INTRODUCTION

Description of Business

Chemtura is among the largest publicly traded specialty chemical companies in the United States and is dedicated to delivering innovative, market-focused specialty chemical solutions and consumer products. The Company is headquartered in Middlebury, Connecticut, and operates in a wide variety of end-use markets, including automotive, transportation, construction, packaging, agriculture, lubricants, plastics for durable and non-durable goods, electronics, and home pool and spa chemicals. The majority of our chemical products are sold to industrial manufacturing customers for use as additives, ingredients or intermediates that add value to their end products. Our crop and consumer products are sold to dealers, distributors and major retailers. We are a market leader in many of our key product lines and transact business in more than 100 countries.

The primary economic factors that influence the operations and sales of the Company's Polymer Additives and Performance Specialties segments are industrial production, residential and commercial construction, electronic component production and polymer production. In addition, the Company's Crop Protection segment is influenced by worldwide weather, disease and pest infestation conditions. The Company's Consumer Products segment is also influenced by general economic conditions impacting consumer spending and weather conditions. For additional factors that impact the Company's performance, see the "Risk Factors" section of this Annual Report on Form 10-K.

Other major factors affecting the Company's financial performance include industry capacity, customer demand, raw material and energy costs, and selling prices. Selling prices are influenced by the global demand and supply for the products we produce. The Company's strategy is to pursue selling prices that reflect the value of our products and to pass on higher costs for raw material and energy to preserve our profit margins. Our long-term financial performance target is to achieve a 15% minimum average operating profit margin across our business portfolio.

Annual sales for 2008 decreased $201 million or 5% compared with 2007. This decrease was due primarily to reduced sales volume of $227 million and a $205 million reduction due to the divestitures of the oleochemicals and organic peroxides businesses as well as the Celogen®, Diamond, and Terraclor product lines. These reductions were partially offset by $159 million of price increases, primarily related to the Polymer Additives and Performance Specialties segments, reflecting the partial recovery of increases in the costs of raw materials during the year. The Company's selling price increases during the year did not fully offset increases of $205 million in raw material and energy costs.

The Polymer Additives segment operating profit decreased 82% compared with the prior year. Higher selling prices, particularly in antioxidant, PVC and surfactant product lines, were not sufficient to offset lower volume and unfavorable product mix and increases in raw material, energy and manufacturing costs.

The Performance Specialties segment operating profit decreased 4% compared with 2007 due to higher raw material, energy, manufacturing and freight costs, that were only partially offset by higher selling prices.

Operating profit for the Consumer Products segment decreased 19% in 2008 due to lower volume and unfavorable product mix and increased raw material, energy and manufacturing costs, partially offset by higher selling prices.

The Crop Protection segment operating profit increased 34% in 2008. Operating profit benefited from higher volume, favorable product mix and lower manufacturing costs, which more than offset increased raw material, energy and other operating costs.

The Company has undertaken various cost reduction initiatives over the past several years and continues to implement cost reductions. The Company is assessing cost savings opportunities on a global basis to improve gross profit margins and reduce selling, general, administrative and research and development ("SGA&R") expenditures as a percentage of total sales. In 2008, the Company achieved its goal of SGA&R expenditures being less than 11% of total sales.

2008 Overview

The first three quarters of 2008 were dominated by an unprecedented level of raw material and energy cost inflation. Each of the Company's business segments saw their input costs rise rapidly. The cost of oil combined with increases in the cost of specialty metals, natural fats, oils drove this inflation. The weakening of the U.S. dollar exacerbated the trend. The Company's businesses addressed the challenge of the increased costs by passing these costs on to their customers through higher selling prices. Each business segment responded by changing the way they contracted with customers and set prices to create the ability to pass on to customers these increased costs as rapidly as possible. Each quarter, the business segments were able to capture a larger portion of the cost increases as they became more effective in managing raw material inflation. However, the Company was unable to recover the increased costs in full during the year due to competitive pressures and contractual commitments.

