This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's 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 excludes restructuring (income) expense and impairment. The Company believes the exclusion of restructuring and impairment expense from segment operating income provides additional perspective on the Company's underlying business trends and provides useful information to investors by excluding amounts from the Company's results that the Company does not believe is indicative of ongoing operating results. Other gains and losses that are directly related to the segments are included in segment operating results.

Results of Operations

Consolidated



                                                                   Years Ended December 31,
                                                              2008           2007           2006
                                                                         (in millions,
                                                                   except per share amounts)
Sales                                                       $ 1,492.1      $ 1,487.6      $ 1,402.9
Gross Margin                                                    428.8          431.9          373.6
Selling and Administration                                      295.5          309.7          282.1
Research and Development                                         21.8           20.1           18.2
Other (Gains) and Losses                                         (1.8 )        (12.8 )         (2.4 )
Restructuring                                                     1.3            8.1             -
Impairment Charge                                                25.8            7.9           23.5
Interest Expense, net                                            10.7           13.3           20.3
Equity in Earnings of Affiliated Companies                        0.4            0.5            0.8
Income Tax Expense                                               38.9           36.8           18.6
Income from Discontinued Operations, net of tax                    -             0.9            0.1
Loss on the Sale of Discontinued Operations, net of tax.           -           (14.9 )           -

Net Income                                                  $    37.0      $    35.3      $    14.2

Basic Income Per Share                                      $    1.49      $    1.44      $    0.59
Diluted Income Per Share                                    $    1.49      $    1.43      $    0.58
Weighted Average Common Stock Outstanding:
Basic                                                            24.8           24.5           24.0
Diluted                                                          24.9           24.7           24.3

The Company is a global biocides company providing chemistry-based and related solutions to selectively destroy and control the growth of harmful microbes. Our concentration is in water treatment, hair and skin care products, treated wood, preservation and protection applications such as for paints and building products, and health and hygiene applications. The Company is 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 causes of the Sick Building Syndrome. The Company operates in two segments: Treatment Products and Performance Products.

Arch's Treatment Products business segment generates approximately 80%-90% 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 core competencies of the Treatment Products segment are superior microbiology, analytical chemistry and chemical formulation skills as well as extensive knowledge of-and expertise in-the regulatory procedures that govern the use of these biocide products, and particularly excellence in toxicology on which those regulations are based. The Company must understand the biological and chemical effects of its products and excel at both developing new products and finding new applications for existing ones. The Company has invested in upgrading and expanding its technical strengths in these disciplines to meet increasingly global regulatory requirements, including those relating to the European Biocidal Products Directive ("BPD"), which requires biocide manufacturers to re-register their biocidal products for sale in the EU, and the EU's Registration, Evaluation and Authorization of Chemical Substances (REACH) legislation. While some companies view these increasing foreign regulations as a hindrance or barrier, the Company sees it as a competitive advantage due to our expertise and commitment to regulatory matters.

Critical success factors for the Company include managing its ability to develop new products to meet its customers' needs; reducing overall product sourcing costs; optimizing its overall global manufacturing facilities to maximize efficiencies in the manufacturing processes; leveraging toxicological, regulatory and microbiological technical strengths to achieve global compliance of the Company's products under existing and new legislation such as the BPD and REACH; and fixing or eliminating unprofitable businesses. In addition, several of its customers generally require that the Company demonstrate improved efficiencies, through cost reductions and/or price decreases. The Company's continued growth will come from organic growth and through strategic acquisitions.

The Company's major sales, distribution and production facilities are located in North America and Europe. Additional facilities are based in Latin America, Asia, Australia 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.

