UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

Commission file number 1-14601

Arch Chemicals, Inc.

(Exact name of registrant as specified in its charter)

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 þ          No o.

          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.     þ

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes þ     No o.

          As of June 30, 2004, the aggregate market value of registrant’s voting and non-voting common equity held by non-affiliates of registrant was approximately $672,418,000.

          As of January 31, 2005, 23,594,255, 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:

TABLE OF CONTENTS

FORM 10-K

PART I

General

      Arch Chemicals, Inc. (“Arch” or the “Company”) is a specialty chemicals manufacturer which supplies value-added products and services to many industries on a worldwide basis. The principal business segments in which the Company competes are treatment products and performance products. The Company’s ability and willingness to provide superior levels of technical, regulatory expertise 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.

      As a result of the disposition of the majority of the operations of the Company’s microelectronics materials segment on November 30, 2004, these businesses were 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 of this Report. Accordingly, Item 1 and Item 2 of this Report describe the Company’s continuing businesses and exclude the microelectronic materials business that was sold.

      The term “Company” as used in Parts I and II of this Report means Arch Chemicals, Inc. and its subsidiaries 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 (“SEC”). The Company does not charge any fees to view, print or access these reports on its website through the Internet. Interested persons may read and copy these reports, proxy statements and other information at the SEC’s Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 and may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website, located at http://www.sec.gov, that contains reports, proxy statements and other information regarding registrants, such as the Company, that file electronically with the SEC.

2004 Events

      On April 2, 2004, the Company completed the acquisition of Avecia’s pool & spa and protection & hygiene businesses. The total purchase price net of cash acquired, was $230.8 million, inclusive of expenses and a final working capital adjustment of $7.4 million. The payment consisted of cash and the issuance of the Company’s common stock with a value of $15.7 million. The purchase price is further subject to a contingent payment of up to $5.0 million in cash based upon earnings attributable to North American sales of certain products. In addition, to the extent that the unfunded pension liability in the U.K. pension plan was less than $10.0 million, the purchase price was adjusted upwards by the difference between $10.0 million and the unfunded liability, with the consideration to be split equally between a contingent cash payment and up to 223,250 additional shares of the Company’s common stock. The share consideration component of this adjustment was 74,788 shares of the Company’s common stock, which were issued in January 2005 with a

value of $1.7 million. The contingent cash payment will be earned based upon cumulative global net sales of certain products through 2005.

      In April 2004, the Company’s contract to sell hydrazine to the U.S. Government expired and the U.S. Government awarded a new 10-year hydrazine propellant supply contract to another company. The Company protested the award and ultimately the government agreed to re-bid the contract. The Company submitted its new bid on January 20, 2005. In addition, in connection with the re-bidding procedure, the Company filed a claim in the U.S. Court of Federal Claims protesting various aspects related to the bidding process. As a result of this complaint, the court directed the Defense Energy Support Center (“DESC”) to add to the price of competitors’ bids the shutdown costs related to the Company’s Lake Charles facility that the DESC had agreed to pay to the Company in the event the Company is not awarded the new contract. The Company is pleased with the court’s order. However, its impact is uncertain and there is no assurance that the order will have a significant impact on the bidding process in favor of the Company. Final revised bids are currently due on March 15, 2005. The DESC notified the Company that it anticipates completing its contract-award decision late in the first quarter or early in the second quarter of 2005.

      On November 30, 2004, the Company sold the majority of the operations of its microelectronic materials business to Fuji Photo Film Co., Ltd. for approximately $160 million in cash, inclusive of an estimated closing working capital adjustment of $1.1 million. Excluded from the transaction were the Company’s 50% interest in Planar Solutions LLC, the Company’s joint venture with Wacker Chemical Corporation for the production and sale of chemical mechanical planarization (“CMP”) slurries, the microelectronics-dedicated manufacturing facility in Brandenburg, Kentucky and the Company’s chemical management services (“CMS”) business.

Products and Services

      The Company’s principal products and services fall within two business segments: treatment products 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.

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

      HTH Water Products. The Company sells chemicals and equipment on a worldwide basis for the sanitization and treatment of residential and commercial pool and spa water, drinking water and water used in industrial applications. The Company sells both chlorine-based products (calcium hypochlorite and chlorinated isocyanurates) and non-chlorine-based products (polyhexamethylene biguanide (“PHMB”)) as sanitizers. With the acquisition of Avecia’s pool & spa business in April 2004, the Company is a major manufacturer and seller of PHMB-based pool and spa treatment chemicals in the U.S. The pool and spa products are sold primarily to U.S. pool and spa owners through an extensive network of authorized, independent retailers, rather than through mass market retailers. The Company’s pool chemical products are sold primarily under the widely-recognized HTH^® brand name and the Baquacil^® and Baqua Spa^® brand names. The Company also sells commercial pool products under the Pulsar^® brand name and to specialty pool dealers under the POOLIFE® brand name. The Company’s water chemical products are also distributed as private label brands. In addition to the pool water sanitizers, PHMB, 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 is a leading worldwide producer of calcium hypochlorite with various concentrations of available chlorine. The Company has a competitive advantage through ownership of several patents covering the manufacture and use of pool chemicals and equipment, as well as through the ownership of strong brand names.

      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 2004, approximately 58% of the Company’s water products sales were within North America, and the remaining 42% were throughout the rest of the world. In North America, the Company sells water chemical products to retail merchants and to 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 has ownership interests in a joint venture in Brazil (Nordesclor S.A.) that manufactures and distributes calcium hypochlorite and other water products to local markets. The Company’s Brazilian subsidiary, Arch Quimica Brasil Ltda., manufactures and distributes other water chemical products in Brazil and other South American countries.

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

      Personal Care and Industrial Biocides. The Company is a leading global supplier of biocides for preservation of industrial and consumer products. It manufactures biocides that control dandruff on the scalp and control the growth of micro-organisms, particularly fungi and algae and with the acquisition of Avecia’s protection & hygiene business in April 2004, also develops, manufactures and markets biocides for anti-bacterial applications. All biocide products are marketed under the well-recognized trademarks, Omadine®, Omacide®, Triadine®, Proxel®, Purista® and Densil® biocides. A large portion 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. The acquisition of the Avecia protection & hygiene business in 2004 expanded the Company’s molecule offerings to include two well-established, market-leading molecules — benzisothiazolin (“BIT”) and PHMB. The Company is a leading supplier of BIT and PHMB into the global biocides market and now supplies biocides used in health and hygiene applications. Biocides make up a small portion of the content 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 biocides market. It is also uniquely positioned as the only pyrithione supplier with U.S. Environmental Protection Agency registrations for metalworking fluids, coatings and antifouling paints. The Company also participates in the personal care market with actives and functional ingredient products sold primarily to manufacturers in the global cosmetic, toiletries and personal care industries. It provides these customers with biotechnological active ingredients, delivery systems, proteins, botanicals and functional ingredients, primarily for use in skin and hair care formulations.

      Wood Protection and Industrial Coatings. The Company is a leading producer of wood treatment chemical solutions that enhance the properties of wood. Its wood preservatives and fire retardants are sold under the brand names WOLMAN®, Dricon®, Tanalith®, Vacsol®, and Resistol® 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 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, residential 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®E and Tanalith®E patented products, leading CCA-alternative wood treatment products, which are utilized by wood treaters to make Wolmanized® Natural Select^tm and Tanalized® wood. The Company continues to supply CCA for industrial purposes such as the treatment of wood used in utility poles and highway guardrails.

      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 and sells a wide range of industrial coatings for a variety of applications for wood and other materials. These finishes are primarily industrial- or consumer-applied products for the surface decoration and protection of wood, including stains, polyester- and polyurethane-based coatings, and water-based coatings and UV systems that incorporate new technology. These coatings products are sold under the name “Arch Coatings,” including the brand names Sayerlack® and Linea Blu®. 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 that support 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 to 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.

      Performance Urethanes. The Company’s performance products segment includes the manufacture and sale of a broad range of urethane intermediate products with diverse end uses. The urethanes products sold by the Company impart physical characteristics that are critical to the performance and value of the customer’s end-use products. Custom manufacturing services are also provided. 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 an 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 includes 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 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. The hydrazine hydrates are supplied in various concentrations and in packaging containers that include bulk, tote bins and drums. Since early 2004, the hydrazine hydrates plant has been idled and the Company purchases hydrazine hydrates from a third party supplier for resale to its customers and as an ingredient for its formulated hydrazine products.

