ARCH CHEMICALS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

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 (I.R.S. Employer
Incorporation or organization) Identification No.)
501 MERRITT 7 06851
NORWALK, CT (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:

(203) 229-2900

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ].

As of June 30, 2003, the aggregate market value of registrant's voting and
non-voting common equity held by non-affiliates of registrant was approximately
$427,579,915.

As of January 31, 2004, 22,512,060, shares of the registrant's common stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Form
10-K as indicated herein:

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TABLE OF CONTENTS

FORM 10-K

1

PART I

ITEM 1. BUSINESS

GENERAL

Arch Chemicals, Inc. ("Arch" or the "Company") is a specialty chemicals
manufacturer which supplies value-added products and services to several
industries on a worldwide basis, including the consumer products and the
semiconductor industries. The principal business segments in which the Company
competes are treatment products, microelectronic materials and performance
products. The Company's ability and willingness to provide superior levels of
technical and customer support, the manufacturing flexibility of many of its
facilities, and the cultivation of close customer relationships are the common
skills on which the Company relies to service its global markets and customers.

The Company was organized under the laws of the Commonwealth of Virginia on
August 25, 1998 as a wholly-owned subsidiary of Olin Corporation ("Olin") for
the purpose of effecting a tax-free distribution of Olin's Specialty Chemical
Businesses ("Distribution") to the shareholders of Olin. The Distribution
occurred on February 8, 1999 ("Distribution Date") upon which the Company became
a separate, independent company.

In connection with the acquisition of Hickson International PLC ("Hickson")
in 2000, the Company announced that it intended to divest the Hickson organics
division. See Item 7 of this Report. Accordingly, the Hickson organics division
was classified as discontinued operations as is more fully discussed in Note 5
of Notes to the Consolidated Financial Statements included in Item
8 -- Financial Statements and Supplementary Data and Item 15 -- Exhibits,
Financial Statement Schedules, and Reports on Form 8-K and Part IV of this
Report. The Hickson organics business, located at Castleford, England, was sold
on August 12, 2003. In addition, as a result of the sale of the sulfuric acid
business, the Company has restated its prior year results to include the results
of the sulfuric acid business and the gain on the disposition as a component of
discontinued operations as is more fully discussed in Note 5 of the Notes to the
Consolidated Financial Statements included in Item 8 -- Financial Statements and
Supplementary Data and Item 15 -- Exhibits, Financial Statement Schedules, and
Reports on Form 8-K of this Report. Accordingly, Item 1 and Item 2 of this
Report describe the Company's businesses without the Hickson organics division
and sulfuric acid business.

The term "Company" as used in Parts I and II of this Report means Arch
Chemicals, Inc. and its subsidiaries (but excluding the Hickson organics
division and the sulfuric acid business) unless the context indicates otherwise.
The Company's products and services described in this Report may be sold,
distributed, manufactured or provided by Arch Chemicals, Inc. or by one or more
of its subsidiaries, affiliates or joint ventures.

The Company makes available through its Internet website, which is located
at http://www.archchemicals.com, its Annual Report on Form 10-K, its Quarterly
Reports on Form 10-Q, its Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after being
electronically filed with or furnished to the Securities and Exchange
Commission. The Company does not charge any fees to view, print or access these
reports on its website through the Internet.

PRODUCTS AND SERVICES

The Company's principal products and services fall within three business
segments: treatment products, microelectronic materials and performance
products. For financial information about each of the Company's segments, and
foreign and domestic and export sales and long-lived assets, see Note 18 of
Notes to Consolidated Financial Statements contained in Item 8 of this Report.
The principal products of each business are described below. For customer
concentrations, see "Business and Credit Concentrations" contained in Note 1 of
Notes to Consolidated Financial Statements contained in Item 8 of this Report.

2

TREATMENT PRODUCTS

Within its treatment products segment, the Company manufactures and sells
water treatment chemicals, industrial biocides and personal care specialty
ingredients and wood treatment and industrial coatings products.

The Company manufactures and sells chemicals and distributes equipment on a
worldwide basis for the sanitization and treatment of residential and commercial
pool and spa water, drinking water and for industrial applications. The Company
sells both calcium hypochlorite and chlorinated isocyanurates as sanitizers. The
Company is a leading worldwide producer of calcium hypochlorite with various
concentrations of available chlorine. The Company has a competitive advantage
through ownership of the J3(TM) technology which enables it to produce calcium
hypochlorite with superior dissolving characteristics and higher available
chlorine as compared to other calcium hypochlorite products. The Company's pool
chemical products are sold primarily under the widely-recognized HTH(R) brand
name. The Company also sells commercial pool products under the Pulsar(R) brand
name and to specialty pool dealers under the POOLIFE(R) brand name. The
Company's water chemical products are also distributed as private label brands.
In addition to the pool water sanitizers, calcium hypochlorite and chlorinated
isocyanurates, the Company sells ancillary chemicals and accessories for the
maintenance of residential and commercial pools, such as algaecides, clarifiers
and test strips.

The Company's water products are also sold in the municipal water market
for the purification of potable water. The Company sells calcium hypochlorite to
purify potable water mainly in a number of countries outside the U.S. The
Company has plans to expand its presence in the municipal and industrial water
market both domestically and internationally.

In 2003, approximately 65% of the Company's water products sales were
within North America, and the remaining 35% were throughout the rest of the
world. In North America, the Company sells water chemical products primarily and
directly to retail merchants but is working to expand into the pool dealer
market from its base of 350 pool dealers. In 2003, the Company acquired all of
its joint venture partner's interest in Aquachlor (Pty.) Ltd., its South African
joint venture. The Company also has ownership interests in a joint venture in
Brazil (Nordesclor S.A.) which manufactures and distributes calcium hypochlorite
and other water products to local markets.

In addition to the manufacture and sale of HTH water products, the Company
manufactures and distributes chemicals and distributes equipment and accessories
for pools in Europe mainly through its wholly-owned subsidiary Arch Water
Products France, S.A.S., located in France.

The Company also manufactures biocides that control the growth of
micro-organisms, particularly fungi and algae, and control dandruff on the
scalp. All biocide products are marketed under the well-recognized trademarks,
Omadine(R), Omacide(R) and Triadine(R) biocides. The majority of the biocide
chemicals produced by the Company are based on the zinc, sodium and copper salts
of the pyrithione molecule. These pyrithione-based biocides include over twenty
products with differing active concentrations, forms and salts, and the Company
believes it is a worldwide leader in these biocide products. Other biocide
chemicals are based on iodopropargyl-n-butylcarbamate (IPBC), a broad-spectrum
fungicide, and serve the metalworking fluids and coatings markets. The
IPBC-based biocides currently consist of five variations with others in
development stages. Biocides make up a small portion of the customer's end
products, and therefore must be highly effective at low concentrations as well
as compatible with the formulation's other components. Meeting the biocide
customer's needs requires a high degree of technical support and the expertise
to do business in a highly regulated environment. The Company's ability to meet
these needs makes it a preferred supplier in the antidandruff market. The
Company is also uniquely positioned as the only pyrithione supplier with U.S.
Environmental Protection Agency registrations for metalworking fluids, coatings
and antifouling paints. Through its acquisition of Brooks Industries personal
care specialty ingredients business, the Company has broadened its position in
the personal care market to include actives and functional products sold
primarily to manufacturers of skin care and hair care products.

The Company is a leading producer of wood treatment chemical solutions that
enhance the properties of wood. Its industrial wood preservatives and fire
retardants are sold under the brand names WOLMAN(R),

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Dricon(R), Tanalith(R), Vacsol(R), and Resistol(R) in markets around the world.
These products protect wood against moisture, fungal decay, or termites and
other insects or retard the combustibility of wood. The principal customers are
sawmills and treaters of softwoods that require chemical treatment to impart
resistance properties to fungal and insect damage, giving softwoods the
performance of hardwoods in service. In the U.S. and Canada, the majority of the
customers are licensed wood treaters that operate under guidelines and standards
established by the Company. The license program includes the use of the brand
name for sale of the products produced by the licensee as well as an extensive
support package comprised of marketing, technical, engineering and environmental
services. The Company's customers sell their wood-treated products into the
construction, utility and agricultural markets. The products sold by the Company
are critical to the performance and value of the end-use products. Arch Wood
Protection, Inc., a subsidiary of the Company, amended its registration with the
U.S. Environmental Protection Agency ("U.S. EPA") for Chromated Copper Arsenate
("CCA") to transition to a new generation of wood preservatives for use in
non-industrial treated wood products by December 31, 2003. Growing consumer
preferences and the availability of alternative products have moved the industry
to CCA-alternative products and the Company is offering its WOLMAN(R)E and
Tanalith(R)E products, leading CCA-alternative wood treatment products, which
are utilized by wood treaters to make Wolmanized(R) Natural Select(TM) and
Tanalized(R) wood.

The Company owns 49% of a joint venture with Koppers Industries, Inc.,
based in Pittsburgh, Pennsylvania, for the manufacture and distribution of wood
treatment chemicals to the Australian and Asia-Pacific markets.

The Company also manufactures a wide range of industrial coatings for a
variety of wood applications. These finishes are industrial- or consumer-applied
products for the surface decoration and protection of wood, including stains,
polyester- and polyurethane-based coatings, and new technology water-based
coatings and UV systems. These wood coatings products are sold under the name
"Arch Coatings," including the brand names Sayerlack(R) and Linea Blu(R). The
major markets for these products include home and office furniture, window and
door frames, picture frames, and other specialty markets. The Company believes
it is a market leader in France, and has a strong presence in several other
areas of Europe, including the strategic Italian market and the United Kingdom.
The Company also has operations in Spain and sales and technical support
facilities in the U.S., China and Singapore supporting sales efforts in North
America and Asia. The major customers for these coatings require a high degree
of applications assistance, and the development of a total coatings solution,
including product development, is key in the growth of this business. As a
result, the Company has many long-standing customers and its customer base
includes many of the leading furniture and joinery manufacturers in Europe.

MICROELECTRONIC MATERIALS

The Company manufactures and supplies a range of products and services to
semiconductor manufacturers and to flat panel display manufacturers throughout
the world.

The Company develops, manufactures and sells a wide range of photopolymer,
thin film and formulated products. The photopolymer products include negative,
g-line, i-line and 248nm and 193nm deep UV photoresists, which are being used to
produce integrated circuits by the leading semiconductor companies around the
world. The Company has a new line of 248nm product line extension and 193nm
photoresist products for sub 110nm applications which are being used to
fabricate leading edge DRAMs and logic chips. These products are being
co-developed and marketed with FUJIFILM Arch (the Company's joint venture with
Fuji Photo Film in Japan) which manufactures and sells photoresists in Asia.
Photopolymer products also include an aqueous-based and environmentally friendly
photosensitive polyimide product line that is sold under the Durimide(R) brand.
Negative tone and solvent based photosensitive polyimides are also sold.

The formulated product line includes aqueous-based, environmentally safer
residue removers, strippers, edge bead removers, developers, cleaners, post etch
residue removers and post chemical mechanical planarization ("CMP") cleaners,
which are sold throughout the world. Planar Solutions, LLC, the Company's joint
venture with Wacker Silicones, opened a CMP development and applications center,
which is located within the Company's Mesa, Arizona manufacturing facility.
Planar Solutions, LLC develops, manufactures

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and sells CMP slurry products to advanced chip manufacturers. This joint venture
is currently completing the construction of a CMP production facility at the
Company's Mesa plant. In addition, the Company's formulated products include
buffered hydrofluoric acid and mixed acid etchants used in the etching of
silicon wafers.

The thin film systems business unit develops, manufactures and sells thin
film deposition precursors, dopants, chlorine sources and chemical delivery
equipment. A new product line of low dielectric constant thin film chemistries
was launched in 2002 and are targeted for use in low k-copper interconnect
technologies. The Company also sells chemical delivery systems such as its
Genstream(R) thin film systems delivery cabinets.

In addition to the range of products offered, the Company provides the
semiconductor manufacturing industry in Europe and North America with chemical
management services, including chemical handling and dispensing, inventory
management and analytical services.

The Company's microelectronic materials products business competes against
other suppliers on the basis of performance, product quality, service,
technology and pricing. The Company has a broad patent portfolio encompassing
the technologies underlying the design of its products which the Company
believes provides a competitive advantage against other suppliers. The Company
enhances its technological competitive advantage by entering into technology
licenses and joint development agreements with third parties to meet the rapidly
evolving needs of the semiconductor industry. The Company's extensive product
line and global infrastructure are distinct advantages that enhance its
competitiveness. Product performance and quality and the technology associated
with quality are generally considered an industry prerequisite. The high quality
standards of the semiconductor industry serve as a hurdle, which limit the
number of new entrants as suppliers to the market.

The Company's microelectronic materials products are sold on a direct basis
or through independent third party distributors. Chemical management services
are offered on a direct basis only.

PERFORMANCE PRODUCTS

Performance Urethanes. The Company's performance products segment consists
of the manufacture and sale of a broad range of urethane intermediate products
with diverse end uses. The performance products sold by the Company are critical
to the performance and value of the customer's end-use products. The performance
products segment is characterized by technology-driven product solutions that
benefit specific customers. Custom manufacturing services are also provided. In
addition, the business is characterized by close customer relationships with
entities who are leaders in the markets in which they compete. The flexibility
afforded by batch manufacturing in some operations combined with the Company's
ability and willingness to provide superior technical support enables it to
respond to the specific needs of a diverse group of customers. This gives the
Company a competitive advantage over competitors whose manufacturing processes
and related cost structure constrain their ability to respond cost effectively
to smaller volume customers.

The Company's performance urethane products business manufactures flexible
polyols, specialty polyols, urethane systems and glycols and glycol ethers.
Specialty polyols, which are used as an ingredient for elastomers, adhesives,
coatings, sealants and rigid foam, are manufactured at the Company's
Brandenburg, Kentucky site, as well as by its Venezuelan subsidiary. The
Brandenburg facility also manufactures glycols and glycol ethers for use as an
ingredient in cleaners, personal care products and antifreeze and provides
custom manufacturing of specialty chemicals for a small group of companies.
Flexible polyols, which are used in the furniture, bedding, carpet and packaging
industries, are manufactured by the Company's wholly-owned Venezuelan
subsidiary, Arch Quimica Andina, C.A., for South American markets.

Hydrazine. The Company supplies hydrazine hydrates as well as propellant
grade hydrazine and hydrazine derivatives. Hydrazine hydrate products are sold
for use in chemical blowing agents, water treatment chemicals, agricultural
products, pharmaceutical intermediates and other chemical products. Hydrazine
products are produced at the Company's Lake Charles, Louisiana production
facility. The

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hydrazine hydrates are supplied in various concentrations and in packaging
containers that include bulk, tote bins and drums. As of date hereof, the
hydrazine hydrates plant has temporarily been idled.

The Company supplies propellant grade hydrazine and hydrazine derivatives
for use as fuel in satellites, expendable launch vehicles and auxiliary and
emergency power units. These propellant grade hydrazine products include Ultra
Pure(TM) Hydrazine (UPH), anhydrous hydrazine (AH), unsymmetrical dimethyl
hydrazine (UDMH), monomethyl hydrazine (MMH) and hydrazine fuel blends. In
addition to space-related applications in satellites and launch vehicles,
auxiliary power from hydrazine-driven units is supplied to the NASA Space
Shuttle for maneuvering its rocket engine nozzles and for operating valves,
control surfaces, brakes and landing gear on the Shuttle Orbiter. Emergency
power from hydrazine is also provided to jet aircraft like the F-16 to operate
electrical and hydraulic units in the event of an engine flameout. The Company
also supplies launch services and special packaging containers including
cylinders to improve the safe handling and storage of propellants and to reduce
launch costs.

CUSTOMERS

No single customer has accounted for more than 10% of the Company's total
annual sales over the last three fiscal years. The Company's customer base is
diverse and includes semiconductor manufacturers, flat panel display
manufacturers, world-renowned consumer product companies, major big box
retailers, furniture manufacturers, national and regional chemical and equipment
distributors, wood treaters, sawmills, other chemical manufacturers and the U.S.
Government. For additional information about customers, see the information
under the caption "Business and Credit Concentrations" in Item 7 of this Report.

RAW MATERIALS AND ENERGY

The Company utilizes a variety of raw materials in the manufacture of
products for its businesses. The Company has not experienced any difficulty in
securing raw materials. Outlined below are the principal raw materials for the
product businesses. The majority of the Company's raw material requirements are
purchased and many are provided under the terms and conditions of written
agreements.

Treatment Products. The principal raw materials for the HTH water products
line include chlorine, caustic soda, lime and chlorinated isocyanurates. The
balance of the raw materials are purchased from other suppliers and are readily
available.

The principal raw materials for industrial biocide treatment chemicals and
personal care specialty ingredient chemicals are pyridine, iodine and propargyl
butyl carbamate.

The principal raw materials for wood protection products include chromic
acid, scrap copper, tebuconazole, copper carbonate, arsenic trioxide, cupric
oxide, monoethanolamine, and proprietary organic biocides. The raw materials for
the industrial coatings line include a wide variety of polyester resin systems,
organic solvents, nitrocellulose, acrylic resins, acrylic and vinyl emulsions,
titanium dioxide, isocyanate, various pigments and colors and stains.

Microelectronic Materials. The principal raw materials for the
microelectronic materials business include ethyl lactate, hydrofluoric acid,
methyl propyl ketone, glycol ether PMA, nitric acid, phosphoric acid, ammonia,
tetraethylorthosilicate (TEOS), dichloroethylene (DCE), trichloroethane (TCA),
phosphorous oxychloride (POCL3), hexamethyldisilazone (HMDS), custom polymers,
photoinitiators, tetra methyl ammonium hydroxide (TMAH) and custom polyimide
resins and photosensitizers.

Performance Products. The principal raw materials for the performance
products business include a variety of chemicals such as propylene, propylene
oxide, ethylene oxide, chlorine, caustic soda and ammonia. For this segment,
propylene is the most significant raw material that is subject to significant
price volatility.

Electricity is the predominant energy source for the Company's
manufacturing facilities and is primarily supplied to the Company by public or
government utilities. Natural gas used for steam production is an important
energy source for many of the Company's U.S. manufacturing sites and is
purchased from multiple suppliers.

6

RESEARCH AND DEVELOPMENT AND PATENTS

The Company's research activities are conducted at a number of facilities.
Company-sponsored research expenditures were $23.6 million in 2003, $23.0
million in 2002 and $25.4 million in 2001.

In general, intellectual property is important to the Company, but no one
technology, patent, or license or group thereof related to a specific process or
product is of material importance to the Company as a whole. The Company
believes that its broad patent portfolio in the microelectronic materials
segment provides a sustainable competitive advantage for that product line. The
Company owns three U.S. patents for the technology relating to the manufacture
of J3(TM) calcium hypochlorite that are materially important to the HTH water
products business. Two of these patents expire in 2009 and the other expires in
2010. The Company owns two patents covering processes for producing Ultra
Pure(TM) hydrazine, the world's purest grade of anhydrous hydrazine, which makes
it the preferred propellant for monopropellant satellite thruster applications.
These patents expire in 2006.

The Company's biocides business holds several U.S. patents relating to
antifouling additives for paints. These patents expire in 2010 and 2012.

With respect to its wood protection business, the Company owns two U.S.
composition of matter patents. These patents include one for an additive to the
Company's wood preservative chromated copper arsenate ("CCA") that improves the
climbability of utility poles. This patent expires in 2008. The other is a
patent on the Company's new preservative formulation (WOLMAN(R)E, Natural
Select(TM) and Tanalith(R)E) which expires in 2014.

SEASONALITY

The Company as a whole usually experiences its highest sales and profits in
the second quarter primarily due to sales of its HTH water products line in that
quarter. The purchase of water chemical products by consumers in the residential
pool market is concentrated in the United States of America between Memorial Day
and the Fourth of July. The water chemical products business principally
distributes directly to retail merchants. Sales of these products are strongest
in the second and third quarters with the second quarter still being the quarter
with the most sales of these products. In addition, the weather can also have a
significant effect on water chemical and wood treatment sales during any given
year with unseasonable wet or cool weather negatively impacting sales.

BACKLOG

The amount of backlog orders is immaterial to the Company as a whole and to
any particular segment.

U.S. GOVERNMENT CONTRACTS AND REGULATIONS

The Company sells hydrazine to the U.S. Government under a government
contract. This contract has been amended to expire on April 30, 2004. The
Company is currently pursuing a new U.S. Government hydrazine supply contract.
In November 2003, the Company secured a new 35-month contract, valued at $4.3
million, with the Defense Energy Support Center ("DESC") for storage and
distribution services of its hydrazine-based propellants products. The contract
begins May 1, 2004. In February 2004, the Company was awarded a twenty-five
month contract valued at $11.9 million, with the Department of Defense for Ultra
Pure(TM) Hydrazine. The contract begins January 1, 2005 and will provide fuel
for future satellite programs. As a government contractor, the Company is
subject to extensive and complex U.S. Government procurement laws and
regulations. These laws and regulations provide for ongoing government audits
and reviews of contract procurement, performance and administration. Failure to
comply, even inadvertently, with these laws and regulations and with laws
governing the export of controlled products and commodities could subject the
Company or one or more of its businesses to civil and criminal penalties and
under certain circumstances, suspension and debarment from future government
contracts and the exporting of products for a specified period of time. Several
of the Company's products are registered with U.S. EPA under the Federal

7

Insecticide, Fungicide, and Rodenticide Act and as such are subject to various
regulations regarding use and disclosure requirements.

COMPETITION

The Company's businesses are in highly competitive industries, and the
Company encounters strong competition with respect to each of its product lines
from other manufacturers worldwide. This competition, from other manufacturers
of the same products and from manufacturers of different products designed for
the same uses, is expected to continue in both U.S. and foreign markets.
Depending on the product involved, various types of competition are encountered,
including price, delivery, service, performance, product innovation, product
recognition and quality. Overall, the Company believes its principal product
groups are competitive with many other products of other producers.

EXPORT SALES

The Company's export sales from the United States to unaffiliated customers
were $75.6 million in 2003, $72.7 million in 2002 and $72.0 million in 2001. The
financial information about geographic areas contained in Note 18 of Notes to
the Consolidated Financial Statements found in Item 8 of this Report is
incorporated herein by reference.

EMPLOYEES

As of December 31, 2003, the Company had approximately 2,890 employees,
approximately 1,310 of whom were working in foreign countries. Approximately 200
of the hourly paid U.S. employees of the Company located at its Brandenburg,
Kentucky; Conley, Georgia and Lake Charles, Louisiana facilities are represented
for purposes of collective bargaining by several different labor organizations,
and the Company is party to six labor contracts relating to such employees.
These labor contracts extend for three- or four-year terms which expire in the
years 2006 and 2007. No major work stoppages have occurred in the last three
years. While relations between the Company and its employees and their various
representatives are generally considered satisfactory, there can be no assurance
that new labor contracts can be entered into without work stoppages. European
hourly employees are also represented by unions in various countries.

RESPONSIBLE CARE COMMITMENT

First adopted as a condition of membership by the American Chemistry
Council ("ACC") in 1988, the Responsible Care(R) initiative was developed to
encourage member companies to continuously improve their performance in the
realms of health, safety and the environment.