The fourth quarter brought a rapid and equally unprecedented change. As the recession deepened, November and December saw sharp reductions in orders for the Company's products as we believe customers saw or anticipated reductions in demand in the industries they served. The Polymer Additives segment experienced the greatest impact with the fourth quarter of 2008 net sales down 35% year-over-year. Demand from electronics, building and construction, polyolefin and general industrial industries saw the greatest changes. The other business segments were impacted by their more cyclically exposed customer applications.

With the sharp reduction in sales, financial performance deteriorated and the Company was required to seek an amendment and waiver from the lenders under its Credit Facility as described below under "Liquidity and Capital Resources". The proceeds from the sale of eligible accounts receivable under the Company's U.S. and European accounts receivable facilities declined in light of the change in financial performance. On January 23, 2009, the Company announced it had entered into a new $150 million U.S. accounts receivable facility with a three-year term. The Company is currently in discussions with the provider of its European accounts receivable facility and anticipates agreeing to certain revisions including, among other matters, a significant reduction in facility size.

The crisis in the credit markets poses a continued challenge for 2009. Under normal market conditions, the Company believes it would have had the ability to refinance its $370 million 2009 Notes due on July 15, 2009 in the debt capital markets. However, with the change in credit market conditions and the deterioration in the Company's financial performance, the Company does not believe it will be able to do so on commercially reasonable terms, if at all. As a result, the Company has launched a process to sell one of its businesses to raise the funds necessary to meet the maturity when due.

With lower revenues and constrained liquidity, the Company undertook a number of actions to reduce costs as well as conserve cash and improve liquidity. These included additional staff reductions, temporary plant closures with the furlough of employees, suspension of its dividend, reductions in capital spending and working capital reductions.

With limited demand visibility by the Company and its customers for 2009, the Company remains focused on managing its costs and its use of cash.
Nevertheless, the Company will likely continue to incur operating losses in the first quarter of 2009 and its liquidity remains constrained such that it may not be sufficient to meet the Company's cash operating needs in this period of economic uncertainty.

Significant Transactions and Events

During the year ended December 31, 2008 and through the date of this filing, the following significant transactions and events have occurred:

† On February 17, 2009, the Company received notice that it is no longer in compliance with the NYSE's share price listing standard.

† During the fourth quarter of 2008, the Company recorded a non-cash impairment charge of $665 million to reduce the carrying value of goodwill associated with the Polymer Additives and Consumer Products segments.

† On December 30, 2008, the Company announced that it entered into amendment and waiver agreements with the lenders under its Credit Facility, as well as with the providers of its U.S. accounts receivable facility. Among other matters, the amendment and waiver agreements provided a 90-day waiver of the Company's compliance with the financial maintenance covenants until March 30, 2009, a permanent reduction in the Credit Facility commitments from $740 million to $500 million, limitations on the Company's ability to enter into certain transactions and a grant of a security interest in the Company's U.S. inventory subject to certain limitations. The U.S. accounts receivable facility agreement provided, among other matters, for a permanent reduction in commitments under the facility from $275 million to $100 million.

† On January 23, 2009, a special-purpose subsidiary of the Company entered into a new $150 million U.S. accounts receivable facility with a three-year term, and secured by certain accounts receivable acquired by the special-purpose subsidiary from the Company and certain of its affiliates, and the commitments under the Credit Facility were further reduced from $500 million to $350 million. The former U.S. accounts receivable facility was terminated.

† On December 11, 2008, the Company implemented a new restructuring initiative to reduce annual cash fixed costs by approximately $50 million. The initiative involves a reduction in professional and administrative staff by approximately 500 people, or about 20 percent. During the fourth quarter of 2008, the Company recorded a charge of $26 million associated with this program.

† On December 8, 2008, the Company announced the election of Craig A. Rogerson to the position of president, chief executive and chairman of the board. The announcement was effective immediately following the resignation of Robert L. Wood.

† On October 30, 2008, the Company announced that it would suspend payment of dividends to conserve cash and improve liquidity. It also advised that it was pursuing the sale of assets to provide funds required to meet the maturity of the $370 million notes.

† During the quarter ended June 30, 2008, the Company recorded a non-cash impairment charge of $320 million to reduce the carrying value of goodwill associated with its Consumer Products segment.