      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. Currently, the Company is not manufacturing or selling AH, UDMH, MMH and hydrazine fuel blends due to the expiration of the U.S. Government propellants contract in April 2004. 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

      The Company’s customer base is diverse and includes pool and spa retailers, 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. While no single customer has accounted for more than 10% of the Company’s total annual sales in 2004, sales to Wal-Mart Stores, Inc. and its affiliates (collectively, “Wal-Mart”) slightly exceeded 10% of the Company’s total annual sales in 2003 and 2002. Further, a significant portion of sales of the treatment products segment (approximately 17% in 2004) is dependent upon Wal-Mart and another customer, with Wal-Mart accounting for a significant portion of the sales of the HTH water products business and the other customer accounting for a significant portion of the sales of the personal care and industrial biocides businesses. 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. 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. Overall, principal raw materials are generally readily available to the Company as a whole.

      Treatment Products. The principal raw materials for the HTH water products line include chlorine, caustic soda, lime and chlorinated isocyanurates. For other pool chemicals, the primary raw material is cyanamide liquor.

      The principal raw materials for industrial biocide treatment chemicals and personal care specialty ingredient chemicals are pyridine, iodine, phthalic anhydride, thionyl chloride, chlorine, cyanamide liquor, 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. The coatings business uses certain water-borne resins which are sourced from one supplier and are not readily available.

      Performance Products. The principal raw materials for the urethanes products are primarily propylene, propylene oxide, ethylene oxide, while chlorine, caustic soda and ammonia are the key raw materials for the hydrazine business. For this segment, propylene is the most significant raw material that is subject to significant price volatility.

      Electricity for the Company’s manufacturing facilities is mostly supplied to the Company by public or government utilities while at shared sites with other companies are supplied by other third parties. Natural gas

used for steam production is an important energy source for many of the Company’s U.S. manufacturing sites, particularly its Brandenburg, Kentucky facility, and is purchased from multiple suppliers.

Research and Development and Patents

      The Company’s research activities are conducted at several sites including Cheshire, Connecticut; South Plainfield, New Jersey; Conley, Georgia; Blackley, England; and Pianoro, Italy. Company-sponsored research expenditures were $15.4 million in 2004, $11.7 million in 2003 and $10.3 million in 2002.

      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 treatment products segment provides a sustainable competitive advantage for the treatment chemical businesses.

      The Company has a significant patent portfolio related to HTH water products that includes 34 U.S. patents and numerous foreign counterpart patents. Three of these U.S. patents are for the technology relating to the manufacture of J3^tm calcium hypochlorite, which enables it to produce calcium hypochlorite with superior dissolving characteristics, and are materially important to the HTH water products business. Two of these three patents expire in 2009 and the other expires in 2010. Most of the remaining patents continue at least until 2012. Another significant patent, which expires in 2015, is for the multi-functional formulated trichloro-isocyanuric (“trichlor”) tablets that enables the Company to offer important enhanced benefits to its water treatment customers as distinguished from basic pure trichlor tablets. The Company has three other material U.S. composition patents for formulated pool chemical products that provide the Company with advantages in product shipping and storage. Of these three composition patents, one expires in 2008, one in 2009 and one in 2022. The other patents cover manufacturing processes, other multifunctional formulated products, and chemical feeder systems for residential/commercial pool and municipal water treatment applications. The Company has recently been awarded a patent covering a dissolving chamber design for chlorinator systems.

      The Company has an expansive biocides patent portfolio that includes 62 U.S. patents, including process, composition and application patents and numerous foreign counterpart patents. The Company’s biocides business holds several U.S. patents relating to antifouling additives for paints. These patents expire in 2010 and 2012. A substantial majority of the Company’s other biocides patents do not expire until after 2012. Patents for the Company’s key targeted growth areas in its marine antifouling paint and building product biocides businesses include those relating to small particle copper pyrithione process for stable biocide dispersions, gel-free paint containing zinc pyrithione, and “in-can” and “dry film” coating antimicrobial compounds. Biocide patents supporting the Company’s personal care ingredients business include those relating to non-spherical and non-platelet crystalline forms of zinc pyrithione and a method for producing distinct particles of pyrithione salts.

      With respect to its wood protection business, the Company owns two significant 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®E, Natural Select^tm and Tanalith®E) which expires in 2014. The Company’s patent portfolio also includes patents, both granted and pending, covering fire retardant and other wood preservation technologies.

      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.

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 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

      In November 2003, the Company secured a 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 performance began 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 began January 1, 2005 and will provide fuel for future satellite programs. In April 2004, the Company’s contract to sell hydrazine to the U.S. Government expired and the U.S. Government awarded a new 10-year hydrazine propellant supply contract to another company. The Company protested the award and ultimately the government agreed to re-bid the contract. The Company submitted its new bid on January 20, 2005. In addition, in connection with the re-bidding procedure, the Company filed a complaint in the U.S. Court of Federal Claims protesting various aspects related to the bidding process. As a result of this complaint, the court directed DESC to add to the price of competitors’ bids the shutdown costs related to the Company’s Lake Charles facility that the DESC had agreed to pay to the Company in the event the Company is not awarded the new contract. The Company is pleased with the court’s order. However, its impact is uncertain and there is no assurance that the order will have a significant impact on the bidding process in favor of the Company. Final revised bids are currently due on March 15, 2005. The DESC notified the Company that it anticipates completing its contract-award decision late in the first quarter or early in the second quarter of 2005.

      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 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 U.S. to unaffiliated customers were $76.2 million in 2004, $68.6 million in 2003 and $66.7 million in 2002. 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, 2004, the Company had approximately 2,675 employees, approximately 1,400 of whom were working in foreign countries. In addition, the Company also employed at such date approximately 470 seasonal or temporary employees, primarily in the HTH water products business. Approximately 170 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 eight labor contracts relating to such employees. These labor contracts extend for three- or four-year terms and 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^® 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^® 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^®. 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^® — 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^® 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 quality controls in all seven performance areas covered under the ACC’s signature Responsible Care^® initiative. In addition, Arch was the first ACC member whose corporate headquarters earned certification under the new Responsible Care^® Management System requirements.

      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 Valparaiso, Indiana 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 1.51 in 2004. By contrast, the average recordable injury rate for all U.S. manufacturers was 6.7 in 2003. The Company also made excellent progress in reducing contractor recordables, which have fallen from 6.30 in 1999 to 0.29 in 2004.

      Responsible Care^® is a registered trademark of the ACC.

      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 and until 2004, the Company never had more than one process incident in a year. However, in 2004 it had four such 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 significantly improved, moving from 18 environmental incidents in 1999 to nine for all of 2004.

      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 U.S. domestic shipments, and this rate has declined from 4.17 in 1999 to 0.50 in 2004.

      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 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.

      In connection with the disposition of the majority of the microelectronic materials business on November 30, 2004, the Company provided indemnification for environmental concerns. For identified environmental liabilities as of the transition date, there is no limit to the liability retained by the Company. The Company estimates such potential liability to be less than $1.0 million. For other pre-closing environmental liabilities the purchaser will be liable for the first $3.0 million of any such liabilities and the parties will share equally the next $6.0 million of any such liabilities with the Company’s total exposure thus limited to $3.0 million over a five-year period from the closing date.

      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 damages directly related to the process sewer system at the Beaumont, Texas plant during the first five years from the closing date.

      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, regarding 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 £5.0 million.

      The Company does not anticipate any material exposure related to the environmental indemnifications for the microelectronic materials, the sulfuric acid and the Hickson organics dispositions. The Company has estimated that the fair value of any such additional 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 of $2.4 million were recorded in 2004 and were not material to operating results in 2003 and 2002, 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 2004, 2003 and 2002 were as follows:

      The Company’s consolidated balance sheets included liabilities for future environmental expenditures to investigate and remediate known sites amounting to $8.3 million at December 31, 2004, of which $3.3 million is classified as other current liabilities and $5.0 million is classified as other noncurrent liabilities and $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. The Company’s estimated environmental liability relates to seven 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.

      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 environ-

mental 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, 2004, the Company had estimated additional contingent environmental liabilities of $7.3 million.

      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 that are owned or leased by the joint venture or unless otherwise noted below, the identified location is owned by the Company.

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

Principal Manufacturing Facilities

      The principal manufacturing properties of the Company described below are all owned by the Company, except for 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. The Company also has products that are produced by third parties under contract manufacturing arrangements.

      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.