The ACC's Responsible Care(R) initiative encompasses seven critical
performance areas: employee health and safety, pollution prevention,
manufacturing process safety, security, distribution safety, product stewardship
and community awareness and emergency response. Ultimately, this initiative is
aimed at making health, safety and environmental protection an integral part of
a product's life cycle -- from manufacture, marketing and distribution to use,
recycling and disposal.

The Company has developed a management system to drive improvement in all
seven areas under Responsible Care(R). To make this complex and multifaceted
process more compelling and to give it a sense of urgency, it has developed what
it calls "The Goal is Zero" initiative. It recognizes a fundamental truth at the
heart of Responsible Care(R) -- that no amount of harm to people or the
environment is acceptable.

The Company's manufacturing plant in Rochester, New York, which makes
industrial biocides, ingredients for cosmetic and personal care products and an
advanced wood preservative, was the first plant in America to be certified under
the new Responsible Care(R) RC 14001 standard that broadly covers performance in
the realms of environmental quality, workplace health and safety, plant security
and community outreach.

The plant received this certification after a rigorous series of audits by
ABS Quality Evaluations, an independent registrar based in Houston, Texas. Using
standards developed by the Registrars Accreditation Board, auditors from ABS
examined the Company's Rochester plant's management systems and related
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quality controls in all seven performance areas covered under the ACC's
signature Responsible Care(R) initiative: employee health and safety, pollution
prevention, manufacturing process safety, security, distribution safety, product
stewardship and community awareness and emergency response.

As its very name implies, the Company's "Goal is Zero" initiative is indeed
aimed at achieving zero employee and contractor injuries, zero manufacturing
process incidents, zero distribution incidents, and zero environmental
incidents. The Company's facilities ranging from Salto, Brazil to Mesa, Arizona
have at times achieved the ultimate goal in each or all of these categories. The
following summarizes the Company's performance in each of the Goal is Zero
targeted areas:

GOAL ONE: ZERO RECORDABLE INJURIES. While some of the Company's
facilities have achieved this goal, overall, the Company's rate of employee
recordable injuries (the number of work-related injuries per 200,000 hours
worked) has declined from 3.16 in 1999 to 1.3 in 2003. By contrast, the average
recordable injury rate for all U.S. manufacturers was 8.1 in 2001. The Company
also made excellent progress in reducing contractor recordables, which have
fallen from 6.30 in 1999 to 0.9 in 2003.

GOAL TWO: ZERO MANUFACTURING PROCESS SAFETY INCIDENTS. These incidents
are defined to include fires, explosions and toxic releases that resulted in a
lost-time injury, off-site consequences or greater than $25,000 of damages.
Since the Distribution, the Company has never had more than one process incident
in a year, and in 2003 it had zero incidents.

GOAL THREE: ZERO ENVIRONMENTAL INCIDENTS. This goal refers to incidents
such as chemical spills or emissions that are reportable because they exceed
strict limits established in state, federal or foreign laws and regulations. The
Company's performance has steadily improved, moving from 18 environmental
incidents in 1999 to seven for all of 2003.

GOAL FOUR: ZERO DISTRIBUTION INCIDENTS. Under this goal, the Company
strives to achieve zero significant incidents such as spills during the
transportation of its products. Performance is measured in terms of distribution
incidents per 1,000 shipments, and this rate has declined from 4.17 in 1999 to
0.57 in 2003.

The Company is pleased with the progress of and results derived from its
Responsible Care Program. It remains committed, however, to achieving further
improvements and realizing of its ultimate goal - the "Goal is Zero" for each of
the above categories.

ENVIRONMENTAL MATTERS

The Company operates manufacturing facilities throughout the world and as a
result is subject to a broad array of environmental laws and regulations in
various countries. The Company also implements a variety of voluntary programs
to reduce air emissions, eliminate or reduce the generation of hazardous wastes
and to decrease the amount of wastewater discharges. The establishment and
implementation of U.S. Federal, state and local standards to regulate air and
water quality and to govern contamination of land and groundwater has affected
and will continue to affect substantially all of the Company's U.S.
manufacturing locations. Federal legislation providing for regulation of the
manufacture, transportation, use and disposal of hazardous and toxic substances
has imposed additional regulatory requirements on industry in general, and
particularly on the chemicals industry. In addition, the implementation of
environmental laws, such as the Resource Conservation and Recovery Act, the
Clean Air Act and the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, has required and will continue to require new
capital expenditures and will increase operating costs.

The Distribution Agreement, dated as of February 1, 1999 (the "Distribution
Agreement"), between the Company and Olin relating to the Distribution,
specifies that the Company is only responsible for certain environmental
liabilities at the Company's then current facilities and certain off-site
locations with respect to the businesses acquired from Olin in the Distribution.
The Company has also become subject to environmental exposures and potential
liabilities in the U.S. and abroad with respect to the businesses it purchased
following the Distribution. 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 consolidated financial statements.
9

In connection with the disposition of the sulfuric acid business on July 2,
2003, the Company provided environmental covenants to the purchaser in which the
Company is solely liable for the costs of any environmental claim for
remediation of any hazardous substances that were generated, managed, treated,
stored or disposed of prior to the closing date of the sale. The Company will be
released, under the sales agreement, from its obligation, which cannot exceed
$22.5 million, 20 years from the closing date. Additionally, as part of its
environmental indemnifications the Company will be responsible, for five years
from the closing date, for damages directly related to the process sewer system
at the Beaumont, Texas plant.

As part of the Hickson organics disposition, the Company will continue to
be responsible for known environmental matters. Such matters have previously
been accrued for in its environmental reserve included in the Consolidated
Financial Statements. Additionally, any unknown environmental matters that are
identified subsequent to the sale, the Company has agreed to share
responsibility with the purchaser over a seven-year period, with the Company's
share decreasing to zero over the seven-year period. The Company's maximum
aggregate liability for such unknown environmental matters is L5.0 million.

The Company does not anticipate any exposure related to the environmental
indemnifications for the sulfuric acid and the Hickson organics dispositions.
The Company has estimated that the fair value of any such exposure would be
immaterial.

Associated costs of investigatory and remedial activities are provided for
in accordance with generally accepted accounting principles governing
probability and the ability to reasonably estimate future costs. Charges to
income for investigatory and remedial efforts were not material to operating
results in 2003, 2002 and 2001, but may be material in future years.

Cash outlays for normal plant operations for the disposal of waste and the
operation and maintenance of pollution control equipment and facilities to
ensure compliance with mandated and voluntarily imposed environmental quality
standards were charged to income. Cash outlays for remedial activities are
charged to reserves. Historically, the Company has funded its environmental
capital expenditures through cash flows from operations and expects to do so in
the future.

Cash outlays for environmental related activities for 2003, 2002 and 2001
were as follows:

The Company's consolidated balance sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$8.6 million at December 31, 2003, of which $3.3 million is classified as other
current liabilities and $5.3 million is classified as other noncurrent
liabilities and $10.4 million at December 31, 2002, of which $4.5 million is
classified as other current liabilities and $5.9 million is classified as other
noncurrent liabilities. The Company's estimated environmental liability relates
to nine sites, six of which are in the United States and none of which are on
the U.S. National Priority List. These amounts did not take into account any
discounting of future expenditures, any consideration of insurance recoveries or
any advances in technology. These liabilities are reassessed periodically to
determine if environmental circumstances have changed or if the costs of
remediation efforts can be better estimated. As a result of these reassessments,
future charges to income may be made for additional liabilities.

Annual environmental-related cash outlays for site investigation and
remediation, capital projects and normal plant operations are expected to range
from $10 million to $15 million over the next several years. While the Company
does not anticipate a material increase in the projected annual level of its
environmental-related costs, there is always the possibility that such increases
may occur in the future in view of the

10

uncertainties associated with environmental exposures. A portion of the increase
in environmental cash outlays during 2001 was associated with a remediation
project at the Company's Conley, Georgia wood treatment facility. Total cash
outlays since its acquisition (capital and remedial) were approximately $5.7
million. The project was completed in 2002.

Environmental exposures are difficult to assess for numerous reasons,
including the identification of new sites, developments at sites resulting from
investigatory studies, 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 lengthy time periods 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 and may have a materially adverse impact on the Company's
business. At December 31, 2003, the Company had estimated additional contingent
environmental liabilities of $7.2 million.

ITEM 2. PROPERTIES

The table below sets forth the primary locations where the Company has
offices or conducts operations, including some joint venture sites, along with a
brief description of the activities conducted at each identified location. A
more detailed description of the Company's principal manufacturing facilities
follows the table. The Company believes that its facilities are sufficiently
maintained and suitable and adequate for its immediate needs and that additional
space is available to accommodate expansion. Except for locations identified as
relating to a joint venture which are owned or leased by the joint venture or
unless otherwise noted below, the identified location is owned by the Company.

- ---------------

(1) Land only is leased.

(2) Leased facility.

(3) Land and building owned by a third party.

(4) Portions are leased and portions are owned.

The Company also leases several sales offices and warehouse facilities in
the U.S. and in foreign countries.

12

PRINCIPAL MANUFACTURING FACILITIES

The principal manufacturing properties of the Company described below are
all owned by the Company, except for the land under the Belgian facility which
is leased until 2041, the land under the McIntosh plant and part of the land
under the Charleston facility which are being leased from Olin and except for
properties held by joint ventures or otherwise noted below.

McIntosh, Alabama. The Company's facility located in McIntosh, Alabama
blends, packages and stores propellant grade hydrazine products. Special
hydrazine fuel blends are produced as the principal propellant for several U.S.
Air Force launch vehicle programs, including the Titan and Delta rockets.

Mesa, Arizona. The Company has a state-of-the-art microelectronic
materials manufacturing facility in Mesa, Arizona. This facility manufactures,
purifies, formulates and packages formulated chemical products. This facility is
QS 9000-, ISO 9002- and ISO 14001-certified. A second facility for thin film
systems was constructed at Mesa in 1999, and a customer applications and a
product development laboratory for CMP slurries and related cleaning products
was added in February 2002. In addition, a new CMP production facility is being
constructed by the Company's joint venture and is expected to be in operation in
early 2004.

In addition to manufacturing operations, the Company has extensive
analytical testing, applications testing and warehousing capabilities for both
formulated products and thin film chemicals at the Mesa plant site. Acreage is
available at the site for future expansions.

Conley, Georgia. This is the Company's major facility for its wood
treatment business in the U.S. Currently, all of the Company's CCA is produced
at this location and some of it is sent by rail to the Company's Kalama,
Washington facility for distribution to customers in the Western U.S. CCA is
also bulk shipped from this plant to the Company's other CCA customers. A 72%
CCA concentrate is also produced at this facility. Office facilities and a
technical center for treatment products are also located at this facility.

Brandenburg, Kentucky. The ISO 9002-certified Brandenburg plant covers an
area of 200 acres, surrounded by 1,200 acres of land which provides both a
buffer zone and expansion capability. The plant contains multiple manufacturing
facilities producing a wide range of products. Many of these products are
derivatives of ethylene oxide and propylene oxide. A broad line of specialty
polyols are produced in a flexible batch facility and sold into urethane
coatings, adhesives, sealant and elastomer applications. Chemical intermediates
for the Company's microelectronic materials business are produced in a separate
manufacturing facility dedicated to this purpose. There is a research and
development and technical center at the site which supports the development and
technical service needs of the polyol and glycol products, wood coatings
products and new product scale up for the microelectronics business. The Company
also operates other facilities on the site to produce commodity and specialty
chemicals for third parties under long-term contractual arrangements.

Lake Charles, Louisiana. The Company's facility located in Lake Charles,
Louisiana consists of three manufacturing plants that produce various hydrazine
products. One ISO 9002-certified plant, built in 1979, produces solution grade
hydrazine products for use in chemical blowing agents, water treatment
chemicals, agricultural products, pharmaceutical intermediates and other
chemical products. A second ISO 9002-certified plant, built in 1953, produces
propellant grade hydrazine products, including anhydrous hydrazine (AH),
unsymmetrical dimethyl hydrazine (UDMH) and monomethyl hydrazine (MMH) for use
as fuel in satellites, expendable launch vehicles and auxiliary power units.
Additional equipment of the Company at this site produces propellant grade Ultra
Pure(TM) Hydrazine (UPH), the world's purest grade of anhydrous hydrazine,
principally for satellite propulsion.

Adrian, Michigan. This QS 9000-certified facility is operated by Planar
Solutions, LLC, the Company's joint venture with Wacker Silicones. The site
manufactures copper CMP slurries and dispersions.

Rochester, New York. This ISO 9002- and RC 14001-certified facility
manufactures a large number of chemicals for the specialty chemicals industry.
Many of these chemicals are biocides used to control the growth of
microorganisms, particularly fungi and algae and to control dandruff on the
scalp. The largest 2-chloropyridine production facility in the world is located
here. 2-Chloropyridine is the key intermediate used

13

to produce the Company's Omadine(R) biocides. These products are based on the
salts of the pyrithione molecule. The Company manufactures over a dozen
pyrithione products at this site by modifying these salts by concentration, form
or combining them with other biocides. This plant also manufactures the
Company's Triadine(R) brand of biocides which are a combination of pyrithione
and triazine, a bactericide purchased from a supplier. This facility also
produces the Omacide(R) IPBC brand biocide, which is based upon iodopropargyl-
n-butylcarbamate (IPBC), a broad-spectrum fungicide. This facility also
manufactures personal care specialty ingredients for the Company's personal care
product line and Wolman(R)E for the Company's wood protection business.

East Providence, Rhode Island. This QS 9000-, ISO 9001- and ISO
14001-certified facility is located in an industrial park in East Providence,
Rhode Island. Originally built as a materials research center in 1974, the
facility was expanded in 1984 to manufacture photoresists, photoresist
developers, and photoresist strippers used in the semiconductor industry. The
materials research center at this site develops new compounds used in the
manufacture of photoactive products and has on-site capabilities for chemical
synthesis, testing, and product formulation. This capability allows for rapid
commercialization of new technologies and is augmented by scale-up facilities at
the Brandenburg, Kentucky site. The manufacturing plant at the site receives raw
materials and formulates, filters and packages finished goods in a high purity,
clean environment. Full quality control capabilities are located on-site or at
the nearby Quonset Point facility. The high degree of flexibility required to
custom manufacture specific products is maintained through the number of
multiple-sized formulation vessels available here.

North Kingstown, Rhode Island. This QS 9000-, ISO 9001- and ISO
14001-certified facility is located in an industrial park in North Kingstown,
Rhode Island (Quonset Point Industrial Park) which originally housed a
distribution warehouse. This state-of-the-art manufacturing facility and product
development center for advanced photoresists was built to expand the Company's
capabilities in the development and manufacture of advanced technology
photoresists and aqueous-based polyimides. A technical service center is located
on-site with advanced photolithography equipment identical to that of the
customer base and provides technical service support to North American
customers. The equipment is also used by the advanced product development groups
to develop state-of-the-art products in anticipation of customer requirements.
The manufacturing plant receives raw materials and formulates, filters and
packages finished goods in a high purity, clean environment. Full test
capabilities are located on-site. The high degree of flexibility required to
custom manufacture specific products is maintained through the number of
multiple-sized formulation vessels available here. Packaging and manufacturing
facilities were designed for a new generation of purity requirements.

Charleston, Tennessee. The Company's ISO 9002-certified facility located
in Charleston, Tennessee produces, packages and stores calcium hypochlorite for
the HTH water products business. At this plant, products are packaged into
containers that range in size from 5 pounds to 2,000 pounds per container. The
site also stores product during peak periods.

Trentham, Victoria, Australia. This Koppers Arch joint venture facility
produces CCA-based wood preservatives for the Australian market. The sales
office services the Victoria, South Australian and Western Australian markets.
The site is ISO 9002-certified.

Zwijndrecht, Belgium. This QS 9000-, ISO 9002- and ISO 14001-certified
facility has been operational since 1993 and primarily manufactures and tests
photosensitive polyimides, photoresist developers, and photoresist strippers
used in the semiconductor industry. A technical service center is also located
on the site with photolithography equipment identical to that of the customer
base and provides technical service support for photoresist and polyimides to
European customers.

Igarassu, Brazil. The Company's facility located in Igarassu, Brazil is a
joint venture operation (Nordesclor S.A.) that produces and packages calcium
hypochlorite for the HTH water products business within Brazil. Products for the
swimming pool market and the water treatment market are manufactured and
packaged at this site. The Company also has a small repackaging facility in
Salto, Brazil. The Salto facility also blends and manufactures products for the
performance products business.

14

Les Mureaux, France. This ISO 9002-certified facility is located just
northwest of Paris, France and serves as the principal location for the
manufacturing of coatings for the French furniture market. The site produces a
wide range of stains and coatings, as well as repackages and sells a line of
industrial coatings produced by the Company's Italian operations.

Swords, Ireland. This facility is located just north of Dublin, Ireland.
2-Chloropyridine is imported from the Company's Rochester, New York plant and
converted into zinc and copper salts of the pyrithione molecule. The products
are shipped to customers in Europe and over fifty countries around the world.
This facility is both ISO 9002- and ISO 14001-certified.

Mariano Comense, Italy. This ISO 9002-certified facility serves as the
primary manufacturing location for the Company's UV-based product line for its
coatings business. It also serves as a distribution location and does some
product development.

Pianoro, Italy. This ISO 9002-certified and ISO 14001-certified facility
serves as the primary manufacturing location and research and development center
for the industrial coatings business. It produces the Sayerlack(R) branded
products that include both solvent- and water-borne urethane systems, solvents,
stains and colors. In addition, the central management for the distribution of
these products throughout Italy and various export markets is located here.

Kempton Park, South Africa. The Company's facility is located in Kempton
Park, South Africa and produces and packages calcium hypochlorite for the HTH
water products business principally within the Southern Africa region. Products
for the swimming pool and water treatment markets are also packaged at this
site.

Maracaibo, Venezuela. The Company's ISO 9002-certified facility in
Venezuela is a multi-product manufacturing plant producing a broad range of
polyols, demulsifiers, and specialty surfactants to support regional markets.
Specialty polyols are also produced for local consumption and export.

ITEM 3. LEGAL PROCEEDINGS

In connection with the Distribution, the Company assumed substantially all
non-environmental liabilities for legal proceedings relating to the Company's
businesses as conducted prior to the Distribution Date. In addition, in the
normal course of business, the Company is subject to proceedings, lawsuits and
other claims, including proceedings under laws and regulations related to
environmental and other matters. All such matters are subject to many
uncertainties and outcomes that are not predictable with assurance. While these
matters could materially affect operating results when resolved in future
periods, it is management's opinion that after final disposition, including
anticipated insurance recoveries, any monetary liability or financial impact to
the Company beyond that provided in the consolidated balance sheet as of
December 31, 2003, would not be material to the Company's financial position or
annual results of operations.

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

No matter was submitted to a vote of security holders during the three
months ended December 31, 2003.

15

EXECUTIVE OFFICERS

The biographical information of the executive officers of the Company as of
March 1, 2004 is noted below.

No family relationship exists between any of the above named executive
officers or between any of them and any Director of the Company. Such officers
were elected or appointed to serve as such, subject to the Bylaws, until their
respective successors are chosen.

Mr. Campbell was elected Chairman of the Board and Chief Executive Officer
on February 7, 1999. On July 27, 2000, he was given the additional title of
President. Prior to the Distribution, he was Executive Vice President of Olin
and had global management responsibility for all of Olin's businesses. Prior to
his election as an Executive Vice President of Olin, Mr. Campbell served as
President of Olin's Microelectronic Materials Division. Prior to that time and
since 1987, he served as Olin's Corporate Vice President, Human Resources.

Mr. Craney was elected a Corporate Executive Vice President on January 30,
2003. Prior to that time and since September 13, 2000, he served as Vice
President and General Manager, Treatment. Prior to that position, he served as
Vice President, Strategic Development since August 31, 1999. From February 7,
1999 until August 31, 1999, he was Vice President and General Manager, Urethane
Products. Prior to the Distribution and since May 1996, Mr. Craney served as
Vice President and General Manager, Urethane Products Chemicals Division, at
Olin. Prior to May 1996, he served as Vice President, Business Development and
Materials Management Chemicals Division, at Olin.

Mr. Massimo was elected a Corporate Executive Vice President on January 30,
2003 and has held the position of Chief Financial Officer since January 27,
1999. Prior to January 30, 2003, Mr. Massimo was a Corporate Vice President
since January 27, 1999. Prior to the Distribution, he served as Controller of
Olin since April 1, 1996 and, in addition, as Corporate Vice President since
January 1, 1997. From November 1994 until April 1996, he served as Olin's
Director of Corporate Accounting. Prior to November 1994, he was an Audit Senior
Manager for KPMG LLP.

Mr. Anderson was elected Corporate Vice President, Human Resources
effective December 1, 2000. Prior to that, he had served as Vice President and
General Manager, Semiconductor Chemicals and Services since June 8, 1999. Prior
to that position and since February 19, 1999, Mr. Anderson was Business
Director, Process Chemicals and Chemical Management Services. Prior to serving
as Business Director and prior to the Distribution, Mr. Anderson served as
Business Director, Chemicals Management Services of Olin since 1995 and from
1993 to 1995 was Business Manager, Chemical Management Services at Olin.

Ms. O'Connor was elected Corporate Vice President, General Counsel and
Secretary on February 7, 1999. She was elected a Vice President of the Company
on October 13, 1998 when the Company was a wholly-owned subsidiary of Olin.
Prior to the Distribution and since 1995, Ms. O'Connor served as Olin's
Director, Planning and Development. Ms. O'Connor became an Associate Counsel in
the Olin Corporate Legal Department in 1989 and was promoted to Counsel in 1992
and to Senior Counsel in January 1995.

16

Mr. Bush was elected Treasurer on February 7, 1999 and also appointed a
Vice President on that date. Prior to the Distribution and since February 1998,
Mr. Bush was a consultant to Olin. Prior to February 1998, and since March 1994,
he was Vice President, Treasurer and then Vice President, Investments of Johnson
& Higgins, an insurance brokerage and benefits consulting firm. Prior to 1994,
he held various managerial positions, including Vice President and Treasurer and
Vice President, Financial Planning and Analysis for Squibb Corporation.

Mr. Gouby was appointed President, Arch Microelectronic Materials on
January 30, 2003. Prior to that time and since September 13, 2000, he was Vice
President and General Manager, Microelectronics. Prior to that appointment, he
had served as Vice President and General Manager, Arch Chemicals Semiconductor
Materials Europe since February 8, 1999. Prior to the Distribution and since
January 1, 1991, Mr. Gouby was Vice President and General Manager, Semiconductor
Materials Europe of the Olin Ciba Geigy joint venture which Olin acquired 100%
of in 1995.

Mr. Giuliano was elected Controller on January 27, 1999. Prior to the
Distribution, Mr. Giuliano was an Audit Senior Manager for KPMG LLP and prior to
that and since 1991, he held various positions of increasing responsibility for
KPMG LLP, where he had overall responsibility for services provided in
connection with audits, SEC filings, private offerings and other services for
certain domestic and multinational clients.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

As of January 31, 2004, there were approximately 6,300 record holders of
Company Common Stock.

The Company's Common Stock is traded on the New York Stock Exchange
("NYSE") under the symbol "ARJ."

Information concerning the high and low sales prices of the Company's
Common Stock and dividends paid on Common Stock during each quarterly period for
the last two most recent fiscal years is set forth in Note 22 of Notes to
Consolidated Financial Statements contained in Item 8 of this Report.