† On June 26, 2008, the Company announced that, after thoroughly exploring a potential sale, merger or other business combination involving the entire Company, it has concluded that shareholders' interests would be best served by continuing to operate as a stand-alone company and focusing on its own growth and efficiency initiatives. The Company advised that it would continue active consideration of the Company's other strategic options, including (among other options) select business divestitures, value-creating acquisitions, joint ventures and changes in the company's capital structure, which could include a stock repurchase program.

† On April 30, 2008, the Company entered into an agreement with Baerlocher for the manufacture of certain heat stabilizers used in PVC Production.

† On March 12, 2008, the Company purchased the remaining shares of GLCC Laurel, LLC. The Company previously held 50% of GLCC Laurel, LLC stock.

† On February 29, 2008, the Company acquired the remaining stock of Baxenden Chemicals Limited Plc. The Company previously held 53.5% of Baxenden's stock.

† On February 29, 2008, the Company completed the sale of its oleochemicals business and recorded a net loss of $26 million. The assets sold included inventory of $26 million, accounts receivable of $23 million, goodwill of $13 million, net fixed assets of $7 million and intangible assets of $1 million. The oleochemicals business had revenues of approximately $160 million in 2007. Proceeds from the transaction were used to reduce debt.

† On January 31, 2008, the Company completed the sale of its fluorine chemical business located at the Company's El Dorado, Arkansas facility for an immaterial net loss. The fluorine chemical business had revenues of approximately $49 million in 2007. The fluorine chemical business is reported as a discontinued operation in the accompanying consolidated financial statements.

ANTITRUST INVESTIGATIONS AND RELATED MATTERS

The Company is party to various governmental and civil antitrust proceedings. For information on these proceedings (including information on Company reserves with respect to these proceedings) see Note 19 - Legal Matters in the Notes to Consolidated Financial Statements and Item 3 "Legal Proceedings" under Part I of this document.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company relies on the following sources of liquidity to continue to operate as a going concern: (i) cash and cash equivalents on hand; (ii) cash generated from operations; (iii) sales of accounts receivables under the Company's accounts receivables facilities; (iv) borrowings under the Company's Credit Facility revolver; (v) net proceeds from asset sales; and (vi) access to the capital markets. The Company's principal uses of cash are to provide for working capital to fund its operations and to service its debt obligations. The changes in financial markets in the late summer and fall of 2008 limited the ability of companies such as Chemtura to access the capital markets. The deepening recession in the fourth quarter of 2008 has had a significant impact on the Company's operations, resulting in a sharp decline in financial performance. As a result, the Company's liquidity became progressively more constrained in the fourth quarter of 2008. The Company has incurred net losses from continuing operations of $973 million, $45 million and $273 million for the years ended 2008, 2007 and 2006, respectively.

The Company's $370 million 2009 Notes are due and payable on July 15, 2009. In light of the recent changes in the financial markets, the Company decided in October 2008 to initiate the sale of certain business assets in order to generate the funds to meet the pending maturity. These asset sale initiatives were aided by the Company's prior exploration of its strategic alternatives that had included the investigation of value enhancing transactions including the sale of one or more of its businesses. Unless the Company can complete a planned asset sale or a debt refinancing transaction with net after-tax proceeds sufficient to meet the redemption of these notes, it will default on its obligation to redeem these notes upon maturity. Any such default may cause a default under certain of the Company's other debt obligations due to cross default provisions in those agreements. The asset sale process is progressing with certain buyers now working to complete their due diligence. Upon completion of due diligence, it is expected that buyers will submit final offers and the Company will be able to determine if a transaction can be completed and if so, what the net proceeds may be. However, until a definitive agreement has been negotiated, executed, and the sale closed, there can be no assurances that the Company will complete an asset sale(s) or have the funds to redeem its 2009 Notes upon maturity. Further, any such asset sale and the use of resulting net proceeds, requires the consent of the lenders under the Credit Facility and the purchasers under the Company's new U.S. accounts receivable facility.

In the fourth quarter of 2008, the Company undertook a sequence of actions to reduce costs as well as conserve cash. The Company continues to implement cost reduction and cash generation actions. These actions include staff reductions, temporary plant closures with the furlough of employees, suspension of its dividend, reductions in capital spending, sale of surplus assets and working capital reductions.