      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 and to its Valparaiso, Indiana facility. A 72% CCA concentrate is also produced at this facility. This site also produces the Company’s CCA-alternative products. Office facilities and a technical center for treatment products are also located at this facility.

      Brandenburg, Kentucky. The ISO 9001-2000-certified Brandenburg plant covers an area of 200 acres, surrounded by 1,200 acres of land that 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. Under a contract manufacturing agreement with the purchaser of the majority of the operations of the Company’s microelectronic chemicals business, the Company produces chemical intermediates for such microelectronic business in a separate manufacturing facility dedicated to this purpose at this site. There is a research and development and technical center at the site that supports the development and technical service needs of the polyol and glycol products and wood coatings products. 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 produces solution grade hydrazine products for use in chemical blowing agents, water treatment chemicals, agricultural products, pharmaceutical intermediates and other chemical products. This plant is currently idled. A second ISO 9002-certified plant which was idled in 2004 following expiration of the hydrazine propellants contract with the U.S. Government, produced propellant grade hydrazine products, including anhydrous hydrazine, unsymmetrical dimethyl hydrazine and monomethyl hydrazine 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, the world’s purest grade of anhydrous hydrazine, principally for satellite propulsion.

      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 dandruff on the scalp and to control the growth of microorganisms, particularly fungi and algae. The largest 2-Chloropyridine production facility in the world is located here. 2-Chloropyridine is the key intermediate used to produce the Company’s Omadine^® 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^® brand of biocides which are a combination of pyrithione and triazine, a bactericide purchased from a supplier. This facility also produces the Omacide^® IPBC brand biocide, which is based upon iodopropargyl-n-butylcarbamate, a broad-spectrum fungicide. This facility also manufactures personal care specialty ingredients for the Company’s personal care product line and Wolman^®E for the Company’s wood protection business.

      Charleston, Tennessee. The Company’s ISO 9002-certified facility located in Charleston, Tennessee primarily 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. Liquid and dry pool maintenance products are also blended, packaged and stored at this site.

      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.

      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. Certain other products for the swimming pool market and the water treatment market are 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.

      Grangemouth, England. This manufacturing site is owned and operated by Avecia under a toll manufacturing arrangement with the Company. The Company owns all of the equipment used in the direct manufacture of PHMB products as well as the HMBDA (Hexamethylene-1,6-Bis-Dicyandiamide) intermediate. The PHMB product is produced in various solutions and in a solid format. It is used by the Company’s HTH water products business to produce Baquacil^®, BaquaSpa^® and related swimming pool and spa treatment chemicals, and it is also used in products sold by the industrial biocides business under the Vantocil^® and Reputex^® brands for various end-use applications, including consumer-focused health and hygiene products. PHMB is also used in products sold under the Cosmocil^® brand for cosmetic and personal care applications.

      Huddersfield, England. This ISO-9001-certified leased facility produces and packages Proxel® and Densil^® biocide blends (which are based on BIT) for sale by Arch’s industrial biocides business. The facility also ships the BIT active ingredients to formulators worldwide. This site is one of the world’s largest BIT production facilities. The products are packed in a variety of sizes from 25kg to full tank truck shipments. There are approximately 25 different product offerings.

      Seal Sands, England. This ISO-9001 and ISO 14001 facility produces and packages the intermediate product used at the Huddersfield site in BIT production. The intermediate is DTBA (2,2-Dithiodibenzoic Acid). The majority of the product is consumed internally at Huddersfield. Product is shipped in totes for easy transport and handling.

      Les Mureaux, France. This ISO 9002-certified facility is located just northwest of Paris, France and serves as European headquarters for water treatment products and French headquarters for personal care ingredient products, timber products and coating products. It also manufactures a limited supply of coatings for the French furniture market. The site also 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 other sources 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. Some product development work is also performed here.

      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^® and Linea Blu^® 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 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 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.

      Koppers Arch Wood Protection (NZ) Limited (“KANZ”), a New Zealand joint venture company in which the Company owns indirectly a 49% interest, is the subject of an on-going investigation by the New Zealand Commerce Commission (“NZ Commerce Commission”) regarding industry competitive practices. KANZ manufactures and markets wood preservative products throughout New Zealand. The NZ Commerce Commission has the authority to assess fines equal to the higher of (i) NZ$10 million (approximately US$7 million), (ii) three times the commercial gain from the contravention or (iii) 10% of the sales of KANZ (approximately US$2 million). Penalties, if assessed against KANZ, could have a material adverse effect on the joint venture’s business, financial condition, cash flows and results of operations. Similarly, Koppers Arch Wood Protection (Aust) Pty Ltd (“KAWP”), an Australian joint venture company in which the Company owns indirectly a 49% interest and the majority shareholder of KANZ, has made an application for leniency under the Australian Competition and Consumer Commission’s (“ACCC”) policy for cartel conduct. The ACCC has granted immunity to KAWP, subject to the fulfillment of certain conditions. If the conditions are not fulfilled, the ACCC may penalize KAWP for any violations of the competition laws of Australia. Such penalties, if assessed against KAWP, could have a material adverse effect on KAWP’s business, financial condition, cash flows and results of operations. As a result of the Company’s ownership in such entities, an unfavorable resolution could have a material adverse effect on equity in earnings of affiliated companies and dividends received.

      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 other 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 other 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, 2004, would not be material to the Company’s financial position or annual results of operations.

      No matter was submitted to a vote of security holders during the three months ended December 31, 2004.

Executive Officers

      The biographical information of the executive officers of the Company as of March 1, 2005 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, Chemical 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.

      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. 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

      As of January 31, 2005, there were approximately 5,650 record holders of the Company’s common stock.

      The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “ARJ.” In 2004, the Company submitted the required Section 303A.12(a) CEO annual certification to the NYSE and has filed as Exhibits 31.1 and 31.2 to this Report the certifications required by Section 302 of the Sarbanes-Oxley Act.

      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 23 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, 2004, dividends and stock repurchases were limited to approximately $48.7 million. In addition, the senior unsecured notes issued in March 2002 contain dividend restrictions, which limit dividends and repurchases to $37.6 million as of December 31, 2004. See Note 11 of Notes to Consolidated Financial Statements contained in Item 8 of this Report for restrictions on dividends and repurchases under the credit facility and senior unsecured notes.

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

      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, 2004 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.

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

products for a transition period to the purchaser of the microelectronic materials businesses from its Brandenburg, Kentucky facility.

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

      As a result of the sale of the majority of the microelectronic materials businesses, the Company has restated its prior year financial statements to include the results of the microelectronic materials businesses sold and the loss on the disposition as a component of discontinued operations in accordance with the Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). The Company has retained its 50 percent interest in Planar Solutions LLC, its joint venture with Wacker Chemical Corporation for the production and sale of chemical mechanical planarization (CMP) slurries, the microelectronics-dedicated manufacturing facility in Brandenburg, Kentucky and its chemical management services (CMS) business. The Company will pursue all strategic options for the CMS business, including its sale. As a result, and in accordance with the accounting requirements of SFAS 144, the CMS business is reported as an asset held for sale and the results of operations are included in discontinued operations in the consolidated financial statements. The Company will continue to supply certain products for a transition period to the purchaser of the microelectronic materials businesses from its Brandenburg, Kentucky facility.

Results of Operations

Consolidated

      The Company is a global specialty chemicals manufacturer supplying value-added products and services to consumer products and industrial markets on a worldwide basis. The Company operates in two segments: Treatment Products and Performance Products. In 2004, the Company sharpened the focus on its core growth platform — Treatment Products — by acquiring Avecia’s pool & spa and protection & hygiene businesses and by divesting the majority of its microelectronic materials businesses.

      Arch’s Treatment Products business segment generates approximately 85% 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 results of the pool & spa business are included in the HTH water products business unit and the results of the protection & hygiene business are included in the personal care and industrial biocides business unit.

      The Treatment Products segment drives growth by its superior product formulation skills, technical customer support capabilities and its expertise in helping customers respond to key regulatory trends aimed at improving the environment or protecting human health and safety. For example, the Company’s environmentally preferable zinc and copper Omadine® biocides are rapidly being formulated into marine antifouling paints to replace tributyl tins, whose toxicity to marine life has led to international bans on their use in marine paints. The Company is also a global market leader in supplying biocides for incorporation into interior and exterior paints, wallboard, ceiling tiles and other building products to deter the growth of mold and mildew, the major cause of the Sick Building Syndrome.

      The Company’s major sales, distribution and production facilities are located in North America and Europe. Additional facilities are based in Latin America, Australia, Asia and South Africa. Approximately 50% of sales and 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 that drive year-over-year performance.