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 for corporate and senior management 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, impairment charges, 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 annual plan's financial targets for the business units are pre-tax income and cash flow. 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. In 2008, the Company modified certain of its long-term incentive plan awards so that a portion are paid out in stock and a portion are paid out in cash. The portion of the award paid out in cash is based upon market price of the Company's common stock, and therefore, the amount of incentive compensation expense would vary based upon the market price of the Company's stock at the end of each reporting period. During the fourth quarter of 2008, the Company entered into equity total return swap agreements in order to minimize earnings volatility related to the long-term incentive plan. For additional information, see Note 13 of Notes to the Consolidated Financial Statements.

The Company has a disciplined acquisition process aimed at complementing its strengths and advancing its business strategies. The Company focuses on acquisition opportunities in its core biocides business areas and screens them against specific strategic criteria we have identified in those areas. Acquisition opportunities are also screened against specific financial targets. Any acquisition must be cash accretive in year one and

earnings accretive no later than the end of the first year. When an opportunity meets our strategic and financial criteria, a detailed integration plan is developed prior to completing the acquisition.

The Company's 2008 net sales of $1,492.1 million were comparable to the prior year's net sales of $1,487.6 million. In 2008 the Company benefited from a full year of sales from the 2007 acquisition of the remaining 51 percent share of the Company's Australian joint venture, Koppers Arch Wood Protection (Aust) Pty Ltd ("KAWP") as well as the fourth quarter 2008 acquisition of the water treatment chemicals business of Advantis Technologies ("Advantis").

Year Ended December 31, 2008 Compared to 2007

The Company's 2008 net sales of $1,492.1 million were comparable to the prior year's net sales of $1,487.6 million. Excluding the impact of the acquisition of the remaining 51 percent share of the Company's Australian joint venture, KAWP ($35.7 million or two percent), and the impact of the acquisition of the water treatment chemicals business of Advantis ($21.8 million or two percent), sales decreased $53.0 million, or four percent, as lower volumes (eight percent) were partially offset by improved pricing (four percent). The lower volumes were principally in the performance urethanes and wood protection businesses. The higher pricing was driven by the performance urethanes, HTH water products and wood protection businesses.

Gross margin percentage was 28.7% and 29.0% for 2008 and 2007, respectively. Higher pricing for the performance urethanes, HTH water products and wood protection businesses, and the benefit from the Company's margin-improvement programs for the industrial biocides business, which included improvements in customer mix and the sourcing of the BIT molecule from third-party suppliers, were offset by higher raw material costs for the performance urethanes and wood protection businesses and lower sales volumes. Included in the 2008 and 2007 gross margin was an $11.5 million and a $16.9 million, respectively, antidumping duty benefit related to a final determination from the U.S. Department of Commerce ("DOC"). Additionally, included in cost of goods sold for 2007 is $0.4 million of inventory disposal costs related to the Company's decision to discontinue the manufacturing of its BIT molecule.

Selling and administration expenses as a percentage of sales decreased to 19.8% in 2008 from 20.8% in 2007. The $14.2 million decrease in selling and administration expenses is due to lower compensation-related expense, principally as a result of the mark-to-market impact of the lower stock price during 2008 on the Company's performance-based stock awards and deferred compensation plans, lower pension expense and favorable foreign exchange, partially offset by increased selling and administration expenses due to the KAWP and Advantis acquisitions.

Other (Gains) and Losses for 2008 represents the reversal of penalties and interest related to a Brazilian state import tax claim recorded in 2004 of $1.4 million due to the expiration of the statute of limitations and a $0.4 million gain from a revised estimate of shutdown costs related to the completion of a contract with the U.S. Government in 2007. Other (Gains) and Losses for 2007 represents a gain for the completion of a contract with the U.S. Government.

Restructuring expense during 2008 relates to a pension settlement associated with executive severance which was recorded in 2007. Restructuring expense of $8.1 million during 2007 includes $4.0 million for severance costs principally related to headcount reductions in the industrial biocides business resulting from the Company's decision to discontinue the manufacturing of its BIT molecule at two U.K. manufacturing locations and begin sourcing from third-party suppliers. In addition, restructuring expense includes $3.2 million primarily for service agreements at the two U.K. sites from which the Company will no longer receive any economic benefit. Included in restructuring is $0.9 million related to executive severance.