Due to the sharp decline in customer demand in November and December 2008, and the resulting decline in sales, the Company's financial performance deteriorated sharply in the fourth quarter of 2008 resulting in the Company's inability to be in compliance with the two financial maintenance covenants under the Credit Facility as of December 31, 2008. On December 30, 2008, the Company obtained a 90-day waiver of compliance with these covenants from the lenders under the Credit Facility. This waiver expires on March 30, 2009. In the current economic environment, it is unlikely that the Company's financial performance in 2009 will be sufficient to enable it to be in compliance with these covenants as of March 31, 2009 and for the balance of 2009. The Company will therefore require a further amendment and waiver from the lenders under its Credit Facility prior to the expiration of the current waiver period in order to avoid a default under the Credit Facility. While an asset sale may generate sufficient proceeds to meet the maturity of the 2009 Notes in July of 2009, the proceeds may not be sufficient to reduce the Company's indebtedness to a level where it can be in compliance with these covenants in light of our trailing twelve month financial performance at that time. It is therefore probable that an amendment of the financial maintenance covenants under the Credit Facility will be required at the time the lenders consider consenting to the asset sale. There can be no assurances that the lenders will grant such further waivers or amendments on commercially reasonable terms, if at all. A default under the Credit Facility would result in a default under the terms of the Company's new U.S. accounts receivable facility, 2009 Notes, 2016 Notes and 2026 Debentures.

In light of the non-compliance with the financial maintenance covenants as of December 31, 2008 under its Credit Facility, for which the Company received a 90-day waiver, and given that it is unlikely that the Company will be in compliance with these covenants after the expiration of the 90-day waiver period and for the balance of 2009, borrowings under the Credit Facility and other debt obligations that contain cross default provisions have been recorded as current. Therefore, during the fourth quarter of 2008, the Company classified its obligations under the Credit Facility, the 2016 Notes and the 2026 Debentures, totaling $804 million, as current liabilities. Accordingly, at December 31, 2008, the Company had a working capital deficiency of $558 million.

The Company's liquidity has been constrained by changes in its financing agreements in light of the changes in its financial performance. The Company's availability under its Credit Facility has historically been constrained by the requirements to meet its two financial maintenance covenants. Under the terms of the amendment and waiver agreement with the lenders, fixed limits were defined on the amount the Company can have outstanding under the Credit Facility revolver. Those limits were set at $180 million for the period ended December 31, 2008, $195 million for the period ended January 31, 2009 and then $190 million for the period ended March 30, 2009.

The Company's liquidity has been further constrained by changes in the availability under its accounts receivable facilities. The eligibility criteria and reserve requirements under the Company's prior U.S. accounts receivable facility tightened in the fourth quarter of 2008 following a credit rating downgrade, significantly reducing the value of accounts receivable that could be sold under the facility compared to September 30, 2008. The availability and access to the Company's European accounts receivable facility were restricted in late December in light of its financial performance. As a result, the Company is currently unable to sell additional receivables under this existing program.
The new three-year U.S. accounts receivable facility entered into by a special-purpose subsidiary of the Company on January 23, 2009 has restored much of the liquidity that the Company had pursuant to the prior U.S. accounts receivable facility before the 2008 fourth quarter events. The Company is currently in discussions to revise certain terms of its European accounts receivable facility under which we are currently unable to sell additional receivables. The anticipated revisions include among other matters, significantly reducing the value of accounts receivable that can be sold under the facility from approximately $244 million (€175 million) to approximately $98 million (€70 million) and changes to the subsidiaries eligible to sell accounts receivable under the facility. These revisions are subject to final approval and documentation.

The Company will likely continue to incur operating losses in the first quarter of 2009 and its liquidity remains constrained such that it may not be sufficient to meet the Company's cash operating needs in this period of economic uncertainty. If the Company would require liquidity in excess of what is available under its Credit Facility and accounts receivable facilities, there is no assurance that the Company can obtain additional liquidity on commercially reasonable terms, if at all. If the Company is unable to obtain or sustain the liquidity required to operate its business, or redeem or refinance its 2009 Notes upon maturity, the Company may need to seek to modify the terms of its debts through court reorganization proceedings to allow it, among other things, to reorganize its capital structure.