      The Company has an annual compensation plan and a long-term incentive compensation plan for its executives and other employees. The annual plan’s financial targets are diluted earnings per share and cash flow. The numerator for diluted earnings per share is net income adjusted for any extraordinary income or expense, special charges or gains, and gains or losses on sales of businesses or sales not in the ordinary course of business (“adjusted net income”). Cash flow is defined as EBITDA, plus or minus the change in working capital, less capital spending. The Company’s long-term incentive plan target is Return on Equity (“ROE”).

ROE is defined as adjusted net income divided by average shareholder’s equity (the average calculated using the shareholder’s equity at the beginning and the end of the fiscal year, excluding the impact on ending shareholder’s equity of any adjustments to net income). These financial metrics are key performance indicators utilized by the Company to evaluate its performance against stated goals. In addition, the estimated and actual performance against such targets can have a significant impact on the amount of incentive compensation expense recorded by the Company.

      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 2004 full year net sales were $1,120.9 million, up approximately 30% from 2003. The Company benefited from acquisitions and from organic 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 2004, the Company continued to see savings from prior restructuring programs that were combined with other cost-reduction initiatives; thereby enabling the Company to offset rising costs in its pension and health-care plans, as well as continued raw material price pressures. The Company remains focused on reducing costs and managing cash wisely, so it has sufficient resources to drive growth both organically and through additional complementary acquisitions.

      Sales increased $257.4 million, or 29.8%, due in part to the acquisition of Avecia’s pool & spa and protection & hygiene businesses and Aquachlor ($126.0 million or 14.6%). Excluding the impact of acquisitions, sales increased $131.4 million, or 15.2%, principally due to an increase in volumes (approximately 12 percent), favorable foreign exchange (approximately four percent), partially offset by lower pricing (approximately one percent). Sales volumes were higher in the wood protection business due to the addition of new customers and favorable product mix as higher volumes of Wolman^® E and Tanalith^® E (CCA-alternative products) and moldecides more than offset lower volumes of traditional CCA products. Sales volumes also increased in the industrial biocides business as a result of strong demand for biocides used in building products, antidandruff shampoos and marine antifouling paints. The sales increase attributable to the favorable effect of foreign exchange was principally in the industrial coatings and HTH water products businesses.

      Gross margin percentage was 27.9% and 28.4% for 2004 and 2003, respectively. The impact of acquisitions on gross margin was an increase of 0.9%. The decrease in margin percentage was primarily a result of lower propellant sales in the hydrazine business as a result of the expiration of a government contract and higher raw material costs in the wood protection and performance urethanes businesses. Additionally, included in the performance products margins in 2003 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 22.5% in 2004 from 24.3% in 2003. Excluding the impact of acquisitions, selling and administration expenses as a percentage of sales were 22.4% in 2004. These expenses increased by $42.9 million primarily due to acquisitions ($29.9 million). Excluding the impact of acquisitions, selling and administration expenses increased $13.0 million due to unfavorable foreign exchange of approximately $5 million, incentive compensation, audit expenses associated with the Sarbanes-Oxley Act ($2.7 million) and higher costs associated with converting customers to CCA-alternative preservatives in the wood treatment business. Lower legal expenses in the personal care and wood protection businesses were slightly offset by higher legal expenses for HTH water products business and the Coatings business. The personal care business benefited from the recognition of a $6.1 million settlement of a favorable judgment obtained earlier in the year against a former owner of an acquired company, which was partially offset by higher reserves for self-insurance liabilities for HTH water products. The industrial biocides

business also benefited from data compensation for toxicology studies of $1.7 million. Included in selling and administration expense for 2004 is $3.3 million of amortization expense due to the acquisition of Avecia’s pool & spa and protection & hygiene businesses.

      Research and development expenses increased by $3.7 million primarily due to the acquired protection & hygiene businesses as well as increased spending in the other treatment products businesses to support growth initiatives.

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

      Restructuring expense of $1.7 million in 2004 includes $2.1 million for severance costs related to headcount reductions in the hydrazine business due to the expiration of the government contract, offset by a reduction of $0.4 million of prior year restructuring reserves. Restructuring in 2003 includes $1.4 million of severance costs for additional headcount reductions associated with the performance products segment, a $1.1 million revision to the 2002 restructuring program, offset by a reduction of the prior years’ restructuring reserves of $2.1 million due to revisions to previous plans’ estimates.

      Impairment charge of $2.9 million in 2004 is for the fully-dedicated manufacturing assets of the microelectronic materials business located in Brandenburg, Kentucky that the Company continues to own that were not sold in the recent divestiture of the majority of the operations of the microelectronic materials business to Fuji Photo Film Co., Ltd. (“Fuji”). These assets will be utilized by the Company solely to supply certain raw materials to Fuji for a transition period of up to two years. Based upon the Company’s current operations, these assets will have limited use, if any, after such transition period. As a result, the Company was required to review these long-lived assets for recoverability. Based upon an undiscounted cash-flow analysis, including an estimate of salvage value, these assets were determined to be impaired (not recoverable) as the carrying value of the assets was greater than the expected cash flows. Therefore, during the fourth quarter of 2004, the Company incurred an impairment charge to write-down such assets to fair value. Fair value was determined based upon estimated discounted cash flows directly related to the assets, including an estimate of salvage value.

      Interest expense, net increased $2.0 million due to the higher debt levels during the year as a result of the purchase of Avecia’s pool & spa and protection & hygiene businesses.

      Equity in earnings of affiliated companies decreased $1.6 million due to unfavorable operating results of the Planar Solutions and Nordesclor joint ventures. The operating results of the Planar Solutions joint venture decreased approximately $0.9 million due to higher manufacturing costs principally related to the start-up of a second copper slurry production facility to meet growing customer demand. The decrease in operating results of the Nordesclor joint venture is a result of continued strong competition in Latin America.

      The tax rate on income from continuing operations for 2004 and 2003 was 29% and 35%, respectively. The decrease in rate is primarily due to the benefit of lower foreign taxes.

      Income (loss) from discontinued operations, net of tax, reflects the results of operations of the microelectronics business through November 30, 2004 (the date of sale). Net income was $10.0 million in 2004 compared to net income of $5.0 million in 2003. The increase in net income is primarily the result of improved operating results of the FUJIFILM Arch joint venture, higher sales, favorable raw material pricing and lower legal costs.

      Income (loss) from discontinued operations in 2003 also includes the results of operations and allocated interest of the Hickson organics business through August 11, 2003. Net loss was $2.9 million in 2003, which includes a $4.0 million impairment charge to adjust the net asset value to its estimated selling price, less costs to dispose. 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.

      Gain (loss) on the sale of discontinued operations, net of tax, in 2004 includes the after-tax loss of $1.6 million on the sale of substantially all the net assets of the Company’s microelectronics business. It includes the after-tax loss of $7.3 million related to the previous sale of the Hickson organics business. The Company provided a reserve for the unpaid post-closing working capital adjustment related to the previously sold Hickson organics business, associated legal expenses due to an independent third party arbitrator’s decision and incurred a charge of $4.0 million related to probable future commitments. These losses were slightly offset by a $1.5 million tax refund related to the sale of the sulfuric acid business.

      Gain on sales of discontinued operations, net of tax, in 2003 includes the after-tax gain of $16.5 million on the sale of substantially all the net assets of the Company’s sulfuric acid business. Also included in the gain on sale of discontinued operations is the after-tax loss of $2.0 million on the sale of the Company’s Hickson organics operations in Castleford, England.

      The Company expects higher raw material costs in its HTH water products business, in particular from purchased chlorinated isocyanurates. However, these cost increases should be more than offset by continued market expansion in the professional pool dealer and the mass merchant markets, a full year contribution from the pool & spa acquisition and further realization of cost and revenue synergies from the acquisition. Also, the Company expects its personal care and industrial biocides business to benefit from continued strong demand for the biocides used in marine antifouling paints, in building products and in antidandruff markets, in addition to the full year contribution from the protection and hygiene acquisition. Wood protection is expected to continue to benefit from increased market share in both the CCA-alternative residential products market and the industrial CCA-market. As a result, the Company anticipates that sales for the full year will increase by approximately eight to ten percent. Earnings per share for the full-year 2005 are forecast to be in the $1.20 to $1.30 per share range, compared to $0.74 in 2004, which included a $0.12 loss for restructuring and impairment. Depreciation and amortization is estimated to be approximately $45 million. Capital spending is anticipated to be approximately $25 million. Pension expense is expected to increase by approximately $6 million and the effective tax rate is assumed to be 35 percent.