The impairment charge of $25.8 million in 2008 represents a $24.6 million charge for the impairment of the remaining goodwill related to the Company's industrial coatings business and a $1.2 million non-cash charge related to certain manufacturing assets in the Company's wood protection and industrial coatings businesses. The

impairment charge of $7.9 million in 2007 is related to the manufacturing assets in the Seal Sands, England and Huddersfield, England manufacturing locations that were impacted by the Company's decision to discontinue the manufacturing of its BIT molecule and to source the material from third-party suppliers.

Interest expense, net, decreased $2.6 million primarily as a result of lower cost borrowings, partially offset by higher net debt during the period.

The tax rate on income from continuing operations for 2008 and 2007 was 51.3% and 42.7%, respectively. The 2008 effective income tax rate of 51.3% includes the non-deductible goodwill impairment charge of $24.6 million. Excluding the goodwill impairment charge, the effective tax rate was 38.7%. The effective tax rate for 2007 was 36.6%, excluding the effect of the U.K. and Italy tax legislation, other (gains) and losses, restructuring and impairment charges. The increase from 2007 is due to higher non-deductible expense and an increase in foreign remitted earnings.

The 2007 tax rate was impacted by legislation that was finalized in the U.K. which reduced the corporate tax rate from 30% to 28%. The Company has significant U.K. deferred tax assets principally related to the Company's U.K. pension plans. As a result of the tax rate change, the Company's deferred tax assets were reduced, with a corresponding increase in tax expense. Included in 2007 is $3.0 million of non-cash tax expense that represents the reduction of a tax benefit previously recorded directly through equity, related to the U.K. pension liabilities. The original tax benefit was not recorded in the income statement. Additionally, 2007 includes a $1.8 million benefit resulting from the impact of a change in the Italian corporate tax rate on deferred tax liabilities which were recorded in purchase accounting. As a result of the tax rate change from 37.3% to 31.4%, the Company's deferred tax liabilities were reduced, with a corresponding tax benefit. The net impact of other (gains) and losses, restructuring and impairment charges was to increase the effective tax rate for 2007 by approximately three percent.

Income from discontinued operations, net of tax, represented the results of operations for the non-strategic performance urethanes business in Venezuela, until its sale in September 2007.

The loss on sales of discontinued operations, net of tax, during 2007 relates to the divestiture of the non-strategic performance urethanes business in Venezuela. The Company recorded a non-cash, after-tax loss of $14.9 million on this transaction due to the recognition of historical foreign currency translation losses.

Antidumping Rulings

During the third quarter of 2008, the U.S. Department of Commerce ("DOC") made its final determination that reduced the Company's antidumping duty rate from 76 percent to less than 1 percent for chlorinated isocyanurates ("isos") that the Company imported from a major Chinese supplier for the period from June 1, 2006 through May 31, 2007. As a result of the final determination, the Company recorded a pre-tax benefit of $12.7 million in the third quarter of 2008. An appeal is pending with the Court of International Trade ("CIT") contesting the DOC's determinations. The appeal will likely delay the cash refund of the duty to the Company until the appeal is completed. In addition, this appeal may result in a change in the antidumping duty rate for this review period, although the Company does not expect that the resolution of this matter will have a material adverse effect on the Company.

Based upon the final determination for the period of June 1, 2006 through May 31, 2007, the Company began paying cash deposits for imports at a rate of approximately 1% in September of 2008.

