |  |                          |       |                      |  |       |      |  |   |     |  |   |       |  



The gross carrying
amount and accumulated amortization for other intangible assets as of September 30, 2004 and December 31, 2003 are as follows:



|                                        |  |                     |       |                         |   |                   |  |                     |       |                         |   |                   |  |   |      |  |   |     
|--------------------------------------- |  | ------------------- | ----- | ----------------------- | - | ----------------- |  | ------------------- | ----- | ----------------------- | - | ----------------- |  | - | ---- |  | - | ----
|                                        |  | September 30, 2004  |       | December 31, 2003      
|                                        |  | GrossCarryingAmount |       | AccumulatedAmortization |   | NetCarryingAmount |  | GrossCarryingAmount |       | AccumulatedAmortization |   | NetCarryingAmount
|Patents                                 |  | $                   | 1.7   |                         | $ | 1.6               |  | $                   | 0.1   |                         | $ | 1.7               |  | $ | 1.6  |  | $ | 0.1 
|Customer lists                          |  |                     | 56.6  |                         |   | 6.4               |  |                     | 50.2  |                         |   | 23.8              |  |   | 3.9  |  |   | 19.9
|Toxicology database                     |  |                     | 16.7  |                         |   | 0.6               |  |                     | 16.1  |                         |   |                  |  |   |     |  |   |    
|Other                                   |  |                     | 16.3  |                         |   | 6.7               |  |                     | 9.6   |                         |   | 15.5              |  |   | 5.5  |  |   | 10.0
|                                        |  |                     |       |                         |   |                   |  |                     |       |                         |   |                   |  |   |      |  |   |     
|Total amortizable other intangibles     |  |                     | 91.3  |                         |   | 15.3              |  |                     | 76.0  |                         |   | 41.0              |  |   | 11.0 |  |   | 30.0
|Trademarks                              |  |                     | 45.9  |                         |   | 0.4               |  |                     | 45.5  |                         |   | 31.5              |  |   | 0.4  |  |   | 31.1
|Developed technology                    |  |                     | 32.5  |                         |   |                  |  |                     | 32.5  |                         |   |                  |  |   |     |  |   |    
|                                        |  |                     |       |                         |   |                   |  |                     |       |                         |   |                   |  |   |      |  |   |     
|Total non-amortizable other intangibles |  |                     | 78.4  |                         |   | 0.4               |  |                     | 78.0  |                         |   | 31.5              |  |   | 0.4  |  |   | 31.1
|                                        |  |                     |       |                         |   |                   |  |                     |       |                         |   |                   |  |   |      |  |   |     
|Total other intangibles                 |  | $                   | 169.7 |                         | $ | 15.7              |  | $                   | 154.0 |                         | $ | 72.5              |  | $ | 11.4 |  | $ | 61.1
|                                        |  |                     |       |                         |   |                   |  |                     |       |                         |   |                   |  |   |      |  |   |     



The goodwill and
certain identifiable intangible assets related to the Avecia acquisition included in the tables above are preliminary and are based on estimates of fair values. The fair value is subject to change upon receipt of the final results of an appraisal of
the fair value of the assets and liabilities of Avecia, as well as identification of certain intangible assets (see Note 16).



Amortization expense for the three and nine months ended September 30, 2004 and 2003 was $1.4 and $3.3, and $0.5 and $1.6, respectively. Estimated
amortization expense is $4.7 for the year ended December 31, 2004 and $5.6 each for the years ending December 31, 2005 through 2008.



In accordance with FASB Statement No. 142, Goodwill and Other Intangibles, the Company has elected to perform its annual goodwill 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, 2004.



7



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



8. Debt



In connection with the acquisition of Avecias pool & spa and protection & hygiene businesses, the Company amended its quarterly leverage
ratio (debt / EBITDA) for its revolving credit facility. The amendment was put in place to take into account the fact that the acquisition would occur during the Companys seasonal build of receivables and inventory. The quarterly leverage
ratio was amended to 4.25 for the quarter ending March 31, 2004, 4.00 for the quarter ending June 30, 2004, returning to 3.50 thereafter. The credit facility also contains 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 plus 50% of cumulative net income (loss) subject to certain limitations beginning June 20, 2003 (the amount available for
restricted payments at September 30, 2004 was $61.9). As of September 30, 2004, facility fees payable on the credit facility are 0.35%. The facility fees can range from 0.2% to 0.4% depending on the Companys quarterly leverage ratios. The
Company may select various floating rate borrowing options, including, but not limited to, LIBOR plus a spread that can range from 0.55% to 1.35% depending on the Companys quarterly leverage ratios. There was $75.0 outstanding under the credit
facility at September 30, 2004.



In connection with the
acquisition of Avecias pool & spa and protection & hygiene businesses, the Company amended its quarterly leverage ratio (debt / EBITDA) covenants and the debt to total capitalization ratio requirement for its senior notes. The
amendment was put in place to take into account the fact that the acquisition would occur during the Companys seasonal build of receivables and inventory. The quarterly leverage ratio was amended to 4.25 as of the last day for the quarter
ending March 31, 2004, 4.00 as of the last day of the quarter ending June 30, 2004, returning to 3.50 thereafter. The debt to total capitalization ratio was amended to 65% beginning on April 2, 2004 to and including June 30, 2004, 60% beginning on
July 1, 2004 to and including September 30, 2004, returning to 55% beginning on October 1, 2004. In addition the notes contain a covenant that restricts the payment of dividends and repurchases of stock to $65.0 less cumulative dividends and
repurchases of stock plus 50% of cumulative net income (loss) under certain circumstances beginning January 1, 2002 (the amount available for restricted payments at September 30, 2004 was $44.8).



At September 30, 2004, the Company had $20.4 of outstanding letters of credit
and $7.5 of letters of guarantee. As of September 30, 2004, the Company has agreed to guarantee 50% or up to $8.5 of Planar Solutions (a joint venture) borrowings ($7.5 at September 30, 2004), which is provided by the Companys joint
venture partner and expires in May 2005. The Company would be required to perform under the above guarantee in the case of nonpayment by Planar Solutions.



9. Derivative Instruments and Hedging



The Company accounts for derivatives in accordance with SFAS 133, as amended by SFAS No. 137 and SFAS No. 138.



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 2004. During the three and nine months ended September 30, 2004 and 2003, 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 effective hedge accounting. The fair value of the foreign currency contracts is included in Other current assets and Accrued liabilities on
the accompanying Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2004 and 2003, the Company recorded income (loss) of $(0.1) and $0, and $0.3 and $0.1, respectively, in Other Comprehensive



8



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



Income (Loss) related to the change in the fair market value of the derivatives designated as effective cash flow hedges. During 2004 there were no gains or
losses realized and during the nine months ended September 30, 2003, the Company recorded a net loss $(0.1), in Selling and Administration expenses related to the change in fair value of derivatives which did not qualify for hedge accounting and the
change in the time value of the forward contracts, which has been excluded from the assessment of hedge effectiveness.



Debt and Interest



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 principal
amount of unsecured senior notes for a floating interest rate 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 $1.3 and are included in Other Liabilities on the accompanying Condensed Consolidated Balance Sheet at September 30, 2004, 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



Arch
U.S. Pension and Retirement Plans



As of September 30,
2004 and 2003, the components of net periodic benefit costs for the Arch U.S. Pension and Postretirement Plans were as follows:



|                                                  |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------- |  | -------------------------------- | ---- | - | ------------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                  |  | Three Months Ended September 30, |      |   | Nine Months Ended September 30, |  
|                                                  |  | 2004                             |      |   | 2003                            |   |      | 2004 |  |   | 2003 |  
|Arch U.S. Pension Plans                           |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|Net Periodic Benefit Expense:                     |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|Service cost (benefits earned during the period)  |  | $                                | 1.6  |   |                                 | $ | 1.7  |      |  | $ | 5.2  |   |  | $ | 5.0  |  
|Interest cost on the projected benefit obligation |  |                                  | 3.0  |   |                                 |   | 3.0  |      |  |   | 9.5  |   |  |   | 9.1  |  
|Expected return on plan assets                    |  |                                  | (2.7 | ) |                                 |   | (3.0 | )    |  |   | (8.5 | ) |  |   | (8.9 | )
|Amortization of prior service cost                |  |                                  | 0.2  |   |                                 |   | 0.2  |      |  |   | 0.5  |   |  |   | 0.5  |  
|Recognized actuarial loss                         |  |                                  | 0.4  |   |                                 |   | 0.1  |      |  |   | 1.2  |   |  |   | 0.3  |  
|                                                  |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                         |  | $                                | 2.5  |   |                                 | $ | 2.0  |      |  | $ | 7.9  |   |  | $ | 6.0  |  
|                                                  |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|                                                  |  |                                 
|                                                  |  | Three Months Ended September 30, |      |   | Nine Months Ended September 30, |  
|                                                  |  | 2004                             |      |   | 2003                            |   |      | 2004 |  |   | 2003 |  
|Arch U.S. Postretirement Plan                     |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|Net Periodic Benefit Expense:                     |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|Service cost (benefits earned during the period)  |  | $                                | 0.2  |   |                                 | $ | 0.2  |      |  | $ | 0.5  |   |  | $ | 0.4  |  
|Interest cost on the projected benefit obligation |  |                                  | 0.2  |   |                                 |   | 0.2  |      |  |   | 0.6  |   |  |   | 0.6  |  
|Amortization of prior service cost                |  |                                  |     |   |                                 |   | (0.1 | )    |  |   | (0.1 | ) |  |   | (0.1 | )
|Recognized actuarial loss                         |  |                                  |     |   |                                 |   |     |      |  |   | 0.1  |   |  |   |     |  
|                                                  |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                         |  | $                                | 0.4  |   |                                 | $ | 0.3  |      |  | $ | 1.1  |   |  | $ | 0.9  |  
|                                                  |  |                                  |      |   |                                 |   |      |      |  |   |      |   |  |   |      |  



As of September 30,
2004 and 2003, 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 MonthsEnded September 30, |      |   | Nine MonthsEnded September 30, |  
|                                                  |  | 2004                            |      |   | 2003                           |   |      | 2004 |  |   | 2003  |  
|Net Periodic Benefit Expense:                     |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Service cost (benefits earned during the period)  |  | $                               | 0.2  |   |                                | $ | 0.3  |      |  | $ | 0.5   |   |  | $ | 0.9   |  
|Interest cost on the projected benefit obligation |  |                                 | 4.4  |   |                                |   | 3.8  |      |  |   | 13.2  |   |  |   | 11.4  |  
|Expected return on plan assets                    |  |                                 | (4.6 | ) |                                |   | (4.0 | )    |  |   | (13.9 | ) |  |   | (12.0 | )
|Recognized actuarial loss                         |  |                                 | 0.6  |   |                                |   | 0.4  |      |  |   | 1.9   |   |  |   | 1.0   |  
|                                                  |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Net periodic benefit cost                         |  | $                               | 0.6  |   |                                | $ | 0.5  |      |  | $ | 1.7   |   |  | $ | 1.3   |  
|                                                  |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  



9



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



As the Company previously disclosed in its consolidated financial statements for the year ended
December 31, 2003, the Company expects the cash funding to be approximately $8.0 for the Arch retirement plans and approximately £5.5 million (approximately $10) for its Hickson U.K. and Hickson U.K. senior executive retirement plans. As of
September 30, 2004, $5.8 had been contributed for the Arch U.S. pension plans and £2.9 million (approximately $5) for its Hickson U.K. and Hickson U.K. Senior Executive retirement plans.



Deferred Compensation Plans



The Board of Directors of the Company had previously adopted three deferred
compensation plans, namely, the 1999 Stock Plan for Non-employee Directors (the Directors Plan), the Supplemental Contributing Employee Ownership Plan and the Employee Deferral Plan. The non-employee Directors participate only in the
Directors Plan while officers and certain other key employees are eligible to participate in the other two plans. These plans permit or require their participants to defer a portion of their compensation. The participants compensation
deferrals are adjusted for changes in value of phantom shares of common stock of the Company and in other phantom investment vehicles. The Company established a rabbi trust for each of these plans (collectively, the Rabbi Trust).
The Rabbi Trust invests its assets in shares of Arch common stock, marketable securities and a cash surrender life insurance policy, which generally are expected to generate returns consistent with those credited to the participants. The assets of
the Rabbi Trust are available to satisfy the claims of the Companys creditors in the event of bankruptcy or insolvency of the Company. The Companys stock held in the Rabbi Trust is treated in a manner similar to treasury stock, with no
subsequent changes in fair value and recorded as a reduction of shareholders equity ($2.4 at September 30, 2004), with an offsetting amount reflected as a deferred compensation liability of the Company. The carrying value of the deferred
compensation liability related to the Companys stock is adjusted to fair market value each reporting period by a charge or credit to operations in Selling and Administration on the Companys Condensed Consolidated Statements of
Operations. The other assets of the Rabbi Trust are reported at fair market value in Other assets in the Condensed Consolidated Balance Sheets ($1.9 at September 30, 2004). The deferred compensation liability in Other liabilities in the Condensed
Consolidated Balance Sheets reflects the fair market value of the plan participants compensation deferrals ($4.4 million at September 30, 2004). Changes in the market value of the marketable securities and the deferred compensation liability
are adjusted to fair market value each reporting period by a charge or credit to operations in Selling and Administration on the Companys Condensed Consolidated Statements of Operations.



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 nine months ended September 30, 2004 and 2003 was as follows:



|                                                     |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |     
|---------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ----
|                                                     |  | Three MonthsEnded September 30, |      |   | Nine MonthsEnded September 30,
|                                                     |  | 2004                            |      |   | 2003                           |   |      | 2004 |  |   | 2003
|Net income                                           |  | $                               | 5.6  |   |                                | $ | 17.7 |      |  | $ | 33.8 |   |  | $ | 30.0
|Foreign currency translation adjustments             |  |                                 |     |   |                                |   | (2.6 | )    |  |   | (5.2 | ) |  |   | 8.6 
|Net unrealized gain (loss) on derivative instruments |  |                                 | (0.1 | ) |                                |   | 0.3  |      |  |   |     |   |  |   | 0.1 
|                                                     |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |     
|Total other comprehensive income                     |  |                                 | (0.1 | ) |                                |   | (2.3 | )    |  |   | (5.2 | ) |  |   | 8.7 
|                                                     |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |     
|Comprehensive income                                 |  | $                               | 5.5  |   |                                | $ | 15.4 |      |  | $ | 28.6 |   |  | $ | 38.7
|                                                     |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   |     



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.



10



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



12. Accumulated Net Unrealized Gain on Derivative Instruments



Changes in the accumulated net unrealized gain on derivative instruments for
the three and nine months ended September 30, 2004 and 2003 are as follows:



|                                                                               |  |                                 |      |                                 |      |   |      |  |      |   |  |   |      |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ---- | ------------------------------- | ---- | - | ---- |  | ---- | - |  | - | ---- | -
|                                                                               |  | Three MonthsEnded September 30, |      | Nine Months Ended September 30, |     
|                                                                               |  | 2004                            |      |                                 | 2003 |   | 2004 |  | 2003 |  
|Beginning balance of accumulated net unrealized gain on derivative instruments |  | $                               | 0.1  |                                 |      | $ | 0.1  |  | $    |  |  | $ | 0.3  |  
|Net gain (loss) on cash flow hedges                                            |  |                                 |     |                                 |      |   |     |  |      |  |  |   | (0.1 | )
|Reclassification into earnings                                                 |  |                                 | (0.1 | )                               |      |   | 0.3  |  |      |  |  |   | 0.2  |  
|                                                                               |  |                                 |      |                                 |      |   |      |  |      |   |  |   |      |  
|Ending balance of accumulated net unrealized gain on derivative instruments    |  | $                               |     |                                 |      | $ | 0.4  |  | $    |  |  | $ | 0.4  |  
|                                                                               |  |                                 |      |                                 |      |   |      |  |      |   |  |   |      |  



13. Segment Reporting



The Company has organized its segments around differences
in products and services, consistent with how the Company manages its business. The three segments are treatment products, microelectronic materials and performance products. Treatment products include three reportable business units: the HTH water
products business, the personal care and industrial biocides businesses, and the wood protection and industrial coatings businesses. The performance products segment includes the performance urethanes and hydrazine businesses. The recently acquired
Avecia pool & spa business is included in the results of the HTH water products business and the Avecia protection & hygiene business is included in the results of the personal care and industrial biocides business.



|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                    |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                                                    |  | 2004                             |       |   | 2003                            |   |       | 2004 |  |   | 2003  |  
|Sales:                                              |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Treatment Products:                                 |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|HTH Water Products                                  |  | $                                | 83.0  |   |                                 | $ | 75.4  |      |  |   | 315.5 |   |  | $ | 250.5 |  
|Personal Care & Industrial Biocides                 |  |                                  | 65.5  |   |                                 |   | 37.1  |      |  |   | 172.9 |   |  |   | 112.9 |  
|Wood Protection & Industrial Coatings               |  |                                  | 86.2  |   |                                 |   | 68.1  |      |  |   | 267.8 |   |  |   | 200.1 |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Treatment Products                            |  |                                  | 234.7 |   |                                 |   | 180.6 |      |  |   | 756.2 |   |  |   | 563.5 |  
|Microelectronic Materials                           |  |                                  | 39.9  |   |                                 |   | 36.5  |      |  |   | 119.1 |   |  |   | 109.0 |  
|Performance Products:                               |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Performance Urethanes                               |  |                                  | 37.6  |   |                                 |   | 31.5  |      |  |   | 103.6 |   |  |   | 90.4  |  
|Hydrazine                                           |  |                                  | 4.5   |   |                                 |   | 7.6   |      |  |   | 19.3  |   |  |   | 26.1  |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Performance Products                          |  |                                  | 42.1  |   |                                 |   | 39.1  |      |  |   | 122.9 |   |  |   | 116.5 |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Sales                                         |  | $                                | 316.7 |   |                                 | $ | 256.2 |      |  | $ | 998.2 |   |  | $ | 789.0 |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Operating Income (Loss):                            |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Treatment Products:                                 |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|HTH Water Products                                  |  | $                                | (6.7  | ) |                                 | $ | (0.8  | )    |  | $ | 24.1  |   |  | $ | 20.7  |  
|Personal Care & Industrial Biocides                 |  |                                  | 17.2  |   |                                 |   | 7.2   |      |  |   | 38.8  |   |  |   | 22.1  |  
|Wood Protection & Industrial Coatings               |  |                                  | 7.3   |   |                                 |   | 4.1   |      |  |   | 21.4  |   |  |   | 10.4  |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Treatment Products                            |  |                                  | 17.8  |   |                                 |   | 10.5  |      |  |   | 84.3  |   |  |   | 53.2  |  
|Microelectronic Materials                           |  |                                  | 5.0   |   |                                 |   | 0.6   |      |  |   | 8.3   |   |  |   | 0.1   |  
|Performance Products:                               |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Performance Urethanes                               |  |                                  | (1.8  | ) |                                 |   | (2.0  | )    |  |   | (6.9  | ) |  |   | (5.9  | )
|Hydrazine                                           |  |                                  | (1.3  | ) |                                 |   | 0.3   |      |  |   | (1.1  | ) |  |   | 1.2   |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Performance Products                          |  |                                  | (3.1  | ) |                                 |   | (1.7  | )    |  |   | (8.0  | ) |  |   | (4.7  | )
|Corporate Unallocated                               |  |                                  | (5.4  | ) |                                 |   | (1.9  | )    |  |   | (16.0 | ) |  |   | (8.6  | )
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Segment Operating Income before Restructuring |  | $                                | 14.3  |   |                                 | $ | 7.5   |      |  | $ | 68.6  |   |  | $ | 40.0  |  
|Restructuring                                       |  |                                  |      |   |                                 |   |      |      |  |   | (1.7  | ) |  |   | (0.6  | )
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Operating Income                              |  | $                                | 14.3  |   |                                 | $ | 7.5   |      |  | $ | 66.9  |   |  | $ | 39.4  |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Capital Spending:                                   |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Treatment Products:                                 |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|HTH Water Products                                  |  | $                                | 0.9   |   |                                 | $ | 0.9   |      |  | $ | 2.8   |   |  | $ | 1.9   |  
|Personal Care & Industrial Biocides                 |  |                                  | 1.1   |   |                                 |   | 0.9   |      |  |   | 3.3   |   |  |   | 2.8   |  
|Wood Protection & Industrial Coatings               |  |                                  | 1.2   |   |                                 |   | 0.9   |      |  |   | 4.2   |   |  |   | 2.0   |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Treatment Products                            |  |                                  | 3.2   |   |                                 |   | 2.7   |      |  |   | 10.3  |   |  |   | 6.7   |  
|Microelectronic Materials                           |  |                                  | 0.6   |   |                                 |   | 0.9   |      |  |   | 1.6   |   |  |   | 2.1   |  
|Performance Products:                               |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Performance Urethanes                               |  |                                  | 0.2   |   |                                 |   | 0.6   |      |  |   | 0.7   |   |  |   | 2.3   |  
|Hydrazine                                           |  |                                  |      |   |                                 |   | 0.1   |      |  |   | 0.9   |   |  |   | 1.3   |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Performance Products                          |  |                                  | 0.2   |   |                                 |   | 0.7   |      |  |   | 1.6   |   |  |   | 3.6   |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Total Capital Spending                              |  | $                                | 4.0   |   |                                 | $ | 4.3   |      |  | $ | 13.5  |   |  | $ | 12.4  |  
|                                                    |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  



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ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



Segment operating income (loss) includes the equity in earnings (losses) of affiliated companies and
an allocation of corporate charges based on various allocation bases. Segment operating income (loss) excludes interest income, interest expense, restructuring, and certain unallocated expenses of the corporate headquarters. A pre-tax gain of $2.5
on the sale of excess land is included in the corporate unallocated operating expenses for the three and nine months ended September 30, 2003. The Company believes the exclusion of restructuring 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. Restructuring



The 2004 restructuring charge includes $2.1 for headcount reductions of approximately 40 employees in the hydrazine
business, offset by a reduction in the prior years restructuring reserves of $0.4 million for revisions to previous plans estimates.



The following table summarizes activity related to its restructuring plans:



|                                 |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|-------------------------------- |  | --------------- | ----- | - | ----------------- | - | ----- | ---------- |  | - | ----- | - |  | - | ----- | -
|                                 |  | Severance Costs |       |   | Asset Write-downs |   |       | OtherItems |  |   | Total |  
|Provision                        |  | $               | 18.0  |   |                   | $ | 11.0  |            |  | $ | 5.0   |   |  | $ | 34.0  |  
|2000 Activity:                   |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Payments                         |  |                 | (1.4  | ) |                   |   |      |            |  |   |      |   |  |   | (1.4  | )
|Utilized                         |  |                 |      |   |                   |   | (11.0 | )          |  |   |      |   |  |   | (11.0 | )
|                                 |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Balance at December 31, 2000     |  |                 | 16.6  |   |                   |   |      |            |  |   | 5.0   |   |  |   | 21.6  |  
|2001 Activity:                   |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Provision                        |  |                 | 2.4   |   |                   |   |      |            |  |   |      |   |  |   | 2.4   |  
|Payments                         |  |                 | (11.0 | ) |                   |   |      |            |  |   | (1.6  | ) |  |   | (12.6 | )
|Reclass postemployment liability |  |                 | (2.5  | ) |                   |   |      |            |  |   |      |   |  |   | (2.5  | )
|Reserve reduction                |  |                 | (0.3  | ) |                   |   |      |            |  |   | (1.2  | ) |  |   | (1.5  | )
|                                 |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Balance at December 31, 2001     |  |                 | 5.2   |   |                   |   |      |            |  |   | 2.2   |   |  |   | 7.4   |  
|2002 Activity:                   |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Provision                        |  |                 | 6.6   |   |                   |   |      |            |  |   | 1.0   |   |  |   | 7.6   |  
|Payments                         |  |                 | (6.1  | ) |                   |   |      |            |  |   | (0.5  | ) |  |   | (6.6  | )
|Reclass postemployment liability |  |                 | (0.5  | ) |                   |   |      |            |  |   |      |   |  |   | (0.5  | )
|Utilized                         |  |                 |      |   |                   |   |      |            |  |   | (0.4  | ) |  |   | (0.4  | )
|                                 |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Balance at December 31, 2002     |  |                 | 5.2   |   |                   |   |      |            |  |   | 2.3   |   |  |   | 7.5   |  
|2003 Activity:                   |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Provision                        |  |                 | 2.5   |   |                   |   |      |            |  |   |      |   |  |   | 2.5   |  
|Payments                         |  |                 | (3.8  | ) |                   |   |      |            |  |   | (0.7  | ) |  |   | (4.5  | )
|Utilized                         |  |                 | (0.6  | ) |                   |   |      |            |  |   |      |   |  |   | (0.6  | )
|Reserve reduction                |  |                 | (1.9  | ) |                   |   |      |            |  |   | (1.2  | ) |  |   | (3.1  | )
|                                 |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Balance at December 31, 2003     |  |                 | 1.4   |   |                   |   |      |            |  | $ | 0.4   |   |  | $ | 1.8   |  
|2004 Activity:                   |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Provision                        |  |                 | 2.1   |   |                   |   |      |            |  |   |      |   |  |   | 2.1   |  
|Payments                         |  |                 | (1.3  | ) |                   |   |      |            |  |   | (0.1  | ) |  |   | (1.4  | )
|Utilized                         |  |                 | (0.2  | ) |                   |   |      |            |  |   |      |   |  |   | (0.2  | )
|Reserve reduction                |  |                 | (0.2  | ) |                   |   |      |            |  |   | (0.2  | ) |  |   | (0.4  | )
|                                 |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  
|Balance at September 30, 2004    |  | $               | 1.8   |   |                   | $ |      |            |  | $ | 0.1   |   |  | $ | 1.9   |  
|                                 |  |                 |       |   |                   |   |       |            |  |   |       |   |  |   |       |  



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ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



As of September 30, 2004, $41.7 had been charged against restructuring reserves. As of September 30,
2004, all employees from each restructuring program in the prior years have been terminated with a portion still receiving benefits under the 2002 and 2003 programs. The majority of the employees from the 2004 restructuring program have been
terminated as of September 30, 2004.



At September 30, 2004,
$1.9 of restructuring reserves was included in Accrued Liabilities in the accompanying Condensed Consolidated Balance Sheet.



15. Commitments and Contingencies



In connection with the acquisition of Hickson, the Company assumed certain legal obligations, including a trial court judgment, in favor of a railroad, of
approximately $8.5 plus interest in a lawsuit associated with a wood preservative spillage in 1994. In 2002, a new trial resulted in a judgment of $2.6 plus interest. The railroad has appealed the judgment. The judgment and related interest is
included in Accrued Liabilities in the accompanying Condensed Consolidated Balance Sheets. The Company does not expect any final resolution of this case to have a material adverse effect on the results of operations or the financial position of the
Company.



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



The Company and/or its CCA-formulating subsidiary Arch Wood Protection, Inc. were named, along with several other chromated copper arsenate (CCA) manufacturers, several CCA customers and various retailers,
in five putative class action lawsuits filed in various state and federal courts regarding the marketing and use of CCA-treated wood. Three of these cases have been dismissed without prejudice. In the fourth case (Jacobs v. Osmose, Inc. et.
al.), the federal district court has ruled that the requirements for a class action have not been met and has denied class action status in this case. Subsequently, the court entered an order granting plaintiffs motion for voluntary
dismissal of their claims against the Company, its subsidiaries and several other defendants.



13



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



In March 2004, in the fifth putative class action lawsuit (Ardoin v. Stine Lumber Company et.
al.), the federal district court has ruled that the requirements for a class action have not been met and has denied class action status to this case. The parties have entered an agreement to settle the claims of the individual plaintiffs for a
nominal amount, and a motion to dismiss the case with prejudice has been filed by the parties.



In addition, there are fewer than ten other CCA-related lawsuits in which the Company and/or one or more of the Companys subsidiaries is involved. These additional cases are not putative class actions. They are
actions by individual claimants alleging various personal injuries allegedly due to exposure to CCA-treated wood.



The Company and its subsidiaries deny the material allegations of all the various CCA-related claims and have vigorously defended and will continue to
vigorously defend them. As a result, legal defense and related costs associated with these cases were significant in 2004 and 2003 and may be significant in the future.



All CCA-related cases are subject to a number of uncertainties. As a result, their impact, if any, is difficult to assess.
Based on the information currently available to the Company, however, the Company does not believe the resolution of these cases is likely to have a material adverse effect on its consolidated financial position, cash flow or results of operations.



In March 2004, a jury in the U.S. District Court for the
District of New Jersey awarded Arch Personal Care Products, a wholly-owned subsidiary of the Company, approximately $7.0 in damages after finding, among other things, one of the defendants had breached his non-compete obligations to Arch Personal
Care Products. In July 2004, the parties reached agreement to settle $6.6 of the judgment for $6.1, of which $3.1 and $6.1 has been recognized in the results for the three and nine months ended September 30, 2004, respectively.



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 per plaintiff. The Company is effectively self-insured for the first $3.0 in this case, regardless of the number of plaintiffs. The case has been removed to the U.S. district court in Oregon by the Company and
plaintiffs have moved to return the case to state court. During the second quarter, the Company recorded $3.0 of self-insurance reserves related to its potential exposure in this case.



In Brazil, the Company uses a third-party agent to process and pay certain state import duties. In July 2004, the Company
was notified of a claim for unpaid state import duties, including interest and potential penalties. During the third quarter, the Company accrued $2.1 for the estimated taxes and related interest for this claim. As of September 30, 2004, the Company
had estimated contingent liabilities related to this claim up to $1.8.



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.



14



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



There are a variety of other 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 nine months ended September 30, 2004.



See the Companys Form 10-K for the year ended December 31, 2003 for additional information.



16. Acquisition



Avecia Acquisition



On April 2, 2004, the Company completed the acquisition of Avecias pool & spa and protection & hygiene businesses. The results of these
operations have been included in the accompanying condensed consolidated financial statements since that date. The pool & spa segment of the business manufactures chlorine-free sanitizers for pools and spas. The protection & hygiene business
manufactures preservatives, fungicides and disinfectants for industrial and consumer products. As a result of this acquisition, the Company expects to increase participation in the specialty pool & spa dealer channel as well as expand product
offerings in the industrial and consumer segments of the biocides market. The total purchase price, net of cash acquired, was approximately $231.6, inclusive of expenses and a final working capital payment of $7.4. The payment consisted of cash and
669,750 shares of Arch common stock which was valued at $15.7. The fair value of the common stock issued was determined based on the average market price of Archs common stock over the 2-day period before and after the terms of the acquisition
were agreed to and announced, including a discount due to the fact that the shares contain certain restrictions that limit their immediate marketability. The shares issued may not be transferred without being registered under the Securities Act of
1933, as amended, or pursuant to an exemption from such registration. Generally speaking, the Company has granted Avecia, Inc. and its affiliates piggyback registration rights in certain circumstances in connection with the shares if the Company
were to file a registration statement for the issuance of shares. The purchase price is further subject to a contingent payment of up to $5.0 in cash based upon earnings attributable to North American sales of certain acquired products. In addition,
to the extent that any unfunded pension liability in the U.K. pension plan is less than $10.0, the purchase price would be adjusted upwards by the difference between $10.0 and the unfunded liability, with the consideration to be split equally
between a contingent cash payment and up to 223,250 additional shares of Arch common stock. The contingent cash payment will be earned based upon cumulative global net sales of certain acquired products through 2005. The acquisition was financed
principally from borrowings under the Companys revolving credit facility.



The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining third-party valuations of certain
intangible assets; thus, the allocation of the purchase price is preliminary and subject to refinement.



|                          |  |                  |      
|------------------------- |  | ---------------- | -----
|                          |  | At April 2, 2004
|Current Assets            |  | $                | 60.0 
|Property and equipment    |  |                  | 38.8 
|Intangible Assets         |  |                  | 96.8 
|Goodwill                  |  |                  | 69.9 
|                          |  |                  |      
|Total assets acquired     |  |                  | 265.5
|Current Liabilities       |  |                  | 23.7 
|Long-term liabilities     |  |                  | 10.2 
|                          |  |                  |      
|Total liabilities assumed |  |                  | 33.9 
|                          |  |                  |      
|Net assets acquired       |  | $                | 231.6
|                          |  |                  |      



Included in the
current liabilities in the opening balance sheet is an accrual for $4.6 for headcount reductions at the U.S. and U.K. locations and office closure costs in the U.S. As of September 30, 2004, $1.9 in payments have been made. The major actions of
these plans should be completed by the end of the year.



15



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



The intangible assets and goodwill identified in the table above reflect the preliminary allocation
of the excess of the acquisition cost over the fair value of the assets and liabilities under the purchase method of accounting for the Avecia acquisition. The estimate of fair values is preliminary, and is subject to change upon receipt of the
final results of an appraisal of the fair value of the assets and liabilities of Avecia, as well as identification of certain intangible assets.



Of the $96.8 of acquired intangible assets, $14.4 was assigned to tradenames and $32.5 was assigned to developed technology, both intangible assets are
not subject to amortization as they have been preliminarily estimated to have indefinite lives. The remaining $49.9 of acquired intangible assets have a preliminary weighted average useful life of approximately 14 years. The intangible assets that
make up that amount include customer lists of $32.8 (14-year weighted-average useful life), a toxicology database of $16.7 (15-year life) and a non-compete agreement of $0.4 (5-year life).



The $69.9 of goodwill was assigned to pool & spa and protection &
hygiene businesses in the amounts of $28.9 and $41.0 respectively.



Supplemental Pro Forma Information



The table
below presents unaudited pro forma financial information in connection with the Avecia acquisition as if it had occurred on January 1, 2003. This unaudited pro forma financial information reflects the preliminary allocation of the excess of the
acquisition cost over the fair value of the assets and liabilities under the purchase method of accounting for the Avecia acquisition. The estimate of fair values is preliminary, and is subject to change upon receipt of the final results of an
appraisal of the fair value of the assets and liabilities of Avecia, as well as identification of certain intangible assets. The final determination of these fair values, which is anticipated by the end of 2004, could result in purchase accounting
adjustments, which may impact the Companys results of operations and financial position.