      In 2004, the Company was notified by the U.S. Defense Energy Support Center (“DESC”) that it had not been awarded the 10-year hydrazine propellant supply contract which the Company had anticipated receiving. The Company had a debriefing with the DESC and submitted a formal protest of the award. In July 2004, the U.S. Government Accountability Office (“GAO”) informed Arch and the DESC that the GAO will sustain the Company’s formal protest of the DESC’s decision to award the government’s next 10-year hydrazine propellant supply contract to a competing firm. As a result of the GAO’s decision, the DESC has notified the Company that it has taken corrective action by re-opening the bidding process. The Company submitted its new bid on January 20, 2005. Final revised bids are currently due March 15, 2005. The DESC has notified the Company that it anticipates completing its contract-award decision late in the first quarter or early in the second quarter of 2005. The 2005 forecast assumes no revenue from the award of a new propellants contract. The hydrazine business as a whole is not core to the Company’s portfolio, is not a growth business and has been managed for cash for several years. The failure to obtain this contract would require the Company to assess the potential impairment of its hydrazine business. The Company may incur a non-cash impairment charge for the long-lived assets of the hydrazine business. The estimate of the amount of the impairment is approximately $13.0 million, including the assets associated with the propellants product line. In addition, the Company may incur cash costs for shutdown and the present value of certain presumed contractual obligations that are assumed to no longer have any benefit to the Company. (Such annual contractual payments are approximately $2.3 million through 2011.) The estimated amount of the pre-tax cash charge resulting from these costs is approximately $15 million. These one-time cash costs are expected to be more than offset by payments to be received from the U.S. Government upon the shut down of the Lake Charles, LA and McIntosh, AL propellants facilities. The present values of such payments are approximately $19.0 million. The net aggregate pre-tax charge for one-time items could be approximately $9 million, net of the payments to be received from the U.S. Government. (See Note 21 of Notes to Consolidated Financial Statements.)

      Additionally, included in the Company’s 2005 outlook is an estimate of incentive compensation expense for 2005, 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.

      The Company’s 2005 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.

      Sales increased $100.5 million, or 13.2%, due to favorable foreign exchange (approximately six percent), an increase in volumes (approximately five percent) and higher pricing (approximately two percent). The sales increase attributable to the favorable effect of foreign exchange was principally in the industrial coatings and HTH water products businesses. Sales volumes were higher in the HTH 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 28.4% and 29.0% for 2003 and 2002, respectively. The decrease in margin percentage was primarily a result of higher raw material costs in the performance urethanes business, lower sales volume in the hydrazine business and unfavorable product mix for the personal care business. These decreases were partially offset by higher margins in the HTH 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 increased slightly to 24.3% in 2003 from 24.2% in 2002 and increased in amount by $25.1 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 $8 million). 2002 includes the write-off of the assets associated with a cancelled expansion of the HTH water products J3™ 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 increased by $1.4 million primarily due to increased spending in the treatment products segment to support various growth initiatives.

      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 $1.5 million.

      Restructuring expense 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 year’s restructuring reserves of $2.1 million due to revisions to previous plan’s estimates. Restructuring expense in 2002 includes employee-related costs for headcount reductions in the treatment products and performance products segments and expenses related to the consolidation of several treatment products operations.

      Equity in earnings of affiliated companies increased $2.5 million due to favorable operating results of all the joint ventures, in particular the Koppers and Planar Solutions joint ventures. Operating results of the Planar Solutions joint venture increased due to increased sales of CMP copper slurries used in advanced chip manufacturing processes. The improvement in operating results of the Koppers joint venture was the result of increased sales volumes in Australasia.

      The tax rate on income from continuing operations for 2003 and 2002 was 35% and 30%, respectively. The impact of restructuring decreased the effective tax rate on income from continuing operations by 4% for 2002.

      Income (loss) from discontinued operations includes the results of the microelectronic materials business. Net income was $5.0 million in 2003 compared to a loss of $0.1 million in 2002. The improvement in operating results is due to higher sales, lower legal costs and improved operating results of the FUJIFILM Arch joint venture.

      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.

      Income (loss) from discontinued operations, net of tax, also 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.

      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 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.

Segment Operating Results

      As a result of the sale of the majority of the microelectronic materials businesses, the Company has restated its prior year financial statements to include the results of the microelectronic materials businesses sold and the loss on the disposition as a component of discontinued operations in accordance with SFAS 144. The Company has retained its 50 percent interest in Planar Solutions LLC, its joint venture with Wacker Chemical Corporation for the production and sale of CMP slurries, the microelectronics-dedicated manufacturing facility in Brandenburg, Kentucky and its CMS business. The Company will pursue all strategic options for the CMS business, including its sale. As a result, and in accordance with the accounting requirements of SFAS 144, the CMS business is reported as an asset held for sale and the results of operations are included in discontinued operations in the consolidated financial statements. The results of its CMP joint venture have been included in General Corporate Expenses. In addition, as a result of the sale, the Company has reallocated certain centralized service costs to the Company’s segments that were previously allocated to the microelectronic materials segment.

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

operating income includes the equity in earnings of affiliated companies and excludes restructuring (income) expense, impairment expense and certain unallocated expenses of the corporate headquarters.

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

Treatment Products

      Sales increased $244.4 million, or 34.6%, and operating income increased $31.6 million. The increase in sales is due to acquisitions ($126.0 million or approximately 18 percent), higher volumes (approximately 15 percent) and favorable foreign exchange (approximately four percent) that was partially offset by lower pricing (approximately two percent). The increase in volumes is due to increased volumes in the wood protection business and the continued strong demand for all product lines in the industrial biocides business. Operating income increased due to the higher sales volumes, partially offset by higher raw material costs in the wood protection business. In addition, the personal care business benefited from the recognition of a $6.1 million settlement of a favorable judgment obtained against a former owner of an acquired company, which was partially offset by higher self-insurance reserves for HTH water products.

      Sales increased $76.3 million, or 26.3%, and operating income decreased $0.4 million. The increase in sales was due primarily to the acquisitions of Avecia’s pool & spa business and Aquachlor ($62.7 million). Excluding the impact of acquisitions, sales increased approximately four percent principally due to increased volumes. The favorable foreign currency rates (approximately three percent) were offset by lower pricing (approximately three percent). The higher volumes were attributable to higher North American residential swimming pool volumes, which include branded calcium hypochlorite (HTH^® and J3^TM), pool maintenance products and accessories and non-branded calcium hypochlorite. The lower pricing is principally due to lower prices for branded chlorinated isocyanurates (Pace^®).

      Operating income decreased by $0.4 million as the higher sales including the positive contributions of the acquisitions were more than offset by higher raw material, freight and distribution costs, lower contribution from the Nordesclor joint venture and increased selling and administration expenses. The increase in selling

and administration expenses is due to higher reserves for self-insured liabilities and legal expenses ($3.2 million), increased selling and advertising expenses which includes pool dealer integration initiatives (approximately $2 million), the acquisition of Aquachlor ($2.8 million), and the unfavorable impact of foreign exchange. In addition, 2004 includes unfavorable manufacturing maintenance costs related to an unscheduled outage.

      Sales increased $85.3 million, or 57.1%, and operating income increased $21.8 million. The sales increase is primarily due to the acquisition of Avecia’s protection & hygiene business ($63.3 million). Excluding the impact of the acquisition, sales increased approximately 15 percent principally due to higher volumes (approximately 16 percent) and favorable foreign currency rates (approximately two percent), partially offset by lower pricing (approximately three percent) for antidandruff products. The higher volumes are attributable to continued strong demand for biocides used in building products markets, antidandruff shampoos and marine antifouling paint.

      Operating income increased $21.8 million due to the higher sales, including the positive contribution from the acquisition and lower legal expenses. The improvement was partially offset by higher selling and administration costs to support various growth initiatives throughout the businesses. In addition, the operating results benefited from a $6.1 million settlement of a favorable judgment obtained earlier this year against a former owner of an acquired company and from compensation for toxicology data of $1.7 million.