During the fourth quarter of 2007, the DOC made its final determination that reduced the Company's antidumping duty rate from 76 percent to 20 percent for isos that the Company imported from a major Chinese supplier for the period from December 16, 2004 through May 31, 2006. As a result of the final determination and the revised rate, the Company recorded a net pre-tax benefit of $12.1 million in the fourth quarter of 2007. An

appeal is pending with the CIT contesting the DOC's determinations. The appeal will likely delay the cash refund of the duty to the Company until the appeal is completed. In addition, this appeal may result in a change in the antidumping duty rate for this review period, although the Company does not expect that the resolution of this matter will have a material adverse effect on the Company. Based upon the final determination for the period of December 16, 2004 through May 31, 2006, the Company began paying cash deposits for imports at a rate of approximately 20 percent for the period from January 2008 to September 2008.

An administrative review has also commenced to determine the final rate for the period June 1, 2007 to May 31, 2008.

Significant Contracts

The Performance Products segment is highly dependent on contract manufacturing arrangements with various terms. The operating results are expected to decrease by approximately $12 million after December 31, 2009 due to anticipated reductions in contract manufacturing. The Company believes that the pipeline of new product offerings should mitigate a portion of this impact.

2009 Outlook

The Company expects full-year 2009 sales to increase by approximately two to four percent, as the contribution from the acquisition of Advantis and higher pricing should be partially offset by unfavorable foreign exchange. Earnings per share from continuing operations are forecast to be in the $1.85 to $2.05 range. Depreciation and amortization is estimated to be approximately $50 million. Capital spending is anticipated to be in the $35 to $40 million range. The effective tax rate is estimated to be in the 37% to 38% range.

The Company's 2009 outlook assumes continued weakness in global economies throughout the year as well as headwinds from unfavorable foreign exchange due to the strengthening of the U.S. dollar. The HTH water products business is expected to report higher profits due to the positive contribution from the acquisition of Advantis, including related synergies, as well as improved pricing. This guidance assumes an antidumping duty rate of approximately one percent in 2009 and an estimated pre-tax benefit of approximately $3 million for the current administrative period under review. The Company expects lower operating results for the personal care and industrial biocides business. This is due to decreased demand for industrial biocides applications as a result of the depressed building products and automotive markets. Additionally, the business will be impacted by increased spending for regulatory and toxicology compliance and additional costs for the Company's new manufacturing facilities in China. Wood protection and industrial coatings results are forecast to be lower due to the continued weakness in the global housing and construction markets. This weakness will more than offset anticipated lower raw material costs. Performance Products results are expected to be below 2008 due to lower pricing in response to competitive activities in the polyol and glycol markets as a result of the decrease in raw material costs, principally propylene and ethylene in the fourth quarter of 2008, and continued lower demand for flexible polyols as a result of market conditions. Unallocated corporate expenses are expected to be higher due to higher pension expense and the absence of a royalty stream that ended in 2008. In addition, the Company anticipates higher interest expense.

For the first quarter, the Company anticipates a loss per share from continuing operations to be in the $(0.15) to $(0.05) per share range, compared to earnings per share from continuing operations of $0.23 during the first quarter of 2008. The expected decrease in first quarter results is principally due to lower results for the industrial biocides and personal care business due to lower demand, additional costs for the Company's new manufacturing facilities in China and lower results for the wood protection and industrial coatings businesses from continued weakness in the global construction and housing markets. In addition, the Company anticipates higher interest expense related to the borrowings from the recent acquisition and higher pension expense. These are expected to be partially offset by modestly higher Performance Products results due to lower raw material costs.

Year Ended December 31, 2007 Compared to 2006

Sales increased $84.7 million, or six percent, due in part to the acquisition of the remaining 51 percent share of the Company's Australian joint venture, KAWP ($33.3 million or two percent). Excluding the impact of the acquisition, sales increased $51.4 million, or four percent, principally due to favorable foreign exchange (three percent) and improved pricing (one percent). The higher pricing was driven by the wood protection and HTH water products businesses, partially offset by lower pricing in the performance urethanes and personal care and industrial biocides businesses.