Among the provisions of the credit facility (as defined in Item 7 of this
Report) are restrictions relating to the payments of dividends and the
acquisition of the Company's Common Stock based on a financial formula. As of
December 31, 2003, dividends and stock repurchases were limited to approximately
$60.5 million. In addition, the senior unsecured notes issued in March 2002
contain dividend restrictions, which limit dividends and repurchases to $41.1
million as of December 31, 2003. See Note 11 of Notes to Consolidated Financial
Statements contained in Item 8 of this Report.

See Item 12 of this Report for Equity Compensation Plan information.

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected historical financial and
operating information with respect to the Company and is derived from the
Consolidated Financial Statements of the Company. The financial data as of and
for each of the years in the three-year period ended December 31, 2003 were
derived from the audited financial statements included elsewhere herein. Such
historical financial data may not be indicative of the Company's future
performance. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. The following information is
qualified in its entirety by the information and financial statements appearing
elsewhere in this Form 10-K. See Note 1 of the Notes to Consolidated Financial
Statements for additional information.

17

As a result of the sale of the sulfuric acid business, the Company has
restated its prior year results to include the results of the sulfuric acid
business and the gain on the disposition as a component of discontinued
operations in accordance with the Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144").

- ---------------

(1) Cost of Goods Sold for 2003 includes an insurance settlement of $3.3
million for the reimbursement of past and future repairs of one of the
Company's manufacturing locations. 2000 includes $3.0 million to write-down
inventory to net realizable value, including disposal costs, due to the
process chemicals restructuring and the exiting of certain businesses.

18

(2) Selling and Administration expenses for 1999 include $2.3 million of
expenses related to an unfavorable arbitration award and the decision to
delay construction of a facility in China.

(3) Other (Gains) and Losses for 2003 principally includes the pre-tax gain on
the sale of excess land of $2.5 million. 2002 consists of the pre-tax gain
on the sales of excess land. 2001 includes a $1.0 million write-off of an
investment in GlobalBA.com, Inc. 2000 consists of a pre-tax gain on the
sale of Superior Pool Products of $10.6 million and certain
acquisition-related costs of $2.5 million related to the acquisition and
integration of Hickson. 1999 represents a gain on the extinguishment of
debt related to the settlement of a $5.2 million face value note through
the payment of $3.0 million, which was previously recorded as an
extraordinary item and has been reclassified per SFAS No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections."

(4) Impairment and Restructuring consist of the following:

Impairment Charge -- 2000 includes $31.0 million related to the write-down of
property, plant and equipment due to the process chemicals
business restructuring.
Restructuring -- 2003 includes severance cost of $1.4 million for headcount
reductions related to the performance products segment, $1.1
million of severance costs for additional headcount
reductions associated with a revision to the 2002 original
restructuring program offset by a reduction of the prior
years' restructuring reserves of $3.1 million. Restructuring
charges for 2002 include $6.6 million related to headcount
reductions of approximately 200 employees in the
microelectronics materials, performance urethanes and HTH
water products businesses, as well as a $1.0 million charge
related to the consolidation of several treatment products
segment operations. The non-cash portion of the
restructuring charge was approximately $1.0 million. 2001
charges include $2.4 million for headcount reductions, a
$1.5 million reduction of the 2000 reserve and $0.8 million
of retention payments, offset by $0.2 million of
reimbursement of certain severance costs. 2000 charges
include a $34.0 million charge, which consists of $8.9
million related to the restructuring of the process
chemicals business, $14.1 million related to the write-off
of certain costs associated with the biocides business, and
$11.0 million related to other headcount reductions.

(5) Represents the results of operations, net of tax, of the Hickson organics
division for 2003 through the date of sale on August 11, 2003, 2002 and
September through December 2001. It also represents the results of the
sulfuric acid business for all years presented through the date of sale on
July 2, 2003. 2003 results include an after-tax gain of $16.5 million on
the sale of the sulfuric acid business and an after-tax loss of $2.0
million on the sale of the Hickson organics Castleford operations. 2002
results include an after-tax loss of $1.5 million on the sale of the
DanChem organics operation in Danville, Virginia. 2002 includes the
operating results of the DanChem operation through the date of its sale in
March 2002.

(6) 2003 reflects the impact of adoption of SFAS No. 143, "Accounting for Asset
Retirement Obligations." 2001 reflects the impact of adoption of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."

(7) The annual dividend rate was $0.80 per share. 1999 dividends represent
three quarterly payments.

(8) The effective tax rate is based on continuing operations before cumulative
effect of accounting change.

(9) Return on equity is calculated using income (loss) from continuing
operations before cumulative effect of accounting change and average total
shareholders' equity.

(10) The Company sells certain accounts receivable through an accounts
receivable securitization program entered into in March 2002. As a result,
accounts receivable have been reduced, the Company's undivided interest in
such receivables have been reflected as a short-term investment and
proceeds from the sales have been used to pay down debt. As of December 31,
2003, the Company had not sold any participation interests in accounts
receivable. As of December 31, 2002, the Company had sold $33.5 million of
participation interests in $55.1 million of accounts receivable.

(11) Includes a cumulative minimum pension liability adjustment, net of taxes of
$84.8 million, $61.3 million and $0.9 million as of December 31, 2003, 2002
and 2001, respectively.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto included
elsewhere herein. Sales consist of sales to third parties net of any discounts.
Gross Margin is defined

19

as Sales less Cost of Goods Sold, which includes raw materials, labor, overhead
and depreciation associated with the manufacture of the Company's various
products and shipping and handling costs. In addition, segment operating income
includes the equity in earnings of affiliated companies and excludes
restructuring (income) expense, the write-off of an investment in GlobalBA.com
and certain unallocated expenses of the corporate headquarters.

As a result of the sale of the sulfuric acid business, the Company has
restated its prior year results to include the results of the sulfuric acid
business and the gain on the disposition as a component of discontinued
operations in accordance with the Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144").

RESULTS OF OPERATIONS
CONSOLIDATED

Arch Chemicals, Inc. is a global specialty chemicals manufacturer supplying
value-added products and services to several industries on a worldwide basis,
including the consumer products and the semiconductor industries. The Company
operates in three segments: treatment products, microelectronic materials and
performance products. The Company has focused its resources on the treatment
products and the microelectronic materials segments, and during the past year
divested several non-strategic businesses, which included the sulfuric acid
business and the Hickson organics business in Castleford, England. In 2003, the
Company also acquired the remaining 50% share of its water products joint
venture in South Africa.

Arch's treatment products business segment generates approximately 70% of
the Company's annual sales. It includes three reportable business units: HTH
water products, personal care and industrial biocides, and wood protection and
industrial coatings. The treatment products segment drives growth by its ability
to help

20

customers respond to key regulatory trends aimed at improving the environment or
protecting human health and safety. For example, as a result of the
international bans on the use of tributyl tins in marine antifouling paints, the
industrial biocides business has been able to seize upon growth opportunities
with its environmentally preferable zinc and copper Omadine(R) biocides that are
used in marine antifouling paints.

In February 2002, the Company announced a voluntary transition from
chromated copper arsenate ("CCA") to a new generation of wood preservatives for
use in non-industrial wood products after December 31, 2003. CCA is a
traditional wood preservative used for the past 70 years to protect treated wood
against termites and rotting. In connection with the transition, the Company
simultaneously requested the EPA's consent to an amendment of its registration
for CCA, which would limit the approved uses of CCA to industrial applications.
Although the Company views this as a growth opportunity for its wood protection
business, a risk exists that new sales of its CCA alternative product, Wolman(R)
E and Tanalith(R) E, will not replace historical sales of the CCA product.

The microelectronic materials segment is a leading global supplier of
chemicals and services used to create semiconductor devices and flat panel
displays. The Company and its Japanese joint venture, FUJIFILM Arch, are
capitalizing on the rapid growth in Asia of semiconductor and flat panel display
production. The profitability of these market segments has been negatively
affected by downward pricing due to gloablization of the materials supply chain.
To minimize the impact of downward pricing the business has significantly
reduced its cost structure. To maximize the benefits of globalization, the
business has focused on widening its global reach and by providing new products
and services that align with two major market growth trends in the semiconductor
and image display industries -- the switch to advanced copper technology in
leading-edge semiconductor devices and the rapid growth of semiconductor based
image sensors for display production around the globe.

The Company's major sales, distribution and production facilities are
located in North America, Europe and Asia. Additional facilities are based in
Latin America, Australia and South Africa. Approximately 50% of sales and 40% of
total long-lived assets, excluding goodwill, are outside the U.S. Accordingly,
the Company has exposure to fluctuations in foreign currency exchange rates.
These fluctuations impact the translation of sales, earnings, assets and
liabilities from the local functional currency to the U.S. dollar. Operating
units outside the U.S. that purchase raw materials in U.S. dollars are also
impacted by fluctuations in foreign currency exchange rates.

Critical success factors for the Company include managing its overall
global manufacturing facilities to maximize efficiencies in the manufacturing
processes, fixing or eliminating unprofitable businesses, reducing overall
product sourcing costs and growing the businesses organically and through
strategic acquisitions. In addition, several of its customers generally require
that the Company demonstrate improved efficiencies, through cost reductions
and/or price decreases. Finally, the Company's continued growth will be based on
its ability to develop new products to meet its customers' needs. See "Results
of Operations" for more details on the factors, which drive year-over-year
performance.

The Company has a disciplined acquisition strategy that is aimed at
complementing existing strengths and under which all candidates must meet
stringent strategic and financial criteria. First, any acquisition must
strengthen the Company and be focused on the core business areas. Secondly, any
acquisition must be cash accretive in year one and earnings accretive no later
than the end of the first year. Lastly, there must be a detailed integration
plan established prior to the acquisition.

The Company's 2003 full year net sales were $1,009.1 million, up
approximately 11% from 2002. The Company benefited from the growth in its core
businesses, which is evidenced by the strong demand for biocides used in marine
antifouling paints, antidandruff shampoos and building products that deter the
growth of mold and mildew. In 2003, the Company has continued to see savings
from prior restructuring programs that have been combined with other cost
reduction initiatives and have allowed the Company to offset rising trends in
its pension and other health-care costs, as well as continued price pressures.
The Company remains focused on reducing costs.

21

YEAR ENDED DECEMBER 31, 2003 COMPARED TO 2002

Sales increased $103.5 million, or 11.4% due to favorable foreign exchange
(approximately six percent), an increase in volumes (approximately four percent)
and higher pricing (approximately one percent). The sales increase attributable
to the favorable effect of foreign exchange was principally in the industrial
coatings and water products businesses. Sales volumes were higher in the water
products business principally due to the Aquachlor acquisition (approximately
$18 million) and the industrial biocides business as a result of continued
strong demand for biocides used in building products and marine antifouling
paint markets. The increase in sales volumes was partially offset by lower
volumes in the performance products segment.

Gross margin percentage was 28.5% and 29.2% for 2003 and 2002,
respectively. The decrease in margin percentage was primarily a result of higher
raw material costs in the performance urethanes business and unfavorable pricing
in the microelectronics materials segment, partially offset by higher margins in
the water products business due to lower manufacturing costs. Margins also
increased in the industrial biocides business due to the increased sales volume.
Additionally, included in the performance products margins is income for an
insurance settlement of $3.0 million for the reimbursement of past and future
repairs and maintenance expense for storm damage at one of the Company's
manufacturing facilities.

Selling and administration expenses as a percentage of sales decreased to
23.8% in 2003 from 24.0% in 2002 and these expenses increased in amount by $22.5
million. The increase in amount was primarily due to higher customer conversion
costs associated with CCA-alternative preservatives in the wood protection
business, higher legal-related costs in the wood protection and personal care
businesses, higher pension and insurance costs (approximately $7 million), the
acquisition of Aquachlor ($2.7 million) and the unfavorable effect of foreign
exchange (approximately $10 million). Amortization expense decreased $2.3
million. 2002 includes the write-off of the assets associated with a cancelled
expansion of the HTH water products J3(TM) plant of approximately $2 million,
offset by a favorable legal decision in a 1994 raw material spillage lawsuit of
$1.9 million.

Research and development expenses were comparable to 2002 primarily due to
increased spending in the treatment products segment to support various growth
initiatives, which were offset by cost-reduction initiatives in the
microelectronic materials segment.

Equity in earnings of affiliated companies increased $5.3 million due to
favorable operating results of all the joint ventures, in particular the
FUJIFILM Arch and Planar Solutions joint ventures. Operating results of the
FUJIFILM Arch joint venture increased due to increased sales of photoresists and
Color Mosaic(R) used in the fabrication of LCD panels and image sensors and the
operating results of the Planar Solutions joint venture increased due to
increased sales of CMP copper slurries used in advanced chip manufacturing
processes.

Other (gains) and losses in 2003 principally represent the pre-tax gain on
the sale of excess land of $2.5 million. 2002 represents the pre-tax gain on
sales of excess land of $1.8 million.

Restructuring income in 2003 includes $1.4 million for severance costs
related to headcount reductions in the performance products segment. The
headcount reductions are due to the reorganization related to the sale of the
sulfuric acid business and the temporary idling of the Company's hydrazine
hydrate plant in Lake Charles, Louisiana. 2003 also includes $1.1 million of
severance costs for additional headcount reductions associated with a revision
to the 2002 organizational restructuring program, offset by a reduction of the
prior years' restructuring reserves of $3.1 million due to revisions to previous
plans estimates. Restructuring expense in 2002 includes employee-related costs
for headcount reductions in the microelectronic materials, treatment products
and performance products segments and expenses related to the consolidation of
several treatment products operations.

The tax rate on income from continuing operations for 2003 and 2002 was 33%
and 30%, respectively. The impact of restructuring decreased the effective tax
rate on income from continuing operations by four percent for 2002.

22

Income (loss) from discontinued operations, net of tax, reflects the
results of operations and allocated interest of the Hickson organics business
through August 11, 2003 (the date of sale). Net loss was $2.9 million in 2003
compared to a net loss of $3.3 million in 2002. 2003 includes a $4.0 million
impairment charge to adjust the net asset value to its estimated selling price,
less costs to dispose. 2002 included $1.9 million of restructuring charges.

Income (loss) from discontinued operations also includes the results of the
sulfuric acid business through July 2, 2003 (the date of sale). Net income was
$1.1 million in 2003 compared to $1.5 million in 2002.

Gain (loss) on the 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 gain
(loss) on sales of discontinued operations is the after-tax loss of $2.0 million
on the sale of the Company's Hickson organics operations in Castleford, England.
The 2002 loss on the sales of discontinued operations, net of tax, includes the
after-tax loss on the sale of the organics operation located in Danville,
Virginia.

2004 OUTLOOK

HTH water products segment expects continued growth in the HTH(R)
POOLIFE(R) brand sold to the professional pool dealer market. Continued strong
demand for the biocides used in marine antifouling paint and antidandruff
markets are expected in the personal care and industrial biocides segment. Wood
protection is expected to continue to benefit from the conversion to
CCA-alternative products. The Performance Products segment is expected to be
adversely impacted by rising raw material costs. As a result of the above
factors, the Company anticipates sales for the full year will increase
approximately eight to ten percent. Earnings per share are expected to range
from $1.00 to $1.25 per share. Depreciation and amortization is estimated to be
approximately $53 million. Capital spending is anticipated to be in the $25 to
$30 million range. Pension expense and related funding are both expected to
increase by approximately $5 million and $7 million, respectively, in 2004. The
Company's effective tax rate is estimated to be 35%. The projections are subject
to various factors, including but not limited to, estimated raw material and
energy prices, general economic conditions (including semiconductor market
recovery); see Cautionary Statement Under Federal Securities Laws.

The Company is subject to proceedings, lawsuits and other claims in the
normal course of business. These contingencies require management judgment in
order to assess the likelihood of any adverse judgments or outcomes and the
potential range of probable losses. The Company anticipates lower legal expenses
in 2004 of approximately $2 million, which is based on the current legal
proceedings pending or threatened against the Company. If there was a
significant change to a current pending or threatened legal proceeding or as new
cases develop, it could have a material impact on the Company's results.

The Company's hydrazine business currently has a three-year contract with
two one-year renewal options with the United States Department of the Air Force
to supply hydrazine-based propellant, which was effective on March 1, 2001 and
has been amended to expire on April 30, 2004. The contract principally consists
of a fixed-price facility management fee and a product purchase arrangement
whereby the Company supplies product at a fixed price per pound, adjusted
annually for agreed-upon cost escalations. The one-year renewal options have not
been exercised. The Company is pursuing a new long-term hydrazine-based
propellant supply contract with the Defense Energy Support Center (DESC). We
anticipate the DESC will award the contract to a bidder in the first half of
2004, but there is no assurance that such contract will be awarded to the
Company. The 2004 forecast assumes the renewal of the supply contract or a
replacement with a new supply contract. The failure to obtain this contract
could have a material impact on the hydrazine business and the Company's
results. In addition to the potential loss of sales and operating income
associated with the loss of such contract, the Company would also need to assess
the potential impairment of its hydrazine business. In connection with that
assessment, the Company, among other things, may decide to downsize or possibly
shut down its hydrazine facility. As a result, the Company could incur a
potential impairment charge and/or other shutdown related costs. The carrying
value of the long-lived assets associated with the hydrazine propellants is
approximately $7 million. (See Note 1 of Notes to Consolidated Financial
Statements)

23

Additionally, included in the Company's 2004 outlook is an estimate of
incentive compensation expense for 2004, which is based on the estimated
financial performance of the Company. The financial targets are set annually by
the Company's compensation committee. The annual incentive plans financial
targets are earnings per share and cash flow. Cash flow is defined as EBITDA,
plus or minus the change in working capital, less capital expenditures. The
Company also has a long-term incentive plan which has a financial target based
on return on equity to be achieved in three years, which can be accelerated to
be earned in two years. If there were a change in the Company's estimated
financial performance, it could have a significant impact on the amount of
compensation expense recorded by the Company and may have a material mitigating
impact on the Company's results.

The Company's 2004 outlook is also based on assumptions regarding the
Company's pension and postretirement benefit obligations, which are recorded
based on actuarial valuations. Inherent in these valuations are key assumptions,
including discount rates, rates of increase in compensation levels, expected
return on plan assets and trends in health care costs, which are updated
annually. Market conditions and interest rates significantly impact future
assets, liabilities and expense of the Company's pension and postretirement
benefit plans. Therefore, any changes in such assumptions could impact the
Company's estimate of expense and, or funding which may be material to the
Company's future results.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO 2001

Sales increased 2.5%, or $22.3 million due to higher overall volumes
(approximately three percent) and favorable foreign exchange (approximately one
percent), partially offset by lower overall prices (approximately two percent).
Excluding the decrease due to the exit of certain unprofitable process chemical
product lines (approximately $17 million), sales increased $39.4 million or
approximately four percent primarily due to higher HTH water products and wood
protection volumes and industrial coatings favorable foreign currency
translation, partially offset by lower volumes in the performance urethanes
business and lower pricing in the microelectronic materials and hydrazine
businesses.

Gross margin percentage was 29.2% and 28.0% for 2002 and 2001,
respectively. The increase in percentage was due primarily to favorable product
mix in the personal care and industrial biocides businesses, higher margins in
the microelectronic materials segment due to the restructuring of the process
chemicals business and increased volumes due to the modest recovery, and lower
fixed costs due to restructuring in the HTH water products business. These were
partially offset by higher costs due to the change in the HTH water products
distribution strategy (approximately $13 million) and the 2001 benefit of a $5.0
million LIFO inventory decrement due to reduced inventory levels.

Selling and administration expenses as a percentage of sales increased to
24.0% in 2002 from 23.3% in 2001 and these expenses increased in amount by $11.2
million. The increase was primarily due to higher selling and advertising costs
in the treatment segment to support the HTH(R)brand relaunch and the entrance
into the professional pool dealer market (approximately $5 million). Higher
legal costs in the wood protection and microelectronic materials businesses,
additional expenses related to the geographic expansion of the industrial
coatings business, higher insurance and employee benefit-related expenses, and
costs related to the Company's accounts receivable securitization program ($1.6
million) also contributed to the increase. These factors were partially offset
by lower selling expenses associated with the microelectronic materials and
performance products segments due to cost reduction initiatives. In addition,
the write-off of the assets associated with a cancelled expansion of the HTH
water products J3(TM) plant of approximately $2 million was offset by a
favorable legal decision in a 1994 raw material spillage lawsuit ($1.9 million).
In addition, the increase in selling and administration costs was partially
offset by a decrease in amortization of intangibles of $6.3 million primarily
due to the adoption of SFAS 142 (see Note 8 of Notes to Consolidated Financial
Statements).

Research and development expenses decreased $2.4 million primarily due to
cost reduction initiatives in the microelectronic materials, performance
products and HTH water products businesses.

24

Equity in earnings of affiliated companies increased $3.1 million
principally due to higher operating profits of the FUJIFILM Arch joint venture
due to higher sales related to stronger Asian demand and favorable operating
results of the Planar Solutions joint venture due to higher sales of
copper-based slurries.

Other (gains) and losses in 2002 represents a $1.8 million pre-tax gain on
the sales of excess land. 2001 represents the write-off of an investment in
GlobalBA.com, Inc., an Internet-based business-to-distributor-to-business
on-line marketplace for specialty chemical companies, which became insolvent in
the third quarter of 2001.

Restructuring in 2002 includes a $6.6 million charge for headcount
reductions in the microelectronic materials, treatment products and performance
products segments, and a $1.0 million charge for expenses related to the
consolidation of several treatment products segment operations. The Company
realized the benefits of this program during 2002 and anticipates ongoing annual
cost savings related to the restructuring. Restructuring in 2001 consists of a
$2.4 million charge for headcount reductions at corporate and at the performance
products business, offset by a $1.5 million reduction of the estimated remaining
liability for the 2000 restructuring program. In addition, 2001 restructuring
includes $0.8 million of retention payments to employees associated with the
restructuring of the process chemicals business, offset by the $0.2 million
reimbursement of certain severance costs, which were previously recorded as part
of the restructuring charge in the fourth quarter of 2000.

Interest expense, net was $16.0 million in 2002 compared to $17.7 million
in 2001. The decrease was primarily due to lower debt due to proceeds from an
accounts receivable securitization program (See Note 2 of Notes to Consolidated
Financial Statements), the sale of the Hickson organics DanChem business and
lower working capital borrowing needs.

The tax rate on income from continuing operations for 2002 and 2001 was 30%
and 20%, respectively. The impact of restructuring decreased the effective tax
rate on income from continuing operations by four percent for 2002.

Income (loss) from discontinued operations, net of tax in 2002 includes the
results of operations of the Hickson organics Castleford business for the full
year and the results of operations of the Hickson organics DanChem business
through the sale of that business in March of 2002. Results in 2002 include
interest expense allocated to this business, a $1.9 million restructuring charge
for headcount reductions for approximately 40 employees at Castleford and a
valuation reserve associated with capital spending at the Castleford business.
Loss from discontinued operations for 2001 includes operating results of the
Hickson organics Castleford and DanChem businesses and interest expense
allocated for September through December 2001 and includes a $1.8 million
restructuring charge for headcount reductions of approximately 45 employees at
Castleford. The net earnings (losses) related to the Hickson organics division
during the holding period through August 2001 are not included in the
Consolidated Statements of Income, but have been recorded as an adjustment to
the net asset value. The post-acquisition income before allocated interest
expense for the period from January 1, 2001 through August 31, 2001 associated
with these assets held for sale was $3.8 million. In addition, interest expense
of $3.8 million was allocated to the Hickson organics division for the
eight-month period ended August 31, 2001. See Note 5 of Notes to Consolidated
Financial Statements.

Income (loss) from discontinued operations also includes the results of the
sulfuric acid business. Net income decreased to $1.5 million in 2002 compared to
$3.0 million in 2001, due to the unfavorable product mix.

Gain (loss) on sales of discontinued operations, net of tax, represents the
after-tax loss on the sale of the Company's operations in Danville, Virginia for
proceeds of approximately $25 million.

SEGMENT OPERATING RESULTS

As a result of the sale of the sulfuric acid business, the Company has
restated its prior period results of the sulfuric acid business as a component
of discontinued operations, in accordance with SFAS No. 144. Additionally, the
Company has combined its performance urethanes and hydrazine businesses to form
the new

25

performance products segment. 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.
Segment operating income includes the equity in earnings of affiliated companies
and excludes restructuring (income) expense, the write-off of an investment in
Global BA.com and certain unallocated expenses of the corporate headquarters.

TREATMENT PRODUCTS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO 2002

Sales increased $106.5 million, or 17.7%, and operating income increased
$9.0 million. The increase in sales is due to higher volumes (approximately nine
percent), favorable foreign exchange (approximately eight percent) and higher
pricing (approximately one percent). The increase in volumes of approximately
$53 million is due primarily to the Aquachlor acquisition (approximately $18
million) in the water products business and the continued strong demand for all
product lines in the industrial biocides business. The favorable foreign
exchange effect on sales is due primarily to the industrial coatings and water
products businesses. Operating income increased due to the higher sales volumes,
partially offset by higher selling and administration due to increased legal
expenses and additional investments to support growth initiatives.

HTH WATER PRODUCTS

Sales increased $46.6 million, or 19.2%, and operating results increased
$10.1 million. The increase in sales was due to the acquisition of Aquachlor
(approximately $18 million), increased volumes of approximately four percent due
to stronger international volumes of branded calcium hypochlorite and
chlorinated isocyanurates and increased pool maintenance products and
accessories volumes and favorable foreign currency rates (approximately seven
percent).

Operating results improved significantly. The improved results were due to
the higher sales, lower manufacturing and product sourcing costs, partially
offset by higher selling and administration costs. Selling and administration
costs increased due to higher litigation related costs associated with property
damage claims (see Note 20 Commitments and Contingencies), partially offset by
lower advertising costs. 2002 included the write-off of the assets associated
with a cancelled expansion of the J3(TM) plant of approximately $2 million.

26

PERSONAL CARE AND INDUSTRIAL BIOCIDES

Sales increased $24.8 million, or 19.9%, due to continued strong demand for
all product lines, in particular the biocides used in marine antifouling paint,
antidandruff shampoo and building products markets. Operating income increased
$0.6 million due to the higher sales, partially offset by higher selling and
administration costs. Selling and administration costs increased to support
various growth initiatives related to the expansion of the personal care
business into new markets and increased legal expenses in the personal care
product line relating to litigation in which the Company is asserting claims
against a former owner and several former employees of an acquired business. In
addition, 2002 benefited from the pre-tax gain on the sale of excess land of
$0.8 million.

WOOD PROTECTION AND INDUSTRIAL COATINGS

Sales increased $35.1 million, or 15.1%, primarily due to favorable foreign
currency rates (approximately 12%). Excluding the favorable impact of foreign
currency, sales increased as higher volumes of Wolman(R) E and Tanalith(R) E
(both CCA-alternative products) and favorable pricing for industrial coatings,
were partially offset by 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 the wood treatment manufacturers of their CCA
registrations for non-industrial uses by December 31, 2003.

Operating income decreased $1.7 million due to higher ongoing legal defense
expenses associated with CCA product related lawsuits and customer conversion
costs associated with CCA-alternative preservatives. 2002 benefited from a
favorable legal decision in a 1994 raw material spillage lawsuit of $1.9
million.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO 2001

Sales increased 10.9% due to higher volumes (approximately 10%) and
favorable foreign exchange (approximately two percent), partially offset by
lower prices (approximately one percent), and operating results increased by
$13.9 million. The increase in volumes is due primarily to higher HTH water
products, new wood preservative products volumes and higher biocides sales to
the marine antifouling paint and anti-dandruff markets. Operating income
increased principally due to the higher sales, partially offset by the increased
costs of the direct-to-retail distribution strategy for HTH water products
(approximately $13 million), higher selling and advertising costs to support the
HTH(R) brand relaunch and entrance into the dealer market (approximately $5
million) and the write-off of the assets associated with a cancelled expansion
of the J3(TM) plant of approximately $2 million. Higher legal defense expenses
associated with CCA product-related lawsuits were mostly offset by a favorable
legal decision in a 1994 raw material spillage lawsuit ($1.9 million). In
addition, 2002 operating results included the benefit of the non-amortization of
goodwill and other intangible assets of $4.4 million and the pre-tax gain on
sales of excess land of $1.5 million. 2001 operating results included a benefit
of a $2.8 million LIFO inventory decrement.

HTH WATER PRODUCTS

Sales increased 16.8% and operating results improved by $1.2 million. Sales
increased primarily due to higher branded (HTH(R) and POOLIFE(R)) and nonbranded
calcium hypochlorite, branded isocyanurates and pool maintenance products and
accessories volumes. The higher branded volumes were a result of the HTH(R)
brand relaunch and the launch of the new POOLIFE(R) dealer exclusive brand. The
higher pool maintenance products and accessories volumes were due to new
marketing initiatives. Foreign sales also increased due to higher volumes as a
result of warm weather in Europe and Canada.

Operating results improved slightly. The higher sales, along with fixed
cost savings due to the restructuring program were mostly offset by higher
selling and advertising costs to support the HTH(R) brand relaunch and the
entrance into the dealer market (approximately $5 million), higher distribution
and warehouse expenses due to the change in distribution strategy to a
direct-to-retail approach (approximately $13 million) and the write-off of the
assets associated with a cancelled expansion of the J3(TM) plant of

27

approximately $2 million. In addition, 2001 operating results included a $2.0
million benefit of a LIFO inventory decrement.

PERSONAL CARE AND INDUSTRIAL BIOCIDES

Sales were 5.6% higher than 2001 as higher biocides volumes to the marine
antifouling paint and antidandruff markets were partially offset by lower
personal care sales due to the economic slowdown. Operating income was
approximately 34% higher than 2001 as a result of higher gross margins due to
favorable product mix and lower manufacturing costs from cost-reduction
initiatives. Operating results also benefited from the non-amortization of
goodwill of $1.6 million and the pre-tax gain on the sale of excess land of $0.8
million. In addition, 2001 operating results included a $0.8 million benefit of
a LIFO inventory decrement.

WOOD PROTECTION AND INDUSTRIAL COATINGS

Sales were 8.1% higher than the prior year due to higher volumes
(approximately five percent), favorable foreign currency translation
(approximately five percent), principally in the coatings business, partially
offset by lower prices (approximately two percent). The higher volumes were
primarily due to higher volumes of Wolman(R)E (Wolmanized(R) Natural Select(TM))
and Tanalith(R) E preservatives (both CCA-alternative products) as well as
stronger European economic conditions resulting in higher industrial coatings
sales. Operating income was approximately 47% higher than the prior year due to
the higher sales, partly offset by higher selling costs as a result of the
geographic expansion of the coatings business. Higher legal defense expenses
associated with CCA product-related lawsuits were mostly offset by a favorable
legal decision in a 1994 raw material spillage lawsuit ($1.9 million). In
addition, operating results benefited from the non-amortization of goodwill and
other intangible assets of $2.7 million and the pre-tax gain on the sale of
excess land of $0.7 million.

MICROELECTRONIC MATERIALS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO 2002

Sales increased $3.0 million or 2.1%. The increase in sales is due to
higher volumes (approximately two percent) and favorable foreign exchange
(approximately two percent), partially offset by lower prices (approximately two
percent). Increased volumes of photoresists and polyimides due to the growth of
new product sales were partially offset by lower pricing principally in
ancillary products. European and Asian sales increased, partially offset by
lower North American sales.

Operating results improved significantly as a result of the higher sales,
lower legal costs and improved operating results of its joint ventures ($4.0
million). This improvement in operating results was offset by lower margins from
reduced pricing. Lower selling and administration costs due to cost-reduction
initiatives were partly offset by the unfavorable effect of foreign exchange.
Operating results of the FUJIFILM Arch joint venture increased due to increased
sales of photoresists and Color Mosaic(R) used in the fabrication of LCD panels
and image sensors. Operating results of the Planar Solutions joint venture
improved due to increased sales of CMP copper slurries used in advanced chip
manufacturing processes.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO 2001

Sales decreased 10.3% due to lower volumes (approximately eight percent)
and lower prices (approximately two percent), and operating results improved by
$4.7 million. Of the sales decrease, approximately

28

$17 million related to the exit of certain unprofitable process chemical product
lines announced in the fourth quarter of 2000. Excluding this effect, sales were
comparable as higher volumes of polyimides, photoresists and blends due to new
product sales and existing customer growth were offset by the weakness of the
semiconductor industry in the early part of the year, which resulted in lower
pricing and adversely affected demand for the thin film and ancillary product
lines.

The improvement in operating results was due to improved operating results
from the Company's FUJIFILM Arch and Planar Solutions joint ventures due to
significantly higher sales. In addition, lower manufacturing, selling and
development costs resulting from cost-reduction initiatives were partially
offset by higher administration expenses due primarily to higher legal defense
costs, net of the benefit of an unrelated insurance recovery of $0.9 million. In
addition, operating results benefited from the non-amortization of goodwill and
other intangible assets of $1.6 million, partially offset by the write-off of
certain intangible assets due to the cancellation of certain technology
agreements of $0.4 million.

PERFORMANCE PRODUCTS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO 2002

PERFORMANCE URETHANES

Performance urethanes sales increased $2.0 million and operating results
decreased by $4.5 million. Sales were higher than prior year due to higher
polyol volumes and higher contract manufacturing, partially offset by lower
Latin American sales, as a result of poor economic conditions and political
instability in Venezuela, the withdrawal from a Middle Eastern market and lower
propylene glycol sales.

Operating results decreased due to significantly higher raw material and
energy costs, slightly offset by lower selling and administration expenses
resulting from cost-reduction initiatives. 2003 also includes income for an
insurance settlement of approximately $3 million for reimbursement of past and
expected future repairs and maintenance expense for storm damage at one of the
Company's manufacturing facilities.

HYDRAZINE

Hydrazine sales decreased $8.0 million and operating income decreased by
$3.5 million. Sales decreased due to lower hydrate volumes resulting from the
temporary idling of the plant, partly offset by favorable hydrate pricing.
Operating income was lower than prior year primarily due to the lower sales and
higher manufacturing costs.

29

YEAR ENDED DECEMBER 31, 2002 COMPARED TO 2001

PERFORMANCE URETHANES

Performance urethanes sales decreased 14.8% principally due to lower Latin
American sales (approximately 10%), a result of poor economic conditions and
political instability in Venezuela and lower propylene glycol volumes, partially
offset by higher North American polyol volumes. Operating results improved $1.0
million as a result of lower raw material costs and lower manufacturing and
selling and administrative costs due to cost-reduction initiatives implemented
in 2001 and 2002. These factors were partially offset by the lower sales, the
absence of a $2.2 million benefit of a LIFO inventory decrement and the $2.5
million contract settlement gain related to the termination of the contract
manufacturing agreement with Sunoco in 2001.

HYDRAZINE

Hydrazine sales were comparable with prior year as higher hydrate volumes
were offset by lower hydrate prices. Operating income was 16.4% lower than 2001
as lower pricing and unfavorable product mix were partially offset by the
absence in 2002 of unrealized losses related to natural gas futures contracts in
2001 of $0.7 million.

ENVIRONMENTAL

The Company operates manufacturing facilities throughout the world and as a
result is subject to a broad array of environmental laws and regulations in
various countries. The Company also implements a variety of voluntary programs
to reduce air emissions, eliminate or reduce the generation of hazardous wastes
and to decrease the amount of wastewater discharges. The establishment and
implementation of U.S. Federal, state and local standards to regulate air and
water quality and to govern contamination of land and groundwater has affected,
and will continue to affect, substantially all of the Company's U.S.
manufacturing locations. Federal legislation providing for regulation of the
manufacture, transportation, use and disposal of hazardous and toxic substances
has imposed additional regulatory requirements on industry in general, and
particularly on the chemicals industry. In addition, the implementation of
environmental laws, such as the Resource Conservation and Recovery Act, the
Clean Air Act and the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, has required, and will continue to require, new
capital expenditures and will increase operating costs.

The Distribution Agreement specifies that the Company is only responsible
for certain environmental liabilities at the Company's current facilities and
certain off-site locations. 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 Consolidated Financial Statements.

In connection with the disposition of the sulfuric acid business on July 2,
2003, the Company provided environmental covenants to the purchaser in which the
Company is solely liable for the costs of any environmental claim for
remediation of any hazardous substances that were generated, managed, treated,
stored or disposed of prior to the closing date of the sale. The Company will be
released, under the sales agreement, from its obligation, which cannot exceed
$22.5 million, 20 years from the closing date. Additionally, as part of its
environmental indemnifications the Company will be responsible, for five years
from the closing date, for damages directly related to the process sewer system
at the Beaumont, Texas plant.

As part of the Hickson organics disposition, the Company will continue to
be responsible for known environmental matters. Such matters have previously
been accrued for in its environmental reserve included in the Consolidated
Financial Statements. Additionally, any unknown environmental matters that are
identified subsequent to the sale, the Company has agreed to share
responsibility with the purchaser over a seven-year period, with the Company's
share decreasing to zero over the seven-year period. The Company's maximum
aggregate liability for such unknown environmental matters is L5.0 million.

30

The Company does not anticipate any exposure related to the environmental
indemnifications for the sulfuric acid and the Hickson organics dispositions.
The Company has estimated that the fair value of any such exposure would be
immaterial.

Associated costs of investigatory and remedial activities are provided for
in accordance with generally accepted accounting principles governing
probability and the ability to reasonably estimate future costs. Charges to
income for investigatory and remedial efforts were not material to operating
results in 2003, 2002 and 2001 but may be material in future years.

Cash outlays for normal plant operations for the disposal of waste and the
operation and maintenance of pollution control equipment and facilities to
ensure compliance with mandated and voluntarily imposed environmental quality
standards were charged to income. Cash outlays for remedial activities are
charged to reserves. Historically, the Company has funded its environmental
capital expenditures through cash flows from operations and expects to do so in
the future.

Cash outlays for environmental related activities for 2003, 2002 and 2001
were as follows:

The Company's Consolidated Balance Sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$8.6 million at December 31, 2003, of which $3.3 million is classified as
current liabilities and $10.4 million at December 31, 2002, of which $4.5
million is classified as current liabilities. The Company's estimated
environmental liability relates to nine sites, six of which are in the United
States and none of which are on the U.S. National Priority List. These amounts
did not take into account any discounting of future expenditures, any
consideration of insurance recoveries or any advances in technology. These
liabilities are reassessed periodically to determine if environmental
circumstances have changed or if the costs of remediation efforts can be better
estimated. As a result of these reassessments, future charges to income may be
made for additional liabilities.

Annual environmental-related cash outlays for site investigation and
remediation, capital projects and normal plant operations are expected to range
from $10 million to $15 million over the next several years. While the Company
does not anticipate a material increase in the projected annual level of its
environmental-related costs, there is always the possibility that such increases
may occur in the future in view of the uncertainties associated with
environmental exposures. A portion of the higher environmental cash outlays
during 2001 was associated with a remediation project at the Company's Conley,
Georgia wood treatment facility. Total cash outlays since its acquisition
(capital and remedial) were approximately $5.7 million. The project was
completed in 2002.

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
lengthy time periods 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. At December 31,
2003, the Company had estimated additional contingent environmental liabilities
of $7.2 million.

31

LEGAL MATTERS

There are a variety of non-environmental legal proceedings pending or
threatened against the Company. In connection with the acquisition of Hickson,
the Company assumed certain legal obligations, including a trial court judgment,
in favor of a railroad, of approximately $8.5 million plus interest in a lawsuit
associated with a wood preservative spillage in 1994. In 2002, a new trial
resulted in a judgment of $2.6 million plus interest. The railroad has appealed
the judgment. The judgment and related interest is included in Accrued
Liabilities in the accompanying 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 in
principle to settle a portion of the litigation that involves claims by
plaintiffs that are individuals. This agreement requires court approval. 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, including the amount of its participation in the settlement, and
does not expect any final resolution on these cases, net of an insurance
recovery, to have a material adverse effect on results of operations or
financial position of the Company.

The Company settled a product claim by a customer related to a discontinued
product in August 2002 for $3.0 million, net of insurance claims of
approximately $2.5 million. The full settlement of $5.5 million was paid by the
Company during the third quarter of 2002. Actual insurance proceeds of $1.6
million were received by March 31, 2003 in full settlement of the insurance
claims.

The Company and/or its CCA-formulating subsidiary Arch Wood Protection,
Inc. were named, along with several other 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.

In the fifth putative class action lawsuit (Ardoin v. Stine Lumber Company
et. al.), the court has not yet decided the issue of whether the case should or
should not be certified as a class action, although management believes the
precedent set in the Jacobs case will prevail in the Ardoin case as well. The
proposed class members in the Ardoin case purport to include various persons who
purchased CCA-treated wood products for residential use. The lawsuit seeks to
recover the purchase price and other alleged unquantified damages under various
theories, including breach of warranty. This case does not allege personal
injury. Plaintiffs have now moved to dismiss this case with prejudice and the
court is still considering plaintiffs' motion.

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 2003 and 2002, and may increase in the
future.

All CCA-related cases are subject to a number of uncertainties, including
in the case of the remaining putative class action, whether and to what extent
it will be certified as a class action. 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
condition, cash flow or results of operations.

32

BUSINESS AND CREDIT CONCENTRATIONS

A significant portion of sales of the treatment products segment
(approximately 21%) is dependent upon two customers, one of which accounts for a
significant portion of the sales of the HTH water products business and the
other of which accounts for a significant portion of the sales of the personal
care and industrial biocides businesses. Sales to these two customers are
individually less than 10% of the Company's 2003 consolidated sales. However,
the loss of either of these customers could have a material adverse effect on
the sales and operating results of the respective segment and businesses if such
customer was not replaced.

Sales of the Company's microelectronic materials products segment are
dependent upon the economic conditions of the semiconductor industry. Changes in
this industry may significantly affect management's estimates of current and
future operating results. Additionally, a significant portion of the sales of
the microelectronic materials segment is dependent upon one customer
(approximately 26%). Sales to this customer are less than 10% of the Company's
2003 consolidated sales. However, the loss of this customer could have a
material adverse effect on the sales and operating results of the segment if
such a customer was not replaced.

Sales of the HTH water products segment are seasonal in nature as its
products are primarily used in the U.S. residential pool market. Historically,
approximately 40% - 50% of the sales in the HTH water products business occur in
the second quarter of the fiscal year, as retail sales in the U.S. residential
pool market are concentrated between Memorial Day and the Fourth of July.
Therefore, interim results for this segment are not necessarily indicative of
the results to be expected for the entire fiscal year. In addition, in 2002 the
HTH water products segment changed its distribution strategy from utilizing
distributors to directly shipping to retail channels, which has made the HTH
water product sales even more concentrated in the second and third quarters.

LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA

CASH FLOW DATA

OPERATING ACTIVITIES:

For 2003, the $80.5 million decrease in cash flow provided by operating
activities from continuing operations was primarily attributable to the Company
not utilizing the accounts receivable securitization program as of December 31,
2003, compared to the benefit of selling receivables as of December 31, 2002
($67.0 million). The remaining decrease in cash flow was attributable to a lower
reduction in working capital for 2003 compared to 2002. The lower reduction was
due to higher receivables as a result of increased sales in the fourth quarter
of 2003.

33

For 2002, the $30.3 million increase in cash flow provided by net operating
activities from continuing operations was primarily attributable to the sale of
accounts receivable and lower restructuring payments. This was partially offset
by a lower working capital reduction as the Company reduced its working capital
by $27.1 million in 2002 compared to a $36.8 million decrease in 2001. The
Company significantly reduced its working capital over the past two years as a
result of its focus on reducing its investment in working capital and as a
result of the restructuring of the process chemical business.

Cash used by the operations of assets held for sale was $13.5 million in
2003 compared to $1.2 million in 2002, primarily due to an increase in working
capital of the Hickson organics Castleford business and the sulfuric acid
business.

Cash used by the operations of assets held for sale was $1.2 million in
2002 compared to cash provided of $1.9 million in 2001 primarily due to timing
of working capital.

INVESTING ACTIVITIES:

Capital expenditures for 2003 decreased 35.4% as compared to 2002 due to
lower expenditures in the water products business and the performance products
segment.

Capital expenditures for 2002 decreased 24.5% as compared to 2001 primarily
due to lower discretionary expenditures associated with the microelectronic
materials and performance products segments.

Capital expenditures for 2004 are expected to be in the $25 to $30 million
range.

In December 2003, the Company sold warehouses for proceeds of approximately
$0.8 million. On September 30, 2003, the Company sold excess land. Total
proceeds from the sale were $6.5 million. Proceeds consisted of cash of $2.0
million and a note of $4.5 million. In September 2002, the Company sold excess
land in China, Ireland and Arizona for cash proceeds of approximately $2.3
million.

On August 11, 2003, the Company completed the sale of the Hickson organics
operations in Castleford, England. Total proceeds from the sale were L12.5
million ($20.1 million), subject to a post-closing working capital adjustment.
Proceeds consist of cash of L11.0 million ($17.7 million) and two notes for L1.5
million ($2.4 million), of which one note for L1.0 million ($1.6 million) is
contingent on future operating results from January 1, 2003 through December 31,
2005. A portion of the proceeds were used to pay down debt.

On August 1, 2003, the Company completed the purchase of the remaining 50%
share of Aquachlor (Proprietary) Limited in South Africa from its joint venture
partner Sentrachem Limited for $2.5 million (see Note 19 of Notes to
Consolidated Financial Statements).

On July 2, 2003, the Company completed the sale of substantially all of the
net assets of its sulfuric acid business to Peak Sulfur, Inc. Net proceeds from
the sale were $47.6 million, after a post-closing working capital payment. A
portion of the proceeds was used to pay down debt.

In March 2002, the Company completed the sale of its DanChem operations in
Danville, Virginia for approximately $25 million. Proceeds from the sale of
these assets have been used to pay down debt. (See Note 5 of Notes to
Consolidated Financial Statements.)

In September 2001, the Company acquired Butler Mabbutt & Wrighton and the
Industrial Division of Humbrol Limited for an aggregate of approximately $1
million in cash.

In March 2001, the Company completed the acquisition of the assets of
Walker Brothers, a division of Consolidated Coatings, for approximately $2
million in cash.

FINANCING ACTIVITIES:

Cash used by financing activities in 2003 was principally due to net
repayments of debt of $2.4 million and dividends paid to shareholders of $18.0
million. 2003 also includes the cash proceeds from the termination of interest
rate swap agreements of $7.1 million, which represented the market value of the
contracts on the date of termination.

34

Cash used by financing activities in 2002 was principally due to net
repayments of debt of $86.0 million and dividends paid to shareholders of $17.9
million.

Cash used in financing activities in 2001 was principally due to net
repayments of debt of $39.6 million and dividends paid to shareholders of $17.7
million.

LIQUIDITY

In June 2003, the Company entered into an unsecured $210.0 million senior
revolving credit facility ("credit facility") which expires in June 2006. This
credit facility replaced a $65.0 million 364-day credit facility, which expired
on June 21, 2003, and a $125.0 million revolving five-year credit facility that
was scheduled to expire in January 2004. 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 ($60.5
million at December 31, 2003). As of December 31, 2003, 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.
At December 31, 2003, the Company had $210.0 million of available borrowings
under the credit facility, as no borrowings were outstanding.

In May 2003, the Company terminated its interest rate swap agreements that
were entered into in April 2002. As a result, the Company received cash proceeds
of $7.1 million, which represented the market value of the contracts on the date
of termination. The Company utilized the proceeds to pay down debt and reduced
the amount recorded in Other Assets for such derivative instruments to zero.
There was no gain or loss on the transaction.

Simultaneous with the termination of the interest rate swap agreements, the
Company entered into new interest rate swap agreements, pursuant to 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 $0.8 million and are included in Other Liabilities
on the accompanying 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 met the criteria of SFAS 133 to qualify for hedge accounting
treatment with no ineffectiveness.

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. The
notes contain quarterly leverage ratio (debt/EBITDA) covenants of 4.5 through
December 31, 2002 and 3.5 thereafter and fixed coverage ratio covenants of 2.0
through December 31, 2002 and 2.25 thereafter, and restrict the payment of
dividends and repurchases of stock to $65 million less cumulative dividends and
repurchases of stock plus 50% of cumulative net income (loss) under certain
circumstances beginning January 1, 2002 ($41.1 million at December 31, 2003). In
addition, the notes contain a debt to total capitalization ratio requirement not
to exceed 55%. Proceeds from the issuance of these notes were used to pay down
debt, including the Company's $225 million revolving credit facility which
expired in March 2002 and which was used to finance the Hickson acquisition and
refinance a portion of the assumed Hickson debt. (See Note 11 of Notes to
Consolidated Financial Statements.)

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. 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. Such agreement is

35

renewable annually. As of December 31, 2003, the Company had not sold any
participation interests in accounts receivable under this program. The amount of
participation interests sold under this arrangement is subject to change based
on the level of eligible receivables. The accounts receivable sold are reflected
as a sale of accounts receivable in accordance with SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The costs of the program of $0.8 million and $1.6 million for the
year ended December 31, 2003 and 2002, respectively, are included in Selling and
Administration expenses in the accompanying Consolidated Statement of Income.
The costs of the accounts receivable securitization program are a percentage of
the fair market value of the participation interests sold. The percentage is
variable and was approximately equivalent to the one-month LIBOR rate plus 0.45%
(1.7% and 2.2% in 2003 and 2002, respectively). See Note 2 of Notes to
Consolidated Financial Statements. The accounts receivable securitization
program provides another source of funding for the Company and lowers overall
funding costs.

At December 31, 2003, the Company had $13.4 million of outstanding letters
of credit and $7.0 million of letters of guarantee, including $6.7 million of
Planar Solutions (a joint venture) borrowings. The Company has agreed to
guarantee up to $8.5 million of Planar borrowings as of December 31, 2003.

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 or cash
generation 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.

COMMITMENTS

The following table details the Company's contractual obligations as of
December 31, 2003:

The amounts above exclude the Company's minimum pension funding
requirements as set forth by ERISA, which is expected to be $8 million in 2004
and $5.0 million in 2005 for the U.S. pension plan. The Company's minimum
funding requirements after 2004 are dependent on several factors, including the
discount rate. The Company also has payments due under other postretirement
benefit plans. These plans are pay as you go, and therefore not required to be
funded in advance. The Company also has minimum funding requirements for its
U.K. pension plan, which are expected to be approximately $10.0 million in 2004.

(1) The debt and capital lease obligations excludes the unamortized fair
value adjustment related to the interest rate swaps that were terminated in May
2003. The Company received proceeds of $7.1 million, which is being amortized
over the life of the senior notes (through March 2007) using the
effective-interest yield method. At December 31, 2003, the unamortized fair
value adjustment was $6.0 million.

OTHER FINANCIAL DATA

On October 28, 1999, Arch's Board of Directors approved a stock repurchase
program whereby the Company is authorized to buy back up to 1.2 million shares
of its common stock, representing approximately five percent of outstanding
shares. The program was suspended in 2000. In October 2003, the Board of

36

Directors unanimously agreed to continue the previous suspension of its stock
repurchase program. The Company had repurchased approximately 893,000 shares of
the 1.2 million authorized, or approximately 75 percent, at a cost of
approximately $16 million.

On February 6, 2004, the Company declared a quarterly dividend of $0.20 on
each share of the Company's common stock. The dividend is payable on March 18,
2004 to shareholders of record at the close of business on February 17, 2004.

CRITICAL ACCOUNTING POLICIES

The Company's consolidated financial statements are based on the accounting
policies used. Certain accounting policies require that estimates and
assumptions be made by management for use in the preparation of the financial
statements. Critical accounting policies are those that are central to the
presentation of the Company's financial condition and results and that require
subjective or complex estimates by management. These include the following:

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company evaluates goodwill and identified intangible assets on a
business-by-business basis ("reporting unit") for impairment. The Company
evaluates each reporting unit for impairment based upon a two-step approach.
First, the company compares the fair value of the reporting unit with its
carrying value. Second, if the carrying value of the reporting unit exceeds its
fair value, the company compares the implied fair value of the reporting unit's
goodwill to its carrying amount to measure the amount of impairment loss. In
measuring the implied fair value of goodwill, the Company would allocate the
fair value of the reporting unit to each of its assets and liabilities
(including any unrecognized intangible assets). Any excess of the fair value of
the reporting unit over the amounts assigned to its assets and liabilities is
the implied fair value of goodwill.

The Company measures the fair value of a reporting unit as the estimated
discounted future cash flows, including a terminal value, which assumes the
business continues in perpetuity. The long-term terminal growth assumptions
reflect the current long-term view of the marketplace. The discount rate is
based upon the weighted average cost of capital of each reporting unit. Each
year the Company re-evaluates the assumptions in the discounted cash flow model
to address changes in the business and marketplace conditions.

Based upon the annual impairment analysis, which is completed in the first
quarter, the estimated fair value of the reporting units exceeded their carrying
value and as a result, the Company did not need to proceed to the second step of
the impairment test.

Considerable management judgment is necessary to estimate discounted future
cash flows in conducting an impairment test for goodwill and other intangible
assets, which may be impacted by future actions taken by the Company and its
competitors and the volatility in the markets in which the Company conducts
business. A change in assumptions in the Company's cash flows could have a
significant impact on the fair value of the Company's reporting units, which
could then result in a material impairment charge to the Company's results of
operations. See Note 8 of Notes to Consolidated Financial Statements for
additional information.

INCOME TAXES

The Company's effective tax rate is based on pre-tax income, statutory tax
rates and tax planning strategies. Significant management judgment is required
in determining the effective tax rate and in evaluating the Company's tax
position.

The Company's accompanying Consolidated Balance Sheets include certain
deferred tax assets resulting from net operating loss carryforwards and
deductible temporary differences, which are expected to reduce future taxable
income. These assets are based on management's estimate of realizability based
upon forecasted taxable income. Realizability of these assets is reassessed at
the end of each reporting period based upon the Company's forecast of future
taxable income and available tax planning strategies, and may result in the
recording of a valuation reserve. Failure to achieve forecasted taxable income
could affect the ultimate

37

realization of certain deferred tax assets. For additional information, see Note
14 of Notes to Consolidated Financial Statements.

PENSION AND POSTRETIREMENT BENEFITS

The Company's accompanying Consolidated Balance Sheets include significant
pension and postretirement benefit obligations, which are recorded based on
actuarial valuations. Inherent in these valuations are key assumptions,
including discount rates, future compensation levels, expected return on plan
assets and trends in health care costs, which are updated annually. The Company
evaluates these assumptions annually with its actuarial advisors and believe
that they are within acceptable industry ranges, although an increase or
decrease in the assumptions or economic events outside the control of the
Company could have a material impact on the results of operations.

The assets, liabilities and assumptions used to measure expense for any
fiscal year are determined as of January 1 of the current plan year
("measurement date"). The discount rate assumption used in the pension and
postretirement benefit plans' accounting is based on current interest rates for
high-quality, long-term corporate debt as determined on each measurement date.
The expected return on plan assets is based on the current and expected asset
allocations, as well as historical and expected returns on various categories of
plan assets.

VALUATION OF LONG-LIVED ASSETS

The impairment of tangible and intangible assets is assessed when changes
in circumstances (such as, but not limited to, a decrease in market value of an
asset, current and historical operating losses or a change in business strategy)
indicate that their carrying value may not be recoverable. This assessment is
based on estimates of future cash flows, salvage values or net sales proceeds.
These estimates take into account management's expectations and judgments
regarding future business and economic conditions, future market values and
disposal costs. Actual results and events could differ significantly from
management estimates.

ENVIRONMENTAL LIABILITIES

Liabilities for environmental matters are accrued for when it is probable
that a liability has been incurred and the amount of the liability can be
reasonably estimated, based upon current law and existing technologies. These
estimates take into account current law, existing technologies and management's
judgment about future changes in regulation. Each quarter the Company formally
evaluates known and potential sites, and when there are changes in
circumstances. The Company reviews estimates for future remediation and
maintenance and management costs directly related to remediation, to determine
appropriate environmental reserve amounts. For each site, a determination is
made of the specific measures that are believed to be required to remediate the
site, the estimated total cost to carry out the remediation plan, the portion of
the total remediation costs to be borne by the Company and the anticipated time
frame over which payments toward the remediation plan will occur. The Company's
estimate of environmental remediation liabilities may change in the future
should additional sites be identified, further remediation measures be required
or undertaken or current laws and regulations be changed. For additional
information, see the Environmental discussion on page 30.

RESTRUCTURING PROGRAM LIABILITIES

During 2003, 2002, 2001 and 2000, the Company recorded charges in
connection with its restructuring programs. Management judgment is used to
estimate the various costs involved in these programs including severance costs,
inventory and fixed asset disposal costs and settlements of contractual
obligations. These liability estimates are reassessed at the end of each
reporting period. Actual experience has been and may continue to be different
from original estimates. For additional information, see Note 21 of Notes to
Consolidated Financial Statements.

38

LEGAL CONTINGENCIES

The Company is subject to proceedings, lawsuits and other claims in the
normal course of business. Each quarter, the Company formally evaluates its
current proceedings, lawsuits and other claims with counsel and when there are
changes in circumstances. These contingencies require management judgment in
order to assess the likelihood of any adverse judgments or outcomes and the
potential range of probable losses. Liabilities for legal matters are accrued
for when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated, based upon current law and existing
information. Estimates of contingencies may change in the future due to new
developments or changes in legal approach. For additional information, see Note
20 of Notes to Consolidated Financial Statements.

For additional information about significant accounting policies, see Note
1 of Notes to Consolidated Financial Statements.

NEW ACCOUNTING STANDARDS

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities." The
Interpretation may have an effect on existing practice because it requires
existing variable interest entities (VIEs) to be consolidated if those entities
do not have sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support or the equity
investors lack an essential characteristic of a controlling financial interest.
The Company has no unconsolidated VIEs and therefore its consolidated financial
statements are in compliance with the requirements of the interpretation.

The FASB is planning to issue an exposure draft proposing to expense the
fair value of equity awards beginning in 2005. Until a new Statement is issued,
the provisions of APB No. 25, SFAS No. 123 and SFAS No. 148 will remain in
effect. The Company will evaluate the impact of any new Statement regarding
employee equity-based awards as requirements are finalized and a new Statement
is issued.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into forward sales and purchase contracts and currency
options to manage currency risk resulting from purchase and sale commitments
denominated in foreign currencies (principally British pound, euro, Canadian
dollar and Japanese yen) and relating to particular anticipated but not yet
committed purchases and sales expected to be denominated in those currencies.
All the currency derivatives expire within one year. At December 31, 2003, the
Company had no forward contracts to either buy or sell foreign currencies. At
December 31, 2002, the Company had forward contracts to sell foreign currencies
with notional amounts of $11.9 million and forward contracts to buy foreign
currencies with notional amounts of $12.0 million. The fair value of these
forward contracts is included in Accrued Liabilities and Other Current Assets,
respectively. At December 31, 2003 and 2002 the Company had no outstanding
option contracts to sell or buy foreign currencies.

The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and SFAS No. 138 as of January 1, 2001. In accordance
with SFAS 133, derivative instruments are recognized as assets or liabilities in
the Company's balance sheet and are measured at fair value. The change in the
fair value of a derivative designated as a fair value hedge and the change in
the fair value of the hedged item attributable to the hedged risk are recognized
in earnings. For derivatives, which qualify for designation as cash flow hedges,
the effective portion of the changes in fair value is recognized as part of
other comprehensive income until the underlying transaction that is being hedged
is recognized in earnings. The ineffective portion of the change in fair value
of cash flow hedges is recognized in earnings currently. Changes in fair value
for other derivatives, which do not qualify as a hedge for accounting purposes
are recognized in current period earnings. Based upon the Company's current
policies of hedging market risks as discussed under Item 7A, the adoption of
SFAS 133 did not have a material effect on the Company's results of operations,
cash flows or financial position. However, the adoption of SFAS 133 may cause
increased volatility in the Company's results of

39

operations in the future, if the Company changes its policies or enters into new
derivative instruments, which do not meet the requirements for "hedge"
accounting under SFAS 133.

In May 2003, the Company terminated its interest rate swap agreements that
were entered into in April 2002. As a result, the Company received cash proceeds
of $7.1 million, which represented the market value of the contracts on the date
of termination. The Company utilized the proceeds to pay down debt and reduced
the amount recorded in Other Assets for such derivative instruments to zero.
There was no gain or loss on the transaction.

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 $0.8 million and are included in Other Liabilities on the
accompanying 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.

CAUTIONARY STATEMENT UNDER FEDERAL SECURITIES LAWS

The information in this Form 10-K contains forward-looking statements that
are based on management's beliefs, certain assumptions made by management and
management's current expectations, outlook, estimates and projections about the
markets and economy in which the Company and its various businesses operate.
Words such as "anticipates," "believes," "estimates," "expects," "forecasts,"
"opines," "plans," "predicts," "projects," "should," "targets," "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
euro; 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 or jury 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 renew or extend the U.S.
government contract for hydrazine propellants; unfavorable weather conditions
for swimming pool use; inability to expand sales in the professional pool dealer
market; and gains or losses on derivative instruments.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to various market risks, including changes in
foreign currency exchange rates, interest rates and commodity prices. The
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes in the normal course of business.

40

INTEREST RATES

The Company is exposed to interest rate risk on approximately 40 percent of
its outstanding borrowings, including, for this purpose, the participation
interests sold under its accounts receivable securitization program, which are
subject to floating rates. Based upon 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 $0.5 million.

FOREIGN CURRENCY RISK

Approximately 30 percent of the Company's sales and expenses are
denominated in currencies other than the U.S. dollar. As a result, the Company
is subject to risks associated with its foreign operations, including currency
devaluations and fluctuations in currency exchange rates. These exposures from
foreign exchange fluctuations can affect the Company's equity investments and
its respective share of earnings (losses), the Company's net investment in
foreign subsidiaries, translation of the Company's foreign operations for U.S.
GAAP reporting purposes and purchase and sales commitments denominated in
foreign currencies. The Company enters into forward sales and purchase contracts
and currency options to manage currency risk from actual and anticipated
purchase and sales commitments denominated or expected to be denominated in a
foreign currency (principally British pound, euro, Canadian dollar and Japanese
yen). It is the Company's policy to hedge up to 80% of these transactions during
a calendar year. The counterparties to the options and contracts are major
financial institutions.

At December 31, 2003, the Company had no forward contracts to either buy or
sell foreign currencies.

Holding other variables constant, if there was a 10 percent change in
foreign currency exchange rates, the net effect on the Company's annual cash
flows would be a increase (decrease) of between $1 million to $2 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 December 31, 2003 and 2002, the
Company had no forward contracts to purchase natural gas. In addition, the
Company is exposed to price risk related to the price volatility of certain
other raw materials including the ongoing purchase of propylene and copper
metal. Holding other variables constant, a 10 percent adverse change in the
price of propylene and copper metal 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.

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of Arch Chemicals, Inc.:

We have audited the accompanying consolidated balance sheets of Arch
Chemicals, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Arch
Chemicals, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" as of January 1, 2002.

KPMG LLP

Stamford, CT
February 2, 2004, except as to "U.S. Government Contracts"
in footnote 1, which is as of February 17, 2004

42

MANAGEMENT REPORT

To Our Shareholders:

The management of Arch Chemicals is responsible for the integrity and
objectivity of the financial and operating information contained in this annual
report, including the consolidated financial statements covered by the
Independent Auditors' Report. These statements were prepared in conformity with
accounting principles generally accepted in the United States of America and
include amounts that are based on the best estimates and judgments of
management.

The Company has a system of internal accounting controls that provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America. This system includes written
policies and procedures, an organizational structure that segregates duties, and
a comprehensive program of periodic audits by the internal auditors. The Company
also has instituted policies and guidelines that require employees to maintain
the highest level of ethical standards.

In addition, the Audit Committee of the Board of Directors, consisting
solely of outside directors, meets periodically with management, the internal
auditors and the independent auditors to review internal accounting controls,
audit results and accounting principles and practices, and annually recommends
to the Board of Directors the selection of independent auditors.

MICHAEL E. CAMPBELL LOUIS S. MASSIMO
Chairman of the Board, President Executive Vice President and Chief Financial Officer
and Chief Executive Officer

43

ARCH CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to the consolidated financial statements.
44

ARCH CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to the consolidated financial statements.
45

ARCH CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to the consolidated financial statements.
46

ARCH CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See accompanying notes to the consolidated financial statements.
47

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN MILLIONS, EXCEPT SHARE AMOUNTS)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FORMATION OF ARCH CHEMICALS, INC.

Arch Chemicals, Inc. ("Arch" or the "Company") was organized under the laws
of the Commonwealth of Virginia on August 25, 1998 as a wholly-owned subsidiary
of Olin Corporation ("Olin") for the purpose of effecting the distribution of
Olin's Specialty Chemical Businesses ("Distribution") to the shareholders of
Olin. The Company is a specialty chemicals manufacturer, which supplies
value-added products and services to several industries on a worldwide basis,
including the consumer products and semiconductor industries. The principal
businesses in which the Company competes are treatment products, microelectronic
materials and performance products. The treatment products segment includes
three reportable business units: the HTH water products, the personal care and
industrial biocides products and the wood protection and industrial coatings
products businesses. The performance segment includes two reportable business
units: the performance urethanes business and the hydrazine business.

The Company has organized its segments around differences in products and
services, which is how the Company manages its businesses.

Treatment products manufactures and sells water treatment chemicals,
industrial biocides and personal care specialty ingredients and wood treatment
and industrial coatings products. HTH water products produces chemicals for the
sanitization and treatment of residential pool and commercial pool and spa
water, and the purification of potable water. Consumer brands include HTH(R),
Sock It(R), Super Sock It(R), Duration(R), POOLIFE(R), and Pace(R). The personal
care and industrial biocides business manufactures biocides that control growth
of micro-organisms. It markets products such as Zinc Omadine(R), the most widely
used antidandruff agent in the world, as well as actives and functional products
sold primarily to manufacturers of skin care and hair care products. The
Company's industrial biocides are used in mildew-resistant paints, coatings and
lubricants. The Company's wood protection business sells wood treatment
chemicals solutions that enhance the properties of wood. Its industrial wood
preservatives and fire retardants are sold under the brand names Wolmanized(R),
Thompsonized(R), Tanalised(R), Vacsol(R), Resistol(R) and Dricon(R). The
Company's industrial coatings business manufactures a wide range of coatings for
a variety of wood applications, which are industrial or consumer applied
products for the surface decoration and protection of wood. These products are
sold under brand names such as Sayerlack(R) and Linea Blu(R).

Microelectronic materials are used in creating integrated circuits and
chips for advanced electronics. The Company and FUJIFILM Arch, its joint venture
with Fuji Photo Film, manufactures and supplies a wide range of products and
services to semiconductor manufacturers and to flat panel display manufacturers
throughout the world. Its products and services include photopolymers, thin film
systems, formulated products, chemical management services, and chemical
mechanical planarization products ("CMP") through Planar Solutions LLC, a joint
venture with Wacker Silicones Corporation.

Performance products consists of performance urethanes and hydrazine.
Performance urethanes manufacture a variety of specialty polyols, which are used
as an ingredient for elastomers, adhesives, coatings, sealants and rigid foam.
The business also manufactures glycols and glycol ethers for use as an
ingredient in cleaners, personal care products and antifreeze. Hydrazine
hydrates are used in chemical blowing agents, water treatment chemicals,
agricultural products and pharmaceutical intermediates. Propellant-grade
hydrazine and hydrazine derivatives are used by NASA, the Air Force and other
customers as fuel in satellites, expendable launch vehicles and auxiliary and
emergency power units. Ultra Pure(TM) hydrazine propellants is the highest
purity anhydrous propellant in the industry and can extend the working life of
satellites.

48

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

BASIS OF PRESENTATION

The Consolidated Financial Statements include the accounts of the Company
and its majority-owned subsidiaries. Intercompany balances and transactions
between entities included in these Consolidated Financial Statements have been
eliminated. Investments in 20-50% owned affiliates are accounted for on the
equity method.

Reclassifications of prior-year data have been made, where appropriate, to
conform to the 2003 presentation.

As a result of the sale of the sulfuric acid business, the Company has
restated its prior year results to include the results of the sulfuric acid
business and the gain on the disposition as a component of discontinued
operations in accordance with the Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144").

USE OF ESTIMATES

The preparation of the Consolidated Financial Statements requires estimates
and assumptions that affect amounts reported and disclosed in the Consolidated
Financial Statements and related Notes. Estimates are used when accounting for
allowance for uncollectable accounts receivable, inventory obsolescence,
valuation of discontinued operations, depreciation and amortization, employee
benefit plans, performance-based incentive compensation, taxes, impairment of
assets, environmental and legal liabilities and contingencies, among others.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with an original
maturity of three months or less.

INVENTORIES

Inventories are stated at the lower of cost or net realizable value.
Certain inventories are valued by the dollar value last-in, first-out ("LIFO")
method of inventory accounting. Costs for other inventories have been determined
principally by the first-in, first-out ("FIFO") method. Elements of costs in
inventories include raw materials, direct labor and manufacturing overhead.

ASSETS HELD FOR SALE

The Company has accounted for the organics division, acquired in connection
with the acquisition of Hickson International PLC ("Hickson"), in accordance
with EITF 87-11, "Allocation of Purchase Price to Assets to be Sold" through
August 31, 2001 and since then, in accordance with Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30") and EITF NO. 90-6, "Accounting For
Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired
Operating Unit to be Sold" ("EITF 90-6").

The Company adopted SFAS 144 effective January 1, 2002. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. As of December 31, 2002, the Company has accounted for the Hickson
assets held for sale in accordance with SFAS 144. Additionally, as a result of
the sale of the sulfuric acid business, the Company has restated its prior year
results to include the results of the sulfuric acid business as an asset held
for sale.