      Sales increased $82.8 million, or 30.9%, primarily due to higher volumes (approximately 25 percent) and favorable foreign currency rates (approximately seven percent), which were slightly offset by lower pricing (approximately one percent). The increase in sales is a result of the favorable product mix, as higher volumes of CCA-alternative products (Wolman® E and Tanalith® E) and moldecides more than offset lower volumes of traditional CCA products. Sales also increased from the addition of new customers in the wood protection business. The improvement in product mix is a result of the transition to a new generation of wood preservatives for use in the residential market, driven by the voluntary withdrawal in the U.S. by wood treatment manufacturers of their CCA registrations for non-industrial uses as of December 31, 2003. Higher sales in the industrial coatings business were principally the result of favorable foreign exchange.

      Operating income increased $10.2 million over the prior year due to higher sales, lower legal expenses and favorable foreign currency, partially offset by higher raw material costs and increased costs associated with converting customers to CCA-alternative preservatives.

      Sales increased $106.5 million, or 17.7%, and operating income increased $8.2 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 to the Aquachlor acquisition (approximately $18 million) in the HTH 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 primarily in the industrial coatings and HTH water products businesses. Operating income increased due to the higher sales volumes, partially offset by higher selling and administration costs due to increased legal expenses and additional investments to support growth initiatives.

      Sales increased $46.6 million, or 19.2%, and operating results improved by $9.9 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.

      Sales increased $24.8 million, or 19.9%, due to continued strong demand for all product lines, in particular the biocides used in the marine antifouling paint, antidandruff shampoo and building products markets. Operating income increased $0.3 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 asserted 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.

      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® E and Tanalith® 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 $2.0 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.

Performance Products

      Sales increased approximately eight percent and operating results decreased by $3.7 million.

      Performance urethanes sales increased $22.8 million, approximately 19%, and operating results improved by $0.8 million. The increase in sales is the result of improved pricing and higher volumes due to stronger demand for glycol and specialty polyol products and higher contract manufacturing volumes. The improved pricing was principally due to the successful price increases to mitigate higher raw material costs. Operating results improved slightly as the higher sales and lower selling and administration expenses resulting from cost-reduction initiatives were mostly offset by higher raw material and energy costs as well as a charge for a Brazilian state import tax claim ($1.6 million). In addition, the 2003 results included 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 that was partially offset by increased bad debt expense related to a customer in Venezuela.

      Hydrazine sales decreased $9.8 million and operating results decreased by $4.5 million. The lower sales were due to lower propellant revenues as a result of the expiration of a long-term propellants supply contract with the U.S. government on April 30, 2004, partly offset by increased demand for Ultra Pure™ Hydrazine. Operating income was lower than prior year due to the lower hydrazine propellant revenues.

      Performance urethanes sales increased $2.0 million and operating results decreased by $4.6 million. Sales increased 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 that was partially offset by increased bad debt expense related to a customer in Venezuela.

      Hydrazine sales decreased $8.0 million and operating income decreased by $3.6 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.

Corporate Expenses (Unallocated)

      The increase in unallocated corporate expenses is principally due to the increase in incentive compensation expense of $3.8 million associated with the Company’s incentive plans and increased audit fees of $2.7 million associated with the Sarbanes-Oxley Act. In addition, the Company incurred additional environmental costs associated with idle properties of approximately $2.4 million. 2003 included a gain on the sale of excess land of $2.5 million. Included in the unallocated corporate costs are the results of operations of the Company’s Planar Solutions joint venture which decreased $1.0 million as a result of higher manufacturing costs related to the start-up of a second copper slurry production facility to meet growing customer demand.

      The decrease in unallocated corporate expenses is principally due to the gain on the sale of excess land of $2.5 million. The gain more than offset the increase in incentive compensation expense of $2.0 million associated with the Company’s long-term incentive plan. In addition, lower expenses associated with the Company’s accounts receivable securitization program were principally offset by higher audit fees.

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 majority of the microelectronic materials business on November 30, 2004, the Company provided indemnification for environmental concerns. For identified environmental liabilities as of the transition date, there is no limit to the liability retained by the Company. The Company estimates such potential liability to be less then $1.0 million. For other pre-closing environmental liabilities the purchaser will be liable for the first $3.0 million of any such liabilities and the parties will share equally the next $6.0 million of any such liabilities with the Company’s total exposure thus limited to $3.0 million over a five-year period from the closing date.

      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 damages directly related to the process sewer system at the Beaumont, Texas plant during the first five years from the closing date.

      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, regarding 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 £5.0 million.

      The Company does not anticipate any material exposure related to the environmental indemnifications for the microelectronic materials, the sulfuric acid and the Hickson organics dispositions. The Company has estimated that the fair value of any such additional 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 of $2.4 million were recorded in 2004 and were not material to operating results in 2003 and 2002, 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 2004, 2003 and 2002 were as follows:

      The Company’s Consolidated Balance Sheets included liabilities for future environmental expenditures to investigate and remediate known sites amounting to $8.3 million at December 31, 2004, of which $3.3 million is classified as current liabilities and $8.6 million at December 31, 2003, of which $3.3 million is classified as current liabilities. The Company’s estimated environmental liability relates to seven 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.

      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, 2004, the Company had estimated additional contingent environmental liabilities of $7.3 million.

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 appealed the judgment, and in February 2005 the court of appeals affirmed 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 to settle a portion of the litigation that involves claims by plaintiffs who are individuals. This agreement has received court approval and the settlement amount has been paid by the Company. The balance of the litigation primarily involves claims by a number of businesses for property damage. The Company has provided for its exposure in this litigation, $3.0 million, including the amount of its participation in the settlement, and does not expect any final resolution of these cases, net of an expected insurance recovery, to have a material adverse effect on results of operations or financial position of the Company. Given that the Company’s applicable insurance policies provide coverage on a reimbursement basis, there may be a lag between any payment ultimately paid to the remaining plaintiffs by the Company and reimbursement of such payment from the Company’s insurers.

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

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

      The Company and its subsidiaries deny the material allegations of all the various CCA-related claims and have vigorously defended and will continue to vigorously defend them. As a result, legal defense and related costs associated with these cases were significant in 2004, 2003 and 2002, and may be significant in the future.

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

      In March 2004, a jury in the U.S. District Court for the District of New Jersey awarded Arch Personal Care Products, a wholly-owned subsidiary of the Company, approximately $7.0 million in damages after finding, among other things, one of the defendants had breached his non-compete obligations to Arch Personal

Care Products. In July 2004, the parties reached agreement to settle $6.6 million of the judgment for $6.1 million, all of which has been recognized in the results for the year ended December 31, 2004.

      In April 2004, the Company was served with a complaint by two parents, their minor child and the parents acting as personal representatives of the estates of their two other children. In the complaint, which was initially filed in Oregon state court against the Company, two of its subsidiaries, and others, plaintiffs allege that a fire caused by a spontaneous exothermic chemical reaction of the Company’s pool chlorination products with other common household products erupted in the parents’ vehicle while occupied by the family. Plaintiffs ask for damages, including non-economic damages of $40.0 million per plaintiff. The Company is effectively self-insured for the first $3.0 million in this case, regardless of the number of plaintiffs. The case has been removed to the U.S. district court in Oregon by the Company and plaintiffs have moved to return the case to state court. The court denied the motion, and plantiffs have moved to reargue. During the second quarter of 2004, the Company recorded $3.0 million of self-insurance reserves related to its potential exposure in this case and does not expect any final resolution of these cases, net of an expected insurance recovery, to have a material adverse effect on results of operations or financial position of the Company. Given that the Company’s applicable insurance policies provide coverage on a reimbursement basis, there may be a lag between any payment ultimately paid by the Company and reimbursement of such payment from the Company’s insurers.

      In Brazil, the Company uses a third-party agent to process and pay certain state import duties. In July 2004, the Company was notified of a claim for unpaid state import duties, including interest and potential penalties. The Company has accrued $2.1 million for the estimated taxes and related interest for this claim. As of December 31, 2004, the Company had estimated contingent liabilities related to this claim up to $1.8 million.

      In May 2004, the U.S. Department of Commerce and the U.S. International Trade Commission initiated antidumping duty investigations of Chinese and Spanish suppliers of chlorinated isocyanurates and related chemicals as a result of petitions filed by domestic producers who asserted that these products were being imported and sold in the U.S.A. at prices below normal value. One of the suppliers being investigated is a major supplier of chlorinated isocyanurates to the Company. In December 2004, the Department of Commerce issued a preliminary determination and estimated antidumping duties margins ranging from approximately 126% to 180% for Chinese producers and 12% for Spanish producers. In February 2005, the rate for the Chinese producer who currently supplies the Company was reduced to 87%. As the importer of record, the Company is obliged to post a bond or cash deposit of these preliminary duties until the investigation is concluded. If the final finding is that no dumping occurred or that those imports did not injure the domestic industry, the duties will terminate and be refunded if paid. The final results of the investigations, and the order if issued, are expected in June 2005. The producers may annually request a review of the final results which may result in a further adjustment of the duties.