Gross margin percentage was 29.0% and 26.6% for 2007 and 2006, respectively. The 2007 gross margin includes a $16.9 million benefit related to a final determination from the DOC that reduced the antidumping duty rate from 76 percent to 20 percent for purchases made by the Company from December 16, 2004 to May 31, 2006. The impact of the favorable antidumping duty ruling increased gross margin by approximately 110 basis points. Additionally, gross margin percentage improved due to the higher sales prices for the wood protection and HTH water products businesses, partially offset by increased manufacturing costs in the performance urethanes, industrial biocides, and industrial coatings businesses. Included in cost of goods sold for 2007 is $0.4 million of inventory disposal costs related to the Company's decision to discontinue the manufacturing of its BIT molecule. In addition, included in 2006 was a charge of $3.6 million from an early termination of a supply contract that adversely impacted the gross margin of the wood protection business.

Selling and administration expenses as a percentage of sales increased to 20.8% in 2007 from 20.1% in 2006. The $27.6 million increase in selling and administration expenses is primarily due to unfavorable foreign exchange, as well as legal and other incremental costs ($6.3 million) associated with the favorable antidumping duty ruling. In addition, the higher selling and administration expenses were due to higher performance-based incentive compensation, and the KAWP acquisition ($4.5 million).

Other (gains) and losses in 2007 represents a gain for the completion of a contract with the U.S. Government of $13.4 million, offset by estimated shutdown costs of $0.6 million. Other (gains) and losses in 2006 includes pre-tax gains from the sale of excess land of $0.8 million, the sale of certain assets in Brazil of $0.4 million and $1.2 million from the sale of an investment in an industrial coatings business.

Restructuring expense of $8.1 million includes $4.0 million for severance costs principally related to headcount reductions in the industrial biocides business resulting from the Company's decision to discontinue the manufacturing of its BIT molecule at two U.K. manufacturing locations and begin sourcing from third-party suppliers. In addition, restructuring expense includes $3.2 million primarily for service agreements at the two U.K. sites from which the Company will no longer receive any economic benefit. Included in restructuring is $0.9 million related to executive severance.

The impairment charge of $7.9 million in 2007 is related to the manufacturing assets in the Seal Sands, England and Huddersfield, England manufacturing locations that were impacted by the Company's decision to discontinue the manufacturing of its BIT molecule and to source the material from third-party suppliers. In 2006 the Company recorded a non-cash goodwill impairment charge of $23.5 million, which reduced the carrying amount of goodwill related to the industrial coatings business.

Interest expense, net, decreased $7.0 million, as a result of repayment of maturing notes with lower cost borrowings. In addition, during the fourth quarter of 2007, the Company recorded interest income of $1.5 million related to the favorable antidumping duty ruling.

The tax rate on income from continuing operations for 2007 and 2006 was 42.7% and 56.9%, respectively. Excluding special items, the effective tax rate in 2007 was higher than 2006. In 2007, legislation was finalized in the U.K. which reduced the corporate tax rate from 30% to 28%. The Company has significant U.K. deferred tax assets principally related to the Company's U.K. pension plans. As a result of the tax rate change, the Company's

deferred tax assets were reduced, with a corresponding increase in tax expense. Included in 2007 is $3.0 million of tax expense that represents the reduction of a tax benefit previously recorded directly through equity, related to the U.K. pension liabilities. The original tax benefit was not recorded in the income statement. This charge is non-cash and is not expected to reverse in the foreseeable future. Additionally, 2007 includes a $1.8 million benefit resulting from the impact of a change in the Italian corporate tax rate on deferred tax liabilities which were recorded in purchase accounting. As a result of the tax rate change from 37.3% to 31.4%, the Company's deferred tax liabilities were reduced, with a corresponding tax benefit. Additionally, the net impact of other
(gains) and losses, restructuring and impairment charges was to increase the effective tax rate for 2007 by approximately three percent. Excluding the effect of the U.K. and Italy tax legislation, other (gains) and losses, restructuring . . .