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



The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the acquisition had been completed at the
dates indicated. The information does not necessarily indicate the future operating results or financial position of the Company. The Avecia pool & spa business is seasonal in nature as its products are primarily used in the U.S.
residential pool market. Therefore, the results of Avecia for the nine months ended September 30, 2004, are not necessarily indicative of the results to be expected for the entire fiscal year



|                                                                                |  |                                 |         |      |   |      
|------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | -----
|                                                                                |  | Nine Months Ended September 30,
|                                                                                |  | 2004                            |         | 2003
|Sales                                                                           |  | $                               | 1,037.3 |      | $ | 903.7
|Income from continuing operations before cumulative effect of accounting change |  |                                 | 36.7    |      |   | 23.6 
|Net Income                                                                      |  |                                 | 36.5    |      |   | 36.3 
|Basic income per common share                                                   |  |                                 |         |      |   |      
|Continuing operations before cumulative effect of accounting change             |  | $                               | 1.57    |      | $ | 1.01 
|Net Income                                                                      |  | $                               | 1.56    |      | $ | 1.56 
|Diluted income per common share                                                 |  |                                 |         |      |   |      
|Continuing operations before cumulative effect of accounting change             |  | $                               | 1.55    |      | $ | 1.01 
|Net Income                                                                      |  | $                               | 1.54    |      | $ | 1.56 



16



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



17. Government Contracts



Hydrazine Propellants Supply Contract



The Company was notified by the U.S. Defense Energy Support Center (DESC) that it had not been awarded the 10-year hydrazine propellant supply
contract which the Company had anticipated receiving. The Company had a debriefing with the DESC and submitted a formal protest of the award. In July 2004, the U.S. Government Accountability Office (GAO) informed Arch and the DESC that
the GAO will sustain the Companys formal protest of the DESCs recent decision to award the governments next 10-year hydrazine propellant supply contract to a competing firm. As a result of the GAOs decision, the DESC has
notified the Company that it has taken corrective action by re-opening the bidding process. The closing date with price proposals has been extended to December 10, 2004, and the DESC anticipates completing its contract-award decision soon
thereafter.



For 2003 and 2002, sales and operating income for
the hydrazine business were $34.0 and $42.0, and $2.1 and $5.6, respectively. Of these historical sales, approximately $22.1 and $24.0 related to the previous propellant supply agreement that expired on April 30, 2004.



The hydrazine business as a whole is not core to the Companys
portfolio, is not a growth business and has been managed for cash for several years. As of September 30, the Company reassessed the potential impairment of its entire hydrazine business, which consists of a hydrazine propellant and a hydrazine
hydrate product line, as a result of the original DESC decision. This assessment was based upon a weighted average probability of cash flows, which included an estimate of obtaining the new contract. As a result of such reassessments at September
30, 2004, the Company did not incur an impairment charge but has incurred severance costs in connection with headcount reductions at the Lake Charles, Louisiana manufacturing facility.



If the Company ultimately does not win the contract as a result of re-opening the bidding process, the Company estimates the
potential one-time pre-tax charge related to these decisions to be the following:



The Company may incur a non-cash impairment charge for the long-lived assets of the hydrazine business in the fourth quarter of 2004. As of September 30, 2004, the estimate of the amount of the impairment would be
approximately $13, including the assets associated with the propellants product line. In addition, the Company may incur cash costs for shutdown and the present value of certain presumed contractual obligations that are assumed to no longer have any
benefit to the Company. (Such annual contractual payments are approximately $2.3 through 2011.) The estimated amount of the pre-tax cash charge resulting from these costs is approximately $15. These one-time cash costs are expected to be more than
offset by payments to be received from the U.S. Government upon the shut down of the Lake Charles, LA and McIntosh, AL propellants facilities. The present values of such payments are approximately $19. The projected annual cash flows relating to
these decisions are estimated to be the following over the next four years and beyond:



|                         |  |      |      |   |      |   |      |      |  |   |            |   |  |   |      |  
|------------------------ |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---------- | - |  | - | ---- | -
|                         |  | 2005 |      |   | 2006 |   |      | 2007 |  |   | Thereafter |  
|Cash Inflow (Outflow)    |  |      |      |   |      |   |      |      |  |   |            |   |  |   |      |  
|Contractual obligations  |  | $    | (2.3 | ) |      | $ | (2.3 | )    |  | $ | (2.3       | ) |  | $ | (9.2 | )
|Shutdown costs           |  |      | (1.0 | ) |      |   |     |      |  |   | (2.0       | ) |  |   |     |  
|                         |  |      |      |   |      |   |      |      |  |   |            |   |  |   |      |  
|Sub-total                |  |      | (3.3 | ) |      |   | (2.3 | )    |  |   | (4.3       | ) |  |   | (9.2 | )
|U.S. government receipts |  |      | 8.5  |   |      |   |     |      |  |   | 13.5       |   |  |   |     |  
|                         |  |      |      |   |      |   |      |      |  |   |            |   |  |   |      |  
|Net Cash Flows           |  | $    | 5.2  |   |      | $ | (2.3 | )    |  | $ | 9.2        |   |  | $ | (9.2 | )



The net aggregate
pre-tax charge for one-time items, including the restructuring charge of $2.1 taken in the second quarter, is expected to be approximately $11, net of the payments to be received from the U.S. Government.



17



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##### Table of Contents

ARCH CHEMICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

($ in millions, except share amounts)



The 35-month contract secured in November 2003 for storage and distribution services of the
DESCs hydrazine-based propellants products, valued at $4.3, is not affected by its decision nor is the award in February 2004 to the Company of the $11.9 million Ultra PureTMhydrazine 25-month supply contract. Although the Company does not currently manufacture hydrazine, it will continue to manufacture and sell Ultra
PureTMhydrazine from existing hydrazine inventory and proprietary blends using hydrazine sourced through third
party producers.



18. Subsequent Event



Sale of the Microelectronic Materials Business:



On October 25, 2004, the Company signed a definitive agreement to sell the
majority of the operations of its Microelectronic Materials business to Fuji Photo Film Co., Ltd. for approximately $160 million. The transaction, which is expected to close by the end of the year, is subject to regulatory approvals and other
customary closing conditions. The transaction sales price is subject to a final post-closing working capital adjustment.



The transaction includes the Companys microelectronics manufacturing facilities and research and development facilities located in North America,
Europe and Asia, and its 49 percent ownership of FUJIFILM Arch Co., Ltd., the Companys joint venture with Fuji Photo Film Co., Ltd. in Japan. These facilities manufacture and supply a wide range of products, which includes photoresists,
formulated products, polyimides and thin film systems, to semiconductor manufacturers and to flat panel display manufacturers throughout the world. Arch will retain its 50 percent interest in Planar Solutions, LLC, the Companys joint venture
with Wacker Chemical Corporation for the production and sale of chemical mechanical planarization (CMP) slurries, the microelectronics-dedicated manufacturing facility in Brandenburg, Kentucky and the chemical management services business
(CMS). The Company will pursue all strategic options for its CMS business, including its sale. Sales of the CMS business in 2003 were approximately $10 million. The Company will continue to supply certain products for a transition period
to the Microelectronic Materials business from its Brandenburg, Kentucky facility.



The Microelectronic Materials businesses to be sold had sales of approximately $135 million in 2003, earnings before interest and taxes of $1.9 million (including allocation of corporate charges), depreciation and
amortization of $11.6 million and capital spending of $2.9 million. Equity in earnings and cash dividends from the Companys FUJIFILM Arch Co., Ltd. joint venture were $6.1 million and $2.0 million, respectively, in 2003. For the nine months
ended September 30, 2004, the Microelectronic Materials businesses to be sold had sales of approximately $110 million, earnings before interest and taxes of $9.2 million (including the allocation of corporate charges), depreciation and amortization
of $7.5 million and capital spending of $1.1 million. Equity in earnings and cash dividends from the Companys FUJIFILM Arch Co., Ltd. joint venture were $10.3 million and $4.4 million, respectively. The estimated proceeds from the divestiture
will be principally used to pay down debt. The Boards of Directors of both companies have approved the agreement.



Hickson organics:



A post-closing working capital adjustment related to the previously sold Hickson organics business of $4.4 was owed to the Company, of which $3.4 was
disputed by the purchaser of the business. On October 26, 2004, the Company received a final determination of the working capital adjustment from an independent third party appointed by the Company and the purchaser. The independent third party
ruled in favor of the Company in an amount of $2.8 related to the disputed amount of $3.4. As a result, the difference of $0.6 has been recorded as a component of loss from the sale of discontinued operations during the third quarter. The remaining
balance due from this post-closing working capital adjustment of $3.8 is included in Accounts receivable, net in the condensed consolidated financial statements as of September 30, 2004. On November 3, 2004, the Company received approximately $2.1
of the post-closing working capital adjustment. The remaining payment will be received during the fourth quarter of 2004.



18



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##### Table of Contents



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



Overview



In analyzing the results of operations for the Company and its segments, the following matters should be considered. The Companys treatment products
segment is seasonal in nature, in particular the HTH water products business. Historically, approximately 40 - 50 percent of the sales in the HTH water products business occur in the second quarter of the fiscal year, as retail sales in the U.S.
residential pool market are concentrated between Memorial Day and the Fourth of July. Accordingly, results of operations for the periods presented are not necessarily indicative of the results to be expected for an entire fiscal year. Segment
operating income includes the equity in earnings of affiliated companies and excludes restructuring and certain unallocated expenses of the corporate headquarters.



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



Results of Operations



Consolidated



|                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                            |  | Three MonthsEnded September 30, |       |   | Nine MonthsEnded September 30, |  
|(In millions, except per share amounts)                     |  | 2004                            |       |   | 2003                           |   |       | 2004 |  |   | 2003  |  
|Sales                                                       |  | $                               | 316.7 |   |                                | $ | 256.2 |      |  | $ | 998.2 |   |  | $ | 789.0 |  
|                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Gross Margin                                                |  | $                               | 85.3  |   |                                | $ | 73.4  |      |  | $ | 285.5 |   |  | $ | 228.6 |  
|Selling and Administration                                  |  |                                 | 68.3  |   |                                |   | 66.0  |      |  |   | 209.7 |   |  |   | 181.2 |  
|Research and Development                                    |  |                                 | 6.2   |   |                                |   | 5.8   |      |  |   | 19.3  |   |  |   | 17.4  |  
|Equity in (Earnings) of Affiliated Companies                |  |                                 | (5.0  | ) |                                |   | (3.4  | )    |  |   | (13.3 | ) |  |   | (7.5  | )
|Other (Gains) and Losses                                    |  |                                 | 1.5   |   |                                |   | (2.5  | )    |  |   | 1.2   |   |  |   | (2.5  | )
|Restructuring                                               |  |                                 |      |   |                                |   |      |      |  |   | 1.7   |   |  |   | 0.6   |  
|Interest Expense, net                                       |  |                                 | 5.3   |   |                                |   | 4.2   |      |  |   | 14.6  |   |  |   | 12.6  |  
|Income Tax Expense                                          |  |                                 | 3.2   |   |                                |   | 1.2   |      |  |   | 18.3  |   |  |   | 9.6   |  
|Income (Loss) from Discontinued Operations, net of tax      |  |                                 |      |   |                                |   | 0.6   |      |  |   |      |   |  |   | (1.8  | )
|Gain (Loss) on Sales of Discontinued Operations, net of tax |  |                                 | (0.2  | ) |                                |   | 15.0  |      |  |   | (0.2  | ) |  |   | 15.0  |  
|Cumulative Effect of Accounting Change, net of tax          |  |                                 |      |   |                                |   |      |      |  |   |      |   |  |   | (0.4  | )
|                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Net Income                                                  |  | $                               | 5.6   |   |                                | $ | 17.7  |      |  | $ | 33.8  |   |  | $ | 30.0  |  
|                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Diluted Income Per Common Share                             |  | $                               | 0.24  |   |                                | $ | 0.78  |      |  | $ | 1.44  |   |  | $ | 1.32  |  
|                                                            |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  



19



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##### Table of Contents

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



Three Months Ended September 30, 2004 Compared to 2003



Sales increased $60.5 million, or approximately 24 percent, due in part to
the acquisitions of Avecias pool & spa and protection & hygiene businesses and Aquachlor (acquisitions) ($34.2 million or approximately 13 percent). Excluding the acquisitions, sales increased $26.3 million or approximately
11 percent, principally due to higher volumes (approximately nine percent). Favorable foreign exchange (approximately three percent) was partially offset by lower pricing (approximately one percent). Sales volumes were higher in the wood protection
business due to the addition of new customers and favorable product mix as higher volumes of Wolman® E and Tanalith® E (CCA-alternative products) and moldecides more than offset lower volumes of traditional CCA products. Sales volumes also increased in the industrial biocides business as a result of strong demand for biocides used in
building products, antidandruff shampoos and marine antifouling paints. The sales increase attributable to the favorable effect of foreign exchange was principally in the industrial coatings and HTH water products businesses. The lower pricing was
principally in the water products and microelectronic materials businesses.



Gross margin percentage was 26.9% and 28.6% for 2004 and 2003, respectively. The change in gross margin percentage attributable to acquisitions was 1.0%. Excluding the impact of acquisitions, gross margin percentage
was 25.9% in 2004. The decrease in margin percentage was primarily a result of higher raw material costs and lower pricing in the HTH water products business and lower propellant sales in the hydrazine business as a result of the expiration of the
government contract.



Selling and administration expenses as a
percentage of sales decreased to 21.6% in 2004 from 25.8% in 2003. Excluding the impact of acquisitions, selling and administration expenses as a percentage of sales were 20.8% in 2004. Selling and administration expenses increased in amount by $2.3
million. Excluding the impact of acquisitions ($9.3 million), selling and administration expenses decreased $7.0 million primarily due to the recognition of the balance of a $6.1 million settlement of a favorable judgment obtained earlier this year
against a former owner of an acquired company in the personal care business ($3.1 million). In addition, lower legal-related expenses in the personal care, wood protection and water products businesses, approximately $3 million, were slightly offset
by higher company-wide compensation and audit expenses. Included in the selling and administration expenses is an additional $0.9 million of amortization expense due to the preliminary identification of intangible assets acquired as part of the
acquisition of the Avecia pool & spa and protection & hygiene businesses.



Research and development expenses were comparable to 2003 primarily due to cost reduction initiatives in the microelectronic materials segment, which were more then offset by increased spending in the treatment
products segment due to the acquired protection & hygiene business



Equity in earnings of affiliated companies increased $1.6 million due to favorable operating results of the FUJIFILM Arch joint venture. The increase in income from the Companys FUJIFILM Arch joint venture was principally driven by
higher sales of advanced semiconductor and liquid crystal display products and stronger Asian demand.



Other (gains) and losses in 2004 includes a charge for a Brazilian state import tax claim of $2.1 million in the performance urethanes, water products and
hydrazine businesses, slightly offset by the pre-tax gain on the sale of a building of $0.6 million in the personal care business. Other (gains) and losses in 2003 represents the pre-tax gain on the sale of excess land of $2.5 million.



Interest expense, net increased $1.1 million due to the higher debt levels
as a result of the purchase of Avecias pool & spa and protection & hygiene businesses which were partially offset by the lower effective interest rates.



The tax rate on income from continuing operations for the three months ended September 30, 2004 and 2003 was 35% and 36%,
respectively.



Loss from discontinued operations, net of tax,
in 2003 reflects the results of operations and allocated interest expense of the Hickson organics Castleford business through August 11, 2003.



20



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##### Table of Contents

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



Loss on sale of discontinued operations, net of tax, in 2004 reflects the write-off of a portion of
the post-closing working capital adjustment related to the previously sold Hickson organics business and associated legal expenses. This was partially offset by a state tax refund associated with the sale of the sulfuric acid business.



Gain on sale of discontinued operations, net of tax, in 2003 includes the
after-tax gain of $16.5 million on the sale of substantially all the net assets of the Companys sulfuric acid business. Also included in the gain on sale of discontinued operations is the after-tax loss of $1.5 million on the sale of the
Companys Hickson organics operations in Castleford, England.



Nine Months Ended September 30, 2004 Compared to 2003



Sales increased $209.2 million, or approximately 26 percent, due in part to the acquisitions ($97.1 million or approximately 12 percent). Excluding the acquisitions, sales increased $112.1 million or approximately 14
percent due to increased volumes (approximately 13 percent) primarily in the wood protection, industrial biocides and microelectronic materials businesses. Favorable foreign exchange (approximately three percent) was offset by lower pricing
(approximately two percent). The favorable effect of foreign exchange was principally in the industrial coatings and HTH water products businesses and the lower pricing was principally in the HTH water products, wood protection and microelectronic
materials businesses.



Gross margin percentage was 28.6% and
29.0% for 2004 and 2003, respectively. The increase in gross margin percentage attributable to acquisitions was 0.7%. Excluding the impact of acquisitions, gross margin percentage was 27.9% in 2004. The decrease in margin percentage from 2003 was
primarily a result of lower propellant sales in the hydrazine business as a result of the expiration of the government contract and higher raw material and energy costs in the wood protection and the performance urethanes businesses. The decrease
was partially offset by increased sales volumes for the industrial biocides business.



Selling and administration expenses as a percentage of sales decreased to 21.0% in 2004 from 23.0% in 2003. Excluding the impact of acquisitions, selling and administration expenses as a percentage of sales were 20.9%
in 2004. These expenses increased by $28.5 million primarily due to acquisitions ($21.3 million). Excluding the impact of acquisitions, selling and administration expenses increased $7.2 million due to the unfavorable foreign exchange, approximately
$6 million, higher company-wide insurance, compensation and audit expenses and higher costs associated with converting customers to CCA-alternative preservatives in the wood treatment business. These factors were partially offset by lower legal
expenses in the personal care and wood protection businesses of approximately $4 million, slightly offset by higher self-insurance reserves for HTH water products business of approximately $2 million. The personal care business also benefited from
the recognition of a $6.1 million settlement of a favorable judgment obtained earlier this year against a former owner of an acquired company, which was offset by higher self-insurance reserves for HTH water products. Included in selling and
administration expense is $1.8 million of amortization expense due to the acquisition of Avecias pool & spa and protection & hygiene businesses.



Research and development expenses increased $1.9 million primarily due to the acquired protection & hygiene business.



Equity in earnings of affiliated companies increased $5.8 million principally
due to favorable operating results of the FUJIFILM Arch joint venture, partially offset by lower operating results of the Nordesclor joint venture. The increase in income from the Companys FUJIFILM Arch joint venture was principally driven by
higher sales of advanced semiconductor and liquid crystal display products, stronger Asian demand and, to a lesser extent, from a lower than anticipated effective tax rate for its most recently completed fiscal year.



Other (gains) and losses in 2004 includes a charge for a Brazilian state
import tax claim of $2.1 million in the performance urethanes, water products and hydrazine businesses, offset by the pre-tax gain of $0.9 million on the sale of a building in the personal care business and excess land principally in the
microelectronic materials business. Other (gains) and losses in 2003 represents the pre-tax gain on the sale of excess land of $2.5 million.



Restructuring expense of $1.7 million in 2004 includes $2.1 million for severance costs related to headcount reductions in the hydrazine business due to
the expiration of the government contract, offset by a reduction of $0.4 million of prior year restructuring reserves. Restructuring in 2003 includes $1.4 million of



21



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##### Table of Contents

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



severance costs for additional headcount reductions associated with the performance products segment, a $1.1 million revision to the 2002 restructuring
program, offset by a reduction of the prior years restructuring reserves of $1.9 million due to revisions to previous plans estimates.



Interest expense, net increased $2.0 million due to the higher debt levels as a result of the purchase of Avecias pool & spa and protection
& hygiene businesses which were partially offset by the lower effective interest rates.



The tax rate on income from continuing operations for the nine months ended September 30, 2004 and 2003 was 35% and 36%, respectively.



Loss from discontinued operations, net of tax, in 2003 reflects the results of operations and allocated interest expense of
the Hickson organics Castleford business through August 11, 2003, as well as the results of the sulfuric acid business through June 30, 2003.



Loss on sales of discontinued operations, net of tax, in 2004 reflects the write-off of a portion of the post-closing working capital adjustment related
to the previously sold Hickson organics business and associated legal expenses. This was partially offset by a state tax refund associated with the sale of the sulfuric acid business.



Gain on sales of discontinued operations, net of tax, in 2003 includes the after-tax gain of $16.5 million on the sale of
substantially all the net assets of the Companys sulfuric acid business. Also included in the gain on sale of discontinued operations is the after-tax loss of $1.5 million on the sale of the Companys Hickson organics operations in
Castleford, England.



Fourth Quarter and Full Year
Outlook



The Companys guidance assumes a full
quarter of results from our Microelectronic businesses and prior to reclassification of its results as a discontinued business. After reclassification of these businesses as discontinued operations, the effective tax rate for continuing operations
will increase due to the absence of the favorable tax impact for equity earnings from the FUJIFILM-Arch joint venture.



For the full-year 2004, sales are expected to increase approximately 22 to 24 percent over 2003. Earnings from continuing operations before restructuring
are expected to be at the low end of our previous guidance of $1.15 to $1.25 per share range. This guidance reflects the $2.1 million charge for a Brazilian import tax claim recorded in the third quarter, as well as continuing increases in raw
material and energy costs. Depreciation and amortization is estimated to be approximately $60 million. Capital spending is anticipated to be in the $20 to $25 million range, compared to the Companys previous guidance of $25 to $30 million
range.



Traditionally, Archs fourth quarter is the
weakest due to the seasonality of its Treatment Products businesses, principally HTH water products. The Company anticipates the loss from continuing operations in the fourth quarter 2004 to be in the $0.24 to $0.34 per share range, compared to a
loss of $0.09, which included restructuring income of $0.03 per share, for the prior-year quarter. This guidance includes the adverse impact caused by the continuing increases in raw material costs, particularly copper in the wood protection
business, propylene in the performance urethanes business and chlorine in the HTH water products business. Furthermore, in light of the U.S. Defense Energy Support Center (DESC) decision to re-bid the next long-term hydrazine propellant
supply contract, the Company continues to assume that there will be no impairment and, as a result, depreciation and certain other costs will continue. The impact on pre-tax earnings is approximately $1.5 million for the fourth quarter of 2004.



The Company was notified by the DESC that it had not been
awarded the 10-year hydrazine propellant supply contract which the Company had anticipated receiving. The Company had a debriefing with the DESC and submitted a formal protest of the award. In July, 2004, the U.S. Government Accountability Office
(GAO) informed Arch and the DESC that the GAO will sustain Archs formal protest of the DESCs recent decision to award the governments next 10-year hydrazine propellant supply contract to a competing firm. As a result of
the GAOs decision, the DESC has notified the Company that it has taken corrective action by re-opening the bidding process. The closing date for initial offers has been extended until December 10, 2004, and the DESC anticipates completing its
contract-award decision shortly thereafter. The hydrazine business consists of a hydrazine propellant and a hydrazine hydrate product line. For 2003 and 2002, sales and



22



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##### Table of Contents

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



operating income for the hydrazine business were $34.0 million and $42.0 million, and $2.1 million and $5.6 million, respectively. Of these historical sales,
approximately $22.1 million and $24.0 million, related to the previous propellant supply agreement that expired April 30, 2004.



The hydrazine business as a whole is not core to the Companys portfolio, is not a growth business and has been managed for cash for several years.
In light of this and because of the DESCs decision, the Company is also assessing the potential impairment of its entire hydrazine business. In connection with that assessment, the Company, among other things, may decide to downsize or
possibly shut down all or part of its hydrazine manufacturing facilities.



The Company may incur a non-cash impairment charge for the long-lived assets of the hydrazine business. The estimate of the amount of the impairment is approximately $13.0 million, including the assets associated with
the propellants product line. In addition, the Company may incur cash costs for shutdown and the present value of certain presumed contractual obligations that are assumed to no longer have any benefit to the Company. (Such annual contractual
payments are approximately $2.3 million through 2011.) The estimated amount of the pre-tax cash charge resulting from these costs is approximately $15 million. These one-time cash costs are expected to be more then offset by payments to be received
from the U.S. Government upon the shut down of the Lake Charles, LA and McIntosh, AL propellants facilities. The present values of such payments are approximately $19.0 million.



The net aggregate pre-tax charge for one-time items, including the restructuring charge of $2.1 taken in the second quarter,
is expected to be approximately $11 million, net of the payments to be received from the U.S. Government.



The 35-month contract secured in November 2003 for storage and distribution services of the DESCs hydrazine-based propellants products, valued at
$4.3 million, is not affected by its decision nor is the award in February 2004 to the Company of the $11.9 million Ultra PureTMhydrazine 25-month supply contract. Although the Company does not currently manufacture hydrazine, it will continue to manufacture and sell Ultra PureTMhydrazine from existing hydrazine inventory and proprietary blends using hydrazine sourced through third party producers.



Segment Information



The Company has organized its business portfolio into three operating
segments to reflect the Companys business strategy. The three segments are treatment products, microelectronic materials 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. The performance products segment includes the performance urethanes and hydrazine businesses. The recently acquired Avecia pool
& spa business is included in the results of the HTH water products business and the Avecia protection & hygiene business is included in the results of the personal care and industrial biocides business. The following compares segment sales
and operating income for the three and nine months ended September 30, 2004 and 2003 (including equity in earnings of affiliated companies and excluding restructuring and certain unallocated expenses of the corporate headquarters):



Treatment Products



|                                      |  |                                 |       |   |                                |   |       |      |  |      |       |  |   |      
|------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | ---- | ----- |  | - | -----
|                                      |  | Three MonthsEnded September 30, |       |   | Nine MonthsEnded September 30,
|                                      |  | 2004                            |       |   | 2003                           |   |       | 2004 |  | 2003
|                                      |  | ($ in millions)                
|Results of Operations:                |  |                                 |       |   |                                |   |       |      |  |      |       |  |   |      
|Sales                                 |  |                                 |       |   |                                |   |       |      |  |      |       |  |   |      
|HTH Water Products                    |  | $                               | 83.0  |   |                                | $ | 75.4  |      |  | $    | 315.5 |  | $ | 250.5
|Personal Care & Industrial Biocides   |  |                                 | 65.5  |   |                                |   | 37.1  |      |  |      | 172.9 |  |   | 112.9
|Wood Protection & Industrial Coatings |  |                                 | 86.2  |   |                                |   | 68.1  |      |  |      | 267.8 |  |   | 200.1
|                                      |  |                                 |       |   |                                |   |       |      |  |      |       |  |   |      
|Total Treatment Products              |  | $                               | 234.7 |   |                                | $ | 180.6 |      |  | $    | 756.2 |  | $ | 563.5
|                                      |  |                                 |       |   |                                |   |       |      |  |      |       |  |   |      
|Operating Income (Loss)               |  |                                 |       |   |                                |   |       |      |  |      |       |  |   |      
|HTH Water Products                    |  | $                               | (6.7  | ) |                                | $ | (0.8  | )    |  | $    | 24.1  |  | $ | 20.7 
|Personal Care & Industrial Biocides   |  |                                 | 17.2  |   |                                |   | 7.2   |      |  |      | 38.8  |  |   | 22.1 
|Wood Protection & Industrial Coatings |  |                                 | 7.3   |   |                                |   | 4.1   |      |  |      | 21.4  |  |   | 10.4 
|                                      |  |                                 |       |   |                                |   |       |      |  |      |       |  |   |      
|Total Treatment Products              |  | $                               | 17.8  |   |                                | $ | 10.5  |      |  | $    | 84.3  |  | $ | 53.2 
|                                      |  |                                 |       |   |                                |   |       |      |  |      |       |  |   |      



23



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##### Table of Contents

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



Three Months Ended September 30, 2004 Compared to 2003



Sales increased approximately 30 percent and operating income increased by
$7.3 million. The increase in sales is due to the acquisitions (approximately 19 percent), higher volumes and favorable product mix (approximately nine percent). Favorable foreign currency rates (approximately four percent) were more then offset by
lower pricing (approximately two percent).



HTH Water
Products



Sales increased $7.6 million, or
approximately 10 percent, and operating results decreased $5.9 million. Sales increased $12.9 million, or approximately 17 percent, due to acquisitions of Avecias pool & spa business and Aquachlor. Excluding the impact of acquisitions,
sales decreased approximately seven percent due to lower volumes (approximately seven percent) in the European and North American residential swimming pool market. Lower pricing (approximately three percent), primarily for branded chlorinated
isocyanurates (Pace®), was offset by favorable
foreign currency rates (approximately three percent). The lower volumes in Europe resulted from unfavorable weather conditions throughout Europe and increased competition in France. The lower North American sales resulted from unfavorable weather
conditions that led to lower pool maintenance products and accessory volumes, partially offset by higher non-branded calcium hypochlorite volumes. Operating loss increased by $5.9 million as favorable foreign currency rates were more than offset by
lower sales excluding acquisitions, higher raw material costs, increased selling and advertising expenses for pool dealer integration initiatives and the modest negative contribution from the acquisition of Avecias pool & spa business.



Personal Care and Industrial Biocides



Sales increased $28.4 million, or approximately 77
percent, and operating income increased $10.0 million. The increase in sales is partially due to the acquisition of Avecias protection and hygiene business ($21.3 million), increased international volumes for personal care intermediate
products and continued strong demand for biocides used in building products, antidandruff shampoos and marine antifouling paints. Excluding the impact of the acquisition, sales increased approximately 19 percent from the year-ago period. The
increase in operating income is a result of the higher sales, the positive contribution from the acquisition and lower legal expenses, which were partially offset by higher selling and administration costs to support growth initiatives. In addition,
this quarters operating results benefited ($3.1 million) from the recognition of the balance of a $6.1 million settlement of a favorable judgment obtained earlier this year against a former owner of an acquired company and from a gain on the
sale of a building ($0.6 million).



Wood Protection &
Industrial Coatings



Sales increased $18.1 million, or
approximately 27 percent, and operating income increased $3.2 million. The increase in sales is principally due to favorable product mix, as higher volumes of Wolman® E, Tanalith® E (CCA-alternative products) and moldecides more than offset lower volumes of traditional CCA products. Sales also increased from the addition of new
customers in the wood protection business and higher industrial coatings sales due to favorable foreign exchange. The improvement in product mix is a result of the transition to a new generation of wood preservatives for use in the residential
market, driven by the voluntary withdrawal in the U.S. by wood treatment manufacturers of their CCA registrations for non-industrial uses as of December 31, 2003. The improvement in operating income over the prior year is due to the higher sales
volumes, lower CCA legal costs and favorable foreign currency, partially offset by higher raw material costs.



24



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##### Table of Contents

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



Nine Months Ended September 30, 2004 Compared to 2003



Sales increased approximately 34 percent and operating income increased
$31.1 million. The increase in sales is due to the acquisitions (approximately 17 percent), higher volumes and favorable product mix (approximately 16 percent). Favorable foreign exchange (approximately four percent) was offset by lower pricing
(approximately three percent).



HTH Water
Products



Sales increased $65.0 million, or
approximately 26 percent, and operating income increased $3.4 million, of which $53.8 million, or approximately 21 percent, is due to acquisitions of Avecias pool & spa business and Aquachlor. Excluding the impact of acquisitions, sales
increased approximately five percent due principally to higher volumes (approximately five percent). The favorable foreign currency rates (approximately three percent) was offset by lower pricing (approximately three percent). The higher volumes
were attributable to higher North American residential swimming pool volumes, which include branded calcium hypochlorite (HTH®and J3), pool maintenance products and accessories and non-branded calcium hypochlorite. The lower pricing is principally due to lower prices for branded chlorinated isocyanurates (Pace®). Operating income increased 16 percent as a result of the higher sales volumes and the positive
contributions of the acquisitions partially offset by higher raw material costs as well as lower operating results of the Nordeschlor joint venture of $0.8 million.



Personal Care and Industrial Biocides



Sales increased $60.0 million, or approximately 53 percent, and operating income increased $16.7 million. The sales increase
is primarily due to the acquisition of Avecias protection and hygiene business ($43.3 million). Excluding the impact of the acquisition, sales increased approximately 15 percent due principally to higher volumes (approximately 17 percent) and
favorable foreign currency rates (approximately two percent), partially offset by lower pricing (approximately four percent) for antidandruff products. The higher volumes are attributable to strong demand for biocides used in building products,
antidandruff shampoos and marine antifouling paints. The increase in operating income is a result of the higher sales, lower legal expenses and the positive contribution from the acquisition, which were partially offset by higher selling and
administration costs to support growth initiatives. In addition, the operating results benefited from a $6.1 million settlement of a favorable judgment obtained earlier this year against a former owner of an acquired company.



Wood Protection & Industrial Coatings



Sales increased $67.7 million, or approximately 34 percent, primarily due to
higher volumes (approximately 29 percent) and favorable foreign currency exchange rates (approximately eight percent) for both businesses, partially offset by lower prices (approximately three percent). The increase in volumes is due to the addition
of new customers and favorable product mix as higher volumes of Wolman® E, Tanalith® E
(CCA-alternative products) and moldecides more than offset lower volumes of traditional CCA products. This improvement in product mix is a result of the transition to a new generation of wood preservatives for use in the residential market, driven
by the voluntary withdrawal in the U.S. by wood treatment manufacturers of their CCA registrations for non-industrial uses as of December 31, 2003. The increase in volumes was slightly offset by lower pricing on the Wolman® E product line compared to 2003. Operating income
increased $11.0 million over the prior year due to higher sales, lower legal expenses and favorable foreign currency, partially offset by higher raw material costs and increased costs associated with converting customers to CCA-alternative
preservatives.



Microelectronic Materials



|                      |  |                                  |      |                                |   |      |  |      |       |  |   |      
|--------------------- |  | -------------------------------- | ---- | ------------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                      |  | Three Months Ended September 30, |      | Nine MonthsEnded September 30,
|                      |  | 2004                             |      | 2003                           |   | 2004 |  | 2003
|                      |  | ($ in millions)                  |      | ($ in millions)               
|Results of Operations |  |                                  |      |                                |   |      |  |      |       |  |   |      
|Sales                 |  | $                                | 39.9 |                                | $ | 36.5 |  | $    | 119.1 |  | $ | 109.0
|Operating Income      |  |                                  | 5.0  |                                |   | 0.6  |  |      | 8.3   |  |   | 0.1  



25



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##### Table of Contents

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



Three Months Ended September 30, 2004 Compared to 2003



Sales increased $3.4 million, or approximately nine percent, as a result of
higher volumes (approximately 16 percent), favorable foreign exchange (approximately one percent), partially offset by lower prices (approximately eight percent). The increase in sales is principally due to higher photoresists demand in all regions,
partially offset by pricing pressure in certain ancillary and polyimides product lines. Operating income increased by $4.4 million as a result of the higher sales and improved operating results from the Companys FUJIFILM Arch joint venture,
partially offset by the unfavorable effects of foreign exchange.



Nine Months Ended September 30, 2004 Compared to 2003



Sales increased $10.1 million or approximately nine percent. The increase in sales is due to higher volumes (approximately 14 percent), favorable foreign exchange (approximately two percent), partially offset by lower
prices (approximately seven percent). Increased volumes for resist product lines across all regions were partially offset by pricing pressure in certain ancillary, polyimide and older generation resist product lines. Operating results improved as a
result of the improved operating results of the Companys FUJIFILM Arch joint venture, higher sales, favorable raw material pricing and lower legal costs. Lower selling and administration costs due to cost-reduction initiatives were partly
offset by the effect of unfavorable foreign exchange. Operating results of the FUJIFILM Arch joint venture increased due to significantly higher sales as a result of market share gain for advanced photoresists and new products introduced in Asia for
flat panel display applications.



Performance Products



|                           |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|-------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                           |  | Three MonthsEnded September 30, |      |   | Nine MonthsEnded September 30, |  
|                           |  | 2004                            |      |   | 2003                           |   |      | 2004 |  |   | 2003  |  
|                           |  | ($ in millions)                 |     
|Results of Operations      |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Sales                      |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Performance Urethanes      |  | $                               | 37.6 |   |                                | $ | 31.5 |      |  | $ | 103.6 |   |  | $ | 90.4  |  
|Hydrazine                  |  |                                 | 4.5  |   |                                |   | 7.6  |      |  |   | 19.3  |   |  |   | 26.1  |  
|                           |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Total Performance Products |  | $                               | 42.1 |   |                                | $ | 39.1 |      |  | $ | 122.9 |   |  | $ | 116.5 |  
|                           |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Operating Income (Loss)    |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Performance Urethanes      |  | $                               | (1.8 | ) |                                | $ | (2.0 | )    |  | $ | (6.9  | ) |  | $ | (5.9  | )
|Hydrazine                  |  |                                 | (1.3 | ) |                                |   | 0.3  |      |  |   | (1.1  | ) |  |   | 1.2   |  
|                           |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Total Performance Products |  | $                               | (3.1 | ) |                                | $ | (1.7 | )    |  | $ | (8.0  | ) |  | $ | (4.7  | )
|                           |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  



Three Months
Ended September 30, 2004 Compared to 2003



Sales
increased approximately eight percent and operating results decreased by $1.4 million.



Performance Urethanes



Performance urethanes sales increased approximately 19 percent over the prior year as a result of higher North American volumes due to stronger demand and improved pricing for glycol and specialty polyol products. Operating results improved
slightly as the higher sales and lower selling and administration expenses resulting from cost-reduction initiatives were mostly offset by higher raw material and energy costs as well as a charge for a Brazilian state import tax claim ($1.6
million). In addition, the 2003 results included a provision for bad debt expense related to the economic instability in Venezuela.



26



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##### Table of Contents

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



Hydrazine



Hydrazine sales decreased by $3.1 million, or approximately 41 percent. The lower sales were due to lower propellant
revenues as a result of the expiration of a long-term propellants supply contract with the U.S. government on April 30, 2004, partly offset by increased demand for Ultra PureTMHydrazine. Operating income was lower than prior year due to the lower hydrazine propellant revenues.



Nine Months Ended September 30, 2004 Compared to 2003



Performance Products sales increased $6.4 million and
the operating results decreased $3.3 million to an operating loss of $8.0 million in 2004.



Performance Urethanes



Performance urethanes sales increased approximately 15 percent principally due to higher prices (approximately 11 percent) and higher volumes (approximately four percent). The improved volume is due to stronger demand in Latin America
despite political instability in Venezuela, as well as improvement in the North American contract business and higher demand for North American specialty polyols. The higher pricing was principally due to the ability to pass on a portion of the
higher raw material costs to our customers. Operating results decreased $1.0 million as higher raw material and energy costs more then offset pricing increases. In addition, 2004 results include a charge for a Brazilian state import tax claim of
$1.6 million.



Hydrazine



Hydrazine sales decreased approximately 26 percent mainly due to lower
propellant revenues as a result of the expiration of a long-term propellants supply contract with the U.S. government on April 30, 2004, partly offset by increased demand for hydrazine hydrates and Ultra PureTMHydrazine. Operating income was lower due to the lower hydrazine propellant revenues.



Liquidity, Investment Activity and Other Financial Data



|                                                    |  |                                |        |   |      |   |       |  
|--------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ----- | -
|                                                    |  | Nine MonthsEnded September 30, |       
|                                                    |  | 2004                           |        |   | 2003 |  
|                                                    |  | ($ in millions)                |       
|Cash Flow Data                                      |  |                                |        |   |      |   |       |  
|Provided By (Used For)                              |  |                                |        |   |      |   |       |  
|Accounts Receivable Securitization Program          |  | $                              | 49.2   |   |      | $ | (33.5 | )
|Change in Working Capital                           |  |                                | (11.9  | ) |      |   | (13.5 | )
|Net Operating Activities from Continuing Operations |  |                                | 117.8  |   |      |   | 3.8   |  
|Capital Expenditures                                |  |                                | (13.5  | ) |      |   | (12.4 | )
|Business Acquired in Purchase Transaction           |  |                                | (215.9 | ) |      |   | (2.5  | )
|Proceeds from Sale of Businesses                    |  |                                |       |   |      |   | 61.5  |  
|Proceeds from Sales of Land                         |  |                                | 1.2    |   |      |   | 2.0   |  
|Net Investing Activities                            |  |                                | (228.4 | ) |      |   | 50.2  |  
|Debt Borrowing (Repayments)                         |  |                                | 93.1   |   |      |   | 0.4   |  
|Net Financing Activities                            |  |                                | 82.9   |   |      |   | (6.4  | )



Nine Months Ended September 30,
2004 Compared to 2003



For the nine months ended
September 30, 2004 and 2003, $117.8 million was provided by operating activities from continuing operations compared to $3.8 million, respectively. The increase in cash flow from operating activities is primarily due to the benefit of utilizing the
accounts receivable securitization program as of September 30, 2004 compared to the Company not utilizing the program as of September 30, 2003. In addition, the cash flow provided by operating activities as of September 30, 2004 was a result of
higher income from continuing operations for the nine months ended September 30, 2004. The use of cash for working capital for both periods is due to the seasonality of the business.



27



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##### Table of Contents

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



Capital expenditures for the first nine months of 2004 were comparable to 2003. Capital expenditures
for 2004 are expected to be in the $20 to $25 million range.



On April 2, 2004, the Company completed the acquisition of Avecias pool & spa and protection & hygiene businesses. The total purchase price, inclusive of expenses and net of cash acquired, was $231.6 million, consisting of
cash and the issuance of the Companys common stock with a value of $15.7 million. During the third quarter, the Company made a final working capital payment of $7.4 million. The purchase price is further subject to a contingent payment of up
to $5.0 million in cash based upon earnings attributable to North American sales of certain acquired products. In addition, to the extent that any unfunded pension liability in the U.K. pension plan is less than $10.0 million, the purchase price
would be adjusted upwards by the difference between $10.0 million and the unfunded liability, with the consideration to be split equally between a contingent cash payment and up to 223,250 additional shares of the Companys common stock. The
contingent cash payment will be earned based upon cumulative global net sales of certain acquired products through 2005. The acquisition was financed principally from borrowings under the Companys credit facility. For additional information
concerning the acquisition see the footnotes included in the 10-Q as well as the Form 8-K/A filed by the Company on June 16, 2004.



In 2004, the Company sold a building and excess land for cash proceeds of $1.2 million. In 2003, the Company sold excess land for total proceeds of $6.5
million. Proceeds consisted of cash of $2.0 million and a note of $4.5 million.



In February 2004, the Company funded rabbi trusts relating to three compensation deferral plans. During 2004, the trusts have purchased marketable securities of $1.9 million and Company stock of $2.4 million, which
are included in investing and financing activities, respectively.



Cash provided by financing activities in 2004 was primarily due to increased borrowings due to the acquisition of Avecias pool & spa and protection & hygiene businesses, this was partially offset by the dividends paid to
shareholders of $13.8 million during the first nine months of 2004.



Cash used by financing activities in 2003 was due to dividends paid to shareholders of $13.5 million during the first nine months of 2003, which was partially offset by cash proceeds from the termination of interest rate swap agreements of
$7.1 million, which represented the fair market value of the contracts on the date of termination.



In June 2003, the Company entered into an unsecured $210.0 million senior revolving credit facility (credit facility) which expires in June
2006. The credit facility contains a quarterly leverage ratio (debt / EBITDA) covenant not to exceed 3.5 and a consolidated interest coverage ratio (EBITDA / total interest expense) covenant not to be less than 3.0. Additionally, the credit facility
restricts the payment of dividends and repurchase of stock to $65.0 million plus 50% of cumulative net income (loss) subject to certain limitations beginning June 20, 2003 ($61.9 at September 30, 2004). As of September 30, 2004, facility fees
payable on the credit facility are 0.35%. The Company may select various floating rate borrowing options, including, but not limited to, LIBOR plus a spread that can range from 0.55% to 1.35% depending on the Companys quarterly leverage
ratios. As of September 30, 2004, the Companys borrowings were at a rate of 2.9%. At September 30, 2004 the Company had approximately $132.0 million available for borrowings under this credit facility.



In May 2003, simultaneous with the termination of the interest rate swap
agreements, the Company entered into new interest rate swap agreements, under which it swapped its 7.94% fixed interest rate on $80.0 million principal amount of unsecured senior notes for floating rate interest based upon 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 $1.3 million and are included in Other liabilities on the accompanying Condensed
Consolidated Balance Sheet, with a corresponding decrease in the carrying amount of the related debt. No gain or loss has been recorded as the contracts meet the criteria of SFAS 133 to qualify for hedge accounting treatment with no ineffectiveness.



28



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##### Table of Contents

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



In March 2002, the Company completed arrangements to sell certain accounts receivable through its
wholly-owned subsidiary, Arch Chemicals Receivables Corp., a special-purpose corporation. Arch Chemicals Receivables Corp. entered into a trade accounts receivable securitization agreement with an independent financial institution whereby it can
sell, on an ongoing basis, participation interests in accounts receivable for a maximum purchase price of up to $80.0 million. As of September 30, 2004, the Company had sold $49.2 million of participation interests in accounts receivable under this
program.



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 and bear fixed interest rates of 7.94% and 8.24%,
respectively, subject to certain leverage ratio requirements. The notes contain quarterly leverage ratio covenants of 3.5, fixed coverage ratio covenants of 2.25, and restrict the payment of dividends and repurchases of stock in excess of $65.0
million plus 50% of cumulative net income under certain circumstances ($44.7 at September 30, 2004). In addition, the notes contain a debt to total capitalization ratio requirement not to exceed 55%.



At September 30, 2004, the Company had $20.4 million of outstanding letters
of credit. In addition, the Company had $7.5 million of letters of guarantee for its joint venture Planar Solutions borrowings. Such guarantee not to exceed $8.5 million.



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



On October 25, 2004, the Company signed a definitive agreement to sell the majority of the operations of its Microelectronic Materials business to Fuji
Photo Film Co., Ltd. for approximately $160 million. The transaction, which is expected to close by the end of the year, is subject to regulatory approvals and other customary closing conditions. The transaction sales price is subject to a final
post-closing working capital adjustment. The estimated proceeds from the divestiture will be principally used to pay down debt. The Boards of Directors of both companies have approved the agreement.



On October 28, 2004, the Company declared a quarterly dividend of $0.20 on
each share of the Companys common stock. The dividend is payable on December 9, 2004, to shareholders of record at the close of business on November 9, 2004.



Government Contract



The Company was notified by the U.S. Defense Energy Support Center (DESC) that it had not been awarded the 10-year hydrazine propellant supply
contract which the Company had anticipated receiving. The Company had a debriefing with the DESC and submitted a formal protest of the award. In July, 2004, the U.S. Government Accountability Office (GAO) informed Arch and the DESC that
the GAO will sustain Archs formal protest of the DESCs recent decision to award the governments next 10-year hydrazine propellant supply contract to a competing firm. As a result of the GAOs decision, the DESC has notified
the Company that it has taken corrective action by re-opening the bidding process. The closing date for initial offers has been extended until December 10, 2004, and the DESC anticipates completing its contract-award decision shortly thereafter. In
light of the DESCs decision to re-bid the next long-term hydrazine propellant supply contract, the Companys current outlook assumes that there will be no impairment and, as a result, depreciation and certain other costs (approximately
$1.5 million) will continue in the fourth quarter of 2004. Fourth quarter and full-year guidance assumes no revenues from any awarding of a new propellants contract.



For 2003 and 2002, sales and operating income for the hydrazine business were $34.0 million and $42.0 million, and $2.1
million and $5.6 million, respectively. Of these historical sales, approximately $22.1 million and $24.0 million, related to the previous propellant supply agreement that expired April 30, 2004.



The hydrazine business as a whole is not core to the Companys
portfolio, is not a growth business and has been managed for cash for several years. As of September 30, the Company reassessed the potential impairment of its entire hydrazine business, which consists of a hydrazine propellant and a hydrazine
hydrate product line, as a



29



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##### Table of Contents

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



result of the original DESC decision. This assessment was based upon a weighted average probability of cash flows, which included an estimate of obtaining
the new contract. As a result of such reassessments at September 30, the Company did not incur an impairment charge but has incurred severance costs in connection with headcount reductions at the Lake Charles, Louisiana manufacturing facility.



If the Company does not win the contract as a result of
re-opening the bidding process, the Company estimates the potential one-time pre-tax charge related to these decisions to be the following:



The Company may incur a non-cash impairment charge for the long-lived assets of the hydrazine business in the second half of 2004. As of September 30,
2004, the estimate of the amount of the impairment would be approximately $13 million, including the assets associated with the propellants product line. In addition, the Company may incur cash costs for shutdown costs and the present value of
certain presumed contractual obligations that are assumed to no longer have any benefit to the Company. (Such annual contractual payments are approximately $2.3 million through 2011.) The estimated amount of the pre-tax cash charge resulting from
these costs is approximately $15 million. These one-time cash costs are expected to be more then offset by payments to be received from the U.S. Government upon the shut down of the Lake Charles, LA and McIntosh, AL propellants facilities. The
present values of such payments are approximately $19 million. The projected annual cash flows relating to these decisions are estimated to be the following over the next four years and beyond:



|                                    |  |      |      |   |      |   |      |      |  |   |            |   |  |   |      |  
|----------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---------- | - |  | - | ---- | -
|Cash Inflow (Outflow) $ in
millions |  | 2005 |      |   | 2006 |   |      | 2007 |  |   | Thereafter |  
|Contractual obligations             |  | $    | (2.3 | ) |      | $ | (2.3 | )    |  | $ | (2.3       | ) |  | $ | (9.2 | )
|Shutdown costs                      |  |      | (1.0 | ) |      |   |     |      |  |   | (2.0       | ) |  |   |     |  
|                                    |  |      |      |   |      |   |      |      |  |   |            |   |  |   |      |  
|Sub-total                           |  |      | (3.3 | ) |      |   | (2.3 | )    |  |   | (4.3       | ) |  |   | (9.2 | )
|U.S. government receipts            |  |      | 8.5  |   |      |   |     |      |  |   | 13.5       |   |  |   |     |  
|                                    |  |      |      |   |      |   |      |      |  |   |            |   |  |   |      |  
|Net Cash Flows                      |  | $    | 5.2  |   |      | $ | (2.3 | )    |  | $ | 9.2        |   |  | $ | (9.2 | )
|                                    |  |      |      |   |      |   |      |      |  |   |            |   |  |   |      |  



The net aggregate
pre-tax charge for one-time items, including the restructuring charge of $2.1 million taken in the second quarter, is expected to be approximately $11 million, net of the payments to be received from the U.S. Government.



The 35-month contract secured in November 2003 for storage and distribution
services of the DESCs hydrazine-based propellants products, valued at $4.3 million, is not affected by its decision nor is the award in February 2004 to the Company of the $11.9 million Ultra PureTMhydrazine 25-month supply contract. Although the Company does not currently manufacture hydrazine, it will continue to manufacture and sell Ultra
PureTMhydrazine from existing hydrazine inventory and proprietary blends using hydrazine sourced through third
party producers.



New Accounting Pronouncement



In May 2004, the FASB issued Staff Position 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003 which provides guidance on the accounting for the effects of the Medicare Act. FASB Staff Position 106-2, which requires measurement of
the Accumulated Postretirement Benefit Obligation (APBO) and net periodic postretirement benefit cost to reflect the effects of the Medicare Act, supersedes FASB Staff Position 106-1. FASB Staff Position 106-2 is effective for interim or
annual periods beginning after June 15, 2004. Management has been advised by its actuaries that the provisions of the Medicare Act will not have a material effect on the Companys consolidated financial statements as the postretirement medical
programs as currently offered by the Company will not be entitled to any reimbursement from the government as a result of this Act.



Cautionary Statement under Federal Securities Laws



Except for historical information contained herein, the information set forth in this communication contains forward-looking statements that are based on
managements beliefs, certain assumptions made by



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



management and managements current expectations, estimates and projections about the markets and economy in which Arch and its various businesses
operate. Words such as anticipates, believes, estimates, expects, forecasts, guidance, opines, plans, predicts, projects,
should, targets, will, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions (Future Factors), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. Future Factors which could cause actual results to differ materially from those discussed include but are
not limited to: general economic and business and market conditions; lack of economic recovery in 2004 in the U.S.; lack of moderate growth or recession in European economies; increases in interest rates; economic conditions in Asia; worsening
economic and political conditions in Venezuela; strengthening of the U.S. dollar against the foreign currencies; customer acceptance of new products; efficacy of new technology; changes in U.S. laws and regulations; increased competitive and/or
customer pressure; the Companys ability to maintain chemical price increases; higher-than-expected raw material costs for certain chemical product lines; increased foreign competition in the calcium hypochlorite markets; lack of continued
recovery in the semiconductor industry; unfavorable court, arbitration, jury or tax matter decisions; the supply/demand balance for the Companys products, including the impact of excess industry capacity; failure to achieve targeted
cost-reduction programs; unsuccessful entry into new markets for electronic chemicals; capital expenditures in excess of those scheduled; environmental costs in excess of those projected; the occurrence of unexpected manufacturing
interruptions/outages at customer or Company plants; reduction in expected government contract orders and/or the failure to be awarded a new U.S. government contract for hydrazine propellants; a determination that state import duties were not
properly paid in Brazil and the imposition of penalties; unfavorable weather conditions for swimming pool use; inability to expand sales in the professional pool dealer market and gains or losses on derivative instruments.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



Interest Rate Risk



The Company was exposed to interest rate risk on approximately 60% of its outstanding borrowings including funding under its accounts receivable
securitization program which are subject to floating rates. Based on the Companys expected 2004 borrowing levels, an increase in interest rates of 100 basis points would decrease the Companys results of operations and cash flows by
approximately $1.0 million to $2.0 million.



Foreign Currency Risk



At September 30, 2004, the Company had forward contracts
to sell foreign currencies with a U.S. dollar equivalent value of $1.6 million and forward contracts to buy foreign currencies with a U.S. dollar equivalent value of $5.4 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. At September 30, 2004 and 2003, the Company had
no derivative commodity instruments outstanding. In addition, the Company is exposed to price risk related to the price volatility of certain other raw materials including the ongoing purchase of propylene, copper metal and ethanolamine
(MEA). Holding other variables constant, a 10 percent adverse change in the price of propylene, copper metal and MEA would decrease the Companys results of operations and cash flows by approximately $1 million each. Holding other
variables constant, a 10 percent adverse change in the price of natural gas would decrease the Companys results of operations and cash flows by approximately $0.5 million.



See the Companys Form 10-K for the year ended December 31, 2003 for additional information on the above items.



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|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-15e and 15d-15e 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 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. The Company also has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily
more limited than those it maintains with respect to its consolidated subsidiaries.



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



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PART II. OTHER INFORMATION



|Item 6. | Exhibits
|------- | --------



| | (a) | Exhibits required by Item 601 of Regulation S-K.
| | --- | ------------------------------------------------



|     |  |                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|2.   |  | Stock and Asset Purchase Agreement dated as of October 24, 2004 between Arch Chemicals, Inc. and Fuji Photo Film Co., Ltd.  Incorporated by reference to Exhibit 2 to the Companys
Current Report on Form 8-K, filed October 25, 2004, SEC File No. 1-14601.*
|     | 
|10   |  | 1999 Stock Plan for Non-employee Directors, as amended October 28, 2004.                                                                                                                                                                                       
|     | 
|31.1 |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                        
|     | 
|31.2 |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                        
|     | 
|32.1 |  | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                         
|     | 
|32.2 |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                         



|* | Schedules and similar attachments to the Stock and Asset Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant will furnish supplementally a
copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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)        
|                 |  |  | 
|November 8, 2004 |  |  |  | By:                  |  | /s/ LOUIS S. MASSIMO
|                 |  |  |  |                      |  |                      |  | Louis S. Massimo                                    
|                 |  |  |  |                      |  |                      |  | Executive Vice President and Chief Financial Officer



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EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                                                                
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                    
|           | 
|2.         |  | Stock and Asset Purchase Agreement dated as of October 24, 2004 between Arch Chemicals, Inc. and Fuji Photo Film Co., Ltd.  Incorporated by reference to Exhibit 2 to the Companys
Current Report on Form 8-K, filed October 25, 2004, SEC File No. 1-14601.*
|           | 
|10         |  | 1999 Stock Plan for Non-employee Directors, as amended October 28, 2004.                                                                                                                                                                                       
|           | 
|31.1       |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                        
|           | 
|31.2       |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                        
|           | 
|32.1       |  | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                         
|           | 
|32.2       |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                         



|* | Schedules and similar attachments to the Stock and Asset Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant will furnish supplementally a
copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36