      Koppers Arch Wood Protection (NZ) Limited (“KANZ”), a New Zealand joint venture company in which the Company owns indirectly a 49% interest, is the subject of an on-going investigation by the New Zealand Commerce Commission (“NZ Commerce Commission”) regarding industry competitive practices. KANZ manufactures and markets wood preservative products throughout New Zealand. The NZ Commerce Commission has the authority to assess fines equal to the higher of (i) NZ$10 million (approximately US$7 million), (ii) three times the commercial gain from any contravention or (iii) 10% of the sales of KANZ (approximately US$2 million). Penalties, if assessed against KANZ, could have a material adverse effect on the joint venture’s business, financial condition, cash flows and results of operations.

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

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

Business and Credit Concentrations

      A significant portion of sales of the treatment products segment (approximately 17%) 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 2004 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 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.

Liquidity, Investment Activity and Other Financial Data

Cash Flow Data

      Operating Activities:

      For 2004, the $62.5 million increase in cash flow provided by operating activities from continuing operations was primarily attributable to the improvement in working capital for 2004 compared to 2003 and higher income. In addition, 2003 cash flow had a negative impact of $33.5 million from not utilizing the accounts receivable securitization program. The improvement in working capital is the result of higher levels of payables and accrued liabilities. The Company’s cash flows has benefited over the past three years as a result of its focus on reducing its investment in working capital.

      For 2003, the $74.7 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.

      Cash provided by the operations of assets held for sale was $11.8 million in 2004 compared to $4.8 million in 2003. The favorable comparison is due to the use of cash in 2003 related to the Hickson organics business that was sold.

      Cash provided by the operations of assets held for sale was $4.8 million in 2003 compared to $20.1 million in 2002, primarily due to a decrease in working capital of the microelectronic materials businesses offset by an increase in working capital of the Hickson organics Castleford business and the sulfuric acid business.

      Investing Activities:

      Capital expenditures for 2004 increased 7.6% as compared to 2003 due to higher expenditures in the HTH water products and wood protection businesses.

      Capital expenditures for 2003 decreased 39.7% as compared to 2002 due to lower expenditures in the HTH water products business and the performance products segment.

      Capital expenditures for 2005 are expected to be approximately $25 million.

      In December 2004, the Company acquired the working capital of a small water products distributor, Arkema, S.A., in Colombia for approximately $0.7 million in cash.

      On November 30, 2004, the Company completed the sale of substantially all of the net assets of its microelectronic materials business to Fuji Photo Film Co., Ltd. Net proceeds from the sale were $158.5 million, after transaction costs and certain non-income taxes paid at closing. A portion of the proceeds was used to pay down debt.

      On April 2, 2004, the Company completed the acquisition of Avecia’s pool & spa and protection & hygiene businesses. The total purchase price net of cash acquired, was $230.8 million, inclusive of expenses and a final working capital payment of $7.4 million. The payment consisted of cash and the issuance of the Company’s common stock with a value of $15.7 million. The purchase price is further subject to a contingent payment of up to $5.0 million in cash based upon earnings attributable to North American sales of certain products. An interim payment is to be made based on 2004 results, and as of December 31, 2004 the Company has accrued $2.5 million with a corresponding increase to goodwill. In addition, to the extent that the unfunded pension liability in the U.K. pension plan was less than $10.0 million, the purchase price was adjusted upwards by the difference between $10.0 million and the unfunded liability, with the consideration to be split equally between a contingent cash payment and up to 223,250 additional shares of the Company’s common stock. The share consideration component of this adjustment was 74,788 shares of common stock, which were issued in January 2005 with a value of $1.7 million. The contingent cash payment will be earned, a maximum of $1.7 million, based upon cumulative global net sales of certain products through 2005. An interim payment will be made in 2005 based on 2004 results and the Company has accrued $0.5 million as of December 31, 2004. The acquisition was financed principally from borrowings under the Company’s credit facility. For additional information concerning the acquisition see the footnotes included in the 10-K (see Note 19 of Notes to Consolidated Financial Statements) as well as the Form 8-K/A filed by the Company on June 16, 2004.

      In 2004, the Company sold a building and excess land for cash proceeds of $0.9 million.

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

      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 and Ireland for cash proceeds of approximately $2.1 million.

      On August 11, 2003, the Company completed the sale of the Hickson organics operations in Castleford, England. Total proceeds from the sale were £12.5 million ($20.1 million), subject to a post-closing working capital adjustment. Proceeds consist of cash of £11.0 million ($17.7 million) and two notes for £1.5 million

($2.4 million), of which one note for £1.0 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 (see Note 5 of Notes to Consolidated Financial Statements). On November 3, 2004, the Company received approximately $2.1 million of the post-closing working capital adjustment. During the fourth quarter there was significant uncertainty concerning the viability of the purchaser, and as a result, the Company provided a reserve for the remaining portion of the working capital adjustment and the outstanding note.

      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.)

      Financing Activities:

      Cash used by financing activities in 2004 was principally due to dividends paid to shareholders of $18.5 million, partially offset by cash proceeds from foreign short-term borrowings of $7.8 million.

      Cash used by financing activities in 2003 was principally due to net repayments of debt of $2.5 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.

      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.

Liquidity

      In June 2003, the Company entered into an unsecured $210.0 million senior revolving credit facility (“credit facility”) which expires in June 2006. In connection with the acquisition of Avecia’s pool & spa and protection & hygiene businesses, the Company amended its quarterly leverage ratio (debt/ EBITDA) for its revolving credit facility. The amendment was put in place to take into account the fact that the acquisition would occur during the Company’s seasonal build of receivables and inventory. The quarterly leverage ratio was amended to 4.25 for the quarter ending March 31, 2004, 4.00 for the quarter ending June 30, 2004, returning to 3.50 thereafter. Such amendments became effective on April 2, 2004, the date the Company completed the acquisition of Avecia’s pool & spa and protection & hygiene businesses. The credit facility also contains an interest coverage ratio (EBITDA/ total interest expense) covenant not to be less than 3.0. Additionally, the credit facility restricts the payment of dividends and repurchase of stock to $65.0 plus 50% of cumulative net income (loss) subject to certain limitations beginning June 20, 2003 ($48.7 million at December 31, 2004). As of December 31, 2004, facility fees payable on the credit facility are 0.35%. The facility fees can range from 0.2% to 0.4% depending on the Company’s quarterly leverage ratios. The Company may select various floating rate borrowing options, including, but not limited to, LIBOR plus a spread that can range from 0.55% to 1.35% depending on the Company’s quarterly leverage ratios. At December 31, 2004, the Company had $207.2 million of available borrowings under the credit facility.

      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% (7.5339% at December 31, 2004). The counter parties to these agreements are major financial institutions. The agreements expire in March 2007. The Company has designated the swap agreements as fair value hedges of the risk of changes in the value of fixed rate debt due to changes in interest rates for a portion of its fixed rate borrowings under SFAS 133. Accordingly, the swap agreements have been recorded at their fair market value of $1.6 million and are included in Other Liabilities on the accompanying Consolidated Balance Sheets, with a corresponding decrease in the carrying amount of the related debt. No gain or loss has been recorded as the contracts 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. In connection with the acquisition of Avecia’s pool & spa and protection & hygiene businesses, the Company amended its quarterly leverage ratio (debt/EBITDA) covenants and the debt to total capitalization ratio requirement for its senior notes. The amendment was put in place to take into account the fact that the acquisition would occur during the Company’s seasonal build of receivables and inventory. The quarterly leverage ratio was amended to 4.00 as of the last day of the quarter ending June 30, 2004, returning to 3.50 thereafter. The debt to total capitalization ratio was amended to 65% beginning on April 2, 2004 to and including June 30, 2004, 60% beginning on July 1, 2004 to and including September 30, 2004, returning to 55% beginning on October 1, 2004. Such amendments became effective on April 2, 2004, the date the Company completed the acquisition of Avecia’s pool & spa and protection & hygiene businesses. In addition, the notes contain a fixed charge coverage ratio covenant of 2.25 and a covenant that restricts the payment of dividends and repurchases of stock to $65.0 million less cumulative dividends and repurchases of stock plus 50% of cumulative net income (loss) subject to certain adjustments beginning January 1, 2002 ($37.6 million at December 31, 2004). 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 renewable annually. As of December 31, 2004 and 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 $1.1 million and $0.8 million for the year ended December 31, 2004 and 2003, 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% (1.9%, 1.7% and 2.2% in 2004, 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, 2004, the Company had $22.3 million of outstanding letters of credit. In addition, the Company had $6.0 million of letters of guarantee for borrowings of its joint venture Planar Solutions. The Company has agreed to guarantee up to $8.5 million of Planar borrowings.