49

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation is
computed on a straight-line basis over the following estimated useful lives:

Improvements to land........................................ 5 to 20 years
Building and building equipment............................. 5 to 40 years
Machinery and equipment..................................... 3 to 12 years

Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvement, whichever is shorter. Start-up costs
are expensed as incurred.

As of January 1, 2003 the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations", which
addresses financial accounting requirements for retirement obligations
associated with tangible long-lived assets. On January 1, 2003 the Company
recorded an asset, liability and a one-time cumulative effect charge, net of tax
benefit, of $0.4, $0.6 and $0.4, respectively, to reflect the cost of retirement
obligations related to facilities, certain equipment used in the manufacturing
process, underground tanks and a landfill. The after-tax charge was recorded as
the cumulative effect of an accounting change. Certain other asset retirement
obligations associated with owned or leased buildings and manufacturing
facilities have not been recorded because these retirement obligations have an
indeterminate settlement date, and accordingly, the retirement obligation cannot
be reasonably estimated. The ongoing annual incremental expense resulting from
the adoption of SFAS No. 143 is not expected to be significant. At December 31,
2003, the change in the fair value of the liability for asset retirements
compared to the original value of the liability recorded at the date of adoption
of SFAS No. 143 was not significant. At January 1, 2002, the pro forma amount of
the Company's asset retirement obligations, using the assumptions as of the date
of the adoption of SFAS No. 143 would be $0.6. Pro forma effects for the year
ended December 31, 2003 and 2002, assuming adoption of SFAS 143 as of January 1,
2002, were not material to net earnings or per share amounts.

GOODWILL

Goodwill represents the excess of the purchase price of acquired businesses
over the fair value of the respective net assets.

As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"), which requires that goodwill no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS 142. The Company tests goodwill for impairment as of January 1 of each year
and when an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. An
impairment charge is recognized for the amount, if any, by which the carrying
amount of goodwill exceeds its fair value. Fair values are established using
discounted cash flows. When available and as appropriate, comparative market
multiples are used to corroborate discounted cash flow results.

Prior to January 1, 2002, goodwill was amortized over periods ranging from
20 to 30 years on a straight-line basis.

OTHER INTANGIBLES

Other intangibles consist primarily of patents, trademarks, non-compete
agreements, customer relationships and various technology licensing agreements.

In accordance with SFAS 142, intangible assets with indefinite useful lives
are not amortized. Intangible assets with definite useful lives are amortized
over their respective estimated useful lives to their estimated

50

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

residual values in proportion to the economic benefits consumed, principally
over 2 to 30 years and generally on a straight-line basis. Intangible assets
with an indefinite life are reviewed at least annually for impairment in
accordance with SFAS 142.

Prior to January 1, 2002, all intangible assets were amortized on a
straight-line basis, principally over 2 to 30 years.

SECURITIZATIONS AND TRANSFERS OF FINANCIAL INSTRUMENTS

The Company may sell trade accounts or notes receivables with or without
recourse in the normal course of business. In accordance with Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"), the
Company's sale of receivables associated with its accounts receivable
securitization program is removed from the consolidated balance sheet at the
time of sale. Sales and transfers that do not meet the criteria for surrender of
control would be accounted for as secured borrowings. The value assigned to the
undivided interest retained in securitized trade receivables is the allocated
carrying amount based on the relative fair values of the interests retained and
sold in the securitization, and is classified as a Short-Term Investment on the
accompanying Consolidated Balance Sheet.

LONG-LIVED ASSETS

The impairment of tangible assets other than goodwill and intangible assets
with definite lives is assessed when changes in circumstances indicate that
their current carrying value may not be recoverable. Under SFAS 144, which the
Company adopted effective January 1, 2002, a determination of impairment, if
any, is made based on the undiscounted value of estimated future cash flows,
salvage value or expected net sales proceeds, depending on the circumstances.
Asset impairment losses are measured as the excess of the carrying value over
the estimated fair value of such assets.

Prior to January 1, 2002, the impairment of tangible and intangible assets
was assessed when changes in circumstances indicated that their carrying value
may not be recoverable, in accordance with Statement of Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." A determination of impairment, if any, was made based
on the undiscounted value of estimated future cash flows, salvage value or
expected net sales proceeds, depending on the circumstances. Asset impairment
losses were measured as the excess of the carrying value over the estimated fair
value of such assets. In accordance with Accounting Principles Board Opinion No.
17, "Intangible Assets", the Company also periodically reviewed the future
period over which the benefit of goodwill would be received. Any impairment was
based on the undiscounted value of future cash flows.

ENVIRONMENTAL LIABILITIES AND EXPENDITURES

Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated, based upon current law and existing technologies. These amounts,
which are not discounted and are exclusive of claims against third parties, are
adjusted periodically as assessment and remediation efforts progress or
additional technical or legal information becomes available. Environmental
remediation costs are charged to reserves. Environmental costs are capitalized
if the costs increase the value of the property and/or mitigate or prevent
contamination from future operations.

FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, accounts receivable,
accounts payable, and short-term borrowings approximated fair values due to the
short-term maturities of these instruments. The fair value of

51

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company's borrowings under its credit facility approximate book value due to
their floating rate interest rate terms. The fair value of the Company's senior
notes is estimated based on year-end prevailing market interest rates for
similar debt instruments. The fair value of the Company's interest rate swaps is
based upon prevailing market values for similar instruments. The fair values of
currency forward and option contracts, if any, are estimated based on quoted
market prices for contracts with similar terms.

DERIVATIVE INSTRUMENTS

As of January 1, 2001, the Company adopted SFAS No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137, SFAS No. 138 and SFAS No. 149. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities.

In accordance with SFAS 133, derivative instruments are recognized as
assets or liabilities in the Company's balance sheet and are measured at fair
value. The change in the fair value of a derivative designated as a fair value
hedge and the change in the fair value of the hedged item attributable to the
hedged risk are recognized in earnings. For derivatives, which qualify for
designation as cash flow hedges, the effective portion of the changes in fair
value is recognized as part of other comprehensive income until the underlying
transaction that is being hedged is recognized in earnings. The ineffective
portion of the change in fair value of cash flow hedges is recognized in
earnings currently. Changes in fair value for other derivatives which do not
qualify as hedges for accounting purposes are recognized in current period
earnings.

REVENUE RECOGNITION

Revenues are principally recognized when services are rendered or products
are shipped to customers. Allowances for estimated returns, discounts and
retailer promotions and incentives are recognized when sales are recorded and
are based on various market data, historical trends and information from
customers. Actual returns, discounts and retail promotions and incentives have
not been materially different from estimates. Certain of the Company's product
lines have extended payment terms due to the seasonal nature of the business.

SHIPPING AND HANDLING COSTS

Shipping and handling fees billed to customers are included in Sales and
shipping and handling costs are included in Cost of Goods Sold in the
accompanying Consolidated Statements of Income.

U.S. GOVERNMENT CONTRACTS

The Company's hydrazine business currently has a three-year contract with
two one-year renewal options with the United States Department of the Air Force
to supply hydrazine-based propellant, which was effective on March 1, 2001 and
has been amended to expire on April 30, 2004. The contract principally consists
of a fixed-price facility management fee and a product purchase arrangement
whereby the Company supplies product at a fixed price per pound, adjusted
annually for agreed-upon cost escalations. The one-year renewal options have not
been exercised. In November 2003, the Company secured a new 35-month contract
valued at $4.3, with the Defense Energy Support Center (DESC) for the storage
and distribution services of its hydrazine-based propellant products. This
contract begins May 1, 2004. Additionally, the Company is pursuing a new
long-term hydrazine-based propellant supply contract with the DESC. We
anticipate the DESC will award the contract to a bidder in the first half of
2004, but there is no assurance that such contract will be awarded to the
Company.

In February 2004, the Company was awarded a twenty-five month contract
valued at $11.9, with the Department of Defense for Ultra Pure(TM) Hydrazine.
This contract begins January 1, 2005 and will provide fuel for future satellite
programs.

52

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2003, 2002 and 2001, the Company's performance products segment sales
include $23.9, $26.4 and $26.8, respectively, related to these agreements.

FOREIGN CURRENCY TRANSLATION

Foreign affiliates generally use their local currency as their functional
currency. Accordingly, foreign affiliate balance sheet amounts are translated at
the exchange rates in effect at year-end, and income statement and cash flow
amounts are translated at the average rates of exchange prevailing during the
year. Translation adjustments are included in the Other Accumulated
Comprehensive Loss component of shareholders' equity. Where foreign affiliates
operate in highly inflationary economies, non-monetary amounts are translated at
historical exchange rates while monetary assets and liabilities are translated
at the current rate with the related adjustments reflected in the Consolidated
Statements of Income.

STOCK OPTIONS

The Company accounts for stock-based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). As allowed under SFAS
123, the Company has chosen to account for stock-based compensation cost using
the intrinsic value method, in accordance with APB No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Pro forma information
regarding net income and earnings per share, as calculated under the provisions
of SFAS 123, is disclosed in Note 16. In December 2002, the Company adopted the
disclosure provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" (see Note 16).

INCOME TAXES

The Company provides for deferred taxes on temporary differences between
the financial statement and tax bases of assets using the enacted tax rates,
which are expected to apply to taxable income when the temporary differences are
expected to reverse.

EARNINGS PER COMMON SHARE

All earnings per share computations and presentations are in accordance
with SFAS No. 128, "Earnings Per Share." Basic earnings per common share are
computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per common share is calculated in a similar manner except that the
weighted-average number of common shares outstanding during the period includes
the potential dilution that could occur if stock options or other contracts to
issue common stock were exercised.

The reconciliation between basic and diluted shares outstanding for the
years ended December 31, 2003, 2002 and 2001 is as follows:

53

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock options of approximately 1.4 million, 1.3 million and 1.1 million
with exercise prices greater than the average market price of the Company's
common stock are not included in the computation of diluted earnings per share
for the years ended December 31, 2003, 2002 and 2001, respectively.

COMPREHENSIVE INCOME (LOSS)

The Company's other comprehensive income (loss) consists of the changes in
the cumulative foreign currency translation gains and losses, the change in the
fair value of derivative financial instruments which qualify for hedge
accounting, net of tax and the minimum pension liability adjustment, net of tax.
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.

EMPLOYEE BENEFIT PLANS

Pension and postretirement health care and life insurance benefits earned
during the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of employees
expected to receive benefits. Curtailment gains and losses are recognized as
incurred. Settlement gains and losses are recognized when significant pension
obligations are settled and the gain or loss is determinable. The Company's
policy is to fund, at a minimum, amounts as are necessary to provide assets
sufficient to meet the benefits to be paid to plan members in accordance with
the relevant regulatory requirements governing such plans.

BUSINESS AND CREDIT CONCENTRATIONS

A significant portion of sales of the treatment products segment
(approximately 21%) is dependent upon two customers, one of which accounts for a
significant portion of the sales of the HTH water products business and the
other of which accounts for a significant portion of the sales of the personal
care and industrial biocides businesses. Sales to these two customers are
individually less than 10% of the Company's 2003 consolidated sales. However,
the loss of either of these customers could have a material adverse effect on
the sales and operating results of the respective segment and businesses if such
customer was not replaced.

Sales of the Company's microelectronic materials products are dependent
upon the economic conditions of the semiconductor industry. Changes in this
industry may significantly affect management's estimates of current and future
operating results. Additionally, a significant portion of sales of the
microelectronic materials segment is dependent upon one customer (approximately
26%), sales to this customer is individually less than 10% of the Company's 2003
consolidated sales. However, the loss of this customer could have a material
adverse effect on the sales and operating results of the segment if such
customer was not replaced.

Sales of the HTH water products segment are seasonal in nature as its
products are primarily used in the U.S. residential pool market. Historically,
approximately 40%-50% of the sales in the HTH water products business occur in
the second quarter of the fiscal year, as retail sales in the U.S. residential
pool market are concentrated between Memorial Day and the Fourth of July.
Therefore, interim results for this segment are not necessarily indicative of
the results to be expected for the entire fiscal year. In addition, in 2002 the
HTH water products segment changed its distribution strategy from utilizing
distributors to directly shipping to retail channels, which has made the HTH
water product sales even more concentrated in the second and third quarters.

54

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. ACCOUNTS RECEIVABLES/SHORT-TERM INVESTMENT

Accounts receivable at December 31, 2003 and 2002 include the following:

Included in other accounts receivable at December 31, 2003 are an insurance
receivable for storm damage of $3.3 and a receivable for a post-closing working
capital adjustment related to the sale of the Hickson organics business of $4.3.

Changes in the allowance for doubtful accounts for the years ended December
31, 2003, 2002 and 2001 are as follows:

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. 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. Such agreement is renewable annually. The Company
has agreed to provide servicing for accounts receivable collections. The
proceeds from the sale of participation interests under this arrangement are
subject to change based on the level of eligible receivables. The accounts
receivable sold have been reflected as a sale of accounts receivable in
accordance with SFAS 140.

As of December 31, 2003, the Company had not sold any participation
interests in such accounts receivables, but had sold $33.5 of participation
interests in $55.1 of accounts receivable at December 31, 2002. The fair value
of the retained undivided interest of $43.3 and $17.9 at December 31, 2003 and
2002, respectively, is classified as a held-to-maturity debt security and is
reflected as Short-Term Investment on the accompanying Consolidated Balance
Sheet. The proceeds of the sales were used to reduce borrowings. The costs of
the program, including certain one-time fees, for the years ended December 31,
2003 and 2002 of $0.8 and $1.6, respectively, are included in Selling and
Administration expenses in the accompanying Consolidated Statements of Income.
The costs of the accounts receivable securitization program are a percentage of
the fair market value of the participation interests sold. The percentage is
variable and was approximately equivalent to the one-month LIBOR rate plus 0.45%
(1.7% and 2.2% in 2003 and 2002, respectively). Fair value of the retained
undivided interest includes a reserve for credit losses ($3.5 and $3.7 at
December 31, 2003 and 2002,

55

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively) 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.

3. INVENTORIES

Inventories at December 31, 2003 and 2002 include the following:

Inventory valued using the LIFO method comprised approximately 40% and 50%
of the total inventory at December 31, 2003 and 2002, respectively. Gross
inventory values approximate replacement cost.

4. OTHER CURRENT ASSETS

Other current assets at December 31, 2003 and 2002 include the following:

5. ASSETS HELD FOR SALE/DISCONTINUED OPERATIONS

ACCOUNTING TREATMENT -- HICKSON ORGANICS DIVISION AND EXCESS LAND

Assets held for sale were acquired in August 2000 in conjunction with the
Company's acquisition of Hickson International PLC ("Hickson") and include the
Hickson organics division and certain land. The Company's intention at the
acquisition date was to divest of the organics division within twelve months of
acquisition. Accordingly, the Company accounted for the organics division in
accordance with EITF 87-11, "Allocation of Purchase Price to Assets to be Sold."
The Company continued to actively work on completing the sale of these assets,
but due to poor market conditions the Company was not able to sell these assets
within a one-year period after acquisition. Therefore, effective September 1,
2001, the Company was required to discontinue its initial accounting and begin
reporting the results of this division as a discontinued operation in accordance
with APB No. 30, "Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" and EITF No. 90-6, "Accounting
For Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired
Operating Unit To Be Sold." As of December 31, 2002, the Company has accounted
for the assets held for sale in accordance with SFAS 144, which superseded the
accounting treatment in APB No. 30.

The valuation of the Hickson organics division at the acquisition date
included an estimate of the cash flows, including estimated net sales proceeds,
and an allocation of interest expense during the holding period.

56

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net earnings (losses) of the Hickson organics division from the acquisition date
through August 31, 2001 were not included in the Consolidated Statements of
Income, but were recorded as an adjustment to the net asset value in accordance
with EITF 87-11. Beginning September 1, 2001, results of operations of the
organics division are included in income (loss) from discontinued operations,
net of tax on the accompanying Consolidated Statements of Income and include an
allocation of interest expense.

On August 11, 2003, the Company completed the sale of the Hickson organics
operations in Castleford, England. Total proceeds from the sale were L12.5
million ($20.1), subject to a post-closing working capital adjustment. Proceeds
consist of cash of L11.0 million ($17.7) and two notes for L1.5 million ($2.4),
of which one note for L1.0 million ($1.6) is contingent on future operating
results from January 1, 2003 through December 31, 2005. The Company has placed a
valuation reserve against the note of L1.0 million ($1.6). As a result of the
sale, the Company recorded an after-tax loss of $2.0, which includes $3.9 of
deferred gains related to foreign currency translation adjustments that were
realized at the time of the sale. Included in the loss on the sale is a
curtailment loss of $0.5, after tax, related to the pension plan of the former
Hickson employees due to the sale of the business. The loss is reflected in Gain
(Loss) on Sales of Discontinued Operations.

On September 30, 2003, the Company completed the sale of its excess land
that had been classified as an asset held for sale. Total proceeds of the sale
were $6.5 and a pre-tax gain of $2.5 was recorded as a component of Other Gains
and (Losses). Proceeds consist of cash of $2.0 and a note of $4.5. The note is
payable in two installments, $0.5 is due by March 31, 2005 and $4.0 is due by
September 30, 2006. The note is collateralized by the property. The note bears
interest per the ten-year constant maturity treasury index.

In March 2002, the Company completed the sale of its DanChem operations in
Danville, Virginia, which was part of the Hickson organics division, for
approximately $25 and recorded a loss on the disposal of $1.5, net of a tax
benefit of $0.9. Proceeds from the sale of these assets were used to pay down
debt.

ACCOUNTING TREATMENT -- SULFURIC ACID BUSINESS

On July 2, 2003, the Company completed the sale of substantially all of the
net assets of its sulfuric acid business to Peak Sulfur, Inc. Net proceeds from
the sale were $47.6, after a post-closing working capital payment. The gain on
the sale of $16.5, net of taxes of $10.5, is reflected in Gain (Loss) on Sales
of Discontinued Operations.

As a result of the sale of the sulfuric acid business, the Company has
restated its prior year results to include the results of the sulfuric acid
business as an asset held for sale and a component of discontinued operations in
accordance with SFAS 144.

BALANCE SHEET

Assets held for sale at December 31, 2002 include the following:

57

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The major classes of assets and liabilities classified as assets held for
sale of the Hickson organics business based in Castleford and the sulfuric acid
business at December 31, 2002 are as follows:

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

The Company accounted for the Hickson organics division in accordance with
EITF 87-11 for the first 12 months after the August 2000 acquisition date.
Operating results of these operations were charged against the related reserve
included in Assets Held For Sale as of the acquisition date. Beginning September
1, 2001, results of operations of the Hickson organics division are included in
Income (Loss) From Discontinued Operations, net of tax on the accompanying
Consolidated Statements of Income and include an allocation of interest expense,
through the date of the sale. The results of operations for the sulfuric acid
business are included through the date of the sale of 2003 and for the years
ended December 31, 2002 and 2001. Discontinued Operations for the year ended
December 31, 2003, 2002 and 2001 include the following:

Operating results for the year ended December 31, 2002 include a $1.9
restructuring charge, which related to headcount reductions of approximately 40
employees. Operating results for the four months ended December 31, 2001 include
a $1.8 restructuring charge, which related primarily to headcount reductions of
approximately 45 employees.

58

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The results of operations associated with the assets held for sale of the
Hickson organics business and interest allocated to the assets of the Hickson
organics business, which are not included on the accompanying Consolidated
Statements of Income are as follows:

6. INVESTMENTS AND ADVANCES -- AFFILIATED COMPANIES AT EQUITY

The Company's investments and advances to affiliated companies at December
31, 2003 include its 50% investment in Nordesclor S.A., its 49% investment in
Koppers Arch ("Koppers"), its 49% investment in FUJIFILM Arch and its 50%
investment in Planar Solutions LLC ("Planar"). Nordesclor produces and packages
calcium hypochlorite, and is located in Brazil. Koppers manufactures CCA-based
and other wood preservatives, and is located in Australia. FUJIFILM Arch is
located in Japan and manufactures photoresists. Planar produces and markets
chemical mechanical planarization slurry products, and is located in the United
States of America.

The amount of cumulative unremitted earnings of joint ventures included in
consolidated accumulated deficit at December 31, 2003 was $13.3. During the
years ended December 31, 2003, 2002 and 2001, distributions of $6.7, $3.3 and
$4.8, respectively, were received from joint ventures.

Summarized unaudited financial information for Nordesclor and FUJIFILM Arch
is as follows:

The increase in sales for FUJIFILM Arch is attributable to FUJIFILM
transferring a high volume, low margin product line to the joint venture during
the last half of 2002. Sales of this product line were $77.3, $34.6 and $4.3 in
2003, 2002 and 2001, respectively. Additionally, sales and operating results of
the FUJIFILM Arch joint venture increased due to increased sales of photoresists
and Color Mosaic(R) used in the fabrication of LCD panels and image sensors.

59

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 2003 and 2002 include the
following:

Leased assets capitalized and included in the previous table are not
significant. Maintenance and repairs charged to operations amounted to $23.8,
$25.0 and $28.4 in 2003, 2002 and 2001, respectively.

8. GOODWILL AND OTHER INTANGIBLES

ADOPTION OF SFAS 142

As of January 1, 2002, the Company adopted SFAS 142, which requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS 142. The application of the non-amortization
provisions of SFAS 142 resulted in a decrease in amortization of goodwill and
other intangibles in the year ended December 31, 2002 of $6.2. SFAS 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
be reviewed for impairment in accordance with SFAS 144. The application of this
provision of SFAS 142 did not have a material effect on the Company's results of
operations.

GOODWILL

The changes in the carrying amount of goodwill for the years ended December
31, 2003 and 2002 are as follows:

Included in net goodwill is $32.6 of accumulated amortization at December
31, 2003 and 2002.

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ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2002, in accordance with EITF 93-7, "Uncertainties Related to Income
Taxes in a Purchase Business Combination," the Company recorded a deferred tax
liability and corresponding $3.6 adjustment to goodwill as a result of its
analysis of the tax basis of the DanChem assets acquired in the Company's
acquisition of Hickson.

OTHER INTANGIBLES

The gross carrying amount and accumulated amortization for other intangible
assets as of December 31, 2003 and 2002 are as follows:

The Company recorded an intangible asset of $2.8 related to the Company's
minimum pension liability adjustment in 2002, included in pension expense in
2003 is $0.7 related to the amortization of this intangible asset. In addition,
the Company recorded $1.4 of deferred financing fees related to the renewal of
the Company's three-year credit facility.

AMORTIZATION

Amortization expense for the years ended December 31, 2003, 2002 and 2001
was $2.1, $4.4 and $10.7, respectively. Estimated amortization expense is $2.0
for each of the years ended December 31, 2004 through 2008.

In accordance with SFAS 142, prior period amounts have not been restated. A
reconciliation of reported net income (loss) and earnings (loss) per share for
the year ended December 31, 2001 to net income (loss) and earnings (loss) per
share as adjusted for the elimination of the amortization of goodwill and
certain other intangible assets, net of the related income tax effect, are as
follows:

61

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. OTHER ASSETS

Included in other assets at December 31, 2003 and 2002 are the following:

10. ACCRUED LIABILITIES

Included in accrued liabilities at December 31, 2003 and 2002 are the
following:

11. DEBT

Included in short-term borrowings and long-term debt at December 31, 2003
and 2002 are the following:

SENIOR NOTES

In March 2002, the Company issued $211.0 of unsecured senior notes to
certain institutional investors in two series. The Series A notes of $149.0 are
due in March 2007 and the Series B notes of $62.0 are due in March 2009 and bear
fixed interest rates of 7.94% and 8.24%, respectively, subject to certain
leverage ratio requirements.

In May 2003, the Company terminated its interest rate swap agreements that
were entered into in April 2002. As a result, the Company received cash proceeds
of $7.1, which represented the market value of the contracts on the date of
termination. The Company utilized the proceeds to pay down debt. In accordance
with Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), the basis
adjustment of $7.1 has been recorded as an increase to the carrying amount of
the senior notes and is being amortized as a reduction of interest expense over
the

62

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

remaining life of the senior notes (through March 2007) using the
effective-interest yield method ($6.0 as of December 31, 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 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 $0.8 and are included in Other Liabilities on the accompanying
Consolidated Balance Sheet at December 31, 2003, 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.

The notes contain quarterly leverage ratio (debt/EBITDA) covenants of 4.5
through December 31, 2002 and 3.5 thereafter and fixed coverage ratio covenants
of 2.0 through December 31, 2002 and 2.25 thereafter, and restrict 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) subject to certain
adjustments beginning January 1, 2002 ($41.1 at December 31, 2003). In addition,
the notes contain a debt to total capitalization ratio requirement not to exceed
55%. Proceeds from the issuance of these notes have been used to pay down debt,
including the credit facility used to acquire Hickson.

CREDIT FACILITY

In June 2003, the Company entered into a new unsecured $210.0 senior
revolving credit facility ("credit facility"), which expires in June 2006. This
credit facility replaced a $65.0 364-day credit facility, which expired on June
21, 2003, and a $125.0 revolving five-year credit facility that was scheduled to
expire in January 2004. 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 plus 50% of cumulative net income (loss) subject to
certain limitations beginning June 20, 2003 ($60.5 at December 31, 2003). As of
December 31, 2003, facility fees payable on the credit facility are 0.35%. The
facility fees can range from 0.2% to 0.4% depending on the Company's quarterly
leverage ratios. The Company may select various floating rate borrowing options,
including, but not limited to, LIBOR plus a spread that can range from 0.55% to
1.35% depending on the Company's quarterly leverage ratios. There were no
outstanding borrowings under the credit facility at December 31, 2003.

OTHER BORROWINGS

Other borrowings at December 31, 2003 and 2002 have interest rates ranging
from 2% to 5%.

At December 31, 2003, the Company had $13.4 of outstanding letters of
credit and $7.0 of letters of guarantee. Outstanding letters of guarantee
include $6.7 of Planar Solutions (a joint venture) borrowings and $0.3 of Planar
Solutions equipment lease payments. As of December 31, 2003, the Company has
agreed to guarantee 50% or up to $8.5 of Planar Solution's line of credit, which
is provided by the Company's joint venture partner and expires in May 2005. In
addition, the Company has guaranteed payments on certain equipment leases, which
expire in May 2004. The Company would be required to perform under the above two
guarantees in the case of nonpayment by Planar Solutions.

63

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF LONG-TERM DEBT

The fair value of the Company's long-term debt at December 31, 2003 was
approximately $239.1. The fair value of the Company's short-term debt at
December 31, 2003 approximated the book value of $0.7 due to the floating
interest rate terms and the short maturity of the instruments.

12. OTHER LIABILITIES

Included in other non-current liabilities at December 31, 2003 and 2002 are
the following:

Included in pensions and other postretirement employee benefit obligations
as of December 31, 2003 and 2002 are minimum pension liability adjustments of
$127.6 and $93.6, respectively.

13. DERIVATIVE FINANCIAL INSTRUMENTS

ADOPTION OF SFAS 133

The cumulative effect of the accounting change due to the adoption of SFAS
133 as of January 1, 2001 was $0.4 before taxes or $0.2 net of tax, principally
due to interest rate swaps acquired in connection with the acquisition of
Hickson, which were cancelled in January 2001.

FOREIGN CURRENCY

The Company uses foreign currency forward sales and purchases contracts and
currency options 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
(principally the euro, British pound, Canadian dollar and Japanese yen). All of
the currency derivatives expire within one year. During 2003 and 2002, the
majority of the Company's foreign currency forward contracts qualified as
effective cash flow hedges while the remainder of the foreign currency contracts
did not meet the criteria of SFAS 133 to qualify for effective hedge accounting.
The accounting for gains and losses associated with changes in the fair value of
the derivative and the effect on the consolidated financial statements will
depend on its hedge designation and whether the hedge is highly effective in
achieving offsetting changes in fair value of cash flows of the asset or
liability hedged.

During 2003 and 2002, the Company recorded net gains (losses) of $0 and
$1.1, respectively in Other Comprehensive Income (Loss) related to the change in
the fair market value of the derivatives designated as effective cash flow
hedges of which, $0.3 and $0.8, respectively, were subsequently reclassified
into current earnings during the year. The Company records expense in Selling
and Administration expense related to the change in the time value of the
forward contracts, which has been excluded from the assessment of hedge
effectiveness.

At December 31, 2003 and 2002, the Company had no outstanding option
contracts to sell or buy foreign currencies. At December 31, 2003, the Company
had no forward contracts to sell or buy foreign currencies. At December 31,
2002, the Company had forward contracts to sell foreign currencies with notional
amounts of $11.9 and forward contracts to buy foreign currencies with notional
amounts of $12.0. The fair value of these

64

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

forward contracts is included in Accrued Liabilities and Other Current Assets,
respectively. The counterparties to the contracts are major financial
institutions. The risk of loss to the Company in the event of nonperformance by
a counterparty is not significant. The Company does not use financial
instruments for speculative or trading purposes nor is the Company a party to
leveraged derivatives.

Foreign currency exchange gains (losses), net of taxes, were $0.4 in 2003,
$(0.3) in 2002 and $(1.0) in 2001.

NATURAL GAS

In 2001, in order to manage the risks associated with the changes in
natural gas prices, the Company purchased futures contracts to hedge a portion
of its projected natural gas purchase requirements. These derivative contracts
did not meet the criteria of SFAS 133 to qualify for effective hedge accounting.
For the years ended December 31, 2003 and 2002, the Company recorded a net
unrealized gain (loss) of $0 and $0.1, respectively, in Selling and
Administration expenses related to the change in fair value of derivatives,
which did not qualify for hedge accounting.

DEBT AND INTEREST

In April 2002, 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 floating rate interest based on six-month
LIBOR plus 3.045%. The counter parties to these agreements were major financial
institutions. The agreements were to expire in March 2007. The Company had
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 were
recorded at their fair market value of $6.8 and were included in Other Assets on
the accompanying Consolidated Balance Sheet at December 31, 2002, with a
corresponding increase in the carrying amount of the related debt. No gain or
loss was recorded as the contracts met the criteria of SFAS 133 to qualify for
hedge accounting treatment with no ineffectiveness. In May 2003, the Company
terminated these interest rate swap agreements. As a result, the Company
received cash proceeds of $7.1, which represented the market value of the
contracts on the date of termination. The Company utilized the proceeds to pay
down debt and reduced the amount recorded in Other Assets for such derivative
instruments to zero. There was no gain or loss on the transaction.

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 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 $0.8 and are included in Other Liabilities on the accompanying
Consolidated Balance Sheet at December 31, 2003, 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.

As of December 31, 2001, a portion of the Company's outstanding short-term
borrowings was denominated in British pounds and had been designated since its
inception as a hedge of the British pound net investment in the Hickson organics
division. Foreign currency translation adjustments during the year ended
December 31, 2003, 2002 and 2001 include $0, $(0.7) and $(0.5), respectively,
related to this debt instrument. In March 2002, the portion of the Company's
outstanding borrowings that was denominated in British pounds and that had been
designated since its inception as a hedge of the British pound net investment in
the Hickson organics division was paid-off with the expiration of the credit
facility used to acquire Hickson.
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The cumulative foreign currency translation gain adjustments related to this
debt instrument of $1.0 was recognized upon the sale of the Hickson organics
Castleford, England operation in 2003.

14. INCOME TAXES

COMPONENTS OF PRETAX INCOME (LOSS)

COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)

The following table accounts for the difference between the actual tax
provision and the amounts obtained by applying the statutory U.S. federal income
tax rate of 35% to the income before taxes.

EFFECTIVE TAX RATE RECONCILIATION

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COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES

Included in Other Current Assets at December 31, 2003 and 2002,
respectively, are $19.1 and $24.4 of net current deferred tax assets. Included
in Other Assets at December 31, 2003 and 2002, respectively are $44.2 and $38.5
of net noncurrent deferred tax assets. Included in Other Liabilities at December
31, 2003 and 2002 are $0.7 and $1.2 of noncurrent deferred tax liabilities.
Taxable income is expected to be sufficient to recover the net benefit within
the period in which these differences are expected to reverse and, therefore, no
valuation allowance was established. Management believes it is more likely than
not that the results of future operations will generate sufficient taxable
income to realize the net deferred tax assets. The valuation allowance of $3.3
relates to state tax credits for which management believes are not likely to be
realized.

The Company has federal net operating loss carryforwards of approximately
$17.7, which are available to offset future taxable income through 2022. The
Company also has alternative minimum tax credit carryforwards of approximately
$0.6, which are available to reduce regular income taxes, if any, over an
indefinite period. The Company has research and development credits of $3.4,
which expire beginning in 2019.

The Company provides for deferred taxes on temporary differences between
the financial statement and tax bases of assets using the enacted tax rates that
are expected to apply to taxable income when the temporary differences are
expected to reverse. At December 31, 2003, the Company's share of the cumulative
undistributed earnings of foreign subsidiaries was approximately $176. No
provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of foreign subsidiaries since the Company intends to
continue to reinvest these earnings. Foreign tax credits would be available to
substantially reduce or eliminate any amount of additional U.S. tax that might
be payable on these foreign earnings in the event of distributions or sale.

15. EMPLOYEE BENEFIT PLANS

PENSION PLANS AND RETIREMENT BENEFITS

Effective February 8, 1999, the Company established the Arch Pension
Benefit Plan, a defined benefit pension plan covering most U.S. employees. The
Company also maintains two nonqualified supplemental pension plans. These plans
were established to provide additional retirement benefits for certain key
employees. Prior to the Distribution, these employees were participants in one
of several Olin pension benefit

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plans covering employees of other Olin businesses. The Arch pension benefit plan
provides benefits based on service with Olin and with the Company. The Company
is liable for the payment of all pension plan benefits earned by Company
employees prior to and following the Distribution who retire after the
Distribution. Olin transferred assets to the Company's pension plan. The amount
of the assets transferred was calculated in accordance with Section 4044 of the
Employee Retirement Income Security Act of 1974, as amended. The assets of the
Arch plan consist primarily of investments in commingled funds administered by
independent investment advisors. The Company's policy is to fund, at a minimum,
amounts as are necessary on an actuarial basis to provide assets sufficient to
meet the benefits to be paid to plan members in accordance with the requirements
of the Employee Retirement Income Security Act of 1974.

Subsequent to the Distribution, the Company adopted a retiree medical and
death benefits plan that covers most domestic employees. The Company is liable
for the payment of all retiree medical and death benefits earned by Company
employees prior to and following the Distribution who retire after the
Distribution. The Arch plan is an unfunded plan.

As part of the acquisition of Hickson, the Company acquired the liability
for an additional U.S. pension plan. In 2002, the Hickson USA retirement plan
and the Arch Pension Benefit Plan were merged.

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The following tables provide a reconciliation of the changes in the plans'
projected benefit obligations, fair value of plan assets and funded status of
the Arch retirement plans.

The Company's qualified pension plan has an accumulated benefit obligation
in excess of plan assets as of December 31, 2003 and 2002. The accumulated
benefit obligation of this plan was $169.4 and $144.0 as of December 31, 2003
and 2002, respectively. The projected benefit obligation relating to the
qualified plan was $192.4 and $167.6, as of December 31, 2003 and 2002,
respectively. The Company's nonqualified pension plans are unfunded. The
accumulated benefit obligation relating to these plans, included in the tables
above, was $10.3 and $8.5, as of December 31, 2003 and 2002, respectively. The
projected benefit obligation related to these plans was $13.0 and $11.1 as of
December 31, 2003 and 2002, respectively. The 2002 curtailment loss is included
in Restructuring in the accompanying Consolidated Statements of Income.

Cash funding in 2004 is expected to be approximately $7.0 higher than in
2003 and pension expense is expected to be $4.0 higher in 2004.

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Benefit costs presented below were determined based on actuarial methods
and include the following components:

The principal assumptions used to determine the pension and other
postretirement expense and the actuarial value of the projected benefit
obligation for the pension and the postretirement plans were:

For 2003, the Company's expected long-term rate of return on assets
assumption was 8.75%. As defined in FAS 87, this assumption represents the rate
of return on plan assets reflecting the average rate of earnings expected on the
funds invested or to be invested to provide for the benefits included in the
benefit obligation. The assumption has been determined by reflecting
expectations regarding future rates of return for the investment portfolio, with
consideration given to the distribution of investments by asset class and
historical rates of return for each individual asset class.

In 2001, the Hickson USA long-term rate of return on assets assumption was
8.5%.

The Company's pension plan asset allocation at December 31, 2003 and 2002
were:

The Company's target allocation of the pension plan assets is 70% in equity
funds and 30% fixed income funds. The Company's investment strategy includes
meeting the plan objectives, generating competitive investment returns and
investing in a diversified portfolio consisting of an array of asset classes
that attempts to

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maximize returns while minimizing volatility. These asset classes currently
include U.S. domestic equities and fixed income, in the future it may include
non-U.S. equities and real estate.

Our annual measurement date is January 1 for our pension benefits and other
postretirement benefits. For measurement purposes, the assumed health care cost
trend rate used for pre-65 non-HMO plans was 11.0% and 9.5% in 2003 and 2002,
respectively, decreasing to an ultimate trend rate of 4.5% in 2012. The trend
rate for pre-65 HMO plans was 11.0% and 9.5% in 2003 and 2002, respectively,
decreasing to an ultimate trend rate of 4.5% in 2012. For non-bargained
participants, Arch's subsidy for pre-65 coverage is limited to $10,000/retiree
with all future cost increases to be paid by the retiree. For post-65 retirees,
the Company provides a fixed dollar benefit that is not subject to escalation.

The assumed health care cost trend rate assumptions can have a significant
impact on the amounts reported. A one percent increase or decrease each year in
the health care cost trend rate utilized would have resulted in a $0.1 increase
or decrease, respectively, in the aggregate service and interest cost components
of expense for the year 2003, and a $0.5 increase or decrease, respectively, in
the accumulated postretirement benefit obligation at December 31, 2003.

On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act into law. This law provides for a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to the benefit established by the law.
The federal subsidy included in the law may result in a reduction of the
Company's OPEB benefit obligation. The Company's other postretirement benefit
plans do provide for such prescription-drug benefits. The Company has made a
one-time election to defer accounting for the economic effects of the Medicare
Act, as permitted by FASB Staff Position 106-1. The FASB plans to issue
authoritative guidance on the accounting for the subsidies in 2004. The issued
guidance could require the Company to change previously reported information.

As part of the acquisition of Hickson, the Company acquired the liability
for the Hickson U.K. and the Hickson U.K. Senior Executive retirement plan. The
following tables provide a reconciliation of the changes in the plans' projected
benefit obligations, fair value of plan assets, funded status, certain
assumptions and components of net periodic pension expense of the Hickson U.K.
and the Hickson U.K. Senior Executive retirement plan for the years ended
December 31, 2003 and 2002.

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The Company's Hickson U.K. plan has an accumulated benefit obligation in
excess of plan assets as of December 31, 2003 and 2002. The accumulated benefit
obligation of this plan was $287.2 and $230.0 as of December 31, 2003 and 2002,
respectively. The projected benefit obligation relating to the Hickson U.K. plan
was $290.9 and $242.5, as of December 31, 2003 and 2002, respectively. The
accumulated benefit obligation relating to the Hickson U.K. Senior Executive
plan, included above, was $10.4 and $9.1, as of December 31, 2003 and 2002,
respectively. The projected benefit obligation related to this plan was $10.4
and $9.2 as of December 31, 2003 and 2002, respectively. In the fourth quarter
of 2003, the Company recorded a pre-tax curtailment loss of $0.7 related to the
pension plan of former Hickson organics employees due to the sale of the
business and is included in the loss on the sale of the business.

The Company's policy is to fund, at a minimum, amounts as are necessary to
provide assets sufficient to meet the benefits to be paid to plan members in
accordance with the requirements of the United Kingdom Pensions Act of 1995.
Cash funding in 2004 is expected to be comparable to 2003 and pension expense is
expected to be approximately $1.0 higher in 2004.

The Company's other foreign subsidiaries maintain pension and other benefit
plans that are consistent with statutory practices and are not significant to
the consolidated financial statements.

CONTRIBUTING EMPLOYEE OWNERSHIP PLAN

Prior to the Distribution, Company employees participated in the Olin
Corporation Contributing Employee Ownership Plan ("Olin CEOP"), which is a
defined contribution plan available to essentially all domestic Olin employees
and provides a match of employee contributions. Subsequent to the Distribution,
the Olin CEOP was converted into a multiple employer plan in which both Olin and
the Company participated. Effective March 1, 2001, the Company established the
Arch Chemicals, Inc. Contributing Employee Ownership Plan ("Arch CEOP") which is
a defined contribution plan available to all domestic employees. As of that
date, the Company ended its participation in the Olin CEOP and all Company
employee balances were transferred to the Arch CEOP. The matching contribution
allocable to Company employees under both plans has been included in costs and
expenses in the accompanying Consolidated Statements of Income and was $3.6,
$4.0 and $2.8 in 2003, 2002 and 2001, respectively.

16. STOCK OPTION AND SHAREHOLDER RIGHTS PLANS

STOCK OPTION PLANS

As of December 31, 2003, the Company had four stock-based compensation
plans, which are described below.

At the time of the Distribution, stock options issued by Olin were
converted into both an option to purchase Company common stock ("Company
Options") and an option to purchase Olin common stock ("New Olin Options") with
the same aggregate "intrinsic value" at the time of the Distribution as the old
award. The conversion of the options did not result in a charge to earnings as
no new measurement date was created. The Company is responsible for delivering
shares of Company common stock upon exercise of Company Options, and Olin is
responsible for the delivery of shares of Olin Common stock upon exercise of New
Olin Options. Options granted under the Olin 1980 Stock Option Plan terminated
during 2001. Options granted to such employees under the Olin 1988 Stock Option
Plan or the Olin 1996 Stock Option Plan retained the original term of the
option. Options granted to such employees under the Olin 1996 Stock Option Plan,
which were not vested at the time of the Distribution, continue to vest in
accordance with their vesting schedule so long as the optionee remains employed
at the Company. No additional Company options will be granted under the 1988 and
1996 Olin Stock Option Plans.

In 1999, the Company adopted the 1999 Long Term Incentive Plan, a long-term
incentive plan to encourage selected salaried employees to acquire a proprietary
interest in the Company's growth and

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performance and to attract and retain qualified individuals. The plan will
provide for the ability to issue stock options, restricted stock and restricted
stock units, and performance awards. In addition, in 1999, the Company adopted
the 1999 Stock Plan for Nonemployee Directors pursuant to which stock options
and other stock awards may be granted to nonemployee directors. The Company's
policy is to grant options to purchase common stock at an exercise price
representing the fair market value of the common stock on the grant date. In
general, the employee options vest and become exercisable within one to three
years and the directors' options are exercisable upon grant. In general, all
options are exercisable up to ten years from the date of grant. In 1999, the
Company granted to certain employees approximately 245,000 performance share
units, the vesting of which was dependent on the attainment of certain
performance measures as of the end of 2001. The measures were not met and the
performance share units were forfeited. At December 31, 2003, total shares
authorized for grant under plans established subsequent to the Distribution Date
were 2,298,000.

The following table summarizes stock option activity during 2003, 2002 and
2001 (number of options in thousands):

At December 31, 2003 and 2002, options covering 2,119,566 and 1,987,043
shares, respectively, were exercisable at weighted average exercise prices of
$24.41 and $24.66, respectively. The average remaining contractual life was
approximately five years.

The following table summarizes information about stock options outstanding
at December 31, 2003 (number of options in thousands):

Pursuant to APB No. 25, compensation cost is recorded when the fair market
value of the Company's stock at the date of grant for fixed options exceeds the
exercise price of the stock option. The Company's

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policy is to grant stock options with an exercise price equal to its common
stock fair value on the date of grant. Accordingly, there are no charges
reflected in the accompanying consolidated financial statements for stock
options granted to employees. Compensation cost for restricted stock units is
accrued over the life of the award based on the quoted market price of the
Company's stock at the date of the award. Compensation cost for performance
share units are estimated based on the number of shares to be earned. The
ultimate cost will be based on the market price of the Company's stock at the
settlement date. Prior to the Distribution, certain employees of the Company
received restricted stock unit awards under Olin's stock-based compensation
plans. The cost associated with the employees participating in these plans is
included in the Consolidated Statements of Income and is not material to
operating results.

The fair value of each Arch option granted during 2003, 2002 and 2001 was
estimated on the date of grant using the Black-Scholes option pricing model.
Assumptions used, weighted average fair values and pro forma net income (loss)
for 2003, 2002 and 2001 are listed below:

SHAREHOLDER RIGHTS PLAN

The Board of Directors adopted a Shareholder Rights Plan in 1999. This plan
is designed to prevent a potential acquirer from gaining control of the Company
without offering a fair price to all shareholders. Each right entitles a
shareholder (other than the potential acquirer) to buy one one-thousandth share
of Series A Participating Cumulative Preferred Stock at a purchase price of $125
per share. The rights are exercisable only if a person (or group of affiliated
persons) acquires more than 15% of the Company's common stock or if the Board of
Directors so determines following the commencement of a tender or exchange offer
to acquire more than 15% of the Company's common stock. If any person acquires
more than 15% of the Company's common stock and effects a subsequent merger or
combination with the Company, each right will entitle the holder (other than the
acquirer) to purchase stock or other property of the acquirer having a market
value of twice the purchase price. The Company can redeem the rights at one cent
per right for a certain period of time. The rights will expire on January 29,
2009 unless redeemed earlier by the Company.

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17. SHAREHOLDERS' EQUITY

COMMON STOCK

On February 8, 1999, Olin, the sole shareholder of the Company, distributed
(on a 1-for-2 basis) all the issued and outstanding shares of common stock, par
value $1 per share, of the Company, to the shareholders of record of Olin's
common stock as of February 1, 1999, upon which the Company became a separate,
independent company. The total number of shares distributed was approximately
22,980,000.

At December 31, 2003, the Company has reserved 2,822,617 shares of its
authorized but unissued common stock for possible future issuance in connection
with the exercise of stock options, restricted stock, and performance share
units.

On October 28, 1999, the Company's Board of Directors approved a stock
repurchase program whereby the Company is authorized to buy back up to 1.2
million shares of its common stock, representing approximately five percent of
outstanding shares. The program was suspended in 2000. In October 2003, the
Board of Directors unamiously agreed to continue the previous suspension of its
stock repurchase program. The Company had previously repurchased 893,000 shares
of the 1.2 million shares authorized, or approximately 75 percent, at a cost of
approximately $16.

SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK

The Company has 40,000 authorized shares of $1 par value Series A
Participating Cumulative Preferred Stock, of which none is outstanding.

RETAINED EARNINGS (ACCUMULATED DEFICIT)

Retained earnings (accumulated deficit) as of December 31, 2003 and 2002
include earnings (losses) since the Distribution.

ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss includes cumulative foreign currency
translation adjustments, additional minimum pension liability adjustments, net
of tax and accumulated net unrealized gain (loss) on derivative instruments, net
of tax.

The additional minimum pension liability adjustments recorded were
principally the result of depressed market values of the Company's pension plan
assets in 2002 and 2001, combined with a decrease in the discount rate due to
declining market interest rates in 2003, 2002 and 2001.

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ACCUMULATED NET UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS

Changes in the accumulated net unrealized gain (loss) on derivative
instruments for the years ended December 31, 2003 and 2002 are as follows:

18. SEGMENT REPORTING

As a result of the sale of the sulfuric acid business, the Company has
restated its prior period results to include the results of the sulfuric acid
business as a component of discontinued operations, in accordance with the SFAS
No. 144. Additionally, the Company has combined its performance urethanes and
hydrazine businesses to form the new performance products segment. 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. Segment results for the three years
ended December 31 were as follows:

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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 and certain unallocated expenses of the corporate headquarters.
Additionally, segment operating income (loss) excludes restructuring income
(expense) and the write-off of an investment in GlobalBA.com investment of $1.0
in 2001. The 2003 corporate unallocated expense includes the gain on sale of
land of $2.5.

Segment assets include only those assets that are directly identifiable to
a segment and do not include such items as cash, deferred taxes, LIFO reserves,
assets held for sale, and certain other assets. Sales by reportable business
unit substantially represent sales for the major product lines of the Company.

Geographic area information for the periods ended December 31, were as
follows:

Sales to external customers are attributed to geographic areas based on
country of destination. Transfers between geographic areas are priced generally
at prevailing market prices. Export sales from the United States to unaffiliated
customers were $75.6, $72.7 and $72.0 in 2003, 2002 and 2001, respectively.

19. ACQUISITIONS

On August 1, 2003, the Company completed the purchase of the remaining 50
percent share of Aquachlor (Proprietary) Limited in South Africa from its joint
venture partner Sentrachem Limited for $2.5 in cash. Aquachlor produces calcium
hypochlorite, which is marketed under the HTH(R) brand, for use in residential
and commercial swimming pools in South Africa. Annual sales for Aquachlor for
the year ended December 31, 2002 were approximately $26. This acquisition was
accounted for as a purchase business

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combination and the results of operations have been included in the consolidated
financial statements from the date of purchase in the HTH water products segment
and were not material in 2002. In the fourth quarter, the Company adjusted the
opening balance sheet of Aquachlor to include a liability for its
post-employment health care plan of $0.8. No goodwill was recognized as part of
the transaction. The supplemental cash flow information on the business acquired
is as follows:

Working Capital............................................. $ 4.3
Property, plant and equipment, net.......................... 3.6
Non-Current Liabilities..................................... (0.8)
Payable to Arch Chemicals, Inc.............................. (4.6)
-----
Cash paid................................................. $ 2.5
=====

In September 2001, the Company acquired Butler Mabbutt & Wrighton and the
Industrial Division of Humbrol Limited for an aggregate of approximately $1 in
cash.

In March 2001, the Company completed the acquisition of the assets of
Walker Brothers, a division of Consolidated Coatings, for approximately $2 in
cash.

20. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases certain properties, such as manufacturing, warehousing
and office space and data processing and office equipment. Leases covering these
properties generally contain escalation clauses based on increased costs of the
lessor, primarily property taxes, maintenance and insurance and have renewal or
purchase options. Total rent expense charged to operations amounted to $18.2 in
2003, $16.8 in 2002 and $18.5 in 2001 (sublease income and contingent rent
expense is not significant).

Future minimum rent payments under operating leases having initial or
remaining noncancelable lease terms in excess of one year at December 31, 2003
are as follows: $13.1 in 2004; $9.8 in 2005; $8.6 in 2006; $3.7 in 2007; $3.2 in
2008 and $8.7 thereafter.

LITIGATION

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
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 in
principle to settle a portion of the litigation that involves claims by
plaintiffs that are individuals. This agreement requires court approval. 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, including the amount of its participation in the settlement, and
does not expect any final resolution on these cases, net of an insurance
recovery, to have a material adverse effect on results of operations or
financial position of the Company.

The Company settled a product claim by a customer related to a discontinued
product in August 2002 for $3.0, net of insurance claims of approximately $2.5.
The full settlement of $5.5 was paid by the Company

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during the third quarter of 2002. Actual insurance proceeds of $1.6 were
received by March 31, 2003 in full settlement of the insurance claims.

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.

In the fifth putative class action lawsuit (Ardoin v. Stine Lumber Company
et. al.), the court has not yet decided the issue of whether the case should or
should not be certified as a class action, although management believes the
precedent set in the Jacobs case will prevail in the Ardoin case as well. The
proposed class members in the Ardoin case purport to include various persons who
purchased CCA-treated wood products for residential use. The lawsuit seeks to
recover the purchase price and other alleged unquantified damages under various
theories, including breach of warranty. This case does not allege personal
injury. Plaintiffs have now moved to dismiss this case with prejudice and the
court is still considering plaintiffs' motion.

In addition, there are fewer then 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 2003 and 2002, and may increase in the
future.

All CCA-related cases are subject to a number of uncertainties, including
in the case of the remaining putative class action, whether and to what extent
it will be certified as a class action. 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
condition, cash flow or results of operations.

There are a variety of non-environmental legal proceedings pending or
threatened against the Company. Those matters that are probable have been
accrued for in the accompanying Consolidated Financial Statements. Any
contingent amounts in excess of amounts accrued are not expected to have a
material adverse effect on results of operations, financial position or
liquidity of the Company.

ENVIRONMENTAL

Olin and the Company have 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
Consolidated Financial Statements.

In connection with the disposition of the sulfuric acid business on July 2,
2003, the Company provided environmental covenants to the purchaser in which the
Company is solely liable for the costs of any environmental claim for
remediation of any hazardous substances that was generated, managed, treated,
stored or disposed of prior to the closing date of the sale. The Company will be
released, under the sales

82

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agreement, from its obligation, which cannot exceed $22.5, 20 years from the
closing date. Additionally, as part of its environmental indemnifications the
Company will be responsible, for five years from the closing date, for damages
directly related to the process sewer system at the Beaumont, Texas plant.

As part of the Hickson organics disposition, the Company will continue to
be responsible for known environmental matters. Such matters have previously
been accrued for in its environmental reserve included in the Consolidated
Financial Statements. Additionally, any unknown environmental matters that are
identified subsequent to the sale, the Company has agreed to share
responsibility with the purchaser over a seven-year period, with the Company's
share decreasing to zero over the seven-year period. The Company's maximum
aggregate liability for such unknown environmental matters is L5.0 million.

The Company does not anticipate any exposure related to the environmental
indemnifications for the sulfuric acid and the Hickson organics dispositions.
The Company has estimated that the fair value of any such exposure would be
immaterial.

The Company's Consolidated Balance Sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting to
$8.6 and $10.4 at December 31, 2003 and 2002, respectively. The Company's
estimated environmental liability relates to nine sites, six of which are in the
United States and none of which are on the U.S. National Priority List. These
amounts did not take into account any discounting of future expenditures, any
consideration of insurance recoveries or any advances in technology. These
liabilities are reassessed periodically to determine if environmental
circumstances have changed or if the costs of remediation efforts can be better
estimated. As a result of these reassessments, future charges to income may be
made for additional liabilities.

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. At December 31, 2003, the Company
had estimated additional contingent environmental liabilities of $7.2.

21. RESTRUCTURING AND OTHER GAINS (LOSSES)

RESTRUCTURING

Results for 2003, 2002 and 2001 include restructuring (income) expense
totaling $(0.6), $7.6 and $1.5, respectively.

Restructuring

The 2003 restructuring income consists of $1.4 for headcount reductions of
approximately 30 employees in the performance products segment. The headcount
reductions are due to the reorganization related to the sale of the sulfuric
acid business and the temporary idling of the Company's hydrazine hydrate plant
in Lake Charles, Louisiana. It also includes a charge of $1.1, for additional
headcount reductions associated with a revision to the 2002 organizational
restructuring program, offset by a reduction in the prior years' restructuring
reserves of $3.1 for revisions to previous plans' estimates.

The 2002 restructuring charge of $7.6 (of which, $4.4, $2.1 and $1.1
related to the treatment products, microelectronic materials, and performance
products segments, respectively), included $6.6 related to headcount reductions
of approximately 200 employees in the microelectronic materials, performance
urethanes and HTH water products businesses, as well as a charge related to the
consolidation of several

83

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

treatment products segment operations. The non-cash portion of the restructuring
charge was approximately $1.0.

The 2001 restructuring of $1.5 includes a restructuring charge of $2.4 for
headcount reductions at corporate and at the performance urethanes business
offset by a $1.5 reduction of the 2000 restructuring reserve to its estimated
remaining liability as of December 31, 2001. In addition, the Company recorded
restructuring income of $0.2 for the reimbursement of certain severance costs
which were previously recorded in the fourth quarter of 2000, and a charge of
$0.8 consisting of retention payments made to employees as a result of the
Company's restructuring of the process chemicals business. The 2001 headcount
reductions affected approximately 30 individuals.

The 2000 restructuring charge of $34.0 included $8.9 of costs associated
with headcount reductions and contractual vendor obligations of the process
chemicals business, $14.1 related to the biocides business for the write-off of
certain costs associated with the abandonment of construction of a facility in
China, the completion of a consolidation study, and additional headcount
reductions, and $11.0 related to headcount reductions at other businesses and
corporate. Total headcount reductions affected approximately 450 individuals.
The non-cash portion of the restructuring charges was approximately $13.

The following table summarizes activity related to the 2003, 2002, 2001 and
2000 restructuring costs:

84

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 2003, 2002 and 2001, $40.1, $35.0 and $27.5,
respectively, had been charged against restructuring reserves.

As of December 31, 2003, all employees from each restructuring program have
been terminated with a portion still receiving benefits under the 2002 and 2003
programs. At December 31, 2003 and 2002, $1.8 and $7.5, respectively, of
restructuring reserves were included in Accrued Liabilities in the accompanying
Consolidated Balance Sheets. All of the costs related to the 2000 and 2001
programs have been incurred and no accrual relates to these restructuring
programs.

Other (Gains) and Losses

Other gains and losses in 2003 include the pre-tax gain on the sales of two
warehouses of $0.5 and the sale of excess land of $2.5. 2002 other gains and
losses include the pre-tax gain on sales of excess land of $1.8 million.

Other gains and losses in 2001 includes a $1.0 write-off of an investment
in Global BA.com, Inc., an Internet-based business-to-distributor-to-business
on-line marketplace for specialty chemical companies, which became insolvent in
the third quarter of 2001.

22. QUARTERLY FINANCIAL DATA (UNAUDITED)

85

ARCH CHEMICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

86

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

ITEM 9A. CONTROLS AND PROCEDURES

As of December 31, 2003 ("Evaluation Date"), the Company conducted an
evaluation, under the supervision and with the participation of the Company's
chief executive officer and chief financial officer, pursuant to Rule 13a-15
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act") of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Company's
chief executive officer and chief financial officer concluded that as of the
Evaluation Date such disclosure controls and procedures were effective to
provide reasonable assurance 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 were no changes in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) promulgated under the Securities
Exchange Act of 1934, as amended) during the fourth quarter of 2003 that
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information relating to the Company's Directors under the paragraphs
entitled "Who are the persons nominated by the Board in this election to serve
as directors?" and "Who are the other remaining directors and when are their
terms scheduled to end?" under the heading "Item 1 -- Election of Directors" in
the Proxy Statement relating to the Company's 2004 Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated by reference in this
Report. See also the list of executive officers following Item 4 of this Report.
The information regarding compliance with Section 16 of the Securities Exchange
Act of 1934, as amended, contained in the paragraph entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" under the heading "Security Ownership
of Directors and Officers" in the Proxy Statement is incorporated by reference
in this Report.

The Company has a code of conduct that applies to all officers and
employees, including the Company's principal executive officer, principal
financial officer and principal accounting officer. The Company's code of
conduct is on its website at: http://www.archchemicals.com in the Investor
Relations section under Corporate Governance. The Company will post any
amendments to the code of conduct, as well as any waivers that are required to
be disclosed by the rules of either the Securities and Exchange Commission or
the New York Stock Exchange on its website.

The Board of Directors has adopted Principles of Corporate Governance and
charters for the Audit, Compensation and Corporate Governance Committees of the
Board of Directors. These documents can be found on the Company's website by
going to the following address: http://www.archchemicals.com in the Investor
Relations section under Corporate Governance. A printed copy of such code and
such principles and charters can be obtained by contacting Investor Relations,
Arch Chemicals, Inc., 501 Merritt 7, P.O. Box 5204, Norwalk, CT 06856-5204 or
calling (203) 229-2654.

The Audit Committee of the Board of Directors is an "audit committee" for
purposes of Section 3(a)(58) of the Securities Exchange Act of 1934. As of March
1, 2004, the members of the Committee are: John P. Schaefer (chair), Michael O.
Magdol and Janice J. Teal. The information under the heading "Who is the Audit
Committee expert?" in the Proxy Statement is incorporated by reference in the
Report.
87

ITEM 11. EXECUTIVE COMPENSATION

The information under the heading "Executive Compensation" in the Proxy
Statement (but excluding the Report of the Compensation Committee on Executive
Compensation contained in the Proxy Statement and the performance graph
contained in the Proxy Statement) is incorporated by reference in this Report.
The information under the heading "Additional Information Regarding the Board of
Directors -- What are the directors paid for their services?" in the Proxy
Statement is incorporated by reference in this Report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information concerning holdings of Company stock by certain beneficial
owners contained under the heading "Certain Beneficial Owners" in the Proxy
Statement and the information concerning beneficial ownership of Common Stock by
directors and officers of the Company under the heading "Security Ownership of
Directors and Officers" in the Proxy Statement are incorporated by reference in
this Report.

EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2003

- ---------------

(1) Figures include information for equity compensation plans of Olin that
issued in 1999 options to acquire shares of the Company's Common Stock in
exchange for old Olin options as part of an equitable adjustment made in
connection with the spinoff of the Company from Olin in 1999. No further
options to acquire the Company's Common Stock may be issued under such
plans. As of December 31, 2003, 817,734 of these options were outstanding.

(2) 486,754 of the shares shown may be issued in connection with future grants
of stock-based awards and future deferrals of compensation to stock
accounts. 44,246 of the shares shown relate to various current deferrals of
awards or compensation in the form of phantom shares payable in shares of
Company Common Stock at the end of the deferral period. Shares remaining
available for future issuance by plan are: 443,483 under the 1999 Long Term
Incentive Plan, 70,446 under the 1999 Stock Plan for Non-Employee Directors
and 17,071 under the Employee Deferral Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information contained under the headings "What were KPMG fees in 2002
and 2003?" and "Pre-Approval Policy and Provisions" in the Proxy Statement is
incorporated by reference in this Report.

88

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

The following is a list of the Financial Statements included in Item 8 of
this Report:

2. Financial Statement Schedules

Except as noted below, schedules not included herein are omitted because
they are inapplicable or not required or because the required information is
given in the consolidated financial statements and notes thereto.

Due to the significance of the Company's FUJIFILM Arch joint venture, the
Company has provided summarized financial statements within the Notes to the
Consolidated Financial Statements and the Company is required to file audited
financial statements for FUJIFILM Arch with this Report. As permitted by SEC
Rule 3-09 of Regulation S-X, the Company will file the financial statements as
an amendment to this Report by June 30, 2004. Additionally, the financial
statements of the Company's Nordesclor joint venture have been summarized within
the Notes to the Consolidated Financial Statements due to the significance of
Nordesclor's results to the consolidated Company. Separate financial statements
of the remaining 50% or less owned companies accounted for by the equity method
are not summarized herein and have been omitted because they would not
constitute a significant subsidiary.

3. Exhibits

Management contracts and compensatory plans and arrangements are listed as
Exhibits 10.7 through 10.17 below.

2 Share Purchase Agreement, dated August 11, 2003, among
Hickson Limited, Greentag (8) Limited, Hickson International
Limited, Arch Chemicals, Inc. and Hickson & Welch Chemical
Products Limited -- Exhibit 2 to the Company's Current
Report on Form 8-K, filed August 18, 2003.*
3.1 Amended and Restated Articles of Incorporation of the
Company -- Exhibit 3.1 to the Company's Current Report on
Form 8-K, filed February 17, 1999.*
3.2 Bylaws of the Company as amended September 1,
2003 -- Exhibit 3 to the Company's Quarterly Report on Form
10-Q for the period ending September 30, 2003.*
4.1 Specimen Common Share certificate -- Exhibit 4.1 to the
Company's Registration Statement on Form 10, as amended.*
4.2 Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 3.1 hereto).*
4.3 Bylaws of the Company (filed as Exhibit 3.2 hereto).*

- ---------------
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are
located in SEC File No. 1-14601 unless otherwise indicated.
89

4.4(a) Rights Agreement dated as of January 29, 1999 between the
Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent -- Exhibit 4.1 to the Company's Current Report
on Form 8-K, filed February 17, 1999.*
4.4(b) Amendment No. 1, dated July 25, 1999, to Rights Agreement,
dated as of January 29, 1999 -- Exhibit 4 to the Company's
Quarterly Report on Form 10-Q, for the period ending June
30, 1999.*
4.4(c) Amendment No. 2, dated April 26, 2002, to Rights Agreement,
dated as of January 29, 1999 -- Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the period ending March
31, 2002.*
4.5 Form of Rights Certificate (attached as Exhibit B to the
Rights Agreement filed as Exhibit 4.4(a) hereto).*
4.6 Revolving Credit Agreement, dated as of June 20, 2003 among
Arch Chemicals, Inc., The Lenders Party hereto, JPMorgan
Chase Bank, as Administrative Agent, J.P. Morgan Securities
Inc., as Joint Lead Arranger and Joint Book Manager, Banc of
America Securities, L.L.C., as Joint Lead Arranger and Joint
Book Manager, Bank of America, National Association, as
Documentation Agent, and Fleet National Bank, as Syndication
Agent, -- Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the period ending June 30, 2003.*
4.7 Note Purchase Agreement, dated as of March 20, 2002, among
the Company and the purchasers named therein, relating to
the Company's $149,000,000 Senior Notes, Series A, due March
20, 2007 and $62,000,000 Senior Notes, Series B, due March
20, 2009 -- Exhibit 4.8 to the Company's Annual Report on
Form 10-K for the period ending December 31, 2001.*
10.1 Distribution Agreement, dated as of February 1, 1999,
between the Company and Olin -- Exhibit 2 to the Company's
Current Report on Form 8-K, filed February 17, 1999.*
10.2 Form of Employee Benefits Allocation Agreement between the
Company and Olin -- Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the period ending December 31,
1998.*
10.3 Form of Intellectual Property Transfer and License Agreement
between the Company and Olin -- Exhibit 10.9 to the
Company's Registration Statement on Form 10, as amended.*
10.4 Form of Sublease between the Company and Olin -- Exhibit
10.5 to the Company's Registration Statement on Form 10, as
amended.*
10.5 Tax Sharing Agreement, dated as of February 8, 1999, between
the Company and Olin -- Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the period ending December 31,
1998.*
10.6 Charleston Services Agreement, dated as of February 8, 1999,
between the Company and Olin -- Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the period ending
December 31, 1998.*
10.7 Form of Executive Agreement -- Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the period ending
December 31, 1999.*
10.8 1999 Stock Plan for Non-employee Directors, as amended and
restated January 30, 2003 -- Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the period ending December
31, 2002.*
10.9 1999 Long Term Incentive Plan, as amended October 28, 1999
and December 14, 2000 -- Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the period ending December
31, 2000.*
10.10 Supplemental Contributing Employee Ownership Plan, as
amended and restated January 30, 2003.
10.11 Supplementary and Deferral Benefit Pension Plan, as amended
July 29, 1999 -- Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the period ending December 31,
1999.*
10.12 Senior Executive Pension Plan, as amended and restated as of
October 23, 2003.
10.13 Employee Deferral Plan, as amended and restated January 30,
2003.

-----------------
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are
located in SEC File No. 1-14601 unless otherwise indicated.
90

10.14 Key Executive Death Benefits -- Exhibit 10.19 to the
Company's Registration Statement on Form 10, as amended.*
10.15 Form of Endorsement Split Dollar Agreement -- Exhibit 10.20
to the Company's Registration Statement on Form 10, as
amended.*
10.16 Arch Chemicals, Inc. Annual Incentive Plan, as amended
December 9, 1999 and April 27, 2000 -- Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the period ending
December 31, 2000.*
10.17 Senior Management Incentive Compensation Plan, as amended
January 27, 2000 -- Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the period ending December 31,
1999.*
10.18(a) Receivables Sale Agreement, dated as of March 19, 2002,
between the Company, Arch Specialty Chemicals, Inc., Arch
Chemicals Specialty Products, Inc., Arch Electronic
Chemicals, Inc., Arch Wood Protection, Inc., Arch Personal
Care Products, L.P., and Arch Chemicals Receivables
Corp. -- Exhibit 10.25(a) to the Company's Annual Report on
Form 10-K for the period ending December 31, 2001.*
10.18(b) Receivables Purchase Agreement, dated as of March 19, 2002,
between Arch Chemicals Receivables Corp., the Company, Blue
Ridge Asset Funding Corporation and Wachovia Bank, N.A., as
agent -- Exhibit 10.25(b) to the Company's Annual Report on
Form 10-K for the period ending December 31, 2001.*
10.18(c) First Amendment, dated as of April 10, 2002, to Receivables
Purchase Agreement, dated as of March 19, 2002, among Arch
Chemicals Receivables Corp., Arch Chemicals, Inc., Blue
Ridge Asset Funding Corporation, and Wachovia Bank, National
Association -- Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ending March 31, 2002.*
10.18(d) Second Amendment, dated as of May 15, 2002, to Receivables
Purchase Agreement, dated as of March 19, 2002, among Arch
Chemicals Receivables Corp., Arch Chemicals, Inc., Blue
Ridge Asset Funding Corporation and Wachovia Bank, National
Association -- Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ending June 30, 2002.*
10.18(e) Third Amendment, dated as of March 18, 2003, to Receivables
Purchase Agreement, dated as of March 19, 2002, among Arch
Chemicals Receivables Corp., Arch Chemicals, Inc., Blue
Ridge Asset Funding Corporation and Wachovia Bank, National
Association.
21. List of Subsidiaries.
23. Consent of KPMG LLP, dated March 1, 2004.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. 1350.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended December 31,
2003, except for a Form 8-K filed October 28, 2003 with respect to Item 7.

- ---------------
* Previously filed as indicated and incorporated herein by reference. Exhibits
incorporated by reference are
located in SEC File No. 1-14601 unless otherwise indicated.
91

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

By /s/ MICHAEL E. CAMPBELL
------------------------------------
Michael E. Campbell
Chairman of the Board, President and
Chief Executive Officer

Date: March 1, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

Date: March 1, 2004

92

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