The factors noted above raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Significant Acquisitions and Divestitures

On March 12, 2008, the Company purchased the remaining outstanding shares of GLCC Laurel, LLC for a note payable of $11 million. The note was paid on September 30, 2008. Since GLCC Laurel, LLC was already being consolidated in the Company's financial statements, the purchase price was allocated to reduce the minority interest liability by $23 million. The value of the long-lived assets was reduced by $14 million since the fair value of the assets exceeded the purchase price. The residual purchase price was allocated to other assets.

On February 29, 2008, the Company acquired the remaining stock of Baxenden Chemicals Limited Plc for approximately $26 million. The purchase price was allocated to goodwill of $9 million; intangible assets of $7 million; property, plant and equipment of $5 million; and other net assets of $5 million.

On February 29, 2008, the Company completed the sale of its oleochemicals business and recorded a net loss of $26 million. The assets sold included inventory of $26 million; accounts receivable of $23 million; goodwill of $13 million; property, plant and equipment of $7 million; and intangible assets of $1 million. The oleochemicals business had revenues of approximately $160 million in 2007. Proceeds from the transaction were used to reduce debt.

On January 31, 2008, the Company completed the sale of its fluorine chemical business located at the Company's El Dorado, Arkansas facility for an immaterial net loss. The assets sold consisted of patents and intangible assets of $12 million; inventory of $8 million; property, plant and equipment of $8 million; and other current liabilities of $1 million. The fluorine chemical business had revenues of approximately $49 million in 2007. The fluorine chemical business is reported as a discontinued operation in the accompanying consolidated financial statements.

Cash Flows from Operations

Net cash used in operations was $11 million in 2008 compared to $149 million of net cash provided by operations in 2007. Changes in key working capital accounts are summarized below:

Favorable (unfavorable)



(In millions)                                         2008    2007    Change
Accounts receivable                                   $  89   $  22   $    67
Proceeds from the sale of accounts receivable          (136 )   (41 )     (95 )
Inventories                                             (12 )    10       (22 )
Accounts payable                                        (25 )   (20 )      (5 )
Pension and post-retirement health care liabilities     (46 )   (22 )     (24 )

During 2008, accounts receivable decreased by $89 million as compared to a $22 million decrease in 2007. The 2008 decrease in accounts receivable was primarily a result of a decrease in sales volumes and the benefit of the Company's collection efforts. In 2008, the decrease in the proceeds from the sale of accounts receivable was $136 million, compared with a decrease of $41 million in 2007. The decrease in 2008 related to reduced accounts receivable and changes in the terms of the accounts receivable facilities in both the U.S. and Europe. Inventory increased by $12 million in 2008 as compared to a decrease of $10 million in 2007. The increase in 2008 was primarily due to the impact of increases in the costs of raw material and packaging. The decrease in 2007 related primarily to planned reductions and the divestiture of the Celogen® product line. The decrease in 2008 and 2007 in accounts payable is primarily due to timing of vendor payments and additional utilization of early payment discounts offered by vendors.

During 2008, the Company's pension and post-retirement healthcare liabilities increased by $46 million, primarily due to a decrease in the fair value of plan assets. This increase is net of contributions of $42 million, which include $22 million for domestic plans and $20 million for international plans. During 2007, the Company's pension and post-retirement healthcare liabilities decreased by $22 million. This decrease includes contributions of $36 million, which include $23 million for domestic plans and $13 million for international plans.

Net cash provided by operations in 2008 also reflects the impact of various charges and changes in pre-existing reserves. A summary of these items and the net impact on cash flows provided by (used in) operations is as follows:

                                           Net Change per
                                            Consolidated                                      2008
                                            Statement of               2008                   Cash
(In millions)                                Cash Flows          Expense (benefit)          Payments
Interest expense                          $             (2 )   $                  78     $          (80 )
Income taxes                                           (87 )                     (27 )              (60 )
Facility closure, severance and related
costs                                                    -                        26                (26 )
. . .