      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.

      The Company is a co-defendant and/or defendant in several cases at December 31, 2004, and has provided for its exposure for these cases. The Company does not expect any final resolution of these cases, net of an expected insurance recovery, to have a material adverse effect on results of operations or financial position of the Company. However, given that the Company’s applicable insurance policies provide coverage on a reimbursement basis, there may be a lag between any payment ultimately paid by the Company and reimbursement of such payment from the Company’s insurers.

Government Contract

      In 2004, the Company was notified by the U.S. Defense Energy Support Center (“DESC”) that it had not been awarded the 10-year hydrazine propellant supply contract which the Company had anticipated receiving. The Company had a debriefing with the DESC and submitted a formal protest of the award. In July, 2004, the U.S. Government Accountability Office (“GAO”) informed Arch and the DESC that the GAO will sustain Arch’s formal protest of the DESC’s recent decision to award the government’s next 10-year hydrazine propellant supply contract to a competing firm. As a result of the GAO’s decision, the DESC notified the Company that it has taken corrective action by re-opening the bidding process. The Company submitted its new bid on January 20, 2005. Final revised bids are currently due on March 15, 2005. The DESC anticipates completing its contract-award decision late in the first quarter or early in the second quarter of 2005.

      For 2004 and 2003, sales and operating (loss) income for the hydrazine business were $24.2 million and $34.0 million, and $(2.6) million and $1.9 million, respectively. Of these historical sales, approximately $5.4 million and $22.1 million, related to the previous propellant supply agreement that expired April 30, 2004.

      The hydrazine business as a whole is not core to the Company’s portfolio, is not a growth business and has been managed for cash for several years. As of December 31, 2004, the Company reassessed the potential impairment of its entire hydrazine business, which consists of a hydrazine propellant and a hydrazine hydrate product line, as a result of the original DESC decision. This assessment was based upon a weighted average probability of cash flows, which included an estimate of obtaining the new contract. As a result of such reassessments at December 31, 2004, the Company did not incur an impairment charge.

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

      The Company may incur a non-cash impairment charge for the long-lived assets of the hydrazine business in 2005 if it is unsuccessful in obtaining the government contract. As of December 31, 2004, the estimate of the amount of the impairment would be approximately $13 million, including the assets associated with the propellants product line. In addition, the Company may incur cash costs for shutdown costs and the present value of certain presumed contractual obligations that are assumed to no longer have any benefit to the Company. (Such annual contractual payments are approximately $2.3 million through 2011.) The estimated amount of the pre-tax cash charge resulting from these costs is approximately $15 million. These one-time cash costs are expected to be more than offset by payments to be received from the U.S. Government upon the shut down of the Lake Charles, Louisiana and McIntosh, Alabama propellants facilities. The present values of

such payments are approximately $19 million. The projected annual cash flows relating to these decisions are estimated to be the following over the next three years and beyond:

      The net aggregate pre-tax charge for one-time items is expected to be approximately $9 million, net of the payments to be received from the U.S. Government.

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

Commitments

      The following table details the Company’s contractual obligations as of December 31, 2004:

      The amounts above exclude the Company’s minimum pension funding requirements as set forth by ERISA, which is expected to be $6.0 million in 2005 and $32.0 million in 2006 for the U.S. pension plan. Our minimum funding requirements after 2005 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 2005 and 2006.

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 5% of outstanding shares. The program was suspended in 2000. In October 2003, the Board of 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%, at a cost of approximately $16 million. In connection with the acquisition of the Avecia pool & spa and protection & hygiene businesses, the Company reissued 669,750 shares with a value of $15.7 million.

      On February 9, 2005, the Company declared a quarterly dividend of $0.20 on each share of the Company’s common stock. The dividend is payable on March 24, 2005 to shareholders of record at the close of business on February 23, 2005.

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:

      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 our current long-term view of the marketplace. The discount rate is based upon our 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.

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

      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

      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.

      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 in Item 7 of this Report.

      The Company has recorded charges in connection with various 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 22 of Notes to Consolidated Financial Statements.

      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 December 2004, the FASB issued revised SFAS No. 123, “Share-Based Payment” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement, which requires the cost of all share-based payment transactions be recognized in the financial statements, establishes fair value as the measurement objective and requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions. The statement applies to all awards granted, modified, repurchased or cancelled after July 1, 2005, and unvested portions of previously issued and outstanding awards. The Company has no unvested portions of previously issued or outstanding awards and the Company currently does not intend to issue any stock awards to employees. Therefore, the Company does not believe that this standard will have any impact on its consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and also requires that the allocation of fixed production overhead be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of adopting this statement.

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, 2004, the Company had forward contracts to sell foreign currencies with notional amounts of $13.8 million and no forward contracts to buy foreign currencies outstanding. At December 31, 2003, the Company had no forward contracts to either buy or sell foreign currencies. The fair value of these forward contracts is included in Accrued Liabilities. At December 31, 2004 and 2003 the Company had no outstanding option contracts to sell or buy foreign currencies.

      In accordance with 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, derivative instruments are recognized as assets or liabilities in the Company’s Consolidated Balance Sheets 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.

      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 $1.6 million and are included in Other Liabilities on the accompanying Consolidated Balance Sheets, with a corresponding decrease in the carrying amount of the related debt. No gain or loss has been recorded as the contracts meet the criteria of SFAS 133 to qualify for hedge accounting treatment with no ineffectiveness.

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” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. Future Factors which could cause actual results to differ materially from those discussed include but are not limited to: general economic and business and market conditions; lack of moderate growth or recession in U.S. and European economies; increases in interest rates; economic conditions in Asia; worsening economic and political conditions in Venezuela; changes in foreign currencies against the U.S. dollar; customer acceptance of new products; efficacy of new technology; changes in U.S. laws and regulations; increased competitive and/or customer pressure; the Company’s ability to maintain chemical price increases; higher-than-expected raw material costs for certain chemical product lines; an increase in anti-dumping duties on certain products; increased foreign competition in the calcium hypochlorite markets; unfavorable court, arbitration or jury decisions or tax matters; the supply/demand balance for the Company’s products, including the impact of excess industry capacity; failure to achieve targeted cost-reduction programs; capital expenditures in excess of those scheduled; environmental costs in excess of those projected; the occurrence of unexpected manufacturing interruptions/outages at customer or company plants; reduction in expected government contract orders and/or the failure to be awarded a new 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.

      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.

Interest Rates

      The Company is exposed to interest rate risk on approximately 40% 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 2005 borrowing levels, an increase in interest rates of 100 basis points would decrease the Company’s results of operations and cash flows by approximately $0.5 million.

Foreign Currency Risk

      Approximately 40 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, 2004, the Company had forward contracts to sell foreign currencies with notional amounts of $13.8 million and no forward contracts to buy foreign currencies outstanding.

      Holding other variables constant, if there were a 10 percent change in foreign currency exchange rates, the net effect on the Company’s annual cash flows would be 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. It is the Company’s policy to hedge up to 80 percent of its natural gas purchases during a calendar year. At December 31, 2004 and 2003, the Company had no forward contracts to purchase natural gas. In addition, the Company is exposed to price risk related to the price volatility of certain other raw materials including the ongoing purchase of propylene, copper metal and monoethanolamine (“MEA”). Holding other variables constant, a 10 percent adverse change in the price of propylene would decrease the Company’s results of operations and cash flows by approximately $4 million. Holding other variables constant, a 10 percent adverse change in the price of copper metal, MEA and natural gas would decrease the Company’s results of operations and cash flows between $1 million to $2 million each.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Arch Chemicals, Inc.

      We have audited the accompanying consolidated balance sheets of Arch Chemicals, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Arch Chemicals, Inc. and subsidiaries internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Stamford, CT

March 14, 2005

ARCH CHEMICALS, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to the consolidated financial statements.

ARCH CHEMICALS, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to the consolidated financial statements.

ARCH CHEMICALS, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to the consolidated financial statements.

ARCH CHEMICALS, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY