##### 



As Filed with the Securities and Exchange Commission on February 3, 2004

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 20-F


(Mark One)o
    
    REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)OF THE SECURITIES EXCHANGE ACT OF 1934ORx
    
    ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003ORo
    
    TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from                               to


Ciba Specialty Chemicals Holding Inc.(Exact name of Registrant as specified in its charter)

Switzerland(Jurisdiction of incorporation or organization)

Klybeckstrasse 141
4002 Basel
Switzerland(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class
American Depositary shares,
Each representing one half of one ordinary share,
nominal value CHF 6 per share
    
    Name of each exchange
on which registered

New York Stock ExchangeOrdinary shares, par value CHF 6 per share*


*Not for trading but only in
connection with the registration of the American Depositary Shares
pursuant to the requirements ofthe Securities
and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None(Title of Class)

Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by
the annual report, December 31, 2003.

72 130 117 Registered Shares

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 such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.

Yes  x
    
    No  o


Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  o
    
    Item 18  x




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##### 

TABLE OF CONTENTS



|                                                                                                     |                                                                                      |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|Introduction                                                                                        
|Currency Translation                                                                                
|Cautionary Statement Regarding Forward-Looking Information                                          
|PART I                                                                                              
|                                                                                                     | Item 1. Identity of Directors, Senior Management and Advisors                       
|                                                                                                     | Item 2. Offer Statistics and Expected Timetable                                     
|                                                                                                     | Item 3. Key Information                                                             
|                                                                                                     | Item 4. Information on the Company                                                  
|                                                                                                     | Item 6. Directors, Senior Management and Employees                                  
|                                                                                                     | Item 7. Major Shareholders and Related Party Transactions.                          
|                                                                                                     | Item 8. Financial Information.                                                      
|                                                                                                     | Item 9. The Offer and Listing                                                       
|                                                                                                     | Item 10. Additional Information                                                     
|                                                                                                     | Item 11. Quantitative and Qualitative Disclosures About Market Risk                 
|                                                                                                     | Item 12. Description of Securities Other than Equity Securities                     
|PART II                                                                                             
|                                                                                                     | Item 13. Defaults, Dividend Arrearages and Delinquencies                            
|                                                                                                     | Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds
|                                                                                                     | Item 15. Controls and Procedures                                                    
|                                                                                                     | Item 16A. Audit Committee Financial Expert                                          
|                                                                                                     | Item 16B. Code of Ethics                                                            
|                                                                                                     | Item 16C. Principal Accountant Fees and Services                                    
|                                                                                                     | Item 16D. Exemptions from the Listing Standards for Audit Committees                
|PART III                                                                                            
|                                                                                                     | Item 17. Financial Statements                                                       
|                                                                                                     | Item 18. Financial Statements                                                       
|                                                                                                     | Item 19. Exhibits                                                                   
|Signature                                                                                           
|Report of independent auditors  Ernst & Young Ltd.                                                 
|Independent auditors report  Arthur Andersen AG                                                   
|Consolidated statements of income for the years ended December 31, 2003,2002 and 2001               
|Consolidated balance sheets at December 31, 2003 and 2002                                           
|Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001          
|Consolidated statements of shareholders equity for the years ended December 31, 2003, 2002 and 2001
|Business segment data                                                                               
|Geographic data                                                                                     
|Notes to consolidated financial statements                                                          
|Exhibit 4.1                                                                                         
|Exhibit 4.2                                                                                         
|Exhibit 4.3                                                                                         
|Exhibit 4.4                                                                                         
|Exhibit 8.1                                                                                         
|Exhibit 12.1                                                                                        
|Exhibit 12.2                                                                                        
|Exhibit 13.1                                                                                        

Table of Contents

PageIntroduction
    
    
    1Currency Translation
    
    
    1Cautionary Statement Regarding
Forward-Looking Statements
    
    
    1PART I
    
    
    
    
    2Item 1.
    
    Identity of Directors, Senior Management and Advisors (N/A)
    
    
    2Item 2.
    
    Offer Statistics and Expected Timetable (N/A)
    
    
    2Item 3.
    
    Key Information
    
    
    2Item 4.
    
    Information on the Company
    
    
    9Item 5.
    
    Operating and Financial Review and Prospects
    
    
    28Item 6.
    
    Directors, Senior Management and Employees
    
    
    56Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    71Item 8.
    
    Financial Information
    
    
    72Item 9.
    
    The Offer and Listing
    
    
    73Item 10.
    
    Additional Information
    
    
    76Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    81Item 12.
    
    Description of Securities Other than Equity Securities (N/A)
    
    
    81PART II
    
    
    
    
    82Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    82Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    82Item 15.
    
    Controls and Procedures
    
    
    82Item 16.
    
    [Reserved]
    
    
    82Item 16A.
    
    Audit Committee Financial Expert
    
    
    82Item 16B.
    
    Code of Ethics
    
    
    82Item 16C.
    
    Principal Accountant Fees and Services
    
    
    82Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees (N/A)
    
    
    82PART III
    
    
    
    
    83Item 17.
    
    Financial Statements
    
    
    83Item 18.
    
    Financial Statements
    
    
    83Item 19.
    
    Exhibits
    
    
    83Signature
    
    
    
    
    85






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##### 



Introduction

This Annual Report on Form 20-F relates to the registered shares with a nominal
value of 6 Swiss francs per share (the Shares) of Ciba Specialty Chemicals
Holding Inc., the American Depositary Shares (ADSs), each representing one
half of one Share, and the American Depositary Receipts (ADR) evidencing the
ADSs under the Deposit Agreement among the Company, Citibank, N.A. (the
Depositary), and the registered holders and beneficial owners from time to
time of the ADRs.

In this Annual Report, Company refers to Ciba Specialty Chemicals Holding
Inc. and its consolidated subsidiaries. In certain cases, where indicated or
where the context requires it, Company refers to Ciba Specialty Chemicals
Holding Inc.

The consolidated financial statements and selected consolidated financial data
as of December 31, 2003, 2002, 2001, 2000 and 1999, and for each of the years
in the five-year period ended December 31, 2003 (the Consolidated Financial
Statements), included in this Annual Report, have been prepared in accordance
with United States generally accepted accounting principles (U.S. GAAP).
Statements in this Annual Report with respect to such financial information are
based on U.S. GAAP information.

All market share data contained in this Annual Report is based on managements
estimates.

Currency Translation

Unless otherwise indicated, all amounts herein are expressed in Swiss francs
(CHF) or United States dollars (U.S. dollars, dollars, USD, US$ or
$). Amounts stated in U.S. dollars, unless otherwise indicated, have been
translated from Swiss francs at the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York (the Noon Buying Rate) on December 31, 2003,
which was CHF 1.24 per US$ 1.00. This rate should be used solely for
convenience and should not be construed as a representation that the Swiss
franc amounts actually represent such U.S. dollar amounts or could be converted
into U.S. dollars at the rate indicated, or at all. This rate may differ from
the actual rates used in the preparation of the Consolidated Financial
Statements of the Company as of December 31, 2003, 2002 and 2001, and for each
of the years in the three year period ended December 31, 2003, included in Item
18 of this Annual Report, which are expressed in Swiss francs. Accordingly,
U.S. dollar amounts appearing herein may differ from the actual U.S. dollar
amounts that were translated into Swiss francs in the preparation of such
financial statements.

Cautionary Statement Regarding Forward-Looking Information

This Annual Report contains certain forward-looking statements and information
with respect to the financial condition, results of operations and business of
the Company and certain of the plans, objectives and market position of the
Company with respect to these items that are based on beliefs of the Companys
management as well as assumptions made by and information currently available
to the Company. In particular, among other statements, certain statements in
Item 4. Information on the Company and Item 5. Operating and Financial
Review and Prospects with regard to trends, revenues, costs, net income,
accounting policies, market size, market share, market demands, volumes,
prices, margins, research and development, capital expenditures, cash flows,
debt levels, patents, outlooks, the effect of technological developments,
strategy and management objectives, opinions and beliefs and sufficiency of
environmental reserves and insurance arrangements are forward-looking in
nature. Such statements reflect the current views of the Company with respect
to market conditions and future events and are subject to certain risks,
uncertainties and assumptions. Investors are cautioned that all forward-looking
statements involve risks and uncertainty as there are certain important factors
that could cause actual results, performance or events to differ materially
from those anticipated including, but not limited to, the following: the timing
and strength of new product offerings, pricing strategies of competitors,
introduction of competing products by other companies, lack of acceptance of
new products and services by the Companys targeted customers, changes in the
Companys business strategy, the Companys ability to continue to receive
adequate raw materials from its suppliers on acceptable terms, or at all, or to
continue to obtain sufficient financing to meet its liquidity needs, the
effects of the Companys reorganization and restructuring and changes in the
political and regulatory framework in which the Company operates or in economic
or technological trends or conditions, including currency fluctuations,
inflation and consumer confidence, on a global, regional or national basis and
various other factors. All forward-looking statements are expressly qualified
in their entirety by the cautionary statements contained or referred to in this
section. Furthermore, the Company does not assume any obligation to update
these forward looking statements. For more information regarding some of these
factors, see Item 3. Key Information  Risk Factors.

1



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##### 



PART I

Item 1.   Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2.   Offer Statistics and Expected Timetable

Not applicable.

Item 3.   Key Information

Selected Financial Data

The tables below set forth selected consolidated financial data for the Company
for the periods indicated and are qualified by reference to, and should be read
in conjunction with, the Companys Consolidated Financial Statements and the
Notes thereto, which are included elsewhere in this Annual Report, and Item
5. Operating and Financial Review and Prospects.

The selected consolidated financial data as of December 31, 2003, 2002, 2001,
2000 and 1999, and for each of the years in the five-year period ended December 31, 2003, have been taken or are derived from the audited consolidated
financial statements of the Company for the relevant periods. The selected
financial data have been prepared in accordance with U.S. GAAP.

2003
    
    2002
    
    2001
    
    2000
    
    1999Results of operationsNet sales
    
    
    6 646
    
    
    
    7 085
    
    
    
    7 367
    
    
    
    7 902
    
    
    
    7 244Operating income
    
    
    571
    
    
    
    788
    
    
    
    761
    
    
    
    876
    
    
    
    632Income from continuing operations, net of tax(1) (4) (5)
    
    
    360
    
    
    
    406
    
    
    
    380
    
    
    
    418
    
    
    
    238Income from discontinued operations, net of tax(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    87Cumulative effect of change in accounting principles, net of tax
    
    
    (16
    )(2)
    
    
    
    
    
    
    2
    (3)
    
    
    
    
    
    
    Net income(1) (4)
    
    
    344
    
    
    
    406
    
    
    
    382
    
    
    
    452
    
    
    
    325Earnings per share, basic and dilutedContinuing operations(1) (4)
    
    
    5.26
    
    
    
    5.92
    
    
    
    5.72
    
    
    
    6.31
    
    
    
    3.58Discontinued operations(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.50
    
    
    
    1.31Cumulative effect of change in accounting principles
    
    
    (0.23
    )(2)
    
    
    
    
    
    
    0.04
    (3)
    
    
    
    
    
    
    Net income per share, basic and diluted(1) (4)
    
    
    5.03
    
    
    
    5.92
    
    
    
    5.76
    
    
    
    6.81
    
    
    
    4.89Equity per share
    
    
    62.64
    
    
    
    63.16
    
    
    
    59.08
    
    
    
    56.82
    
    
    
    54.74Dividend per share(6)
    
    
    
    
    
    
    
    
    
    
    2.00
    
    
    
    2.00
    
    
    
    2.00Capital reduction per share(6)
    
    
    3.00
    
    
    
    3.00
    
    
    
    1.00
    
    
    
    
    
    
    
    Weighted average number of shares outstandingBasic
    
    
    68 361 123
    
    
    
    68 549 964
    
    
    
    66 419 147
    
    
    
    66 311 879
    
    
    
    66 454 357Diluted
    
    
    68 361 123
    
    
    
    68 575 058
    
    
    
    66 419 147
    
    
    
    66 311 879
    
    
    
    66 462 898Other data  continuing operationsNet sales development percentage
    
    
    (6
    )%
    
    
    (4
    )%
    
    
    (7
    )%
    
    
    9
    %
    
    
    9
    %Operating income
    
    
    571
    
    
    
    788
    
    
    
    761
    
    
    
    876
    
    
    
    632Depreciation and amortization of other intangible assets
    
    
    366
    
    
    
    385
    
    
    
    408
    
    
    
    406
    
    
    
    402Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    64
    
    
    
    52Restructuring and special charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    EBITDA(9), before restructuring and special charges
    
    
    937
    
    
    
    1 173
    
    
    
    1 230
    
    
    
    1 348
    
    
    
    1 086EBITDA margin(9), before restructuring and special charges
    
    
    14.1
    %
    
    
    16.6
    %
    
    
    16.7
    %
    
    
    17.1
    %
    
    
    15.0
    %Operating income margin
    
    
    8.6
    %
    
    
    11.1
    %
    
    
    10.3
    %
    
    
    11.1
    %
    
    
    8.7
    %Capital expenditures
    
    
    233
    
    
    
    250
    
    
    
    259
    
    
    
    249
    
    
    
    267Research and development
    
    
    281
    
    
    
    294
    
    
    
    276
    
    
    
    293
    
    
    
    256Personnel costs
    
    
    1 713
    
    
    
    1 752
    
    
    
    1 796
    
    
    
    2 047
    
    
    
    1 836Number
of employees at year end (unaudited)
    
    
    18 658
    
    
    
    19 007
    
    
    
    19 683
    
    
    
    20 306
    
    
    
    20 117Balance sheet dataCurrent assets
    
    
    4 939
    
    
    
    5 314
    
    
    
    4 827
    
    
    
    4 797
    
    
    
    4 272Property, plant and equipment, net
    
    
    2 963
    
    
    
    3 196
    
    
    
    3 565
    
    
    
    3 787
    
    
    
    3 914Total assets
    
    
    11 098
    
    
    
    11 792
    
    
    
    11 718
    
    
    
    12 105
    
    
    
    12 407Short-term debt
    
    
    259
    
    
    
    1 496
    
    
    
    316
    
    
    
    371
    
    
    
    1 174Long-term debt
    
    
    3 187
    
    
    
    2 344
    
    
    
    3 678
    
    
    
    3 859
    
    
    
    4 265Common stock
    
    
    433
    
    
    
    649
    
    
    
    721
    
    
    
    721
    
    
    
    721Shareholders equity
    
    
    4 245
    
    
    
    4 354
    
    
    
    3 908
    
    
    
    3 754
    
    
    
    3 638


2



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##### 



2003
    
    2002
    
    2001
    
    2000
    
    1999Business segment data(7)Plastic AdditivesNet sales
    
    
    1 722
    
    
    
    1 813
    
    
    
    1 834
    
    
    
    1 959
    
    
    
    1 784Operating income
    
    
    178
    
    
    
    245
    
    
    
    275
    
    
    
    319
    
    
    
    279Depreciation and amortization of other intangible assets
    
    
    94
    
    
    
    101
    
    
    
    113
    
    
    
    104
    
    
    
    98EBITDA
    
    
    272
    
    
    
    346
    
    
    
    388
    
    
    
    423
    
    
    
    377EBITDA margin
    
    
    15.8
    %
    
    
    19.1
    %
    
    
    21.1
    %
    
    
    21.6
    %
    
    
    21.1
    %Operating income margin
    
    
    10.3
    %
    
    
    13.5
    %
    
    
    15.0
    %
    
    
    16.3
    %
    
    
    15.6
    %Coating EffectsNet sales
    
    
    1 807
    
    
    
    1 920
    
    
    
    1 944
    
    
    
    2 118
    
    
    
    1 955Operating income
    
    
    300
    
    
    
    341
    
    
    
    312
    
    
    
    371
    
    
    
    307Depreciation and amortization of other intangible assets
    
    
    97
    
    
    
    99
    
    
    
    99
    
    
    
    104
    
    
    
    96EBITDA
    
    
    397
    
    
    
    440
    
    
    
    411
    
    
    
    475
    
    
    
    403EBITDA margin
    
    
    22.0
    %
    
    
    22.9
    %
    
    
    21.1
    %
    
    
    22.4
    %
    
    
    20.6
    %Operating income margin
    
    
    16.6
    %
    
    
    17.7
    %
    
    
    16.1
    %
    
    
    17.5
    %
    
    
    15.7
    %Water & Paper TreatmentNet sales
    
    
    1 349
    
    
    
    1 409
    
    
    
    1 486
    
    
    
    1 558
    
    
    
    1 408Operating income
    
    
    85
    
    
    
    98
    
    
    
    65
    
    
    
    92
    
    
    
    50Depreciation and amortization of other intangible assets
    
    
    83
    
    
    
    88
    
    
    
    92
    
    
    
    95
    
    
    
    101EBITDA
    
    
    168
    
    
    
    186
    
    
    
    157
    
    
    
    187
    
    
    
    151EBITDA margin
    
    
    12.5
    %
    
    
    13.2
    %
    
    
    10.6
    %
    
    
    12.0
    %
    
    
    10.7
    %Operating income margin
    
    
    6.3
    %
    
    
    7.0
    %
    
    
    4.4
    %
    
    
    5.9
    %
    
    
    3.6
    %Textile EffectsNet sales
    
    
    1 401
    
    
    
    1 544
    
    
    
    1 673
    
    
    
    1 841
    
    
    
    1 683Operating income
    
    
    69
    
    
    
    142
    
    
    
    181
    
    
    
    204
    
    
    
    116Depreciation and amortization of other intangible assets
    
    
    60
    
    
    
    66
    
    
    
    67
    
    
    
    71
    
    
    
    63EBITDA
    
    
    129
    
    
    
    208
    
    
    
    248
    
    
    
    275
    
    
    
    179EBITDA margin
    
    
    9.2
    %
    
    
    13.5
    %
    
    
    14.8
    %
    
    
    14.9
    %
    
    
    10.6
    %Operating income margin
    
    
    4.9
    %
    
    
    9.2
    %
    
    
    10.8
    %
    
    
    11.1
    %
    
    
    6.9
    %Home & Personal CareNet sales
    
    
    367
    
    
    
    399
    
    
    
    430
    
    
    
    426
    
    
    
    414Operating income
    
    
    32
    
    
    
    56
    
    
    
    67
    
    
    
    58
    
    
    
    62Depreciation and amortization of other intangible assets
    
    
    26
    
    
    
    26
    
    
    
    28
    
    
    
    22
    
    
    
    23EBITDA
    
    
    58
    
    
    
    82
    
    
    
    95
    
    
    
    80
    
    
    
    85EBITDA margin
    
    
    15.7
    %
    
    
    20.6
    %
    
    
    22.2
    %
    
    
    18.8
    %
    
    
    20.5
    %Operating income margin
    
    
    8.8
    %
    
    
    14.0
    %
    
    
    15.7
    %
    
    
    13.5
    %
    
    
    15.0
    %Discontinued operations(8)Net sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    774
    
    
    
    1 729Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    131Gain on sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    




---

|(1) |  | As of January 1, 2002, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standard
(SFAS) No. 142 Goodwill and Other Intangible Assets, which requires that
goodwill no longer be amortized to earnings. The results of
operations on an adjusted basis, excluding goodwill amortization, for the
years prior to 2002 had SFAS No. 142 been applied retroactively
for all periods presented, would have been: Income from continuing
operations  in 2001 CHF 441 million, in 2000 CHF 482 million, in
1999 CHF 290 million; Basic and diluted earnings per share for income from
continuing operations  in 2001 CHF 6.64, in 2000 CHF 7.27,
in 1999 CHF 4.37; Net income  in 2001 CHF 443 million, in 2000
CHF 520 million, in 1999 CHF 387 million; Basic and diluted earnings
per share for net income  in 2001 CHF 6.68, in 2000 CHF 7.83, in 1999 CHF
5.83. For the years 2000 and 1999, net income as adjusted
excludes goodwill amortization from continuing operations and from
discontinued operations.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Company applied FASB Interpretation No. 46 (FIN No. 46) to a
previously unconsolidated trust that leases an asset to the Company,
resulting in the consolidation by the Company of the trust effective July
1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) |  | As of January 1, 2001, the Company adopted SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities as amended
which replaced existing pronouncements and practices with a single,
integrated accounting framework for derivatives and hedging
activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(4) |  | Effective January 1, 2003, the Company adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting
Standards No. 123, as amended. Had the Company applied the fair value
method for all periods prior to 2003, pro forma income from
continuing operations would have been in 2002 CHF 395 million, in 2001 CHF
368 million, in 2000 CHF 410 million, in 1999 CHF 224 million; pro forma basic and diluted earnings per share for income from
continuing operations would have been  in 2002 CHF 5.76, in
2001 CHF 5.53, in 2000 CHF 6.19, in 1999 CHF 3.37; pro forma net income
would have been in 2002 CHF 395 million, in 2001 CHF 370 million, in 2000 CHF 444 million and in 1999 CHF 311 million; pro forma
basic and diluted earnings per share for net income would have
been in 2002 CHF 5.76, in 2001 CHF 5.57, in 2000 CHF 6.69 and in 1999 CHF
4.68. (see note 17 to the Consolidated Financial
Statements).                                                                                                                

3



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##### 



|(5) |  | The 2000 income from discontinued operations of CHF 34 million represents
the gain on sale of discontinued operations, net of tax for the
Companys Performance Polymers business which was sold on May 31, 2000.
This gain includes income from continuing operations, net
of taxes, of CHF 37 million and a CHF (3) million loss from the sale of
the net assets of the Performance Polymers business. (See footnote
(8) below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(6) |  | For 2003 the Board of Directors proposes to carry forward the entire
retained earnings of Ciba Specialty Chemicals Holding Inc. and not to
pay a dividend. The Board of Directors, however, proposes a cash payment
to its shareholders resulting from a capital reduction of CHF 3
per share. The capital reduction is subject to shareholder approval at the
Annual General Meeting to be held on February 26, 2004. If
approved the capital reduction will take the form of a reduction in the
nominal value of each share from CHF 6 per share by CHF 3 per
share to CHF 3 per share. The Company expects, subject to various
conditions and approval, that the payment of the capital reduction
will be made to the shareholders on May 14, 2004.
 
The proposed capital reduction, based on the USD exchange rate of December 31, 2003 is USD 2.42 per share. Based on the USD
exchange rate at the payment date
of May 23, 2003, the 2002 capital reduction per share was USD 2.32 and at the payment date
of June 28, 2002, the 2001 capital reduction per share was USD 0.67.
 
Based on the USD exchange rate at the respective payment dates of the
2001, 2000 and 1999 dividends, the USD equivalent of the
dividend per share was USD 1.19, USD 1.23 and USD 1.25, respectively.
|   
|(7) |  | In 2002, the Company implemented SFAS No. 142 Goodwill and Other
Intangible Assets. As a result of adopting this standard, the Company reclassified certain goodwill and other intangible assets to the
segments that were previously reported as corporate items and
not allocated to the segments. In addition, the Company reclassified
goodwill amortization that was previously allocated to the segments
to corporate and reclassified other intangible amortization from corporate
to the segments corresponding to the other intangible asset
reclassification. Amounts reported for the previous periods have been
restated to conform to the 2002 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(8) |  | Reflects the results of the Performance Polymers business as a
discontinued operation due to its sale on May 31, 2000. The results
represent substantially all of the operations of the Performance Polymers
divisions business and do not include an allocation of the
Companys interest costs or unallocated corporate general and
administrative expenses. For 2000, the results are for the five month period
ended May 31, 2000, the date of the divestment. Included in the
Performance Polymers results is goodwill amortization of CHF 4 million in
2000 and CHF 10 million in 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(9) |  | EBITDA, and EBITDA margin derived there from, are non-U.S. GAAP
financial measures. See Item 5. Operating and Financial
Review and Prospects  Use of Certain Supplementary Financial
Indicators for further information regarding the use of these measures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Exchange Rate Information

The table below sets forth, for the periods indicated, the average, high, low
and period-end Noon Buying Rate for Swiss
francs expressed in Swiss francs per U.S. dollar.

Year
    
    Average(1)
    
    High
    
    Low
    
    Period End1999
    
    
    
    
    1.5151
    
    
    
    1.5991
    
    
    
    1.4163
    
    
    
    1.59912000
    
    
    
    
    1.6930
    
    
    
    1.8250
    
    
    
    1.5526
    
    
    
    1.62022001
    
    
    
    
    1.6893
    
    
    
    1.8185
    
    
    
    1.5878
    
    
    
    1.65982002
    
    
    
    
    1.5566
    
    
    
    1.7190
    
    
    
    1.3833
    
    
    
    1.38332003
    
    
    
    
    1.3374
    
    
    
    1.4181
    
    
    
    1.2380
    
    
    
    1.2380Months2003
    
    January
    
    
    
    
    
    
    1.4015
    
    
    
    1.3512
    
    
    
    1.3683February
    
    
    
    
    
    
    1.3745
    
    
    
    1.3493
    
    
    
    1.3557March
    
    
    
    
    
    
    1.4000
    
    
    
    1.3247
    
    
    
    1.3538April
    
    
    
    
    
    
    1.3995
    
    
    
    1.3537
    
    
    
    1.3545May
    
    
    
    
    
    
    1.3480
    
    
    
    1.2851
    
    
    
    1.3022June
    
    
    
    
    
    
    1.3519
    
    
    
    1.2973
    
    
    
    1.3519July
    
    
    
    
    
    
    1.3818
    
    
    
    1.3412
    
    
    
    1.3736August
    
    
    
    
    
    
    1.4181
    
    
    
    1.3475
    
    
    
    1.4005September
    
    
    
    
    
    
    1.4133
    
    
    
    1.3208
    
    
    
    1.3208October
    
    
    
    
    
    
    1.3382
    
    
    
    1.3067
    
    
    
    1.3382November
    
    
    
    
    
    
    1.3737
    
    
    
    1.2917
    
    
    
    1.2917December
    
    
    
    
    
    
    1.3003
    
    
    
    1.2380
    
    
    
    1.23802004
    

January (through January 30)
    
    
    
    
    
    
    1.2659
    
    
    
    1.2190
    
    
    
    1.2593




---

|(1) |  | Represents the average of the Noon Buying Rates on the last business day of each month during the relevant year.
|--- |  | ----------------------------------------------------------------------------------------------------------------

4



---



##### 



Capitalization and Indebtedness
 not applicable

Reasons for the Offer and use of proceeds  not applicable

Risk Factors

Prospective purchasers and existing holders of the ADSs of the Company should
consider carefully all of the information set
forth in this Annual Report and, in particular, should evaluate the following
risks in connection with an investment in the
ADSs. Information contained or incorporated by reference in this Annual Report
contains forward-looking statements
which can be identified by the use of forward-looking terminology such as
believes, opinion, expects, may, will,
should or anticipates or the negative thereof or other variations thereon
or comparable terminology, or by discussions of
strategy. Such statements include, without limitation, the Companys beliefs
about trends in the global economy, in the
specialty chemicals industry and its views about the long-term future of the
industry and the Company. See Item 5.
Operating and Financial Review and Prospects and Item 4. Information on the
Company. No assurance can be given that
the future results covered by the forward-looking statements will be achieved.
The following matters constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and
uncertainties that could cause actual results to vary materially from the
future results covered in such forward-looking
statements. Other factors could also cause actual results to vary materially
from the future results covered in such forward-looking statements.

The Company is subject to various changing competitive, economic, political,
legal and social conditions, including the
following:

As an international business, the Company is exposed to various global
economic, political, social and local business risks that
may have a material adverse effect on its financial condition and results of
operations.

The Company has a small home market for its products and has for many years
operated on a global basis. The Company
currently has manufacturing facilities in 25 countries and sales organizations
in more than 120 countries. This means the
Company is faced with different complex legal and regulatory requirements in
many jurisdictions. These include tariffs and
trade barriers, requirements relating to withholding taxes on remittances and
other payments by subsidiaries and different
intellectual property regimes. The Companys international operations also
expose it to different local business risks and
challenges. The Companys overall success as a global business depends, in
part, upon its ability to succeed in differing
economic, social and political conditions. The Company may not continue to
succeed in developing and implementing
policies and strategies that are effective in each location where it does
business.

The Companys results of operations and financial position also are affected by
developments and trends in the world
economy. The year 2003 was, for example, characterized by a continuous uncertain
economic environment. The expected
economic recovery in the United States and the rest of the NAFTA region did not
fully occur. European economies,
particularly the German, United Kingdom and French economies continued to
remain weak. Economic performance in
South America softened, compared to 2002, having been affected by the political
and economic crises in the region. In the
Asia-Pacific region, the Japanese market has not yet recovered from its lows of
1999, remaining sluggish throughout 2003.
The China Region continued to grow, with real GDP growth remaining at between 7
to 8 percent. In most of the regions of
the world, with the exception of China, the industrial sector growth was below
total GDP growth. This was particularly
accentuated in the United Kingdom. In the United States consumer demand
remained relatively stable, due to significant
incentives and rebates in several market sectors, particularly in the
automotive sector. The war in Iraq contributed
significantly to the uncertainty in the global economic environment in 2003.

The economic conditions in the NAFTA, Europe, and parts of Asia-Pacific,
particularly Japan may continue to worsen or not
fully recover, which could have a material adverse effect on the Companys
results of operations and financial position. In
addition, an adverse development in the political and social stability in the
regions where the Company operates, may have
a material adverse effect on the Companys results and financial condition.

The Company currently has operations in more than 120 countries, and its
results of operations may be adversely affected by
currency fluctuations.

The results of the operations and the financial position of the Companys
subsidiaries outside of Switzerland are reported in
the relevant foreign currencies and then translated into Swiss francs at the
applicable exchange rates for inclusion in the
Companys Consolidated Financial Statements. The exchange rates between these
currencies and the Swiss franc may
fluctuate substantially. Because the Company generates a significant percentage
of its revenues and a substantially lower
percentage of its operating expenses in currencies other than the Swiss franc,
fluctuations in the value of the Swiss franc
against other currencies have had in the past, and may have in the future, a
material effect on the Companys operating
margins as well as its competitive position compared with local producers in
affected markets. Currency fluctuations also
may significantly affect the comparability of the Companys results between
financial periods. The Companys results and
financial condition are particularly affected by significant changes in the
value of the Swiss franc, euro, U.S. dollar, Japanese
yen, and British pound relative to each other. For more information, see Item
5. Operating and Financial Review and
Prospects  Currency Trends in this Annual Report.

5



---



##### 



Significant competition may force the Company to reduce its product prices
which may adversely impact its results of
operations.

The Company faces significant competition in the markets in which it operates.
Although competition in specialty chemicals
is based upon a number of considerations, such as product innovation, product
range and quality, relationships with
customers, reliability of delivery, technical support and distribution
capability, price competition does exist in certain of the
Companys markets due to factors such as industry overcapacity and low-cost
local competition. Increased price competition
may also occur in certain product areas due to consolidation and globalization
among the Companys customers and
competitors and as industry segments mature. As a result of the trends toward
global expansion and consolidation by
competitors, the Company anticipates that it will continue to face new
competitive challenges, continued price competition
as well as additional risks inherent in international operations in developing
regions.

The Companys inability to remain technologically innovative and to offer
improved products and applications cost-effectively
could negatively impact its operating results.

The Companys operating results depend to a significant extent on its ability
to be a low-cost producer of its core products
and to continue to introduce new products and applications that offer distinct
value in use for its customers. In many of the
industry sectors to which the Company sells its products, products are subject
to a traditional product life cycle. The
Company must devote significant resources to the development of new
technologically advanced products and applications,
and the Company may not be successful in these efforts at all times.

The cyclicality in the various industries served by the Company may have a
material adverse effect on the Companys business
and financial condition.

The Companys results are affected by cyclicality in various industries served
directly or indirectly by the Company, including
the automotive, plastics, textiles and clothing, paper, packaging, paint and
coating, electronics and construction industries.
Such cyclicality in specialty chemicals is, however, less pronounced than in
base chemicals. The Companys results of
operations and financial position have in the past been affected adversely, for
example, by slow growth in the textile and
paper industries, reduced demand in the automotive industry and by declining
demand in a number of industries. The
cyclical nature of pricing and investment in the specialty chemicals business
is likely to continue, and the Company will
continue to experience periods of overcapacity, declining prices and lower
profit margins. In addition, external factors
beyond the Companys control, such as general economic conditions, competitors
actions, international events and
circumstances and governmental regulation in the United States and in other
foreign jurisdictions, can cause volatility in raw
material prices and product demand, as well as fluctuations in the Companys
prices, volumes and margins.

The Company depends upon proprietary technologies, and its competitive position
may be adversely affected if it fails to
protect its intellectual property rights or is subject to claims that it is
infringing upon the rights of others.

Proprietary rights are important to the success and competitive position of the
Company. If the Company is unable to
maintain the relative exclusivity of certain of its products following patent
expiration, through manufacturing scale, technical
know-how, advanced applications and service expertise, increased competition
may result with consequent erosion of profit
margins. Actions taken by the Company to protect its proprietary rights may be
insufficient to prevent others from
developing similar products to those of the Company. In addition, the laws of
many foreign countries do not protect the
Companys intellectual property rights to the same extent as the laws of
Switzerland, other European countries, the United
States and Japan.

The Company has in the past received and may continue to receive in the future
communications asserting that certain of its
products or their applications infringe on the proprietary rights of others. In
the recent past, the Company has experienced a
significant increase in intellectual property conflicts, either initiated by
the Company or by third parties. In managements
opinion there is no material pending litigation against the Company regarding
any intellectual property claim but there
could be in the future. Such legal proceedings or claims, with or without
merit, and whether initiated by the Company or
another party, could subject the Company to costly and time-consuming
litigation and divert its research, technical and
management personnel from their regular responsibilities. Furthermore,
successful legal proceedings or claims against the
Company could suspend the development and manufacture of products using the
contested invention, or require the
Company to pay substantial penalties or royalties.

Any disruption or deterioration in the quality of the raw materials available
for the Companys products may have a material
adverse effect on the results of the Companys operations.

The Company utilizes specialty chemicals and base chemicals as its main raw
material in its manufacturing process. Raw
material costs represent a significant component of the Companys cost of goods
sold. The prices and availability of these
raw materials vary with market conditions and can be highly volatile. As a
result of these factors, the Companys operating
margins may decrease if it cannot pass on increased raw material prices to
customers, if prices for its products decrease faster
than raw material prices or if the price it pays under long-term supply
contracts is above the market price.

There have been in the past, and may be in the future, periods of time during
which raw material price increases cannot be
passed on to customers in whole or in part. Even in periods during which raw
material prices decrease the Company may
suffer decreasing operating profit margins if raw material price reductions
occur at a slower rate than decreases in the selling
prices of its products. Historically, the Company typically has not entered
into significant hedging arrangements with respect
to prices of raw materials but the Company has entered into long-term supply
contracts for some raw materials. Any major
dislocation in the supply or price of these raw materials or any material
difference between the price the Company pays
under its supply contracts and market price may have a material adverse effect
on its financial condition and results of

6



---



##### 



operations. Additionally, the Company requires raw materials to be of a
satisfactory standard for manufacturing its products.
Any deterioration in the quality of the raw materials available to the Company
may adversely impact the Companys ability
to manufacture its products to an acceptable standard and may have a material
adverse effect on the results of its
operations. Even if it could obtain acceptable substitute raw materials, the
Company could incur increased expenses in
securing the raw materials from an alternative source and suffer reduced profit
margins and an adverse impact on its
business.

Environmental laws and regulations may expose the Company to liability and
result in increased costs.

The Companys business is subject to stringent environmental laws and
regulations in the various countries in which it
operates. Such laws and regulations govern, among other things, air emissions,
wastewater discharges, the use and handling
of hazardous substances, waste disposal and the investigation and remediation
of soil and groundwater contamination. As
with other companies engaged in similar activities, a risk of environmental
liability is inherent in its current and historical
activities. See Item 4. Information on the Company  Environmental Matters in
this Annual Report.

The EU Chemicals Policy

The EU Chemicals Policy, if adopted by the appropriate EU bodies and Member
States in its current draft form (as published
29th October) would require all companies to register with defined data
requirements, their substances manufactured or
imported in the EU at levels above 1 ton per year. Whilst presently, the Company
cannot assess the complete impact of the
EU Chemicals Policy, it believes that the proposed regulatory system will be
highly resource intensive and therefore costly to
industry and regulators alike. At present, the exact timing of the legislative
process and the resulting definitive regulations
cannot be estimated.

The Companys business may be adversely affected by rigorous health and safety
regulation.

Certain of the Companys products are subject to rigorous health and safety
regulations. There is a risk that key raw materials
or one of the Companys products may be recharacterized as or found to have a
toxicological or health related impact on
the environment or on its customers or employees. Health and safety regulations
are continually strengthened and relevant
raw materials or products may be banned or the Company may incur increased
costs in complying with new requirements.

Liabilities arising from the development, manufacturing and use of the
Companys products may adversely impact the
Companys financial condition.

The Companys operations are subject to various hazards associated with the
production of chemicals, including the use,
handling, processing, storage and transportation of hazardous materials. These
hazards can cause personal injury and loss of
life, severe damage to and destruction of property and equipment, and
environmental damage, and may result in the
suspension of operations and the imposition of civil and criminal liabilities.
The Company has been subject to claims of injury
from direct exposure to such materials and from indirect exposure when such
materials are incorporated into other
companies products. As a result of past or future operations, there may be
additional claims of injury by employees or
members of the public due to exposure, or alleged exposure, to such materials.
Furthermore, the Company also has
exposure to present and future claims with respect to workplace exposure,
workers compensation and other matters arising
from events both prior to and after the date of this Annual Report. The Company
cannot predict the actual amount of these
liabilities or the timing thereof, if any.

Change of control provisions and limitations on shareholder voting rights may
render the Company an unattractive target for
any transaction in which the Companys investors could receive a premium for
their Shares or ADSs.

Certain contractual arrangements with Novartis and restrictions on the voting
rights of shareholders of the Company may
make an acquisition of the Company less likely, and thus may limit any
opportunity for the Companys shareholders to
receive a premium for their Shares or ADSs. Similarly, the Company may face
adverse tax consequences in foreign
jurisdictions if certain material parts of the business are divested.
Accelerated vesting provisions and the elimination of
restriction periods under one or more employee incentive plans instituted by
the Company could result in a significant cost
to the Company in the event of a change of control not recommended by the
Companys board of directors.

Additionally, a change in control of the Company or a sale of substantially all
the assets of the Company could relieve
Novartis of its contractual obligation to indemnify the Company for a portion
of specified environmental liabilities arising
from prior activities of the predecessor of the Company in the United States.

Pursuant to the Companys articles of association, no shareholder or group of
shareholders of the Company will be
recognized in the Company share register as owning the voting rights of more
than 2 percent of the Companys share
capital. No shareholder or group of shareholders may represent more than 5
percent, by proxy or otherwise, of the
Companys share capital at a shareholders meeting.

Under certain circumstances, the Company may not be permitted to continue to
use the name CIBA, which could adversely
affect its brand name recognition and its results of operations.

Pursuant to an agreement between the Company and Novartis, the Company is
permitted to use Ciba Specialty
Chemicals as part of its registered corporate name, while Novartis may
continue to use the name Ciba in the Ciba Vision
Group and in certain other cases. The Company is entitled to use the Ciba
trademarks and trade names outside the core
business of Novartis (pharma specialties, pharma OTC and generics, eyecare,
crop protection, seeds, animal health and
nutrition). Novartis remains entitled to continue to use trademarks and trade
names containing the term Ciba as they
were being used at the date of the Spin-off. In addition, Novartis is entitled
to use trademarks and tradenames containing
the term Ciba in the areas for its marketing concept for the Ciba line of
pharmaceutical products and for products and

7



---



##### 



services of the Ciba Vision Group. In addition, the Master Spin-off Agreement
entered into by the Company and Novartis
includes provisions which specify that upon the occurrence of certain change of
control events or acquisitive transactions
involving the Company or other members of the Company, or in the event any
member of the Company begins to compete
materially with Novartis business as in existence as of the time of the
Spin-off, the Company may be required to cease using
Ciba as a corporate name or to pay Novartis significant liquidated damages
for its continued use. The above restrictions
could affect the Companys ability to conduct its business with its present and
future customers. Even if the Company is able
to establish brand name recognition under a new name, it may incur significant
expenses in doing so, which could adversely
affect its future results of operations.

The introduction of the euro and the replacement of currencies in which the
Company presently conducts business may
adversely affect the operations of the Company.

The introduction of the euro in twelve of the fifteen member states of the
European Union may continue to have an impact
on the Companys operations. These potential impacts include, but are not
limited to, increased cross-border price
transparency and tax and legal implications (such as easier harmonization).

The Companys share price may be highly volatile and subject to sudden and
significant drops.

The trading price of the Shares and the ADSs has been, and could in the future
continue to be, subject to significant
fluctuations in response to variations in the Companys financial performance,
regulatory and business conditions in the
specialty chemicals industry, general economic trends and other factors, some
of which are unrelated to the operating
performance of the Company. For more information on the historical price ranges
of the Companys shares and the ADSs, see
Item 9. The Offer and Listing  Principal Trading Market and Price Range.
From time to time, following periods of
volatility in the market price of a companys securities, securities litigation
has been instituted against that company. The
institution of any such litigation against the Company could result in
substantial costs and a diversion of the Companys
managements attention and resources, which could materially adversely affect
its business, results of operation and financial
condition.

The Companys inability to successfully manage and integrate businesses
acquired or its alliances may adversely impact the
Companys results operations and financial condition.

The Company has made and expects to continue to make acquisitions and to enter
into alliances from time to time.
Acquisitions and alliances present significant challenges and risks relating to
the integration of the acquired business into the
existing business of the Company. There can be no assurances that the Company
will manage the integration of acquisitions
and alliances successfully.

If we cannot successfully manage the
integration of these acquisitions or alliances on a timely and efficient
basis, we may incur higher than expected costs and may not realize all
the benefits of these acquisitions or alliances

Other risks we face with respect to acquisitions or alliances
include:



| |  | greater than expected costs and
management time and effort
involved in completing and integrating acquisitions or alliances;                        
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | potential disruption of our ongoing business and difficulty in
maintaining or upgrading our standards, controls, information
systems and procedures;
| 
| |  | our inability to successfully integrate the services, products and
personnel of any acquisition into our operations;                                
| 
| |  | the potential incurrence of a significant amount of debt and
contingent liabilities; and                                                            
| 
| |  | realizing little, if any, return on our investment.                                                                                                 

Integration or other acquisition or alliance difficulties could have a
material adverse impact on our financial condition and results of
operations.



8



---



##### 



Item 4.   Information on the Company

History and Development

Ciba Specialty Chemicals Holding Inc.s registered office is located at
Klybeckstrasse 141, CH-4002 Basel, Switzerland,
telephone +41 61 636 1111.

Ciba Specialty Chemicals Holding Inc. was first registered as a corporation in
Switzerland on April 24, 1996, and began to
conduct the specialty chemicals business of the former Ciba-Geigy Limited
(Ciba-Geigy) as of January 1, 1997. Until the
merger of Ciba-Geigy and Sandoz Limited (Sandoz) into Novartis AG
(Novartis), as described below, the businesses of
the Company were part of Ciba-Geigy. Ciba-Geigy was formed in 1970 through the
merger of CIBA Aktiengesellschaft
(CIBA) and J.R. Geigy AG (Geigy), two Basel, Switzerland-based chemicals
and pharmaceuticals multinationals.

The Companys roots go back to 1757 when Geigy, the oldest chemical company in
Basel began trading in chemicals and
dyes. In 1925, Geigy began research into textile chemicals and in the 1930s
turned its attention to agrochemicals. A
pharmaceuticals division was formed in 1938.

In 1970, Geigy merged with CIBA, a chemical company founded in 1884 in Basel.
CIBA developed its first pharmaceutical
products in 1889 and added other products such as textile auxiliaries and
finishing products, cosmetics and plastics in the
1920s. It introduced epoxy resins in 1946 and began to manufacture plant
protection products in 1954, followed by
products for animal health and hygiene in 1959.

In 1996, Ciba-Geigy and Sandoz merged to form Novartis (the Merger). As part
of the Merger, Ciba-Geigys specialty
chemicals business was spun off to form Ciba Specialty Chemicals Holding Inc.
(the Spin Off), which on March 13, 1997,
was listed on the Swiss Exchange.

In early 2001, the Company implemented a new organizational structure
comprising five reporting segments (Segments)
focused on specific customer markets. The five Segments are Plastic Additives,
Coating Effects, Water & Paper Treatment,
Textile Effects and Home & Personal Care. Each Segment is responsible for
marketing, research and development,
technology, production and sales. The mission of each Segment is to provide the
best and most complete service to its
customers industries and strive for market leadership in its respective area.

While each Segment has a lasting role in providing for a well-balanced
portfolio for the Company, they are positioned for
growth and higher profitability through different approaches: innovation
(Plastic Additives and Coating Effects), cost
leadership (Textile Effects) and business growth (Water & Paper Treatment and
Home & Personal Care).

Recent Acquisition and Divestiture Activities

In order to optimize the Plastic Additives Segments global manufacturing
network, the Company acquired, in January 2001,
a controlling interest in Musashino-Geigy Co. Ltd. (Musashino-Geigy),
increasing its holdings from 50 percent to 60
percent. Musashino-Geigy has a facility in Isohara, Japan and produces
antioxidants, UV absorbers and blends for plastics.

As part of its focus on core businesses, in March 2001, the Company sold its 50
percent interest in TFL Ledertechnik GmbH
& Co. KG, an international chemical company whose products and technical
services are geared exclusively to the needs of
the leather industry. The net proceeds received of CHF 62 million approximated
the carrying value of the investment at the
date of sale.

To expand the Coating Effects Segments service business and its high value
added products offerings, in June 2001, the
Company acquired EFKA Additives B.V. (EFKA) for a total purchase price of
approximately CHF 65 million. EFKA
manufactures, markets and distributes additives for the coatings and inks
industries.

To expand the flame retardant business of Plastic Additives and its offerings
to combine flame retardancy with other effect
additives in customized solutions, the Company, in May 2002, purchased Melapur
B.V. (Melapur) from DSM N.V. for
approximately CHF 22 million. Melapur markets and distributes halogen-free
melamine-based flame retardants. If the
Melapur business reaches certain sales milestones over the next three years,
additional purchase consideration of up to CHF
5 million (euro 3.5 million) will be paid to DSM N.V.

In 2003, the Company acquired additional equity interests in Diamond Dye-Chem
Limited for approximately CHF 11 million, increasing its holdings to 69 percent. Also in 2003, the Company
purchased additional shares in Shanghai Ciba Gao-Ciao Chemical Co. Ltd., for approximately CHF 12 million, increasing its
holdings to 75 percent.

Capital Expenditures

Ciba Specialty Chemicals aggregate capital expenditures for property, plant
and equipment were CHF 233 million in 2003,
CHF 250 million in 2002 and CHF 259 million in 2001. In 2003, 2002 and 2001,
capital expenditures have been focused
primarily on efficiency and safety improvement-related items. Recent projects
include investments in new production
facilities for stabilizers and pigments, upgrades to water and paper treatment
production facilities, and investment in
emerging markets, particularly Asia.

9



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Business Overview

Ciba Specialty Chemicals is one of the worlds leading developers and producers
of specialty chemicals, which are high value
added chemical products used as key components and in a wide variety of
consumer and industrial products. The Company
operates on a global basis with manufacturing facilities in 23 countries and
sales in more than 120 countries.

In 2003, the Company had net sales from continuing operations of CHF 6
646 million, operating income of CHF 571 million
and net income of CHF 344 million.

Net sales, by geographic region of the Company for the past three years were as
follows:

2003
    
    2002
    
    2001amounts in CHF millions, except percentages
    
    Sales
    
    in %
    
    Sales
    
    in %
    
    Sales
    
    in %Europe
    
    
    2 731
    
    
    
    41
    %
    
    
    2 721
    
    
    
    38
    %
    
    
    2 755
    
    
    
    37
    %Americas(1)
    
    
    2 066
    
    
    
    31
    %
    
    
    2 459
    
    
    
    35
    %
    
    
    2 654
    
    
    
    36
    %Asia Pacific(2)
    
    
    1 849
    
    
    
    28
    %
    
    
    1 905
    
    
    
    27
    %
    
    
    1 958
    
    
    
    27
    %Total net sales
    
    
    6 646
    
    
    
    100
    %
    
    
    7 085
    
    
    
    100
    %
    
    
    7 367
    
    
    
    100
    %




---

|(1) |  | The Americas are comprised of North, Central and South America.                       
|--- |  | --------------------------------------------------------------------------------------
|   
|(2) |  | Asia Pacific is comprised of Asia, Africa, the Middle East, Australia
and New Zealand.

Organization

The Companys organizational structure consists of five Segments focused on
specific customer markets and various Group
Service Units focused on providing cost efficient support services to the
Segments. To ensure that innovation efforts are
successfully shared across Segments, the Company has created a corporate
technology office under the leadership of a Chief
Technology Officer. All Segments share the support functions provided by the
Group Service Units, which include finance
and accounting, human resources, communications, information technology (IT)
infrastructure, legal and supply chain
services.

Segments

The Companys five reporting Segments are Plastic Additives, Coating Effects,
Water & Paper Treatment, Textile Effects and
Home & Personal Care. These Segments develop, manufacture and market different
products, services and solutions. They
are managed separately because each Segment has different customer markets and
requires different technology and
marketing strategies. Each Segment is responsible for its own marketing,
research and development, technology, production
and sales. The mission of each Segment is to provide the best and most complete
service to its customers industries and
strive for market leadership in its respective area.

Net sales, by Segment, of the Company for each of the past three years were
as follows:

2003
    
    2002
    
    2001amounts in CHF millions, except percentages
    
    Sales
    
    in %
    
    Sales
    
    in %
    
    Sales
    
    in %Plastic Additives
    
    
    1 722
    
    
    
    25.9
    %
    
    
    1 813
    
    
    
    25.6
    %
    
    
    1 834
    
    
    
    24.9
    %Coating Effects
    
    
    1 807
    
    
    
    27.2
    %
    
    
    1 920
    
    
    
    27.1
    %
    
    
    1 944
    
    
    
    26.4
    %Water & Paper Treatment
    
    
    1 349
    
    
    
    20.3
    %
    
    
    1 409
    
    
    
    19.9
    %
    
    
    1 486
    
    
    
    20.2
    %Textile Effects
    
    
    1 401
    
    
    
    21.1
    %
    
    
    1 544
    
    
    
    21.8
    %
    
    
    1 673
    
    
    
    22.7
    %Home & Personal Care
    
    
    367
    
    
    
    5.5
    %
    
    
    399
    
    
    
    5.6
    %
    
    
    430
    
    
    
    5.8
    %Total net sales
    
    
    6 646
    
    
    
    100.0
    %
    
    
    7 085
    
    
    
    100.0
    %
    
    
    7 367
    
    
    
    100.0
    %


Plastic Additives develops, manufactures and markets products and provides
services to the plastic and lubricant industries. The Segments products are
additives, which are ingredients added in small quantities to polymers and
lubricants that prevent aging and corrosion and help improve appearance,
durability and performance of finished goods such as polyolefins and
engineering plastics as well as high-performance motor oils and lubricants. The
service business adds value to customers by providing solutions in product
applications.

Coating Effects is a leading global manufacturer of organic pigments and the
leading supplier of photoinitiators and lightstabilizers to the coatings,
graphic arts and electronic industries. The Segment develops, manufactures and
markets additives, pigments, as well as additive and pigment concentrates, for
the coatings, printing, imaging, electronic, plastics and fibers industries.
The end-user markets for its products and services are, among others, the
automotive, packaging, publication, electronics, construction, photographic
and digital printing industries.

Water & Paper Treatment serves the paper and water treatment industries. The
Segment offers products and services to the global paper and board industry
focused on increasing mill productivity as well as effect chemicals which
provides solutions for its customers in order to determine appearance, handling
and performance of the paper or board. The Segment also offers products and
services used to treat the water streams in industrial and municipal
applications and to improve the efficiency of mineral and oil processing as
well as soil additives and specialty monomers.

Textile Effects serves the textile industry, offering dyes and chemicals,
services and integrated solutions to customers along the whole textile value
chain. The Segments products include dyes and chemicals for dyeing and
printing of almost all textile fibers, optical brighteners and textile
finishing products for protection and easy-care. Services offered by the
Segment

10



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##### 



include color matching via the Internet and technical consultancy regarding
textile color and effects management for
international brand houses and retailers.

Home & Personal Care is one of the leading global manufacturers of whiteners
and a leading supplier of antimicrobials to
the personal care market. It develops, manufactures and markets products for
home and personal care end-use industries.
Among its range of product offerings are whiteners for detergents, hygiene
effects for a variety of home and personal care
products, UV absorbers for sunscreens and innovative hair dyes.

Group Services

The Company has established a number of Group Service Units that are
responsible for providing cost efficient support
services to the Segments. The utilization of these centralized Group Service
Units has two primary benefits to the Company:
they allow the Segments to fully concentrate on serving their markets and
customers and they reduce overall costs as a
consequence of increased economies of scale. The functions of the Group Service
Units of the Company are described in the
following paragraphs.

The Supply Chain Services unit is responsible for distribution of all finished
products as well as order processing, warehousing
and transportation of products. They are also responsible for managing
relationships with the Companys major transport
partners, including negotiation of related service contracts. The Supply Chain
Services unit maintains shared order desks on a
regional/country level that service all Segments with regards to order taking
and order processing, shipping and customer
invoicing. The Company, through its Supply Chain Services unit, utilizes a
global network of both Company- and third-party-owned warehouses and distribution centers to ensure adequate coverage of the
Companys distribution requirements.
Supply Chain Services has completed the integration of the Companys three
supply chains into a single global supply chain
and continues working to significantly reduce the number of partners in the
transportation area with the ultimate goal to co-operate with one global Lead Logistics Provider.

The Global Infrastructure unit, working with outsourcing partners, has the
principal objective of optimizing the Companys
information technology infrastructure including its wide area networks.

The Company in 2003 maintained twelve Business Support Centers that provide
finance and accounting services to the
regions, instead of using numerous country organizations. The Business Support
Centers, using standardized financial
systems, provide control, treasury and information management services to the
Company for financial and corporate
applications. They are responsible for ensuring the accuracy, validity and
timeliness of financial reporting. As part of its
strategy to streamline administrative operations and reduce costs, the Company
in 2004 is consolidating the functions of its
Central European and Central American Business Support Centers into other
existing Business Support Centers, and will
therefore maintain ten such centers on an ongoing basis.

Corporate functions such as legal, environmental, communications and human
resources are managed through eight
Regional Presidents Offices.

Headquarters is responsible for
strategy, public reporting, investor relations and corporate governance.

Equity Affiliates

The Company, from time to time, acquires and disposes of participations in
entities to help achieve strategic objectives. The
Companys investments in equity affiliates resulted in total income from
earnings of equity affiliates of CHF 3 million in 2003,
CHF 6 million in 2002 and CHF 8 million in 2001.

The Company invests in equity affiliates to support and supplement the growth
of its core business. Some of these
investments are made in countries where legislation requires or custom dictates
local investor control or participation. The
Company holds an active interest in its equity affiliates.

The Companys most significant investments in equity affiliates as of December
31, 2003 are a 50 percent interest in each of
CIMO Compagnie Industrielle de Monthey SA and Daihan Swiss Chemical Corp. CIMO
Compagnie Industrielle de Monthey
SA is a joint venture with Syngenta that provides infrastructure services and
utilities to the partners manufacturing facilities
in Monthey Switzerland. Daihan Swiss Chemical Corp. is a joint venture with
Daihan Color Ind. Co., Ltd., which has a
pigments facility in Ulsan, Korea, and makes classical pigments for inks,
paints, plastics and synthetic fibers.

In order to optimize the Plastic Additives Segments global manufacturing
network, the Company acquired, in January 2001, a
controlling interest in Musashino-Geigy Co. Ltd., increasing its holding from
50 percent to 60 percent. As a result, beginning in
2001, its operations have been consolidated with those of the Company.
Musashino-Geigy has a facility in Isohara, Japan and
produces antioxidants, UV absorbers and blends for plastics.

As part of its focus on core businesses, in March 2001, the Company sold its 50
percent interest in TFL Ledertechnik GmbH
& Co. KG, an internationally active chemical company whose products and
technical services are geared exclusively to the
needs of the leather industry. The net proceeds received of CHF 62 million
approximated the carrying value of the
investment at the date of sale.

11



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Company Strategy

The key components of the Companys strategy to drive profitable growth and to
maximize value for its shareholders are to
place the customer first, offer leading edge innovation, aim for best-in-class
manufacturing, and attract, develop and retain
the very best people. Placing the customer first involves utilizing an
industry-focused organization that is closely aligned with
customers industries. A focus on leading edge innovation enables the Company
to make everyday products better and
makes breakthrough products possible. The Company offers its customers both
significant innovation as well as steady
improvements by fostering a creative culture and by sharing and leveraging its
core competencies. In aiming for best-in-class
manufacturing, the Company seeks lowest-cost manufacturing coupled with focused
capital expenditures, while maintaining
an overriding policy of safety first. A single, streamlined global supply
system supports both manufacturing and customer
supply concerns, and increases efficiency across the Company.

Competition

The Company competes in the global specialty chemicals market. Its major
competitors include BASF, Bayer, Buckman,
Clariant, Cognis, Croda, Crompton, Cytec, Degussa, Dow, GE Water Technologies,
Great Lakes, Hercules, Johnson Polymer,
Lubrizol, Nalco, Rhodia, Rohm & Haas, SNF Floerger and Stockhausen.

Plastic Additives

Overview

Plastic Additives products maintain and improve the desirable properties, or
suppress the adverse properties, of plastic, oil
and lubricant materials and improve the stability of these materials during
processing, thereby facilitating or improving the
efficiency of industrial processes. In addition, additives can improve quality
and provide long-term stability and economical
viability of final industrial and consumer products by, for example, protecting
products against aging, corrosion or wear.

Plastic Additives business has for many years experienced strong growth and
profitability resulting from its leadership in the
additives markets. The Segment is the leading supplier of stabilizers and
stabilizer systems to the plastics industry. In
addition, the Segment is a leading supplier of ashless antioxidants and extreme
pressure and antiwear agents to the lubricant
industry.

Plastic Additives is managed as an integrated global business and primarily
focuses on three market segments: (i) Polymer
Products, (ii) Base Polymers, and (iii) Process and Lubricant Additives

The additives market is affected by shorter-term economic and industrial cycles
experienced by its customers, particularly in
the plastics and oil industries, which in turn are dependent on the automotive,
construction and packaging industries.
Increasing environmental and safety regulations governing the industries of the
Companys customers have also affected the
additives market. These regulations have resulted in an increased demand for
more innovative products with lower
environmental impacts. The Companys products are developed for sensitive
applications, such as use with food and
drinking water. These applications are subject to a higher degree of regulatory
control. Other regulatory initiatives being
introduced in the area of environmental control (for example, the removal of
volatile organic chemicals) have led to the
reformulation of some products and greater engineering oversight in production
by the Company.

The table below sets forth certain historical combined financial information
and the percentage contribution to the
consolidated Company net sales from continuing operations for Plastic Additives
for the years ended December 31, 2003,
2002 and 2001.

(amounts in millions of
CHF, except percentages)
    
    2003
    
    2002
    
    2001Total Segment net sales
    
    
    1 722
    
    
    
    1 813
    
    
    
    1 834Operating income
    
    
    178
    
    
    
    245
    
    
    
    275Capital expenditures
    
    
    59
    
    
    
    86
    
    
    
    80Research and development expenditures
    
    
    82
    
    
    
    81
    
    
    
    73Contribution to the consolidated Company net sales from continuing operations, in percentage
    
    
    25.9
    %
    
    
    25.6
    %
    
    
    24.9
    %


Products

Plastic Additives products add value to the polymer and lubricant industries.
The Segments product offerings for the
polymer industry include:



| |  | Polymer Protection products such as antioxidants, processing stabilizers,
UV absorbers and hindered amine light
stabilizers (HALS);
|- |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Special Effects such as antifogging agents, antistatic agents, slip
agents, antimicrobials, clarifying agents, shelf life
extension, flame retardants, optical brighteners and additives for
degradable plastics;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Products for Polymer Recycling such as antioxidants and light stabilizer
systems;
|- |  | ---------------------------------------------------------------------------------



| |  | Specialized product forms and multi-component product packages, which
simplify the incorporation process and
improve worker hygiene and resin quality; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Products for Polymer Design such as polymerization regulators.
|- |  | --------------------------------------------------------------

The Segments leading product lines in the polymer protection category are
Ciba® IRGANOX® antioxidants, Ciba® IRGAFOS®
processing stabilizers, Ciba® FIBERSTAB® L phenol-free processing stabilizers,
Ciba® IRGASTAB® FS phenol-free processing
stabilizers, Ciba® CHIMASSORB® light stabilizers/UV absorbers, and Ciba®
TINUVIN® light stabilizers/UV absorbers.

12



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In addition to the Segments traditional Ciba® IRGANOX® heat stabilizer range,
Ciba® IRGANOX® HP and Ciba® IRGANOX®
XP are examples of how additives support the polymer industry with new,
innovative products and services. Both the Ciba®
IRGANOX® HP and Ciba® IRGANOX® XP ranges combine HP-136, the Companys
innovative lactone technology, with
established high-performance phosphites. Some examples of applications for
these products are Ciba® IRGANOX® HP, which
stabilizes polyurethane foams and protects polyolefin during processing.

The Ciba® IRGAFOS® processing stabilizer range ensures efficiency in processing
and maintenance of polymer properties
across a broad range of processing conditions.

Ciba® FIBERSTAB® L & Ciba® IRGASTAB® FS phenol-free processing stabilizers
systems set a new standard in the processing
stabilization of polyolefin fibers with excellent gas-fade resistance. They
provide outstanding processing stability to polyolefin
fibers while virtually eliminating any gas-fade discoloration that may occur
when phenolic systems are used. The systems also
provide good long-term thermal stability and enhanced light stability. Ciba®
FIBERSTAB® L is particularly suited for PP fiber
applications such as carpets and hygienic non-wovens.

Ciba® TINUVIN® light stabilizers/UV absorbers constitute a complete range of
products for providing light stability to
polyolefins, engineering plastics, adhesives and elastomers. Examples of new
innovative products include Ciba® TINUVIN ®
123 S as the preferred solution for demanding polyolefin outdoor applications
and Ciba® TINUVIN® 1577 as the innovative
UV absorber for glazing, thin films and laminates.

Ciba® POLYAD® customer-specific blends are multi-component additive packages in
easy-to-handle forms.

The Segments leading product lines in the special effects additives category
are ATMER  antifogging agents, Ciba®
IRGASTAT and ATMER  antistatic agents, ATMER SA  slip agents, Ciba®
IRGAGUARDTM antimicrobial line, including Ciba®
IRGAGUARDTM A  antialgae and Ciba® IRGAGUARDTM B  antibacterial, and, Ciba®
IRGACLEAR® F antifungal
antimicrobials, Ciba® IRGACLEAR®  clarifying agents, Ciba® SHELFPLUS®  shelf
life extension, Ciba® FLAMESTAB®NORTM and, Ciba® MELAPUR®  flame retardants, Ciba ®TINUVIN ® FR flame retardant / light
stabilizer combinations and Ciba® UVITEX®
optical brighteners.

The Segment is adding to its polymer product offerings by branching out from
its core polymer protection and stabilization
business to take advantage of new market opportunities in the area of property
enhancement. With a new focus on surface
modification, the Segment is improving materials with special physical effects,
thereby improving surface properties and
product performance. A step in this direction has been the expansion of an
antistatic and antifogging product range, which
modifies surfaces to temper the buildup of static charge or water as fog.

The novel agricultural growth promoter Ciba®SMARTLIGHT® RL100 utilizes
photo-selective properties of the product to
improve crop quality and productivity.

Ciba®IRGAZONE 997, launched in 2003 for rubber applications, represents a new
technology that offers protection against
ozone, fatigue and oxygen, with non-staining properties and extraction
resistance.

With Ciba® IRGAMODTM 195,a highly effective multifunctional additive for PET
was launched. The product optimizes PET
manufacturing and delivers improved product properties.

The trend of plastics replacing other materials, such as glass and wood, is
expected to continue. This offers the Segment
opportunities to further work with customers to develop new applications for
the Segments products, for example, in the
automotive industry where engineered plastics are replacing traditional
materials. In addition, in the area of base polymers
the Segment is continuously expanding its services businesses area to provide
customers with tailor-made additives blends as
part of a market approach that emphasizes customer contact and quick response
times.

To cope with the increased temperature stress in modern engine oils, two new
high temperature antioxidant systems, Ciba*
IRGANOX* L 93 and Ciba® IRGANOX® L94 were introduced.

In 2001, Plastic Additives introduced
CIBA EXPERT SERVICESTM which enhances the
customers business performance via the
delivery of knowledge-based services. This is accomplished by applying a global
services network possessing Plastic
Additives comprehensive expertise and experience in the plastics industry.
CIBA EXPERT SERVICESTM is an innovative
business approach drawing on more than 50 years of experience in supporting the
Companys global plastics business. This
well recognized know-how and experience is now available on the open market. In
2003, CIBA EXPERT SERVICESTM was
further expanded and now offers a comprehensive selection of services which
include Color, Educational, Environmental,
Regulatory, Safety and Testing Services to the chemical and pharmaceutical
industry.

For the lubricant industry, the Segment offers:



| |  | Single components for engine oils and industrial lubricants such as
antioxidants, extreme pressure/antiwear additives, friction modifiers, corrosion inhibitors and metal deactivators;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Services such as pre-blends; and
|- |  | --------------------------------



| |  | Additives packages for industrial lubricants.
|- |  | ---------------------------------------------

13



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In the Process and Lubricant Additives business, the focus is on working with
customers to develop additives for lubricants,
such as Ciba® IRGALUBE® F10, that enhance the performance of engine oils while
providing environmental benefits.

Management is of the opinion that products such as additives for plastics
recycling and ashless antioxidants for lubricants are
becoming more important with increased environmental awareness and regulation.

Customers and End-User Markets

In 2003, end-user markets such as the packaging industry accounted for
approximately 28 percent of the Segments sales,
the construction industry for 20 percent, the durable goods for 10 percent, the
automotive industry for 8 percent, the
agricultural industry for 7 percent and the lubricants industries for 10
percent. A number of other smaller end-user markets
account for the remaining 17 percent of the Segments sales. The top ten
customers of the Segment accounted for
approximately 33 percent of the Segments 2003 sales.

Research and Development

Plastic Additives spends approximately 4 percent of sales each year on research
and development activities (CHF 82 million
in 2003). The primary objective of these research and development activities is
to achieve and maintain a high level of the
Segment sales of innovative products. Innovative products are defined as
patent protected products or products and
applications younger than five years. Management is of the opinion that Plastic
Additives has a growing product pipeline.
The goal is to further improve sales with innovative products and to protect
product and application innovations by
appropriate patents. Products currently being developed include new classes of
light stabilizers, anti-static additives, process
stabilizers for plastics, flame retardants and process chemicals for reactive
monomers.

Research and development activities focus on new product development as well as
process improvements that aim at
lowering costs and increasing productivity, speeding time-to-market of new
products and improving responsiveness to
customers by increased integration of manufacturing processes with the
Segments distribution network.

Coating Effects

Overview

Coating Effects develops, manufactures and markets additives, pigments, pigment
and additive concentrates for the
coatings, printing, imaging, plastics, synthetic fibers, and information
storage industries. Coating Effects is a leading global
manufacturer of organic pigments and the leading supplier of photoinitiators
and lightstabilizers to the coatings, graphic arts
and electronic industries.

Coating Effects is managed as an integrated global business and serves five
industry-focused markets: (i) coatings, (ii)
plastics, (iii) electronic materials, (iv) imaging & inks and (v)
masterbatches.

Pigments are insoluble coloring materials used for the coloration of printing
inks, paints, plastics and synthetic fibers in
products such as automotive paints, transportation coatings, synthetic carpets
and upholstery, printed materials and
publications, building paints, packaging, cables, flooring, toys, industrial
goods and equipment, furniture, consumer goods
and electronics.

Additives maintain or improve the desirable properties, or suppress the adverse
properties, of materials and improve the
stability of these materials during processing, thereby facilitating or
improving the efficiency of industrial processes. In
addition, additives can improve quality and provide long-term stability and
economical viability for the final product by, for
example, protecting the product against aging, destruction or wear.

Growth in the global pigments market tends to track Gross Domestic Product
(GDP) development. There is a move towards
high value pigments and improved additives as customers upgrade their products
and the technical performance
requirements of the colorants and additives they incorporate in their
formulations. Changes in technology in the customer
base provide opportunities for new products, for example in the fast changing
electronics industry. In recent years,
environmental pressure to replace heavy metals such as cadmium and lead has led
to an increased demand in organic
pigments. The impact of the low volatile organic content (VOC) regulations is
that solvent usage is being reduced in the
printing ink and coatings industries with alternative technologies, such as
UV-curing, powder coatings, high solid paint
systems and water-based systems. With the Segments current portfolio and
innovation projects, the Company believes the
Segment is well placed to take advantage of these trends. There also is a need
for products which make processing easier
and more cost effective for customers, in all the traditional served
industries. In particular, there is a focus on ease of product
handling, for example, low dusting colorants and additives. The Segments range
of products includes liquid forms, granules,
dispersions and concentrates. As pigment manufacturers have traditionally had
strong market positions in particular colors
(for example, the Segment has a strength in high performance, opaque red
pigments used in automotive paint), color
trends can benefit particular producers while negatively affecting others.

The high performance and high value pigments market are characterized by
capital-intensive production facilities and
demanding standards for high and constant quality. The major applications for
these pigments are automotive paints,
general industrial paints, decorative paints, plastics and packaging and
specialty inks, with competition based mainly upon
the technical properties of the products. In contrast, the classical pigments
market is characterized by relatively mature
products with minimal patent protection and strong competition from low cost
manufacturers in emerging countries. The
major application for these pigments is printing inks. The dispersions market
for organic and inorganic pigments is
characterized primarily by the provision of customer-specific solutions and
delivery service. The major application for
dispersions is the plastics industry and the major applications for inorganic
pigments are plastics and industrial paint.

14



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##### 



The additives market is affected by shorter-term economic and industrial cycles
experienced by its customers, particularly in
the coatings industry, which in turn is dependent on the automotive industry.
Increasing environmental and safety
regulations governing the industries of the Companys customers also have
affected the additives market. These regulations
have resulted in an increased demand for more innovative products with lower
environmental impacts. The Companys
products are developed for sensitive applications, such as use with food and
drinking water. These applications are subject to
a higher degree of regulatory control.

The table below sets forth certain historical combined financial information
and the percentage contribution to the
consolidated Company net sales from continuing operations for Coating Effects
for the years ended December 31, 2003,
2002 and 2001.

(amounts in millions of CHF, except percentages)
    
    2003
    
    2002
    
    2001Total Segment net sales
    
    
    1 807
    
    
    
    1 920
    
    
    
    1 944Operating income
    
    
    300
    
    
    
    341
    
    
    
    312Capital expenditures
    
    
    79
    
    
    
    74
    
    
    
    66Research and development expenditures
    
    
    95
    
    
    
    100
    
    
    
    96Contribution to the consolidated Company net sales from continuing operations, in percentage
    
    
    27.2
    %
    
    
    27.1
    %
    
    
    26.4
    %


Products

The Segments leading colorant product lines include the high performance
pigments, Ciba® IRGAZIN®, Ciba® CINQUASIA®
and Ciba® CROMOPHTAL®, used in coatings, inks, plastics and synthetic fibers,
the IRGAPHOR®, functional dye products
used for optical information storage (CD-R and DVDR) and Ciba® IRGALITE®
classical pigments used primarily in printing
inks. The Segment also produces pigment dispersions and masterbatches. The
Segments management is of the opinion that
its Diketo-Pyrrolo-Pyrrol (DPP) technology offers distinct advantages to users
of its high performance pigments for coatings
and plastics. DPP pigments are currently being used in automotive paints and
high performance plastics materials. Current
environmental pressure on cadmium pigments opens up good growth opportunities
for DPP pigments in the plastics
industry. The Segment does not believe it has yet fully exploited the benefits
of DPP technology in the automotive industry
or in other paint, plastics or inks applications.

The Segments leading additives products lines include, Ciba® TINUVIN® light
stabilizers for coatings, inks and photographic
applications, Ciba® IRGACURE® photoinitiators and photoinitiators blends for
ultraviolet curing of coatings, paints, inks and
electronic materials and the environmental friendly polymer specialty rheology
agents and dispersants for coatings. The
Segment also offers stabilizers and process chemicals for photographic and
photo-reproduction systems, algaecides for
antifouling and dispersion paints. Management is of the opinion that products
such as photoinitiators for solvent-free
coatings are becoming more important with increased environmental awareness and
regulation.

Customers and End-User Markets

In 2003, Coating Effects supplied pigments and additives to the paint and
coatings industries, the printing ink industry, the
plastics industry, the synthetic fibers industries and the electronic materials
industry. The top ten customers of the Segment
accounted for approximately 29 percent of the Segments 2003 sales.

In 2003, the end-user markets such as the automotive industry accounted for
approximately 22 percent of the Segments
sales, the imaging and publication industry for 17 percent, the packaging
industry for 17 percent, the electronics industry
for 14 percent and the construction industry for 12 percent of the Segments
sales. A number of other smaller end-user
markets account for the remaining 18 percent.

Consolidation and globalization have occurred in certain of the customer
industries served by the Segment, particularly in
the coatings and printing ink industries. The effect of such consolidation and
globalization is that pricing pressure is exerted
on suppliers.

Research and Development

Coating Effects spends approximately 5 percent of sales each year on research
projects (CHF 95 million in 2003). The
primary objective of these research and development activities is to achieve
and maintain a high level of the Segment sales
of innovative products. Innovative products are defined as patent protected
products or products and applications
younger than five years. Pigment products currently being developed by the
Segment include high value pigments with a
new standard of performance to price ratio (a novel range of polymer soluble
dyes), novel granule forms of pigments,
solvent-free dispersions, pigments for optical storage and color filters. The
Segment is also developing colorants for digital
ink jet printing on paper and plastic.

Additive products currently being developed include high performance
photoinitiators for coatings, imaging and
information storage, new classes of light stabilizers, UV-absorbers, sterically
hindered amines for coatings as well as
algaecides for antifouling paints. In addition, in response to increasing
environmental and safety regulations, Coating Effects
is developing various additives for waterborne, powder or radiation curable
systems.

15



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Certain patents covering some of the Segments important products such as a
hindered amine light stabilizer and an
algaecide expired in 2001. In addition one of the photoinitiator patents for
ink applications expired in 2003. Management is
of the opinion that expiration of these patents will only have a limited effect
on its result of operations because of the
Companys level of customer service associated with these products and
processes. Although patent protection for part of
the DPP product range expired in 2003, the Company has newer patents covering
more recently launched or yet to be
launched products.

Water & Paper Treatment

Overview

Water & Paper Treatment products and services for the paper and board industry
increase the speed, run-ability and quality
of the paper making process (retention and drainage aids, fixatives), improve
the visual appearance, optical properties and
printability of the paper (paper whiteners, paper coloration, coating additives
and surface modifiers), impart water, oil and
grease resistance (barrier effects and sizing), and provide stable images on
carbonless and thermal papers.

The products and services offered in in the area of water treatment improve the
separation of solids from liquids, purify
water and dewater sludge for disposal. In extractive and process technologies,
the Segments products improve the
efficiency of oil processing. The Segment also serves a number of niche
markets including soil additives where products
improve plant nutrition and soil fertility, and performance intermediates where
high purity specialty monomers are supplied
by the Segment for various applications (e.g. rubbers and adhesives). Water &
Paper Treatment is one of the leading global
suppliers to the paper industry and the municipal and industrial waste-water
treatment industries and is managed as an
integrated global business.

The Water & Paper Treatment market has been affected by increasing
environmental and safety regulations, which govern
the industries of the Companys customers. These regulations have resulted in
an increased demand for more innovative
products with lower environmental impact.

The table below sets forth certain historical combined financial information
and the percentage contribution to the
consolidated Company net sales from continuing operations for Water & Paper
Treatment for the years ended December 31,
2003, 2002 and 2001.

(amounts in millions of CHF, except percentages)
    
    2003
    
    2002
    
    2001Total Segment net sales
    
    
    1 349
    
    
    
    1 409
    
    
    
    1 486Operating income
    
    
    85
    
    
    
    98
    
    
    
    65Capital expenditures
    
    
    42
    
    
    
    35
    
    
    
    52Research and development expenditures
    
    
    27
    
    
    
    29
    
    
    
    34Contribution to the consolidated Company net sales from continuing operations, in percentage
    
    
    20.3
    %
    
    
    19.9
    %
    
    
    20.2
    %


Products

In the paper industry, there is an ongoing demand for more efficient production
processes and this is where Cibas patented
technologies such as the Ciba® TELIOFORMTM retention and drainage aid system
and Ciba® PERGAFASTTM Color Developer
for the Color Former market bring value to customer. At the same time consumers
are demanding more innovative paper
products and here the Companys range of effect chemicals  whiteners, colors,
color formers & barrier effects  allow the
Company to be a leading innovator in meeting consumer requirements. The rapid
change of technology, the globalization
of the customer base and the growing importance of emerging economies are
likely to shape the future direction of these
markets. Of particular importance are the growing environmental regulations,
which are expected to contribute to a growth
in chemical demand in excess to that of the paper and board industry.

The Segment develops, produces and sells the following products to the water
treatments market segment: Ciba® ZETAGTM,
Ciba® MAGNAFLOC® and Ciba® MAGNASOLTM polyacrylamide polymers, organic
coagulants, and poly acrylic acid
polymers. The main usage of these products is as flocculants for the separation
of solid particles from water. The water
treatments product range also includes Ciba® IRGATREATTM specialty formulations
for the full range of water purification and
conditioning applications, dispersants to reduce the viscosity and to increase
the performance of inorganic pigments and
fillers in water systems, monomers as building blocks used in water treatment,
mineral recovery, adhesives, synthetic fibers
and antistatic finishes as well as Ciba® LIBFER® iron chelate to correct
deficiencies in crops grown intensively.

Customers and End-User Markets

In 2003, Water & Paper Treatment supplied products and services to the paper and
board, municipal and industrial waste
water treatment industries. The top ten customers of the Segment accounted for
approximately 19 percent of the Segments
2003 sales.

In 2003, end-user markets such as the paper and board industry accounted for
approximately 52 percent, the waste water
specialties industry accounted for 19 percent, the extractives and process
technologies industry accounted for 12 percent
and the agricultural industry accounted for 3 percent, of the Segments sales.
A number of other smaller end-user markets
accounted for the remaining 14 percent of Segment sales.

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Research and Development

Water & Paper Treatment spends approximately 2 percent of sales each year on
research and development activities
(CHF 27 million in 2003). The Segments integrated R&D philosophy is aimed at:



| |  | developing process/production technology to improve the profitability of
the acrylic based technologies;
|- |  | --------------------------------------------------------------------------------------------------------



| |  | developing targeted new offerings; and
|- |  | --------------------------------------



| |  | expanding/transforming to novel high value added markets by exploiting
existing and emerging technologies.
|- |  | ----------------------------------------------------------------------------------------------------------

Textile Effects

Overview

Textile Effects develops, manufactures and markets organic and inorganic
synthetic dyes and other chemicals for natural and
synthetic fibers, focusing on cellulose, polyester, wool and polyamide and
their blends.

Based on 2003 sales, management estimates that the Segment Textile Effects is
one of the largest textile effects businesses in
the world. The Segment is the worlds second largest manufacturer of textile
dyes, the largest manufacturer of dyes for wool,
polyamide carpets and automotive fabrics, the second largest manufacturer of
reactive dyes and disperse dyes for polyester,
and one of the leading suppliers of textile chemicals to the textile industry.
Other major product offerings to these industries
are whiteners, antimicrobials, UV (ultraviolet) protection products and
auxiliaries for textile processing and finishing for the
textile industries. The textile chemicals business provides customers with an
integrated range of products and services for
fabric processing and finishing, including sizing, pretreatment, dyeing and
printing auxiliaries, whiteners, comfort and easy
care, UV protection, oil and water repellents, flame retardants and coating
chemicals.

Demand for textile dyes and chemicals is mainly driven by developments in the
textiles markets, such as fashion trends, the
level of personal disposable incomes and by environmental regulations. The
textile industry continues to shift to Asia, and
even within Asia production of textiles is moving from higher wage countries
(such as Japan, South Korea and Taiwan) to
lower wage countries, particularly those with fast growing internal markets
(such as China, India and Vietnam).

The table below sets forth certain historical combined financial information
and the percentage contribution to the
consolidated Company net sales from continuing operations for Textile Effects
for the years ended December 31, 2003, 2002
and 2001.

(amounts in millions of CHF, except percentages)
    
    2003
    
    2002
    
    2001Total Segment net sales
    
    
    1 401
    
    
    
    1 544
    
    
    
    1 673Operating income
    
    
    69
    
    
    
    142
    
    
    
    181Capital expenditures
    
    
    29
    
    
    
    34
    
    
    
    32Research and development expenditures
    
    
    32
    
    
    
    36
    
    
    
    39Contribution to the consolidated Company net sales from continuing operations, in percentage
    
    
    21.1
    %
    
    
    21.8
    %
    
    
    22.7
    %


Products

The Segments leading dyestuffs product lines include CIBACRON® reactive dyes
for cellulose, Ciba® LANASET® and Ciba®
NEOLAN® dyes for wool, Ciba® TECTILON® acid dyes for carpet and Ciba® TERASIL®
and Ciba® TERATOP® disperse dyes for
polyester. In addition, the Segment manufactures vat and direct dyes for
cellulose, and cationic dyes for polyacrylonitril. The
Segments leading textile chemical product lines include Ciba® UVITEX®
whiteners for textiles, CIBATEX® UV absorbers for the
protection of textiles against ultraviolet radiation; Ciba®YROVATEX® flame
retardants and Ciba® ALCOPRINT® print
thickeners. In February 2002, a global cooperation agreement between Ciba and
Invista was announced. The agreement
enables both companies to share intellectual and technical resources and serve
the increasingly sophisticated needs of the
consumer for easy care and other effects. It includes Ciba® OLEOPHOBOL® fabric
protector products for protection against
stains as well as access to DuPonts TEFLON® brand.

The Segments core European markets are experiencing a plateau in demand,
however, substantial growth opportunities
continue in Eastern Europe, Asia and Latin America.

Customers and End-User Markets

Textile Effects supplies the clothing/apparel, home furnishing and industrial
textile industries (including automotive textiles).
In 2003, the top ten customers of the Segment accounted for approximately 8
percent of the Segments sales. The customer
base of the textile dyes market is highly fragmented. In 2003, the end-user
markets of the fibers, carpets, textiles industries
accounted approximately for substantially all of the Segments sales with the
automotive industry accounting for a small
percentage. While the clothing/apparel industry is predominant in Asia, the
automotive textiles and the carpet industry is
focused primarily in North America and Europe.

17



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Research and Development

Textile Effects spends approximately 2 percent of sales each year on research
projects (CHF 32 million in 2003). The primary
objective of these research and development activities is to achieve and
maintain a high level of the Segment sales of
innovative products. Innovative products are defined as patent protected
products or products and applications younger
than five years. Textile dyes currently being developed by the Segment include
reactive dyes with improved ecological and
economical performance, a range of economically and technically superior
reactive dyes for printing, a range of wetfast
reproducible and economical disperse dyes, metal free dyes for polyamide and
wool, replacements for indigo, and sulphur
and naphthol dyes. Textile chemicals currently being developed by the Segment
include ecologically improved flame
retardants, more efficient ultraviolet (UV) absorbers and optical brighteners,
economical oil and water repellents, range of
improved products for Easy Care and the whole process chemicals range to
increase the efficiency and simplify dyeing and
printing processes. The Segments R&D focus also includes technologies geared
towards new effects, such as
microencapsulation, application of nanoparticles and use of biotechnological
processes.

Home & Personal Care

Overview

Home & Personal Care is managed as an integrated global business and develops,
manufactures and markets products for
two end-use industries: (i) home and fabric care and (ii) personal care. Among
its major product offerings into these
industries are whiteners for detergents, antimicrobials providing hygiene
benefits for home and fabric care and personal care
products; UV (ultraviolet) absorbers for fabric and personal care as well as
specialty colors for home and personal care
products. Based on 2003 sales, management estimates that Home & Personal Care
is the leading global manufacturer of
whiteners and the leading provider of antimicrobials of hygiene, mainly to the
personal care industry. Home & Personal Care
is dedicated to the production of high value chemical ingredients for
manufacturers of non-durable home and personal care
consumer goods.

The table below sets forth certain historical combined financial information
and the percentage contribution to the
consolidated Company net sales from continuing operations for Home & Personal
Care for the years ended December 31,
2003, 2002 and 2001.

(amounts in millions of CHF, except percentages)
    
    2003
    
    2002
    
    2001Total Segment net sales
    
    
    367
    
    
    
    399
    
    
    
    430Operating income
    
    
    32
    
    
    
    56
    
    
    
    67Capital expenditures
    
    
    18
    
    
    
    18
    
    
    
    25Research and development expenditures
    
    
    31
    
    
    
    30
    
    
    
    24Contribution to the consolidated Company net sales from continuing operations, in percentage
    
    
    5.5
    %
    
    
    5.6
    %
    
    
    5.8
    %


Products

The Segments leading product lines include Ciba® TINOPAL® whiteners for
detergents; Ciba® TINOSORB® UV absorbers for
the protection of skin against ultraviolet radiation; Ciba® IRGASAN®, Ciba®
IRGACARE® and Ciba® TINOSAN® antimicrobials
providing hygiene benefits in soaps, toothpaste, detergents, and disinfectants;
Ciba® SALCARE® rheology modifiers and
conditioning polymers; Ciba® TINODERM® carrier systems for personal care
applications; and Ciba® TINOTEXTM laundry
additives for comfort enhancement.

The Segments main product categories and their characteristics can be broadly
summarized as follows:

Whitenersare supplied to the
detergents industry. In detergents, the demand
for whiteners has stagnated in the European,
United States and Japanese markets, while the emerging markets of Asia and
South America continue to show signs of
growth.

Hygiene effectsare high value-adding antimicrobial ingredients supplied to the
personal care, home and fabric care
industries. Main applications include soaps, deodorants, toothpastes,
dishwashing liquids, detergents and disinfectants for
hospitals and medical purposes. The Segments antimicrobial solutions
IRGASAN®, IRGACARE® and TINOSAN® continue to
be recognized as the industry standard for efficiency, performance and safety
by key customers.

Ultraviolet (UV) absorbersare supplied to the fabric, cosmetic and hygiene
industries. UV absorbers are used to provide
protection to the skin against the harmful effects of ultraviolet A (UVA  long
wave-length) and ultraviolet B (UVB  short
wave-length) radiation, both of which are identified as high-risk causes of
skin cancer. UV absorbers are manufactured for use
in a variety of products applied directly to the skin, including sunscreens and
lotions and are as well used in detergents.
Growth prospects are particularly strong in regions where concern for effective
broadband (both UVA and UVB) protection
from sunlight is high.

Personal carespecialties, such as rheology modifiers, ingredient protectants,
colors, moisturizers and carrier systems, enhance
the quality of end consumer products in cosmetic and hygiene applications.
Rheology modifiers allow customers to produce
formulations to the highest standards of quality and consistency. Colorants are
used in a range of products including soaps
and toothpaste. The Segment also utilizes microscopic nanocolloid technology
for the delivery of active ingredients for more
direct application of effects. In addition, the Segment researches various
natural substances for use in the field of personal
care as active ingredients.

18



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Customers and End-User Markets

In 2003 Home & Personal Care supplied the home and fabric care and the personal
care industries. The top ten customers of
the Segment accounted for approximately 62 percent of the Segments 2003 sales.
The home and fabric care market is
dominated by a small number of large global customers with strong purchasing
power and a desire to form strategic
alliances with innovative suppliers.

In 2003, the end-user markets for home and fabric care accounted for the
majority of the Segments sales, with the cosmetic
and hygiene industries accounting for the remainder.

Research and Development

Home & Personal Care spends approximately 8 percent of sales each year on
research and development activities
(CHF 31 million in 2003). The primary objective of these research and
development activities is to achieve and maintain a
high level of the Segments sales with innovative products. Innovative
products are defined as patent protected products
or products and applications younger than five years. Products recently
developed by the Segment include new UV
absorbers for sunscreens, a new photobleach agent for laundry detergents, a new
class of oxidation catalysts for use in Home
& Fabric Care applications and new nanocolloid encapsulated active ingredients
for skin care products.

Manufacturing

The Company has 60 manufacturing sites in 23 countries in important regions of
the world. Currently, 39 of these sites are
used primarily for chemical synthesis and the others are used to manufacture
formulations that meet customer specific
requirements. Europe and North America account for over 80 percent of the fixed
asset base of the Company, with nearly 70
percent of the Companys assets located in Switzerland, the United States,
Germany and the United Kingdom. All of the
Companys major manufacturing facilities have qualified for International
Organization for Standardization (ISO) 9001 or
ISO 9002 certification. The Company has also entered into several manufacturing
arrangements and participates with shares
of up to 50 percent in three non-consolidated joint ventures, all in Asia.

The Companys production costs, excluding raw materials, amounted to
approximately 23 percent of sales in 2003, 23
percent of sales in 2002 and 23 percent in 2001.

In recent years, the Company has achieved significant capacity increases at its
facilities, through process and production
improvements. For example, through de-bottlenecking, production capacities have
been increased for high performance
pigments, whiteners and antioxidants and newly developed production processes
have increased capacities for hindered
amine stabilizers and antimicrobials. The Companys manufacturing facilities
generally operate within a range of sixty to
eighty percent of capacity. Management is of the opinion that capacity
utilization provides adequate growth potential.
However, improved asset utilization is a priority for the Company generally and
the Company conducts an ongoing
monitoring study of capacity utilization on a cross-segmental basis to improve
asset utilization. For example, the Company
closed its formulations sites at Mississauga, Canada and at Barberà de Vallès,
Spain and moved the respective production
activities to other sites in the NAFTA region and in Europe. The Companys
manufacturing strategy is to be a low cost
producer, to increase productivity and to concentrate production on higher
value-added products. To this end, after a period
of considerable investments in new facilities, all Segments plan to focus
capital expenditure on capacity, product and process
improvements with a total spending of more than CHF 500 million in the next 5
years. For example Textile Effects will spend
CHF 15 million to streamline their dyestuff production facilities at Basel.

Plastic Additives is investing in the Hindered Amine Stabilizer area, primarily
in the NAFTA region. These projects are
expected to be completed in 2004, with a total estimated total cost of
approximately CHF 70 million.

Coating Effects invested between 1999 and 2001 approximately CHF 280 million in
new manufacturing facilities in the
United Kingdom and the United States for granules, DPP and Quinacridone
pigments and is investing CHF 30 million in a
new production unit for DPP pigments at Monthey, Switzerland. Coating Effects
will invest another CHF 10 million to increase
their Benzotriazol capacities at McIntosh, USA and Lampertheim, Germany.

Water & Paper Treatment invested, from 1999 to 2001, approximately CHF 80 million in a production site in West Memphis,
Arkansas, United States, which allows for backward integration in the field of
cationic monomers. During the period from
2002 to 2004, Water & Paper Treatments expects to invest more than CHF 40 million to upgrade its production site at
Bradford, United Kingdom and West Memphis, Arkansas, United States.

Textile Effects invested approximately CHF 14 million from 1998 to 2000 in a
consolidated production joint venture in
Thailand and is investing another CHF 7 million to increase the capacity. In
addition, Textile Effects has implemented a new
Key Manufacturing Base Concept in Panyu, China, which was finished in 2002, at
a total cost of approximately CHF 15 million.

Home & Personal Care invested approximately CHF 10 million in Grenzach, Germany
and Basel, Switzerland in a production
facility for a new UV absorber for skin protection, which was completed in
2002.

The Company is strengthening its position in emerging markets, particularly
Asia, by expanding its facilities in these areas.
For example, Coating Effects invested CHF 5 million from 2002 to
2003 to increase the
capacity for classical pigments at
Qingdao, China and Plastic Additives started in 2003 the production of UV
absorbers at their Goa site in India.

The Company is not dependent on any single production site. The five largest
production sites of the Company are in Basel
(Switzerland), Grenzach (Germany), McIntosh (Alabama, United States), Bradford
(United Kingdom) and Monthey
(Switzerland).

19



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Sales, Marketing and Distribution

The Company sells its products in more than 120 countries through a global
sales network. The sales and marketing
functions are decentralized within the Company, with each Segment having its
own sales and marketing strategy for its
products and services. The organization of these functions varies from Segment
to Segment.

Sales in all Segments are generally on a purchase order basis. However, the
Company has established longer-term
arrangements with certain key customers or where required by customers. Such
arrangements generally do not extend
beyond one year. Bidding on one to three year supply arrangements has become
common in the paper and detergent
whiteners markets, with contracts in the paper industry tending to be for
longer periods. Such bidding has tended to
increase price pressure in these product segments.

All distribution and order processing, warehousing and transportation are
centrally managed by the Supply Chain Services
unit on behalf of the Segments.

Shared order desks on a regional/country level service all Segments with
regards to order taking and processing, shipping
and invoicing. A global network of warehouses and distribution centers, both
externally and internally operated, ensures
adequate coverage of the Companys distribution requirements. Contracts with
major transport partners are
negotiated/managed centrally. The strategy is to significantly reduce the
number of partners in this field with the ultimate
goal to co-operate with one global Lead Logistics Provider for all
intercontinental transports.

In 2000, the Company was one of the first chemical companies to offer a
comprehensive e-business service to all its
customers: mybusiness@cibasc. The site is a secure, user-customized one-stop
shop which lets customers place and track
orders from all Segments, get access to product and safety information, receive
technical support and learn about new
applications. mybusiness@cibasc is available in over 10 languages and has over
15 000 active users in 140 countries. In
addition, the Company participates in Elemica, a specialized
business-to-business exchange that allows the Company, in one
step, to link its Enterprise Resource Planning system directly to those of
major suppliers and customers, allowing the
Company to achieve higher efficiency and reduce supply-chain costs.

The Company is focusing production and process development efforts on better
integration of the manufacturing process
with the supply chain in order to increase customer responsiveness while at the
same time reducing inventories by increasing
the volume of products shipped directly from the production facility to the
customers.

Sourcing of Raw Materials

The Company purchases a large number of raw materials and intermediates from
third parties around the world for its
manufacturing processes, and strives to optimize the supply chain for each
Segment. Raw material costs represent a
significant component of the Companys cost of goods sold. The prices and
availability of these raw materials vary with
market conditions and can be highly volatile. The Company has limited backward
integration and has out-sourced
production where economically feasible.

In 2003, the Company experienced a slight overall increase in its cost for raw
materials due to significantly higher oil and
feedstock prices. The Segments have been able to source more raw materials and
intermediates from newly established
sources in Asia allowing the Company to stabilize the cost of raw materials. At
least for the near future, the Company
expects a continuation of this trend and also the opportunity to source more
raw materials from new sources. The Company
also is adjusting its currency portfolio to mitigate exchange rate fluctuations
in 2003.

Although the Segments purchase certain raw materials from single suppliers,
management does not believe that the loss of
any supplier would have a material adverse effect on the Companys business or
financial condition.

Intellectual Property

Where appropriate, the Company protects its new products and processes by
obtaining patents and registering trademarks
in selected regional markets. The Company has over 19 000 granted patents and
pending applications world-wide and has
trademark protection for approximately 400 product names. The Company continues
to experience a constant increase in
intellectual property conflicts, either initiated by the Company or by third
parties. The Company relies on its know-how and
technical expertise in many of its manufacturing processes to develop and
maintain its market position. Management is of
the opinion that intellectual property rights as a sole measure do not create a
sustainable competitive advantage in the
specialty chemicals industry. The Companys ability to extract the maximum
value from its patent protected products and
processes is dependent upon the Companys ability to apply its technical
expertise in its manufacturing processes to meet
customer requirements. In general, the Company historically has not licensed or
sold its intangibles to third parties. In
addition, separate cash flow streams cannot, in general, be identified with
intangible assets separately from the cash flows
associated with the related productive assets. The value of internally
developed patent and process protection is, therefore,
generally inseparable from the Companys productive assets and processes.

20



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In connection with the Spin-off, Novartis assigned to the Company certain
patents relating to the specialty chemicals
business. Pursuant to the Master Spin-off Agreement, Novartis also granted the
Company a non-exclusive royalty-free
worldwide license with respect to (i) certain patents that were originally
registered by Ciba-Geigys central research
department and (ii) those patents remaining with Novartis which the Company was
using, or had a specific plan to use, at
the effective date of the Spin-off. The Master Spin-off Agreement also provides
that Novartis and the Company may enter
into other arrangements with respect to certain patents pursuant to which
royalties would be payable. Although relative
exclusivity can be maintained for certain products following patent expiration
through know-how and technical expertise,
the expiration of a basic patent can result in intense competition, including
from lower cost producers, and erosion of profit
margins. Prior to and following expiration of the basic patent for a key
product, the Company will generally focus efforts on
developing patentable enhancements to the product or new patentable
formulations for which the product is used.
Management is of the opinion that the loss of patent protection for any
particular product or process would not have a
material adverse effect on the Companys results of operation or financial
condition.

The Company and Novartis also entered an agreement regarding the use of the
name and trademark Ciba. Pursuant to
such agreement, the Company and its subsidiaries and affiliates may use Ciba
Specialty Chemicals as part of their
registered corporate names, while Novartis may continue to use the name Ciba
in connection with the Ciba Vision Group
and in some other special cases. The Company and its subsidiaries and
affiliates are entitled to use the Ciba trademarks
and trade names outside of the core business of Novartis (defined as pharma
specialties, pharma over-the-counter and
generics, eyecare, crop protection, seeds, animal health and nutrition).
Novartis is entitled to continue to use trademarks and
trade names containing the term Ciba as they are currently used and to use
new and existing trademarks and trade names
containing the term Ciba to market the Ciba line of pharmaceutical products
and for products and services of the Ciba
Vision Group.

Industry Regulatory Matters

Production and marketing of chemical substances are regulated by national and
international laws. Although almost every
country has its own legal procedure for registration and import of chemical
substances, the most significant to the
Companys business are the laws and regulations in the European Union, the
United States and Japan, including the
European inventory of existing commercial chemical substances, the European
list of notified chemical substances, the
United States Toxic Substances Control Act and the chemicals list of the
Japanese Ministry of Trade and Industry. Chemicals
which are on one or more of the above lists can usually be registered and
imported without additional testing in any other
country, although additional administrative requirements may exist.

The Company also actively seeks approvals from the United States Food and Drug
Administration (FDA) for certain
specialty chemicals that it produces, principally where the Companys
management is of the opinion that such specialty
chemicals will or may be used in the manufacture of products that will come in
contact with food. The Company has also
worked with certain of its customers in a joint effort to obtain FDA approval
of the antimicrobial triclosan, which was
obtained. On November 21, 2002, the Company announced that a Food Contact
Notification became effective for its Ciba®
IRGAGUARD B 5000 silver-based inorganic antimicrobial, allowing its use as an
antimicrobial agent in all types of food
contact polymers. IRGAGUARD B 5000 is now listed on the U.S. FDA website. In
addition, this product is registered for use
under the U.S. EPAs Federal Insecticide, Fungicide and Rodenticide Act (FIFRA)
as a material preservative and antimicrobial
agent for use in the manufacture of polymer, plastic and textile products to
protect the finished article itself.

Agreements with Novartis in Connection with the Spin-off

Novartis and the Company entered into a Master Spin-off Agreement dated
December 20, 1996, which governed the
separation of the specialty chemicals business from Novartis. In addition, this
agreement, together with certain ancillary
agreements, established various interim and ongoing relationships between
Novartis and the Company.

Pursuant to the Master Spin-off Agreement, Novartis and the Company provide
each other with chemical products and
intermediates and certain services, such as provision of utilities, waste
handling and security at shared production sites. Such
products and intermediates are provided at market prices or, in the absence of
market prices, at full cost, and such services
are provided at the lower of market price or full cost. In addition, pursuant
to the Master Spin-off Agreement, the Company
and Novartis agreed on the allocation of taxes relating to the transaction and
past operations of the businesses. The
Company is responsible for taxes relating to the past operations of entities
engaged exclusively in the specialty chemicals
business and Novartis is responsible for transaction related taxes and taxes
relating to the past operations of entities other
than those engaged exclusively in the specialty chemicals business.

Pursuant to the Cooperation Agreement Regarding the Use of Ciba as Corporate
Name and as a Mark, the Company is
permitted to use Ciba Specialty Chemicals as part of its registered corporate
name, while Novartis may continue to use the
name Ciba in the Ciba Vision Group and in certain other cases. See
Intellectual Property.

Novartis and the Company have also entered into certain arrangements with
respect to the responsibility for environmental
liabilities associated with operation of the specialty chemicals business prior
to the Spin-off. See Environmental Matters.

Insurance

Management is of the opinion that the Companys insurance arrangements
regarding property, liability and marine are
adequate and sufficient.

21



---



##### 



Organizational Structure

Ciba Specialty Chemicals Holding Inc. is the ultimate holding company of the
Ciba Specialty Chemicals group. Its Shares are
listed on the Swiss Exchange, traded on virt-x, and its ADSs trade on the New
York Stock Exchange (see Item 9  The Offer
and Listing).

The following table identifies the Companys significant subsidiaries, their
jurisdiction of incorporation or residence, the
Companys ownership interest in each subsidiary and the principal function of
the subsidiary.

Group Holdings in %
    
    Principal Function of CompanySelling
    
    Manufacturing
    
    Research
    
    Service, FinanceAMERICASArgentinaCiba Especialidades Quimicas S.A., Buenos Aires
    
    
    100
    
    
    BermudaChemical Insurance Company Ltd., Hamilton
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals Eurofinance Ltd., Hamilton
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals International Finance Ltd., Hamilton
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals Investment Ltd., Hamilton
    
    
    100
    
    
    
    
    
    
    
    
    BrazilCiba Especialidades Quimicas Ltda., Sao Paulo
    
    
    100
    
    
    
    
    CanadaCiba Specialty Chemicals Canada Inc., Mississauga
    
    
    100
    
    
    Ciba Specialty Chemicals Water Treatments Corp., Mississauga
    
    
    100
    
    
    ChileCiba Especialidades Quimicas Ltd., Santiago de Chile
    
    
    100
    
    
    
    
    Ciba Especialidades Quimicas Conosur S.A., Santiago de Chile
    
    
    100
    
    
    ColombiaCiba Especialidades Quimicas S.A., Bogota
    
    
    100
    
    
    
    
    GuatemalaCiba Especialidades Quimicas, S.A. (ACC), Guatemala
    
    
    100
    
    
    
    
    MexicoCiba Especialidades Quimicas Mexico S.A. de C.V., Mexico
    
    
    100
    
    
    
    
    PanamaCiba Especialidades Quimicas Colon S.A., Colon
    
    
    100
    
    
    USACiba Specialty Chemicals Corporation, Tarrytown, NY
    
    
    100
    
    
    
    
    
    
    ASIA-PACIFICAustraliaCiba Specialty Chemicals Pty. Ltd., Thomastown
    
    
    100
    
    
    
    
    BahrainCiba
Specialty Chemicals Middle East WLL
    
    
    100
    
    
    ChinaCiba Specialty Chemicals (China) Ltd., Beijing
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals (Hong Kong) Ltd., Hong Kong
    
    
    100
    
    
    Ciba Specialty Chemicals (Shanghai) Ltd., Shanghai
    
    
    100
    
    
    Guangdong Ciba Specialty Chemicals Co. Ltd., Panyu, Guangdong
    
    
    95
    
    
    
    
    Guangzhou Ciba Specialty Chemicals Co. Ltd., Guangzhou
    
    
    80
    
    
    
    
    Qingdao Ciba Dyes Co. Ltd., Qingdao
    
    
    94
    
    
    
    
    Qingdao Ciba Pigments Co. Ltd., Qingdao
    
    
    91
    
    
    
    
    Shanghai Ciba Gao-Qiao Chemical Co. Ltd., Shanghai
    
    
    75
    
    
    
    
    Shenzhen Ciba Specialty Chemicals Co. Ltd., Shenzhen
    
    
    85
    
    
    
    
    Xiangtan Chemicals & Pigments Co. Ltd., Xiangtan
    
    
    49
    
    
    
    
    IndiaCiba India Private Ltd., Mumbai
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals (India) Ltd., Mumbai(1)
    
    
    69
    
    
    
    
    Diamond Dye-Chem Limited, Mumbai(2)
    
    
    69
    
    
    
    
    


22



---



##### 



Group Holdings in %
    
    Principal Function of CompanySelling
    
    Manufacturing
    
    Research
    
    Service, FinanceASIA-PACIFIC (continued)IndonesiaP.T. Ciba Specialty Chemicals Indonesia, Jakarta
    
    
    80
    
    
    
    
    JapanChemipro Fine Chemical Kaisha Ltd., Kobe
    
    
    51
    
    
    
    
    Ciba Specialty Chemicals K.K., Osaka
    
    
    100
    
    
    
    
    
    
    Musashino-Geigy Co. Ltd., Tokyo
    
    
    60
    
    
    
    
    Nippon Alkyl Phenol Co. Ltd., Tokyo
    
    
    46
    
    
    
    
    Republic of Korea (South Korea)Ciba Specialty Chemicals Korea Ltd., Seoul
    
    
    100
    
    
    Daihan Swiss Chemical Corp., Seoul
    
    
    50
    
    
    
    
    
    
    Doobon Fine Chemical Co., Ltd., Chongwon-kun
    
    
    63
    
    
    
    
    MalaysiaCiba Specialty Chemicals (Malaysia) SDN. BHD., Klang
    
    
    70
    
    
    
    
    New ZealandCiba Specialty Chemicals N.Z. Ltd., Auckland
    
    
    100
    
    
    
    
    SingaporeCiba Specialty Chemicals (Singapore) Pte Ltd., Singapore
    
    
    100
    
    
    South AfricaCiba Specialty Chemicals (Pty) Ltd., Spartan
    
    
    100
    
    
    TaiwanCiba Specialty Chemicals (Taiwan) Ltd., Kaohsiung
    
    
    100
    
    
    
    
    ThailandCiba Specialty Chemicals (Thailand) Ltd., Bangkok
    
    
    100
    
    
    
    
    Ciba Specialty Chemicals Industries Ltd., Bangkok
    
    
    95
    
    
    
    
    EUROPEAustriaCiba Spezialitaetenchemie GmbH, Hard
    
    
    100
    
    
    BelgiumCiba Specialty Chemicals N.V., Groot-Bijgaarden
    
    
    100
    
    
    FinlandCiba Specialty Chemicals Finland OY, Helsinki
    
    
    100
    
    
    FranceCiba Specialites Chimiques SA, Saint Fons
    
    
    100
    
    
    
    
    Ciba Specialty Chemicals Masterbatch SA, Saint Jeoire en Faucigny
    
    
    100
    
    
    
    
    
    
    GermanyCiba Spezialitaetenchemie Grenzach GmbH, Grenzach-Wyhlen
    
    
    100
    
    
    
    
    
    
    Ciba Spezialitaetenchemie Holding Deutschland GmbH, Lampertheim
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Spezialitaetenchemie Lampertheim GmbH, Lampertheim
    
    
    100
    
    
    
    
    
    
    Ciba Spezialitaetenchemie Pfersee GmbH, Langweid/Lech
    
    
    100
    
    
    
    
    
    
    GreeceCiba Specialty Chemicals Hellas ABEE, Thessaloniki
    
    
    100
    
    
    HungaryCiba Specialty Chemicals Magyarorszag, Kft., Budapest
    
    
    100
    
    
    ItalyCiba Specialty Chemicals S.p.A., Sasso Marconi (Bologna)
    
    
    100
    
    
    
    
    
    
    L.A.C. S.p.A., Vanzaghello, Milano
    
    
    100
    
    
    
    
    Magenta Master Fibres, S.r.l., Milano
    
    
    60
    
    
    
    
    
    
    LuxembourgCiba Specialty Chemicals Finance Luxembourg S.A.
    
    
    100
    
    
    
    
    
    
    
    
    


23



---



##### 



Group Holdings in %
    
    Principal Function of CompanySelling
    
    Manufacturing
    
    Research
    
    Service, FinanceEUROPE (continued)NetherlandsCiba Specialty Chemicals International Nederland B.V., Maastricht
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals (Maastricht) B.V., Maastricht
    
    
    100
    
    
    
    
    
    
    EFKA Additives B.V., Heerenveen
    
    
    100
    
    
    
    
    
    
    Ciba Specialty Chemicals Melapur B.V., Heerlen
    
    
    100
    
    
    
    
    
    
    PortugalCiba Especialidades Quimicas Lda., Porto
    
    
    100
    
    
    SpainCiba Especialidades Quimicas S.L., Barcelona
    
    
    100
    
    
    SwedenCiba Specialty Chemicals Sweden AB, Göteborg
    
    
    100
    
    
    SwitzerlandCiba Specialites Chimiques Monthey SA, Monthey
    
    
    100
    
    
    
    
    Ciba Spezialitaetenchemie AG, Basel
    
    
    100
    
    
    
    
    
    
    Ciba Spezialitaetenchemie Finanz AG, Basel
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Spezialitaetenchemie International AG, Basel
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Spezialitaetenchemie Kaisten AG, Kaisten
    
    
    100
    
    
    
    
    Ciba Spezialitaetenchemie Schweizerhalle AG, Muttenz
    
    
    100
    
    
    
    
    Ciba Spezialitaetenchemie Services AG, Basel
    
    
    100
    
    
    
    
    
    
    
    
    CIMO Compagnie Industrielle de Monthey SA, Monthey
    
    
    50
    
    
    
    
    
    
    
    
    TurkeyCiba Oezel Kimyevi Uerueaenler Sanayi ve Ticaret Ltd., Istanbul
    
    
    100
    
    
    United KingdomCiba Specialty Chemicals PLC, Macclesfield
    
    
    100
    
    
    
    
    
    
    Ciba Specialty Chemicals Investment PLC, Macclesfield
    
    
    100
    
    
    
    
    
    
    
    
    Ciba Specialty Chemicals Water Treatments Ltd., Bradford
    
    
    100
    
    
    
    
    
    
    




---

|(1) |  | The shares of Ciba Specialty Chemicals (India) Ltd., Mumbai, (CSCIL)
are listed on the Mumbai Stock Exchange (www.bseindia.com)
under the scrip name CIBA SPE CH; the scrip code is
532184. The total
market value of the 13 280 819 outstanding shares of CSCIL as of
December 31, 2003 was approximately CHF 60 million (INR 2198 million).
Ciba Specialty Chemicals Holding Inc. (CSCH) made a
voluntary offer to the public shareholders of the CSCIL to acquire up to 6
507 594 CSCIL shares, representing the balance of 49% share
capital of CSCIL at a price of INR 110 per share. The offer commenced on
June 05, 2002 and closed on July 04, 2002. As a result of this
offer and the subsequent acquisition of shares of CSCIL, CSCH along with
its group company hold 9 200 887 Equity Shares as at
December 31, 2003, representing 69.28% of the paid-up share capital of
CSCIL.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Diamond Dye-Chem Limited is a wholly owned subsidiary of Ciba Specialty
Chemicals (India) Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

To enhance the readability of this report and because of being less relevant,
the share or quota capitals of Ciba group
companies are not indicated herein  with the exception of Ciba Specialty
Chemicals (India) Ltd., two publicly listed companies.

Property, Plant and Equipment; Manufacturing

The Company owns all of its principal manufacturing facilities and owns
substantially all the land on which such facilities are
located. In certain cases, infrastructure is either shared with Novartis or
with its recent spin-off Syngenta or outsourced to
third parties as in some Swiss facilities. The Company also has other
properties, including office buildings, research
laboratories and warehouses. The principal office buildings are the
headquarters in Basel, Switzerland. The principal research
and development facilities are located in Basel, Switzerland and Tarrytown, New
York, USA.

24



---



##### 



The following table sets forth the Companys principal manufacturing facilities
by geographic region together with the
Segment or Segments that maintain principal responsibility for the management
and production at the site and the major
product lines that each facility is designed to manufacture.

Location
    
    Size in hectares(1)
    
    Major Product LinesEUROPEBasel, Switzerland
    
    
    14
    
    
    Textile Effects (reactive dyes for cellulose and wool, disperse, vat and acid dyes)Bradford, United Kingdom
    
    
    28
    
    
    Water & Paper Treatment (water treatment and paper chemicals, inks, soil
additives, intermediate monomers, rheology modifiers and textile chemicals)Clayton, United Kingdom
    
    
    22
    
    
    Textile Effects (direct, disperse and acid dyes)Water & Paper Treatment (specialty chemicals for paper coating)Grenzach, Germany
    
    
    52
    
    
    Home & Personal Care (whiteners, specialty colors, antimicrobials, new
businesses, cationic and solvent soluble dyes)Coating Effects (high performance pigments)Grimsby, United Kingdom
    
    
    19
    
    
    Water & Paper Treatment (water treatment chemicals)Heerenveen, Netherlands
    
    
    2
    
    
    Coating Effects (defoamers, slip and leveling, high molecular weight
dispersants, wetting and dispersing agents)Huningue, France
    
    
    12
    
    
    Coating Effects (high performance pigment preparations, imaging and coating
additives)Plastic Additives (polymer additives and process and lubricant additives)Kaisten, Switzerland
    
    
    59
    
    
    Plastic Additives (polymer additives)Lampertheim, Germany
    
    
    80
    
    
    Plastic Additives (polymer additives, imaging and coating additives and
process and lubricant additives)Langweid/Lech, Germany
    
    
    29
    
    
    Textile Effects (fabric finishing and dyeing and printing auxiliaries)Maastricht, Netherlands
    
    
    11
    
    
    Coating Effects (dispersions and inorganic pigments)Monthey, Switzerland(2)
    
    
    11
    
    
    Home & Personal Care (whiteners)Coating Effects (high performance pigments)Mortara & Trivolzio, Italy
    
    
    17
    
    
    Coating Effects (imaging and coating additives)Paisley, United Kingdom
    
    
    17
    
    
    Coating Effects (classical pigments)Pontecchio Marconi, Italy
    
    
    12
    
    
    Plastic Additives (polymer additives and production of insecticides for a third
party)Saint Fons, France
    
    
    9
    
    
    Textile Effects (metal-complex and acid dyes)Saint Jeoire, France
    
    
    5
    
    
    Coating Effects (masterbatches)Schweizerhalle, Switzerland
    
    
    1
    
    
    Coating Effects (polymer additives, Imaging and coating additives)Textile Effects (standardization)AMERICASAtotonilquillo, Mexico
    
    
    43
    
    
    Textile Effects (disperse, basic and acid dyes, textile chemicals)Home & Personal Care (whiteners, photobleach)Camaçari, Brazil
    
    
    14
    
    
    Plastic Additives (polymer additives)Charlotte, North Carolina USA
    
    
    6
    
    
    Textile Effects (dyeing and printing auxiliaries)Estrada do Colegio, Brazil
    
    
    4
    
    
    Home & Personal Care (whiteners, fabric finishing)McIntosh, Alabama, USA
    
    
    637
    
    
    Plastic Additives (polymer additives and imaging and coating additives)Home & Personal Care (whiteners)Newport, Delaware USA
    
    
    15
    
    
    Coating Effects (high performance pigments)Puebla, Mexico
    
    
    22
    
    
    Plastic Additives (polymer additives and process and lubricant additives)St. Gabriel, Louisiana USA
    
    
    81
    
    
    Textile Effects (reactive and acid dyes)Suffolk, Virginia USA
    
    
    89
    
    
    Water & Paper Treatment (water treatment chemicals)West Memphis, Arkansas USA
    
    
    60
    
    
    Water & Paper Treatment (water treatment chemicals)


25



---



##### 



Location
    
    Size in hectares(1)
    
    Major Product LinesASIA-PACIFICAi-oi, Japan(3)
    
    
    
    
    
    Plastic Additives (polymer additives and imaging and coating additives)Ankleshwar, India
    
    
    2
    
    
    Home & Personal Care (whiteners)Candra Sari, Indonesia
    
    
    5
    
    
    Textile Effects (textile chemicals)Chiba, Japan(4)
    
    
    
    
    
    Plastic Additives (polymer additives)Goa, India
    
    
    14
    
    
    Plastic Additives (polymer additives)Isohara, Japan(5)
    
    
    8
    
    
    Plastic Additives (polymer additives)Kaohsiung, Taiwan
    
    
    4
    
    
    Plastic Additives (polymer additives)Mahachai, Thailand
    
    
    4
    
    
    Textile Effects (reactive dyes for cellulose)Panyu, China(6)
    
    
    5
    
    
    Textile Effects (textile chemicals)Perth, Australia
    
    
    2
    
    
    Water & Paper Treatment (water treatment chemicals)Qingdao, China(7)
    
    
    1
    
    
    Coating Effects (classical pigments)Qingdao, China(8)
    
    
    1
    
    
    Textile Effects (wool and disperse dyes)Shanghai, China(9)
    
    
    6
    
    
    Plastic Additives (polymer additives)Ulsan, South Korea(10)
    
    
    7
    
    
    Coating Effects (classical pigments)





|(1)  |  | One hectare is equal to 2.471 United States acres.                                                                                                                                                                      
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Most of the infrastructure facilities are shared with Syngenta and
Huntsman through a joint venture in which the Company holds a 50
percent interest.                                                                   
|    
|(3)  |  | Joint venture with Chemipro Kasai Kaisha, Ltd., in which the Company holds
a 51 percent interest.                                                                                                                       
|    
|(4)  |  | Joint venture with Mitsui Petrochemical and Musashino-Geigy, in which the
Company holds a 40 percent interest.                                                                                                          
|    
|(5)  |  | Effective January 2001, the Company acquired a controlling interest in
Musashino-Geigy Co. Ltd., increasing its holdings from 50 percent
to 60 percent in this joint
venture with Musashino Chemical Laboratory Co. Ltd.
|    
|(6)  |  | Venture with Panyu City Shilou Town Economical Development Company
Limited, in which the Company holds a 95 percent interest.                                                                                           
|    
|(7)  |  | Venture with Qingdao Double Peach, in which the Company holds a 91.4
percent interest.                                                                                                                                  
|    
|(8)  |  | Venture with Qingdao Double Peach, in which the Company holds a 94 percent
interest.                                                                                                                                    
|    
|(9)  |  | Joint venture with Shanghai Gao-Qiao Petrochemical Company, in which the
Company holds a 75 percent interest.                                                                                                           
|    
|(10) |  | Joint venture with Daihan Color Ind., Co., Ltd., in which the Company holds
a 50 percent interest.                                                                                                                      

The Companys management is of the opinion that its principal manufacturing
facilities and other significant properties are
in good condition and that they are adequate to meet the Companys needs.
Except as disclosed in this Annual Report, the
Company does not currently plan to construct, expand or improve facilities
significantly.

Environmental Matters

Operating in the chemical industry, the Company is subject to stringent
environmental, health and safety laws and
regulations. It is the Companys policy to continuously develop and improve the
environmental performance of key
manufacturing processes through an active program to address environmental
matters. In addition to process
improvements, the Company uses advanced waste treatment and disposal facilities
at all major manufacturing sites that
allow the sites to comply with recent laws and regulations applicable to waste
streams. In managements opinion, the
Company substantially complies with all such laws.

For outstanding environmental matters that are currently known and estimable by
the Company, provisions of
approximately CHF 557 million at December 31, 2003 and CHF 614 million at
December 31, 2002 have been recorded in
the accompanying Consolidated Balance Sheets. The decrease in the provision of
CHF 57 million in 2003 compared to 2002
relates to usage of the provisions of CHF 22 million and mainly to foreign
currency exchange rate effects of CHF 35 million.
The Companys environmental protection and improvement cash expenditures were
approximately CHF 31 million in 2003
(CHF 96 million in 2002), including investments in construction, operations and
maintenance and usage of the provision.

In the agreement on the Companys spin-off from Novartis, Novartis agreed to
reimburse the Company 50 percent of United
States environmental liabilities arising from past operations of the Company in
excess of the agreed reserves. Outside the
United States, environmental liabilities are allocated between Novartis and the
Company based on the ownership of the site
or, if environmental liabilities do not relate to production sites or these are
not owned by either entity, according to the
polluter pays principle. If causation between the parties cannot be determined,
costs are shared equally. The agreement with
Novartis is not subject to any time or amount limits but could terminate for
certain liabilities in the United States (i) upon a
sale of substantially all of the Companys assets, (ii) upon a change in
control of the Company, or (iii) for individual facilities,
upon the sale of the facility (unless the Company retains responsibility for
any clean-up at such site).

The contractual terms of the sale of the Performance Polymers business
stipulate that, in general, the Company will retain
responsibility for environmental claims relating to the operations of the
Performance Polymers business prior to May 31, 2000,
whereby damages for remediation in connection with sites outside the United
States shall cover only 80 percent of the
respective costs. The responsibility with respect to any non-United States
sites covers environmental liabilities incurred within
fifteen years from May 31, 2000 and is limited to CHF 75 million. With respect
to any such environmental liabilities in the
United States, the Companys obligation to indemnify is unlimited in time or
amount. Novartis environmental indemnification
obligations to the Company described above are not affected by the sale of the
Performance Polymers business.

26



---



##### 



The Company continues to participate in environmental assessments and clean-ups
at a number of locations, including
operating facilities, previously owned facilities and United States Superfund
sites. The Company accrues reserves for all
known environmental liabilities for remediation costs when a clean-up program
becomes probable and costs can be
reasonably estimated. Clean-up of the most significant sites has been or is
nearly completed, except as described in the
following paragraphs.

At its Toms River, New Jersey remediation site, the Companys subsidiary in the
United States is engaged in a large bio-remediation project which will take eight to ten years to complete. Based on
managements current estimates, the
Companys environmental provisions are adequate to cover the expected costs to
complete this remediation plan.

In October 2003, the Companys subsidiary in the United States received a
letter from the New Jersey Department of
Environmental Protection (NJDEP) seeking to begin discussions on natural
resource damage liability issues (NRDs) at the
Toms River Site for alleged injury to groundwater. The subsidiary is engaged in
on-going settlement discussions with the
State to see if it can reach a mutually beneficial settlement to avoid
litigation. If a mutual agreement cannot be reached and
NJDEP decides to initiate litigation, the Company believes that it has
significant defenses to these potential NRD claims.

The planning for the total remediation of the waste disposal site in Bonfol,
Switzerland, which was closed in 1976, is
ongoing. The responsibility for the remediation lies with eight chemical
enterprises including among others the Company.
The responsible companies cooperate with the governmental authorities to define
the necessary measures in view of a final
remediation of the site. The planning and remediation effort could require up
to fifteen years to complete. In managements
opinion, based on the current remediation plans, the Companys environmental
provisions are adequate to cover the
Companys share of the expected costs to complete the remediation at this site.

In the Basel region, several landfills (Switzerland, France and Germany)
contain chemical waste besides other industrial and
household wastes. Presently eleven landfills are the subject of investigations
carried out with the authorities by the
Interessengemeinschaft Deponiesicherheit Regio Basel, an association of the
involved pharmaceutical and chemical
enterprises (including the Company). As of December 31, 2003, no remedial
actions have been defined or required in a
legally binding form.

In managements opinion, the environmental reserves accrued are sufficient to
meet all currently known and estimable
environmental claims and contingencies. Because of the nature of the Companys
operations, however, there can be no
assurance that significant costs and liabilities from ongoing or past
operations will not be incurred in the future. In addition,
environmental clean-up periods are protracted in length and environmental costs
in future periods are subject to changes in
environmental remediation regulations.

See Item 3. Key InformationRisk FactorsEnvironmental laws and regulations
may expose the Company to liability and
result in increased costs.

27



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##### 



Item 5.   Operating and Financial Review and Prospects.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

The discussion in this Managements Discussion and Analysis of Financial
Condition and Results of Operations (Managements Discussion and Analysis) is based on, and should be read in
conjunction with Item 3. Key Information and the Consolidated Financial
Statements and the Notes thereto, which are prepared in accordance with United
States Generally Accepted Accounting Principles (U.S. GAAP) and are included
elsewhere in this Annual Report. For a definition of certain financial terms
used herein, see Glossary of Financial Terms at the end of this Managements
Discussion and Analysis. Except for percentages, share, per share data or
exchange rate data and except as otherwise stated, all numbers in tables are in
millions of Swiss francs (CHF).

Year
in review  2003 compared to 2002

Results of operations
    
    2003
    
    2002Net sales
    
    
    6 646
    
    
    
    7 085Gross profit
    
    
    2 067
    
    
    
    2 356Operating income
    
    
    571
    
    
    
    788Income from continuing operations
    
    
    360
    
    
    
    406Cumulative effect of change in accounting principles
    
    
    (16
    )
    
    
    0Net income
    
    
    344
    
    
    
    406Earnings per share, basic and diluted:Continuing operations
    
    
    5.26
    
    
    
    5.92Cumulative effect of change in accounting principles
    
    
    (0.23
    )
    
    
    0.00Net income per share
    
    
    5.03
    
    
    
    5.92Other dataOperating income
    
    
    571
    
    
    
    788Depreciation and amortization
    
    
    366
    
    
    
    385EBITDA(1)
    
    
    937
    
    
    
    1 173Net
cash provided by operating activities
    
    
    1 033
    
    
    
    1 038Free cash flow(1)
    
    
    728
    
    
    
    683Net debt(1)
    
    
    1 049
    
    
    
    1 463Shareholders equity at year-end
    
    
    4 245
    
    
    
    4 354Dividend per share(2)
    
    
    0.00
    
    
    
    0.00Capital reduction per share(2)
    
    
    3.00
    
    
    
    3.00Key performance ratiosNet sales development
    
    
    (6
    )%
    
    
    (4
    )%Net sales development in local currencies
    
    
    0
    %
    
    
    3
    %Expressed as a percentage of sales:Gross profit
    
    
    31.1
    %
    
    
    33.3
    %Operating income
    
    
    8.6
    %
    
    
    11.1
    %Income from continuing operations
    
    
    5.4
    %
    
    
    5.7
    %Net income
    
    
    5.2
    %
    
    
    5.7
    %EBITDA
    
    
    14.1
    %
    
    
    16.6
    %




---

|(1) |  | EBITDA, free cash flow and net debt are non-U.S. GAAP financial measures.
See Use of Certain Supplementary Financial Indicators in this Managements
Discussion and Analysis for further discussion of the use of these measures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | For 2003, the Board of Directors proposes to carry forward the entire
retained earnings of Ciba Specialty Chemicals Holding Inc. and not to pay a
dividend. The Board of Directors, however, proposes a cash payment to the
shareholders resulting from a capital reduction of CHF 3 per share, which is reflected in the table above. The per share amounts
presented above for 2002 reflect that no dividend was paid in 2003, based on
2002 results, as well as the capital reduction approved by the Companys
shareholders in 2003, based on 2002 results. For further information see the
Operational Review section of this Managements Discussion and Analysis and
Item 6. Directors, Senior Management and Employees  Dividends and Dividend
Policy.

28



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##### 



Executive summary

The global economic environment continued to present the Company with
significant challenges during 2003. Strongly competitive conditions in mature
markets such as textile dyes and inks were contrasted by excellent growth in
electronic materials and personal care specialties, where the Company was able
to benefit from its strong portfolio of effects products. A similar contrast
was evident on a geographical basis. The difficult economic environment heavily
impacted traditional sales territories. In particular, the delayed effect of
the second half recovery in the U.S. did not provide the Company with a
respective upturn in 2003. The European markets performed slightly better and
although sluggish in certain areas were generally stable. Asia, on the other
hand, again confirmed its
potential as the platform for growth, driven especially by another excellent
year in China.

Certain terminology used throughout this Managements Discussion and Analysis
is described in the Glossary of Financial Terms, which can be found
at the end of Item 5. Operating and Financial Review and
Prospects.

Operational review  Sales stable in local currencies despite adverse
environment, profitability declines

Net sales at CHF 6 646 million were stable in local currencies. Sales in Swiss
francs were again adversely impacted by unfavorable currency developments.
Consequently, sales decreased by 6 percent in Swiss francs. Stable sales in
local currencies were achieved in spite of a fiercely competitive sales
environment, with Asian competitors benefiting from the weak U.S. dollar. The
Company was able to defend volumes through effective marketing strategies and
continued focus on higher margin specialty applications, and at the same time
exploit new and emerging market areas with stronger demand levels.

In response to difficult competitive conditions, the Company continued to
prioritize cash flow generation by further reducing receivable levels, and in
the fourth quarter, selectively scaling back certain production operations.
This was highly effective in reducing inventory levels with significant
positive cash flow being generated as a result. However, this had an adverse
impact on profit levels due to higher unabsorbed capacity costs arising from
the lower volumes produced during this period.

Profitability was heavily impacted by adverse currency developments during the
year. With the exception of the euro, the Swiss franc appreciated against most
major trading currencies, notably the U.S. dollar, and to a lesser extent the
British pound and the Japanese yen. Further, price concessions of 3 percent
were necessary to maintain competitive position. Raw material costs were
relatively stable in 2003.

The Company continued to focus on efficiency and productivity improvements,
ensuring that operating expenses were stable in local currencies supported by
further headcount reductions in low-growth regions. The manufacturing
infrastructure was successfully realigned in key areas ensuring that the
Company remains well positioned to balance future growth potential with
production capabilities. In connection with its Managing for Growth
initiative in 2003, the Company further expanded its presence in China, where
an additional 80 positions have been filled in order to support growing
activities in the region.

Gross profit in absolute terms declined from CHF 2 356 million in 2002 to CHF 2
067 million in 2003.

Operating income decreased by CHF 217 million to CHF 571 million compared to
CHF 788 million in 2002. Operating income margin was also lower in 2003 at
8.6 percent compared to 11.1 percent in 2002.

Income from continuing operations was CHF 360 million or CHF 5.26 per share in
2003, compared to CHF 406 million or CHF 5.92 per share in the prior year. Net
income was CHF 344 million or CHF 5.03 per share in 2003 compared to CHF 406
million or CHF 5.92 per share in the prior year.

The Companys EBITDA and EBITDA margin, respectively, were CHF 937 million and
14.1 percent in 2003 compared to CHF 1 173 million and 16.6 percent in 2002.

Cash
flow review  Strong operating cash flow enables further strengthening of
balance sheet

The Company continued its trend of generating net cash from operating
activities in excess of CHF 1 billion and increased free cash flow by 7 percent
over prior year to CHF 728 million by offsetting the impact of lower operating
performance described above with a successful program in the fourth quarter to
substantially reduce its net current operating assets. Every segment succeeded
in reducing its working capital requirements. Overall inventories and
receivables were reduced significantly resulting in the ratio of net current
operating assets to sales decreasing significantly to 24.7 percent. The ratio
of inventories to sales dropped from 20.4 percent in 2002 to 18.5 percent in
2003 and the ratio of receivables to sales dropped from 14.3 percent in 2002 to
14.1 percent in 2003.

Net cash flows used in financing activities totaled CHF 742 million in 2003 as
the result of the Company using its cash flows from operations to further
strengthen its balance sheet by reducing debt, to pay a high CHF 3 per share
distribution to shareholders and to purchase treasury shares under the share
buy-back program initiated in 2003. Net debt as of year-end 2003 was lowered by
CHF 414 million, or 28 percent, from year-end 2002. During 2003, the Company
repaid CHF 1 084 million of long-term debt at its scheduled maturity, which was
partially offset by CHF 715 million proceeds from the issuance of EUR 500
million fixed rate unsecured notes maturing 2018.

Throughout 2003, the Company maintained strong liquidity and at year-end 2003
had a sizeable cash position of CHF 2.4 billion, maintaining its flexibility
for future acquisitions.

29



---



##### 



Due to the Companys strong financial position, the Board of Directors will
propose at the Annual General Meeting of shareholders on February 26, 2004, a
CHF 3 per share cash payout through a further reduction of the nominal value of
Ciba Specialty Chemicals shares, matching the capital reduction that occurred
in 2003, which amounted to CHF 206 million.

In connection with a share buy-back program initiated in 2003, the Company
purchased 1.3 million treasury shares for CHF 117 million. The Board of
Directors will propose at the Annual General Meeting of shareholders on
February 26, 2004 that these shares be
cancelled; this proposal is subject to shareholder approval.

Significant other events

During 2003, the Company settled a tax-related dispute with Novartis that
resulted in an additional CHF 39 million of net income from the release of
previously established provisions related to the dispute. In addition, the
Company capitalized on the recovery in 2003 of the market value of its
investment in Hexcel Corporation by selling its remaining Hexcel Corporation
shares, which resulted in a CHF 16 million pre-tax gain on sale. The positive
income impact of the above two items were partially offset by the recording of
an after-tax charge of CHF 16 million for the cumulative effect of the change
in accounting that resulted from the adoption in 2003 of a new accounting
standard. Each of the above three items are more fully described elsewhere in
this Managements Discussion and Analysis or in the Companys Consolidated
Financial Statements and Notes thereto.

Critical accounting policies

The Consolidated Financial Statements of the Company are sensitive to
accounting methods, assumptions and estimates that form the basis of these
financial statements and accompanying notes. Critical accounting policies, the
judgments and other uncertainties affecting application of those policies and
the sensitivity of reported results to changes in conditions and assumptions
are factors to be considered in conjunction with reviewing the Companys
financial statements and the discussion in this Managements Discussion and
Analysis.

Note 1 to the Consolidated Financial Statements in this Annual Report describes
the significant accounting policies and methods used in the preparation of the
Companys Consolidated Financial Statements. Following are the Companys
critical accounting policies impacted by judgments, assumptions and estimates.

Impairment testing of property, plant and equipment, goodwill and other
intangible assets

As discussed in Note 1, Summary of Significant Accounting Policies, in the
Companys Consolidated Financial Statements, the Company periodically
evaluates property, plant and equipment, goodwill and other intangible assets
for potential impairment. If such assets are considered to be impaired, they
are written down to fair value as appropriate.

The impairment review process requires management to make significant estimates
and judgments regarding the future cash flows expected to result from the use
and, if applicable, the eventual disposition of the respective assets as well
as other factors to determine the fair value of the respective assets. The key
variables that management must estimate in determining these expected future
cash flows and fair values include sales volumes, sales prices, sales growth,
production and operating costs, capital expenditures, market conditions, and
other economic factors. Significant management judgment is involved in
estimating these variables, and such estimates are inherently uncertain;
however, the assumptions used are consistent with the Companys internal
planning. Management periodically evaluates and updates the estimates based on
the conditions that influence these variables.

The assumptions and conditions for determining impairments of property, plant
and equipment, goodwill and other intangible assets, reflect managements best
assumptions and estimates, but these items involve inherent uncertainties as
described above, many of which are not under managements control. As a result,
the accounting for such items could result in different estimates or amounts if
management used different assumptions or if different conditions occur in
future accounting periods.

Environmental compliance and expenditures

The measurement of environmental liabilities is based on an evaluation of
currently available facts with respect to each individual site and considers
factors such as existing technology, presently enacted laws and regulations and
prior experience in remediation of contaminated sites. Inherent uncertainties
exist in such evaluations primarily due to unknown conditions, changing
governmental regulations and legal standards regarding liability, the
protracted length of the clean-up periods and evolving technologies.
Environmental operations and maintenance as well as remediation costs are
accrued when environmental assessments and the need for remediation are
probable and the costs can be reasonably estimated. The recorded liabilities
are adjusted periodically as remediation efforts progress or as additional
technical or legal information becomes available.

The assumptions and conditions for determining the level of the environmental
liabilities reflect managements best assumptions and estimates, but these
items involve inherent uncertainties as described above, many of which are not
under managements control. As a result, the accounting for such items could
result in different amounts if management used different assumptions or if
different conditions occur in future accounting periods.

For further discussion related to environmental matters, see Note 21 to the
Consolidated Financial Statements and Item 4  Information on the
Company  Environmental Matters.

30



---



##### 



Pension and other postretirement benefits

Many of the amounts recognized in the Consolidated Financial Statements related
to pension and other postretirement benefits are determined from actuarial
valuations. Inherent in these valuations are assumptions including discount
rates, expected return on plan assets, rates of increase in future compensation
levels, mortality rates and health care cost trend rates. These assumptions are
updated
annually based on current economic conditions and, if required, also for any
changes to the terms and conditions of the pension and postretirement plans.
These assumptions can be affected by (i) for the discount rate, changes in
rates of return on high-quality fixed income investments currently available in
the markets and those expected to be available during the period to maturity of
the pension benefits; (ii) for the expected return on plan assets, changes in
the pension plans strategic asset allocations to various investment types or
to long-term return trend rates in the capital markets in which the pension
funds assets are invested; (iii) for future compensation levels, changes in
labor market conditions; and (iv) for health care cost trend rates, the rate of
medical cost inflation in the regions of the world where these benefits are
offered to the Companys employees.

The weighted average actuarial assumptions used to compute the Companys
pension and postretirement benefit obligations for 2003 and 2002, as well as
the U.S. GAAP requirements for accounting for the differences between actual
results that differ from the assumptions used in calculating the annual
retirement benefit liabilities and costs, are disclosed in Note 18 to the
Consolidated Financial Statements. While management believes that the
assumptions used are appropriate, differences in actual experience or changes
in assumptions may affect the Companys pension and other postretirement
obligations and expenses in future accounting periods.

Income taxes

Deferred tax assets and liabilities are determined using enacted tax rates for
temporary differences between the book and tax bases of assets and liabilities,
as well as the effects of net operating losses carried forward in certain tax
jurisdictions in which the Company operates that may be utilized to offset
future taxable income and similar tax credits carried forward that may be
utilized to reduce future taxes payable. The Company records valuation
allowances on deferred tax assets when appropriate to reflect the expected
future tax benefits to be realized. In determining the appropriate valuation
allowances, certain judgments are made by management relating to recoverability
of deferred tax assets, use of tax loss and tax credit carryforwards, levels of
expected future taxable income and available tax planning strategies.

The assumptions involved in making these judgments are updated periodically by
management based on current business conditions that affect the Company and
overall economic conditions. These management judgments are therefore subject
to change based on factors that include, but are not limited to (i) changes in
the profitability of the Companys subsidiaries, as well as for the Company as
a whole, (ii) the ability of the Company to successfully execute its tax
planning strategies and (iii) the accuracy of the Companys estimates of the
potential effect that changes in tax legislation, in the jurisdictions where
the Company operates, may have on the Companys future taxable profits. Failure
by the Company to achieve forecasted taxable income or to execute its tax
planning strategies may affect the ultimate realization of certain deferred tax
assets. Factors that may affect the Companys ability to achieve sufficient
forecasted taxable income or successfully execute its tax planning strategies
include, but are not limited to, increased competition, general economic
conditions, a decline in sales or earnings, loss of market share, delays in
product availability or changes in tax legislation.

In addition, the Company operates within multiple taxing jurisdictions and is
subject to audits in these jurisdictions. These audits can involve complex
issues that may require an extended period of time for resolution. In
managements opinion, adequate provisions have been made for any additional
taxes that may result from any tax audits of historical periods that are
currently ongoing or that may occur.

Financial review

Sales stable in local currencies, down in Swiss francs

Net sales in local currencies were similar to those of prior year. In Swiss
francs, sales decreased by 6 percent to CHF 6 646 million. Sales development
in 2003 compared to 2002 resulted from the following factors:

Consolidated sales development
    
    2003 compared to 2002Volume/product mix
    
    
    3
    %Price
    
    
    (3
    )%Currency
    
    
    (6
    )%Total in Swiss francs
    
    
    (6
    )%


In local currencies, sales levels at the start of the year recovered from the
low levels of late 2002, reflective of more upbeat customer expectations at
that time as to the level of economic recovery. However, as economic
development continued to be sluggish, this optimism receded and the Companys
sales levels likewise began to recede during the second quarter, ending the
year at similar levels to 2002 in local currencies. In Europe, sales levels
during the first half of the year were slightly higher than the prior year
period in local currencies, but deteriorated in the latter part of the year,
ending the year slightly below prior year levels in local currencies. The NAFTA
region showed signs of improvement during the first half of the year, with
recovery well underway in the U.S. by the end of the year. However, the
positive effect of the upturn was not

31



---



##### 



yet fully reflected throughout all industry sectors, including those served by
the Company. Asia continues to be the global growth engine, with excellent
performances in most of the region, notably China.

Contributing to the sales decline in Swiss francs was the strengthening of the
Swiss franc compared to most major trading currencies, particularly against the
U.S. dollar, and to a lesser extent the British pound and Japanese yen,
partially offset by the appreciation of the euro. This resulted in a reduction
in sales in Swiss francs of 6 percent compared to 2002. The Company continued
to experience a difficult competitive environment resulting in price erosion of
3 percent. The negative impact of lower prices, however, was offset by
volume/product mix gains of 3 percent.

Sales in Swiss francs increased in most of the major markets in Europe, with
the exception of the U. K. and Italy. The performance in Swiss francs was
partially attributable to the stronger euro. In local currencies, sales
declined in varying degrees across most major markets. In the Americas, sales
in the U.S. decreased both in local currency and in Swiss francs. Sales in
South America grew in local currencies but declined in Swiss francs. In Asia
Pacific, sales increased in local currencies fuelled by the strong result in
China. Japan also achieved positive growth in local currency. However, sales in
the region overall were lower in Swiss francs.

Geographic sales distribution
    
    2003
    
    2002Europe
    
    
    41
    %
    
    
    38
    %Americas(1)
    
    
    31
    %
    
    
    35
    %Asia-Pacific(2)
    
    
    28
    %
    
    
    27
    %




---

|(1) |  | The Americas are comprised of North, Central and South America.                       
|--- |  | --------------------------------------------------------------------------------------
|   
|(2) |  | Asia Pacific is comprised of Asia, Africa, the Middle East, Australia and
New Zealand.

Profit margins deteriorate in adverse sales climate

Gross profit margin in 2003 decreased to 31.1 percent of sales from 33.3
percent in the prior year. Margins were adversely impacted by currency exchange
rate developments. Sales volume gains of 3 percent were completely offset by
price erosion as the Company faced stiff competition particularly in mature
markets. Production expenses were lower in Swiss francs and were stable in
local currencies. Higher levels of unabsorbed costs occurred in 2003 that were
mainly due to temporary production shutdowns in the fourth quarter, improving
cash flow due to lower purchasing activities, but adversely impacting
profitability. Raw material costs increased in the early part of the year and
peaked in the second quarter; by the end of the year raw material prices
decreased and overall were similar to prior year levels.

Selling, general and administrative expenses stable

Selling,
general and administrative expenses in Swiss francs decreased by CHF 62 million, from CHF 1 247 million in 2002 to CHF 1 185 million in 2003. In
local currencies, these costs remained stable. Selling, general and
administrative expenses expressed as a percentage of sales were 17.8 percent in
2003 compared to 17.6 percent in the prior year. Higher costs for pensions and
insurance were incurred in 2003. The Company continues to pursue cost
containment strategies in the current business climate, ensuring that tight
cost controls are in place for day-to-day operational expenditures. Further
headcount reductions were made in order to align the Companys cost structure
with its business needs.

Investment in research and development sustained

Research and development expenses as a percentage of sales remained at 4.2
percent in 2003 as for 2002. In absolute terms, research and development
expenses decreased slightly by CHF 13 million to CHF 281 million in 2003 from
CHF 294 million in 2002. This was mainly due to currency effects.

The Company has historically invested and plans to continue to invest
approximately 4 percent of sales in research and development activities. In
addition, pursuant to its commitment to innovation, the Company in 2002
created a Research Fund for high risk/high reward projects, allowing up to
CHF 15 million additional research and development expenses annually for such
projects.

Operating income and EBITDA adversely affected by lower sales levels and
unfavorable currency developments

2003
    
    2002Operating income
    
    
    571
    
    
    
    788EBITDA
    
    
    937
    
    
    
    1 173Operating income margin
    
    
    8.6
    %
    
    
    11.1
    %EBITDA margin
    
    
    14.1
    %
    
    
    16.6
    %2003 compared to 2002Operating income
    
    
    (28
    )%EBITDA
    
    
    (20
    )%


Operating income fell by CHF 217 million in 2003, and operating income margin
deteriorated to 8.6 percent of sales in 2003 from 11.1 percent in the prior
year. Contributing to this result was the combined effect of adverse currency
development, sales price reductions that were partially offset by volume
increases, and a stable cost base achieved through

32



---



##### 



tight expense control during the year. The strengthening of the Swiss franc
against the U.S. dollar, and to a lesser extent, against most other major
currencies negatively impacted operating income by approximately CHF 111
million in 2003.

EBITDA decreased to CHF 937 million in 2003 compared to CHF 1 173 million in
the prior year, of which approximately CHF 134 million was due to unfavorable
currency developments. EBITDA margin decreased to 14.1 percent of sales in 2003
from 16.6 percent in 2002.

Segments results

Plastic Additives results

Sales decreased to CHF 1 722 million in 2003 or by 5 percent in Swiss francs
and increased by 1 percent in local currencies. Sales development in 2003
compared to 2002 resulted from the following factors:

Sales development
    
    2003 compared to 2002Volume/product mix
    
    
    4
    %Price
    
    
    (3
    )%Currency
    
    
    (6
    )%Total in Swiss francs
    
    
    (5
    )%


Sales increased slightly in local currencies driven by a solid performance in
Polymer products, despite ongoing competitive price pressures as a result of
the weak U.S. dollar. Base polymers sales decreased marginally in local
currencies with the major market areas generally sluggish. Sales in process and
lubricant additives increased slightly in local currencies despite customer
inventory reductions affecting sales in the fourth quarter. Sales decreased,
however, in Swiss francs. The Segment continues to experience strong price
pressures, and price concessions were necessary to maintain the Segments
competitive position. The Segment was successful, however, in slowing this
trend during the second half of 2003.

Geographically, sales in Europeincreased in both Swiss francs and in local
currencies. Growth was generally positive across the region, driven by a solid
performance in Germany in particular. In the Americas, sales levels were below
those of prior year both in Swiss francs and in local currencies. In the United
States, sales levels did not recover from a slow start, remaining sluggish
throughout the year resulting in lower sales levels in local currency. Sales in
South America increased in local currencies. In Asia Pacific, sales increased
in local currencies but decreased in Swiss francs. The major territories posted
strong sales development in local currencies, buoyed by an excellent result in
China and continued recovery in Japan where sales levels were also higher in
Swiss francs.

Operating income
    
    2003
    
    2002Absolute in CHF
    
    
    178
    
    
    
    245As a percentage of sales (Operating income margin)
    
    
    10.3
    %
    
    
    13.5
    %EBITDAAbsolute in CHF
    
    
    272
    
    
    
    346As a percentage of sales (EBITDA margin)
    
    
    15.8
    %
    
    
    19.1
    %


Operating income and EBITDA decreased primarily due to lower sales and a
strongly adverse currency impact. Operating expenses remained at prior year
levels in local currencies and were lower in Swiss francs, although idle
capacity costs increased due to both start-ups of additional capacity and
temporary plant shutdowns for inventory reduction purposes. These higher idle
capacity costs coupled with raw material price increases and adverse sales
price development resulted in lower gross profit levels. Selling, general and
administration expenses were lower both in Swiss francs and in local
currencies. The Segment maintained its investment level in research and
development activities at approximately 5 percent of sales.

Asset management
    
    2003
    
    2002Net current operating assets:Absolute in CHF
    
    
    327
    
    
    
    378As a percentage of sales
    
    
    19
    %
    
    
    21
    %Capital expenditures in CHF
    
    
    59
    
    
    
    86Invested capital in CHF
    
    
    1 127
    
    
    
    1 236Total assets in CHF
    
    
    1 378
    
    
    
    1 493


33



---



##### 



The Segment was successful in reducing its asset base in 2003. Despite higher
sales volumes, inventory levels decreased in both absolute and intensity terms.
Receivable levels were also lower in absolute terms but increased slightly in
intensity. Payable levels
decreased slightly from prior year levels. Capital expenditures were mainly
focused on efficiency and improvements programs at production facilities and
were well below the level of depreciation. The combined effects of the
reduction in net current assets, lower capital investment than depreciation
expense and currency effects led to both total assets and invested capital
being slightly lower than prior year levels.

Coating Effects results

Sales decreased to CHF 1 807 million in 2003 or by 6 percent in Swiss
francs and were stable in local currencies. Sales development in 2003
compared to 2002 resulted from the following factors:

Sales development
    
    2003 compared to 2002Volume/product mix
    
    
    4
    %Price
    
    
    (4
    )%Currency
    
    
    (6
    )%Total in Swiss francs
    
    
    (6
    )%


Sales performance across the Segment was mixed. Positive sales growth in local
currencies was achieved in the electronic materials market driven by demand for
flat-panel monitors and televisions in the displays sector, in addition to
strong growth in the optical information storage market for CD-R products.
Sales in the coatings business were higher in local currencies fuelled by solid
results in both the transportation and the industrial and decorative coating
markets. The Segment continues to leverage its wide range of targeted product
applications into the plastics market and delivered positive growth in local
currencies despite intense competition. Demand remained weak in the traditional
printing inks market, although digital printing products continued to grow
strongly in 2003.

Geographically, in Europesales decreased both in local currencies and in Swiss
francs. Sales declines were evident across most major countries with the
exception of Germany, where sales were stable in local currency and increased
in Swiss francs. In the Americas, sales levels decreased slightly in local
currencies and more so in Swiss francs. Sales levels in the U.S. were mainly
stagnant and ended the year below prior period levels in local currency. Asia
Pacificsales grew in local currencies and decreased slightly in Swiss francs.
The positive result in local currencies was fuelled by strong performances in
both China and Japan. This was augmented by positive growth levels in local
currencies throughout the remainder of the region.

Operating income
    
    2003
    
    2002Absolute in CHF
    
    
    300
    
    
    
    341As a percentage of sales (Operating income margin)
    
    
    16.6
    %
    
    
    17.7
    %EBITDAAbsolute in CHF
    
    
    397
    
    
    
    440As a percentage of sales (EBITDA margin)
    
    
    22.0
    %
    
    
    22.9
    %


Operating income and EBITDA decreased both in absolute terms and as a
percentage of sales, mainly due to lower sales and unfavorable currency
development. Production expenses were lower in Swiss francs despite increases
in utility costs. Lower raw material and production expenses could not fully
offset the effects of sales price declines and adverse currency developments,
resulting in gross profit deterioration in both absolute and intensity terms.
Selling, general and administrative costs were lower in Swiss francs and were
stable in local currencies. Investment in research and development continued at
the previous high level of approximately 5 percent of sales.

Asset management
    
    2003
    
    2002Net current operating assets:Absolute in CHF
    
    
    520
    
    
    
    575As a percentage of sales
    
    
    29
    %
    
    
    30
    %Capital expenditures in CHF
    
    
    79
    
    
    
    74Invested capital in CHF
    
    
    1 773
    
    
    
    1 834Total assets in CHF
    
    
    2 020
    
    
    
    2 107


34



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##### 



The Segment maintained its focus on effective management of its operating
assets. Inventory levels were below those of the prior year and improved in
both absolute and intensity terms. Receivable levels were also lower in both
absolute and intensity terms. Payable levels decreased from prior year levels.
Capital expenditures were focused primarily on efficiency and productivity
programs and were below the level of depreciation. The combination of currency
effects, lower investment than annual depreciation in fixed assets and the
effective management of current assets led to a reduction in total assets and
invested capital.

Water & Paper Treatment results

Sales decreased to CHF 1 349 million in 2003 or by 4 percent in Swiss francs,
but increased by 2 percent in local currencies. Sales development in 2003
compared to 2002 resulted from the following factors:

Sales development
    
    2003 compared to 2002Volume/product mix
    
    
    4
    %Price
    
    
    (2
    )%Currency
    
    
    (6
    )%Total in Swiss francs
    
    
    (4
    )%


Water Treatment sales increased in local currencies, but were lower in Swiss
francs. Solid performances in local currencies were achieved across the
Segments main market sectors, although the impact of competitive pricing
pressure continues to negatively affect sales performance. Sales levels in the
paper business overall were below prior year levels in local currencies and in
Swiss francs, although good results were achieved in the paper coloration and
water management sectors.

Geographically, sales in Europeincreased in both Swiss francs and in local
currencies. Positive sales development was evident across much of the region
with France and the U.K. leading the way, delivering solid growth levels in
local currencies. Germany posted a slight increase in Swiss francs helped by
the stronger euro. Sales declined in the Americasboth in local currencies and
in Swiss francs. Sales in the U.S. remained below prior year levels throughout
the year both in local currency and in Swiss francs. South America posted sales
growth in local currencies, but sales were lower in Swiss francs. Asia Pacific
again demonstrated excellent growth levels in local currencies overall,
particularly in China and Japan, augmented by robust performances in
Africa/Middle East, where sales increased both in local currencies and in Swiss
francs.

Operating income
    
    2003
    
    2002Absolute in CHF
    
    
    85
    
    
    
    98As a percentage of sales (Operating income margin)
    
    
    6.3
    %
    
    
    7.0
    %EBITDAAbsolute in CHF
    
    
    168
    
    
    
    186As a percentage of sales (EBITDA margin)
    
    
    12.5
    %
    
    
    13.2
    %


Operating income and EBITDA decreased both in absolute terms and as a
percentage of sales. These decreases were due to sales price reductions and
higher raw materials costs that could only be partially offset by lower
production costs in Swiss francs, although these increased slightly in local
currencies. Positive sales volume gains only partially offset the above
negative effects. Selling, general and administrative costs were lower in Swiss
francs and slightly lower in local currencies. Investments in research and
development remained at the prior year level of approximately 2 percent of
sales.

Asset management
    
    2003
    
    2002Net current operating assets:Absolute in CHF
    
    
    290
    
    
    
    335As a percentage of sales
    
    
    22
    %
    
    
    24
    %Capital expenditures in CHF
    
    
    42
    
    
    
    35Invested capital in CHF
    
    
    2 271
    
    
    
    2 429Total assets in CHF
    
    
    2 460
    
    
    
    2 606


The Segment managed to reduce its asset base below prior year levels.
Inventories decreased both in absolute and intensity terms. Receivable also
decreased in absolute terms, but increased slightly in intensity terms. Capital
expenditures were higher due partially to certain expenditures deferred from
prior year. Investments continued to be focused mainly on small-scale
debottlenecking and productivity improvement projects. The combination of
currency fluctuations, lower investment than annual depreciation in fixed
assets and the effective management of current assets led to a reduction in
total assets and invested capital.

35



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##### 



Textile Effects results

Sales decreased to CHF 1 401 million in 2003 or by 9 percent in Swiss francs
and by 3 percent in local currencies. Sales development in 2003 compared to
2002 resulted from the following factors:

Sales development
    
    2003 compared to 2002Volume/product mix
    
    
    0
    %Price
    
    
    (3
    )%Currency
    
    
    (6
    )%Total in Swiss francs
    
    
    (9
    )%


The Segment continued to experience a weak textile dyes market subject to
fierce competitive activity from both traditional and non-
traditional suppliers. Sales levels were well below prior year both in local
currencies and in Swiss francs. Competition in the wool business remains intense. A more encouraging outlook
is noted in cellulose exhaust dyes, where demand is growing for the Segments
newer ranges that offer superior quality and performance to classical
commodity products. In the pad and printing dyes sector, gains in the ink jet
and printing businesses were offset by lower sales in reactive dyes where
market conditions remain sluggish. In the textile chemicals markets, sales
levels were higher in local currencies, but were lower in Swiss francs.
Continuing the trend of prior year, the Segment again posted a strong result
in effects chemicals, where demand for its innovative oil and water repellant
products remains strong.

Geographically, sales in Europewere below prior year levels in both Swiss
francs and in local currencies. Sales declines were evident across the main
European markets, with the exception of Turkey, where sales developed
positively both in Swiss francs and in local currency. In the Americas, sales
declined in Swiss francs and in local currencies. In the U.S., sales were well
below prior year levels in both Swiss francs and in local currency. In the Asia
Pacificregion, sales increased slightly in local currencies, particularly in
the China and South Asia regions, but declined overall in Swiss francs.

Operating income
    
    2003
    
    2002Absolute in CHF
    
    
    69
    
    
    
    142As a percentage of sales (Operating income margin)
    
    
    4.9
    %
    
    
    9.2
    %EBITDAAbsolute in CHF
    
    
    129
    
    
    
    208As a percentage of sales (EBITDA margin)
    
    
    9.2
    %
    
    
    13.5
    %


Operating income and EBITDA decreased in both absolute terms and as a
percentage of sales, reflective of the overall weak sales performance. The
Segment successfully realigned certain key components of its productive
infrastructure, with the result that operating expenses were below prior year
levels in both Swiss francs and, to a lesser extent, local currencies. Selling,
general and administrative costs were lower in Swiss francs compared to the
prior year, due to the lower cost base achieved primarily from further
headcount reductions. Investment in research and development remained stable at
approximately 2 percent of sales.

Asset management
    
    2003
    
    2002Net current operating assets:Absolute in CHF
    
    
    439
    
    
    
    532As a percentage of sales
    
    
    31
    %
    
    
    34
    %Capital expenditures in CHF
    
    
    29
    
    
    
    34Invested capital in CHF
    
    
    1 115
    
    
    
    1 291Total assets in CHF
    
    
    1 304
    
    
    
    1 495


The Segment was successful in reducing its net current operating assets.
Inventory levels were significantly lower than prior year levels both in
absolute and intensity terms. Receivable levels were also lower in absolute and
intensity terms, benefiting from effective credit management. Payable levels
decreased from prior year levels partially due to lower purchasing activity in
the fourth quarter. Capital expenditures were well below both prior year levels
and depreciation expense for the period. The combination of effective
management of current assets and lower capital investment than annual
depreciation in fixed assets, together with currency fluctuations, resulted in
a reduction of total assets and invested capital.

36



---



##### 



Home & Personal Care results

Sales decreased to CHF 367 million in 2003 or by 8 percent in Swiss francs and
increased by 1 percent in local currencies. Sales development in 2003 compared
to 2002 resulted from the following factors:

Sales development
    
    2003 compared to 2002Volume/product mix
    
    
    1
    %Price
    
    
    0
    %Currency
    
    
    (9
    )%Total in Swiss francs
    
    
    (8
    )%


Sales in Home & Personal Care increased slightly in local currencies, but were
again adversely impacted by the strong Swiss franc, particularly in the first
half of the year as a significant proportion of the Segments sales are
denominated in U.S. dollars. Sales in personal care increased in local
currencies and were stable in Swiss francs. Lower sales in hygiene effects were
offset by excellent growth in new effects products, especially UV-filters. In
the home and fabric care market sector, sales were lower both in local
currencies and in Swiss francs.

Geographically, sales in Europeincreased both in Swiss francs and in local
currencies, driven especially by strong growth in Germany and France. In the
Americas, sales decreased slightly in local currencies and were much lower in
Swiss francs, as a result of the difficult U.S. market. Central America posted
a sales increase in local currencies but sales were lower in Swiss francs. In
Asia
Pacific, sales increased slightly in local currencies, but declined in Swiss
francs.

Operating income
    
    2003
    
    2002Absolute in CHF
    
    
    32
    
    
    
    56As a percentage of sales (Operating income margin)
    
    
    8.8
    %
    
    
    14.0
    %EBITDAAbsolute in CHF
    
    
    58
    
    
    
    82As a percentage of sales (EBITDA margin)
    
    
    15.7
    %
    
    
    20.6
    %


Operating income and EBITDA, both in absolute terms and as a percentage of
sales, were adversely affected by lower sales and unfavorable currency
fluctuations. Further decreases in production costs, partially offset by higher
idle capacity costs, could not offset the strongly adverse currency impact
thereby resulting in lower operating income and EBITDA margins. Selling,
general and administrative costs were lower in Swiss francs and increased
slightly in local currencies compared to prior year. Investments in research
and development activities continued at the high level of approximately 8
percent of sales, indicative of the Segments focus on innovation.

Asset management
    
    2003
    
    2002Net current operating assets:Absolute in CHF
    
    
    91
    
    
    
    93As a percentage of sales
    
    
    25
    %
    
    
    23
    %Capital expenditures in CHF
    
    
    18
    
    
    
    18Invested capital in CHF
    
    
    281
    
    
    
    294Total assets in CHF
    
    
    337
    
    
    
    356


The Segment again achieved a reduction in its asset base. Both inventories and
receivables decreased slightly in absolute terms but increased in intensity
terms. Payable levels decreased slightly. Capital investments were similar to
prior year levels, continue to focus primarily on efficiency and productivity
programs and were below the level of depreciation expense. The effects of the
reduction in net current assets, lower capital investment than annual
depreciation in fixed assets, together with currency fluctuations, resulted in
a reduction of total assets and invested capital.

Consolidated balance sheets

Selected balance sheet data as of December 31,
    
    2003
    
    2002Cash and cash equivalents and short-term investments
    
    
    2 397
    
    
    
    2 377Total assets
    
    
    11 098
    
    
    
    11 792Total shareholders equity
    
    
    4 245
    
    
    
    4 354


The continued emphasis on the management of operational assets led to a
reduction in total assets of CHF 714 million, excluding cash and cash
equivalents and short-term investments. Approximately 60 percent of this
reduction was achieved through continued proactive asset management in areas
such as inventories and accounts receivable, and through the continued efforts
to focus the Companys capital expenditures on efficiency and safety
improvement related items. Proposed

37



---



##### 



investments in additional production capacity continue to be carefully
evaluated to ensure that sufficient market demand exists to justify the
investment. The Company also continues its practice of maintaining total
investments in property, plant and equipment at less than the annual
depreciation cost.

The remaining asset reduction resulted from the change between December 31,
2002 and 2003 in year-end currency exchange rates, which are used to translate
the Companys various non-Swiss franc denominated balance sheet items located
around the world into Swiss francs. In particular, the U.S. dollar depreciated
by 13 percent, and the euro appreciated by 7 percent, from year to year against
the Swiss franc.

Liquidity and capital resources

In recent years, the Companys sources of liquidity have primarily been
provided by operations and funds from capital markets. The management of the
Company is of the opinion that the funding available to it from these
sources will be sufficient to satisfy its working capital and debt service
requirements for the foreseeable future.

Treasury management

The international financial markets in 2003 remained volatile. The major trends
in the markets, which were the focus of the Companys treasury management
initiatives, included movements in interest rates as well as the continued
weakening of the U.S. dollar against the Swiss franc, and during the latter
part of the year, the strengthening of the euro against the U.S. dollar.

As a consequence of the slow economic recovery and political instability
experienced in 2003, global interest rates fell below 2002
levels reaching a trough at approximately mid-year 2003, before rising slightly
from mid-year levels. Through the effective anticipation of market conditions
and the use of financial instruments available in the financial markets, the
Company was able to further reduce the average cost of its total borrowings
from 4.02 percent in 2002 to 3.84 percent in 2003. As a consequence of this
interest cost reduction as well as lower overall debt levels, the Companys net
interest cost, which is interest expense less interest income, decreased by CHF
2 million to CHF 108 million in 2003 compared to CHF 110 million in 2002.

During 2003, the U.S. dollar fluctuated against the Swiss franc from a high of
approximately CHF 1.42 to a low of approximately CHF 1.24. The Swiss franc
balance sheet year-end rate was at CHF 1.25 against the U.S. dollar in 2003
versus CHF 1.43 at the end of 2002. During 2003, the euro fluctuated against
the Swiss franc from a high of approximately CHF 1.57 to a low of approximately
CHF 1.46. At the end of 2003, the Swiss franc was at a level of CHF 1.56
against the euro versus CHF 1.46 at the end of 2002.

The Company, in accordance with its stated risk management policy, continues to
monitor its currency exposures and, where appropriate, enters into transactions
to minimize its overall exposures to volatility in the currency markets. The
Company selectively executes foreign currency transactions, when considered
cost effective, to protect the cash flows of its operating companies against
unfavorable foreign currency movements.

In 2003, other financial expense, net which includes foreign currency exchange
gains and losses, net hedging expenses, and losses on financial investments,
was CHF 24 million, a decrease of CHF 81 million, compared
to CHF 105 million in
2002. Of this decrease, CHF 59 million resulted from the Companys investment
in Hexcel Corporation (Hexcel). In 2002, the Company recorded a CHF 38
million expense for the unrealized loss on this investment that was deemed to
be other than temporary. In 2003, however, the market value of Hexcel improved
significantly and the Company sold its remaining shares in Hexcel, realizing a
CHF 16 million gain.

Capital resources

The Companys policy is to maintain a high degree of flexibility in its
funding process by using a broad variety of financial instruments and
currencies depending on market conditions. The Company enters into derivative
financial instruments in the ordinary course of business to mitigate its
exposure to adverse changes in foreign exchange rates and to manage its
interest rate exposures. Various risk exposures, arising from existing assets
and liabilities, from future transactions in which the Company is firmly
committed and from future anticipated transactions, are assessed and managed
centrally by the Companys treasury group based on the Companys aggregate
exposure.

Under the Companys written hedging policy, treasury management continuously
monitors and reports the results of its risk management programs to senior
management and may choose to partially or fully hedge exposures. In accordance
with its hedging policy, the Company primarily utilizes foreign exchange
currency forwards, swaps and options contracts. The Companys risk management
policies do not permit the utilization of financial instruments for speculative
or trading purposes. For further information see Note 9 to Consolidated
Financial Statements and Item 11  Quantitative and Qualitative Disclosures
About Market Risks.

Throughout 2003, the Company continued to maintain its long-term debt ratings
of A from Standard & Poors and of A2 from Moodys. In Managements
opinion, based on the Companys current financial position, its credit
protection ratios are strong for its rating category. Consequently, management
believes that the Company will continue to be able to access global capital
markets to meet its capital requirements as required.

38



---



##### 



The Companys capital requirements are primarily dependent on managements
business plans regarding the levels and timing of capital expenditures and
investments. Subject to developments affecting the Company which cannot be
predicted or controlled, management, for the next one to two years, intends to
maintain the Companys capital expenditure levels generally in the range of the
past three years. The Company is not currently subject to any commitment for
capital expenditures that individually is material to the Company.

For further information on capital resources available to the Company, see
Notes 12 and 13 to Consolidated Financial Statements.

Net debt

The table below shows the components of net debt at December 31, 2003 and 2002:

Net debt
    
    2003
    
    2002Short-term debt
    
    
    259
    
    
    
    1 496Long-term debt
    
    
    3 187
    
    
    
    2 344Total debt
    
    
    3 446
    
    
    
    3 840Less: cash and cash equivalents
    
    
    (2 386
    )
    
    
    (2 361
    )Less: short-term investments
    
    
    (11
    )
    
    
    (16
    )Net debt
    
    
    1 049
    
    
    
    1 463


The Company maintains short-term debt facilities, including commercial paper
programs and bank overdraft and credit line facilities to finance its working
capital requirements, which are described in Note 12 to the Consolidated
Financial Statements.

The Companys long-term debt in 2003 and 2002 consisted primarily of Euro
Medium-Term Notes (EMTN Program), convertible bonds, and straight bonds, which
are described in Note 13 to the Consolidated Financial Statements. The current
portion of long-term debt totaled CHF 1 million at December 31, 2003 and CHF 1
198 million at December 31, 2002.

The continued generation of cash flows from operations in excess of 1 billion
Swiss francs allowed the Company to reduce net debt levels in Swiss franc terms
by CHF 414 million in 2003. Short-term debt, excluding the current portion of
long-term debt, was reduced by CHF 40 million in 2003. This was achieved
through the Companys ability to finance its working capital needs through cash
flows generated from its operating activities.

Long-term debt, including current portion, decreased by a net CHF 354 million
as the result of repayments of existing debt that matured during 2003,
partially offset by the issuance of new debt during 2003 (see Note 13 to
Consolidated Financial Statements).

The Companys commercial paper and EMTN programs are uncommitted and the
availability of future funds there under depends to a large extent on market
conditions. The Company may, if and when it is economically advantageous, issue
new debt. As of December 31, 2003, the Company had available borrowings under
the EMTN Program of approximately CHF 1.8 billion; however it currently has no
plans to utilize this program in the future.

Cash flows

The net increase in cash and cash equivalents of CHF 25 million from December
31, 2002 to December 31, 2003 resulted from cash flows provided by or used in
the Companys operating, investing and financing activities.

Cash flows from operating activities
    
    2003
    
    2002
    
    2001Net income
    
    
    344
    
    
    
    406
    
    
    
    382Depreciation and amortization
    
    
    366
    
    
    
    385
    
    
    
    469Net change in operating assets and liabilities
    
    
    302
    
    
    
    8
    
    
    
    96Other, net
    
    
    21
    
    
    
    239
    
    
    
    107Net cash provided by operating activities
    
    
    1 033
    
    
    
    1 038
    
    
    
    1 054


During 2003, the Companys focus on operating asset management enabled it to
continue to generate cash from operating activities in excess of CHF 1 billion
despite having lower net income and depreciation and amortization during 2003
than in 2002. This was accomplished by offsetting the impact of lower operating
performance with a successful program in the fourth quarter of 2003 to
substantially reduce net current operating assets.

Cash flows from investing activities
    
    2003
    
    2002
    
    2001Capital expenditures
    
    
    (233
    )
    
    
    (250
    )
    
    
    (259
    )Sale (acquisition) of businesses, net of cash
    
    
    (71
    )
    
    
    (116
    )
    
    
    (144
    )Proceeds from sale of assets and changes in loans and other long-term assets
    
    
    65
    
    
    
    17
    
    
    
    69Net cash provided by (used in) investing activities
    
    
    (239
    )
    
    
    (349
    )
    
    
    (334
    )


39



---



##### 



Net cash used in acquisition and divestment activities in 2003 consisted
primarily of a CHF 71 million payment for separation costs attributable to the
past divestment of the Performance Polymers business. Also included is an
aggregate CHF 23 million for the acquisition of additional interests in two
equity affiliates in Asia, where the Company is experiencing significant sales
growth. These cash outflows were partially offset by proceeds of CHF 21 million
from the sale of the Companys remaining Hexcel shares.

In 2002, the net cash used in acquisition and divestment activities amounted to
CHF 116 million. The most significant costs incurred related to additional cash
payments for separation cost attributable to the divestment of the Performance
Polymers business, which amounted to approximately CHF 69 million. This was
lower than the Companys prior year estimate of cash payments to be made due to
delays in the settlement of certain matters between the parties that were out
of the direct control of the Company. The remaining CHF 47 million was used
primarily for minor strategic business acquisitions, including the acquisition
of the flame retardant business of Melapur B.V. from DSM N.V.

Cash flows from financing activities
    
    2003
    
    2002
    
    2001Increase (decrease) in short-term and long-term debt, net
    
    
    (394
    )
    
    
    4
    
    
    
    (152
    )Dividends paid
    
    
    0
    
    
    
    (134
    )
    
    
    (132
    )Capital reduction paid
    
    
    (206
    )
    
    
    (69
    )
    
    
    0Treasury stock transactions and other
    
    
    (142
    )
    
    
    343
    
    
    
    9Net cash flows provided by (used in) financing activities
    
    
    (742
    )
    
    
    144
    
    
    
    (275
    )


For discussion of cash flows from short-term and long-term debt, see the Net
Debt section of this Managements Discussion and Analysis and Notes 12 and 13
to Consolidated Financial Statements.

At the Companys Annual General Meeting on March 6, 2003, the shareholders
approved the Board of Directors proposal for a
payment to the shareholders in the form of a capital reduction of CHF 3 per
share. The capital reduction was in the form of a reduction in the nominal
value of each common share from CHF 9 per share to CHF 6 per share. The Company
paid the capital reduction on May 23, 2003, which totaled CHF 206 million.

At the Companys Annual General Meeting on March 22, 2002, the shareholders
approved the Board of Directors proposal for an unchanged dividend of CHF 2 per
share and an extraordinary payment to the shareholders in the form of a capital
reduction of CHF 1 per share. The capital reduction was in the form of a
reduction in the nominal value of each common share from CHF 10 per share to
CHF 9 per share. The Company paid the dividend on March 27, 2002, which
amounted to CHF 134 million and paid the capital reduction on June 28, 2002,
which totaled CHF 69 million.

In connection with its share buy-back program initiated in 2003, the Company
purchased 1.3 million treasury shares for CHF 117 million. The Board of
Directors will propose at the Annual General Meeting of shareholders on
February 26, 2004 that these shares be cancelled; this proposal is subject to
shareholder approval. For further details, refer to Note 16 to Consolidated
Financial Statements.

Free cash flow
    
    2003
    
    2002
    
    2001Net cash from continuing operations
    
    
    1 033
    
    
    
    1 038
    
    
    
    1 054Add: restructuring payments
    
    
    0
    
    
    
    12
    
    
    
    46Less: net cash used in investing activities
    
    
    (239
    )
    
    
    (349
    )
    
    
    (334
    )Add: sale (acquisition) of business, net of cash
    
    
    71
    
    
    
    116
    
    
    
    144Less: dividends(1)
    
    
    (137
    )
    
    
    (134
    )
    
    
    (132
    )Other
    
    
    0
    
    
    
    0
    
    
    
    1Free cash flow
    
    
    728
    
    
    
    683
    
    
    
    779




---

|(1) |  | The Company considers CHF 2 per share to be the normal annual per
share dividend amount expected by its shareholders. As a result, this
amount is used in the Companys calculation of free cash flow. Actual
per share dividends or other distributions to shareholders may differ
from this per share amount (see the Operational Review section of this
Managements Discussion and Analysis above).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company historically has utilized free cash flow to maintain short-term
debt at stable levels, to repay long-term debt according to payment terms or
earlier when economically advantageous to the Company, for acquisitions of
businesses or treasury shares, and to pay distributions to shareholders.

Free cash flow generation in 2003 remained strong, growing by CHF 45 million
over the amount generated in 2002. The Company was able to accomplish this
despite the difficult economic environment during 2003 primarily as a result of
being able to maintain the consistent level of net cash from operations
discussed above combined with having spent in 2003 less on investment-related
activities, excluding acquisitions, than in each of the two prior years. Free
cash flow generated in 2003 was used for debt repayment and for small strategic
acquisitions.

40



---



##### 



Long-term obligations, commitments and contingencies

The Company has various purchase commitments for materials, supplies and items
of permanent investment incident to the ordinary course of business. Management
believes that these commitments are not in excess of current market prices and
reflect normal business operations. The Company had outstanding at December 31,
2003, various long-term obligations that will become due in 2004 and beyond.
These various purchase commitments and long-term obligations will have an
effect on the Companys future liquidity and capital resources. The table below
shows, by major category of commitment and long-term obligations outstanding as
of December 31, 2003, the Companys current estimate of their annual
maturities.

Payments by year, as from December 31, 2003

Total
    
    Less than 1 year
    
    1 to 3 years
    
    3 to 5 years
    
    More than 5 yearsLong-term debt, including current portion(1)
    
    
    3 134
    
    
    
    1
    
    
    
    265
    
    
    
    1 212
    
    
    
    1 656Long-term obligations, including current
portion(2)
    
    
    1 487
    
    
    
    70
    
    
    
    148
    
    
    
    151
    
    
    
    1 118Raw material purchase commitments
    
    
    253
    
    
    
    122
    
    
    
    88
    
    
    
    43
    
    
    
    Fixed assets and other purchase commitments
    
    
    176
    
    
    
    97
    
    
    
    63
    
    
    
    4
    
    
    
    12Lease commitments
    
    
    86
    
    
    
    39
    
    
    
    33
    
    
    
    10
    
    
    
    4Total
    
    
    5 136
    
    
    
    329
    
    
    
    597
    
    
    
    1 420
    
    
    
    2 790




---

|(1) |  | Long-term debt shown is the face amount of the debt obligations. The
amounts reported on the Consolidated Balance Sheets and in Note 13 to
Consolidated Financial Statements are net of discounts and premiums, in
accordance with U.S. GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Estimated payments for long-term obligations have been determined by the
Company based on payment schedules for those long-term obligations where set
payments exist. For long-term obligations with no set payment schedules,
estimates have been made by the Company based on the most likely timing of cash
payments based on the facts and circumstances that exist as of December 31,
2003. The ultimate timing of these future cash flows may differ due to events
and circumstances that are out of the direct control of the Company.
Also included are liabilities related to environmental matters, which are
further discussed in Note 21 to Consolidated Financial Statements.

In addition to the long-term obligations and commitments disclosed above, the
Company, in the normal course of business, provided guarantees to third
parties. The Company estimates that the fair value of these guarantees is not
material and does not expect to incur material losses as a result of these
guarantees. As of December 31, 2003, the Company has provided guarantees to
third parties for indebtedness of others of approximately CHF 17 million, of
which CHF 15 million expire in 2004, CHF 1 million expire in 2005 and CHF 1
million expire thereafter (see Note 21 to Consolidated Financial Statements).

Effective income tax rate

The Company reported an effective income tax rate of 17 percent in 2003, a
reduction of 10 percent compared to 27 percent reported in 2002. Substantially
all of this reduction in the effective tax rate is due to the occurrence in
2003 of a non-recurring event. In their past tax audit of the Companys
operations in Grenzach, Germany, the German tax authorities had made a
substantial tax adjustment. In accordance with the Master Spin-off Agreement
with Novartis and with Swiss commercial law, management was of the opinion that
the total liability owed resulting from this adjustment was the responsibility
of Novartis. This opinion was disputed by Novartis and, in 2001, it initiated
arbitration proceedings against the Company in relation to this matter. This
dispute was settled in 2003, resulting in the release by the Company of CHF 39
million of previously established tax reserves. This event reduced the
Companys effective income tax rate by 9 percent; 10 percent when combined with
another reserve release. Consequently, for comparability with 2002, the
Companys effective income tax rate in 2003 without these events would have
been 27 percent instead of the 17 percent effective tax rate reported (see Note
14 to Consolidated Financial Statements).

41



---



##### 



Year in Review  2002 Compared to 2001

Results of operations
    
    2002
    
    2001(1)Net sales
    
    
    7 085
    
    
    
    7 367Gross profit
    
    
    2 356
    
    
    
    2 379Operating income
    
    
    788
    
    
    
    761Income from continuing operations
    
    
    406
    
    
    
    380Net income
    
    
    406
    
    
    
    382Basic and diluted earnings per share:Income from continuing operations per share
    
    
    5.92
    
    
    
    5.72Net income per share
    
    
    5.92
    
    
    
    5.76Other dataOperating income
    
    
    788
    
    
    
    761Depreciation and amortization of other intangible assets
    
    
    385
    
    
    
    408Amortization of goodwill
    
    
    
    
    
    
    61EBITDA
    
    
    1 173
    
    
    
    1 230Operating cash flows
    
    
    1 038
    
    
    
    1 054Operating cash flows, before restructuring payments(2)
    
    
    1 050
    
    
    
    1 100Free cash flow(3)
    
    
    683
    
    
    
    779Net debt(4)
    
    
    1 463
    
    
    
    2 351Shareholders equity at year-end
    
    
    4 354
    
    
    
    3 908Dividend per share(5)
    
    
    
    
    
    
    2.00Capital reduction per share(5)
    
    
    3.00
    
    
    
    1.00Results of operations as adjusted,
excluding goodwill amortization(1)Operating income
    
    
    788
    
    
    
    822Income from continuing operations
    
    
    406
    
    
    
    441Net income
    
    
    406
    
    
    
    443Basic and diluted earnings per share:Income from continuing operations per share
    
    
    5.92
    
    
    
    6.64Net income per share
    
    
    5.92
    
    
    
    6.68Key performance ratiosSales development
    
    
    (4
    )%
    
    
    (7
    )%Sales development in local currencies
    
    
    3
    %
    
    
    (3
    )%Expressed as a percentage of sales:Gross profit
    
    
    33.3
    %
    
    
    32.3
    %Operating income
    
    
    11.1
    %
    
    
    10.3
    %Income from continuing operations
    
    
    5.7
    %
    
    
    5.2
    %Net income
    
    
    5.7
    %
    
    
    5.2
    %EBITDA
    
    
    16.6
    %
    
    
    16.7
    %




---

|(1) |  | Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No.
142 Goodwill and Other Intangible Assets, which requires that goodwill no
longer be amortized to earnings. For comparison purposes to the 2002 reported
results, the results of operations on an adjusted basis, excluding goodwill
amortization, for the year 2001 are shown in the table above in the
Results of operations as adjusted excluding goodwill amortization section (see
Note 1 to Consolidated Financial Statements).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Restructuring payments were CHF 12 million in 2002 and CHF 46 million in
2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(3) |  | For the calculation of free cash flow, see the corresponding table in
the Liquidity and Capital resources section of this Managements Discussion
and Analysis.                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(4) |  | For the calculation of net debt, see the corresponding table in the
Consolidated balance sheets section of this Managements Discussion and
Analysis.                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(5) |  | For 2002, the Board of Directors proposes to carry forward the entire
retained earnings of Ciba Specialty Chemicals Holding Inc. and not to pay a
dividend. The Board of Directors, however, proposes a cash payment to the
shareholders resulting from a capital reduction of CHF
3 per share. For further information see the Operational review section of
this Managements Discussion and Analysis and Item 8.
Financial Information 
Dividends and Dividend Policy.                                                                                                           

42



---



##### 



Overview

The weakening of the global economic environment of the year 2001 continued
during 2002. Following slight signs of recovery during the spring, the economic
climate noticeably declined towards the end of the year. The U.S. economy
showed volatile and mixed economic development. In the second quarter of 2002,
economic growth was noticeable but was followed by a significant weakening by
the end of the year. European economic development was sluggish, with Germany
experiencing an above average decline in growth. In Asia, the China Region
remained the global growth engine in 2002.

The volatile sales development indicates a cautious buying pattern of the
customers in the Companys market segments. Towards the end of the year, a
slight increase in inventories at the Companys customers was noticed.

Operational review

Tight
cost management compensated for difficult market conditions

Net sales at CHF 7 085 million increased in local currencies by 3 percent. The
Company improved its market position in a difficult environment. Sales in Swiss
francs decreased by 4 percent compared to the prior year. Through the Companys
continued focus on global sourcing of raw materials and its position in the
chemicals value chain, the Company benefited from a decrease in raw material
prices mainly during the first half of the year 2002. The decrease in raw
material prices slowed down during the second half of the year and by the end
of the year, the Company experienced price increases for some raw materials. In
2002, a higher capacity utilization compared to 2001 also contributed to the
increase of the gross profit margin. In absolute terms, gross profit decreased
to CHF 2 356 million from CHF 2 379 million in the prior year. This decline is
attributable to unfavorable currency fluctuations.

Due to numerous process improvements, normal fluctuation and the completion of
restructuring programs that had been previously announced, the number of
employees was reduced by 676 full-time equivalents (FTEs) to 19 007 FTEs in
2002, compared to 19 683 FTEs in 2001. The integration of the original three
supply chains into one single supply chain progresses according to plan and
will be completed in 2003. The rationalization of the Information Technology
(IT) support structure was completed during 2002.

While these proactive actions to protect profitability were generally
successful in reducing the Companys cost base in 2002, compared to the
previous year, they were unable to fully compensate for unfavorable currency
fluctuations. The weakening of most currencies against the Swiss franc,
particularly the U.S. dollar, the British pound, the euro and the Japanese yen,
had a significant negative effect on the Companys results.

Effective January 1, 2002, in accordance with new U.S. GAAP accounting rules,
the Company no longer amortized goodwill to earnings. As a result of goodwill
not being amortized, the Companys operating income in 2002 was improved by CHF
61 million, as compared to prior year.

Operating income increased by CHF 27 million to CHF 788 million compared to CHF
761 million in the prior year.

Income from continuing operations was CHF 406 million or CHF 5.92 per share in
2002 compared to CHF 380 million or CHF 5.72 per share in the prior year. Net
income was CHF 406 million or CHF 5.92 per share in 2002 compared to CHF 382
million or CHF 5.76 per share in the prior year. The Companys EBITDA and
EBITDA margin were CHF 1 173 million and 16.6 percent, respectively, in 2002
compared to CHF 1 230 million and 16.7 percent, respectively, in 2001.

Free cash flow of CHF 683 million further enhances the Companys financial
position

The Companys continued focus on the generation of cash further strengthened
the financial position of the Company. Improved operational performance plays a
crucial role in sustaining high cash flows for the Company. In addition,
inventory levels and accounts receivable were reduced to 34.7 percent of net
sales in 2002, compared to 35.2 percent in 2001.

Capital expenditures remained relatively stable at 2001 levels and continue to
be focused on efficiency improvement projects, remaining below the level of
annual depreciation. The combination of cash flows generated from operations
and effective asset management resulted in free cash flow of CHF 683 million
in 2002 compared to CHF 779 million in 2001.

The continuing focus on operational efficiencies, cash flow and portfolio
management resulted in a reduction of the Companys net debt to CHF 1 463
million in 2002, an improvement of CHF 888 million from 2001 levels. The
Companys treasury share transactions, as well as the capital reduction payment
made in 2002, are excluded from the Companys definition of free cash flow. In
2002, the net effect from the sale of the Companys treasury shares and the
capital reduction also contributed to reduction of net debt.

EBITDA interest cover has improved to 10.66 in 2002 from 9.18 in 2001. EBITDA
interest cover is calculated as EBITDA (2002: CHF 1 173 million;
2001: CHF 1 230 million) divided by net interest  interest expense less interest income
(2002: CHF 110 million; 2001: CHF 134 million).

The Company continues to optimize its business portfolio through selective
acquisitions to strengthen its focus on its core businesses and to improve
profitability

In order to improve the product range for flame retardants and integrated
formulation with effect combinations in the Plastic Additives Segment, the
Company purchased Melapur B.V. (Melapur) from DSM N.V. in May 2002. Melapur
manufactures and distributes halogen-free flame retardants on melamine
basis.

43



---



##### 



Financial review

Sales
increased by 3 percent in local currencies

Net sales in local currencies increased by 3 percent. In Swiss francs sales
decreased by 4 percent to CHF 7 085 million. Sales development in 2002 compared
to 2001 resulted from the following factors:

Consolidated sales development
    
    2002 compared to 2001Volume/product mix(1)
    
    
    6
    %Price
    
    
    (3
    )%Currency
    
    
    (7
    )%Total in Swiss francs
    
    
    (4
    )%




---

|(1) |  | Includes acquisition effects of 1 percent.
|--- |  | ------------------------------------------

Sales for the year started off moderately as a result of the continued weak
economic environment. Sales in Europe and in the NAFTA region started to
improve during the second quarter and weakened slightly towards the end of the
year. As a consequence of volatile market conditions and mixed economic
development, sales in 2002 showed a rather high oscillation from month to month
compared to 2001. Contributing to the sales decline in Swiss francs was the
strengthening of the Swiss franc compared to other currencies, particularly
against the U.S. dollar, the British pound, the euro and the Japanese yen,
resulting in a reduction in sales in Swiss francs of 4 percent compared to
2001. In these difficult economic conditions, the Company experienced sales
price erosion of 3 percent but was able to compensated for this by a
volume/product mix increase of 6 percent. This emphasizes the overall quality
of the Companys product portfolio and customer partnerships.

Sales in local currencies increased in some of the major markets in Europe,
except in the United Kingdom and in France. In Swiss francs, sales declined. In
the Americas, sales in local currencies increased in North America and Central
America, but decreased in Swiss francs. Sales in South America showed a
stronger increase in local currencies than the rest of the Americas, but
declined in Swiss francs. In most of the major markets in Asia Pacific, sales
increased in local currencies. The China Region and Australia showed increased
sales also in Swiss francs. Whereas in the other major markets of the region,
sales in Swiss francs declined. In the China Region, sales increased by double
digits in local currencies.

Geographic sales distribution
    
    2002
    
    2001Europe
    
    
    38
    %
    
    
    37
    %Americas(1)
    
    
    35
    %
    
    
    36
    %Asia Pacific(2)
    
    
    27
    %
    
    
    27
    %




---

|(1) |  | The Americas are comprised of North, Central and South America.                       
|--- |  | --------------------------------------------------------------------------------------
|   
|(2) |  | Asia Pacific is comprised of Asia, Africa, the Middle East, Australia and
New Zealand.

Profit margins remained relatively stable and benefited from the Companys cost
reduction programs

The gross profit margin improved to 33.3 percent of sales compared to 32.3
percent in the prior year. The increase in gross profit was achieved through
price reductions on raw materials and effective control on other production
costs, combined with relatively stable selling prices. In the first half of
2002, raw material prices declined due to the continuation of the Companys
policy to purchase supplies globally through its worldwide organization and its
position in the chemical value chain. In the second half of the year, the
decline of raw material prices slowed down and prices started to increase for
some raw materials towards the end of the year. Process improvements in
production with respective staff reductions combined with the increased plant
utilization due to higher production output further improved the gross profit
margin.

Selling, general and administrative expenses decrease

Selling, general and administrative expenses decreased in absolute terms by CHF
11 million to CHF 1 247 million, compared to CHF 1 258 million in 2001.
Selling, general and administrative expenses expressed as a percentage of sales
were 17.6 percent compared to 17.1 percent in the prior year. The Companys
continuous efforts to streamline its operational structure, the cost
initiatives under the Companys reorganization program Fit For Growth! as
announced in 2001, process improvements and the completion of previously
announced restructuring programs, resulted in a reduction of personnel levels
and a decrease in selling, general and administrative expenses that offset most
of the negative impacts. The Company had higher variable compensation expenses
in 2002 compared to 2001, as compensation levels are partly linked to achieving
performance targets, which were only partly met in 2002, and to a lesser extent
in 2001. The Company also had in 2001 non-recurring income related to providing
third party services to Vantico, a company that was established by the
purchaser of the Companys Performance Polymers business. These service
contracts have expired and will not be renewed.

Continuing commitment to research and development

Research and development expenses as a percentage of sales increased to 4.2
percent in 2002 compared to 3.8 percent in 2001. In absolute terms, research
and development expenses increased by CHF 18 million to CHF 294 million in 2002
as compared to CHF 276 million in 2001, an increase of 7 percent in Swiss
francs or 9 percent in local currencies.

The Company has historically invested and plans to continue to invest
approximately 3 to 4 percent of sales in research and development activities.
The Companys research and development program focuses on generating new
business and

44



---



##### 



defending leading market positions by continuous innovation. As part of the
reorganization, announced in February 2001, certain research and development
activities, mostly focused on innovative new ideas and opportunities, were
transferred to a central group managed directly by the Chief Technology
Officer. The Companys research and development strategy is to enter both new
and existing markets with innovative formulations and solutions that will
satisfy customer needs.

Some examples of new formulations used to enter new markets are soft pigment
formulations for both textile printing and textile dyeing. These formulations
have superior characteristics as they can be used for printing and bath dyeing.
They maintain the soft handle of the textile in the finished product and are
environmentally friendly. A further example are new UV absorber systems that
are added to laundry detergents, which when applied regularly, increase the
sun-protection of a fabric up to a factor of 30.

Innovative product range extensions and customer focused solutions within
existing markets include a new compound for optical information storage on
recordable Compact Discs (CDs) and Digital Versatile Discs (DVDs) with improved
data storage quality, warp free pigments for use in plastics, and new colors
for color filters used in color flat-screen displays (LCD-TFT). The Water &
Paper Treatment Segment introduced a series of environmentally friendly
fluorine chemicals for the paper market, which prevent, for example,
food-packaging papers from being stained by fatty content.

In parallel, the Company continues to develop new and improved manufacturing
processes, which are cost competitive and meet all environmental, health and
safety requirements.

Amortization of goodwill ceased to apply with the adoption of SFAS No. 142

As of January 1, 2002, in accordance with new U.S. GAAP accounting rules, the
Company no longer amortizes any goodwill to earnings, but instead is required
to review its recoverability through annual impairment testing. Other
identifiable intangibles continue to be amortized to earnings over their
estimated useful lives. The Company adopted the new accounting rule effective
January 1, 2002. Upon adoption of this accounting rule, an initial impairment
test of the goodwill as of January 1, 2002 was required. In addition, the
Company was required to perform an annual impairment test of goodwill during
2002. The Company tested the recoverability of its goodwill as of January 1,
2002 and as of December 31, 2002, concluding as of each respective date that
the book value of goodwill was not impaired. For further information see the
Supplemental Information  Change in accounting policy and new accounting
standards section below and Note 1 to Consolidated Financial Statements. In
2001, the goodwill amortization expense was CHF 61 million.

Amortization of other intangibles

The amortization of other intangibles remained relatively constant at CHF 33
million compared to CHF 31 million in 2001. The increase was a result of recent
acquisitions during 2002 and acquisitions that occurred at the end of 2001.

Income from earnings of equity affiliates decreased

Income from earnings of equity affiliates (investments in unconsolidated
companies with greater than 20 percent and less than or equal to 50 percent
ownership), before income taxes, decreased to CHF 6 million in 2002 from CHF 8
million in 2001. The related income taxes on earnings of equity affiliates are
recorded separately in the Companys provision for income taxes.

The reduction in income from earnings of equity affiliates is primarily due to
the sale, in March 2001, of the Companys 50 percent interest in TFL
Ledertechnik GmbH & Co. KG (TFL). The net proceeds received from the sale of
the TFL interest approximated the carrying value of the investment at the date
of sale.

Operating income and EBITDA adversely affected by lower sales levels and
unfavorable currency developments

2002
    
    2001Operating income (EBIT)
    
    
    788
    
    
    
    761EBITDA, before restructuring and special charges
    
    
    1 173
    
    
    
    1 230EBIT margin
    
    
    11.1
    %
    
    
    10.3
    %EBITDA margin, before restructuring and special charges
    
    
    16.6
    %
    
    
    16.7
    %2002 compared to 2001Operating income (EBIT)
    
    
    4
    %EBITDA
    
    
    (5
    )%


Operating income increased by CHF 27 million in 2002 and the EBIT margin
increased by 0.8 percent points to 11.1 percent of sales. Increased sales in
local currencies, favorable raw material prices, process improvements and
proactive measures for cost control contributed to these improvements. The
strengthening of the Swiss franc against most currencies negatively impacted
operating income by approximately CHF 165 million. The amortization of goodwill
amounted to CHF 61 million in 2001.

EBITDA declined by CHF 57 million compared to 2001, mainly as a result of the
unfavorable currency fluctuation of the Swiss franc against other currencies.
In local currencies, EBITDA increased by 10 percent. The EBITDA margin of 16.6
percent in 2002 maintained at the previous years level.

45



---



##### 



Restructuring
and special charges, net  prior year programs completed in
2002.

The Company evaluates the performance of its segments operating incomes
before restructuring and special charges. Accordingly, restructuring and
special charges are not included in the segments operating results.

The restructuring accrual at January 1, 2002 relates to the 2000
restructuring projects, announced in the second half of 2000. These
restructuring programs were completed during 2002 and are described below.

The Company implemented a program (Fit For Growth!) in 2001 that aligned the
Companys operational activities with its customers industries. This new
structure was designed to bring the Companys businesses closer to its
customers and allow for a greater focus on providing not just products, but
total integrated solutions. This program resulted in the establishment of five
business segments, a Chief Technology Officer at the Executive Committee level
and a new, cross-segment Research and Technology Board, which was formed to
leverage the Companys existing technological core competencies and to identify
new technology platforms for future growth. The Fit For Growth! program was
also designed to speed up decision-making by eliminating the former divisional
layer, as well as to improve efficiency by harmonizing several support areas.
The major initiatives in these efficiency projects are the merging of the
existing three supply chains into one coordinated global supply chain system,
which is expected to be completed during 2003, the rationalization of
Information Technology support structures and infrastructure and the reduction
of personnel in the Water & Paper Treatment Segment as part of the strategy to
streamline operations, improve profitability and business growth.

During 2002, in connection with the Fit For Growth! program initiated in
2001, the Company reduced its headcount by an additional 676 employees. These
reductions in the number of employees were achieved through productivity gains
realized from the implementation of the new organizational structures
introduced in 2001. The reductions were made, for the most part, through
attrition and the very limited hiring of new personnel.

In 2001, under the Fit For Growth! program, the Company reduced its headcount
by 262 full-time equivalents (FTEs) under severance programs. The total cost of
these severances was approximately CHF 33 million. The Company also released to
income excess restructuring provisions of CHF 8 million and special charges
provisions of CHF 25 million that were established in prior years.

The 2000 year programs comprised primarily the restructuring of certain
operations of the Water & Paper Treatment segment in the United States
(mainly relating to the closure of a manufacturing facility), the
reorganization of the Companys administration functions in Southern Europe and the reduction of
personnel, principally at a Plastic Additives and Home & Personal Care
manufacturing facility in the United States. Severance costs that were incurred
in 2000 related to the reduction of
approximately 238 FTEs in the United States and Southern Europe, principally in
the administration, sales and marketing functions and, in addition, the
manufacturing functions in the United States. These restructuring programs were
completed during 2002.

Under all programs reported and through additional initiatives in the last
two years, the company reduced its headcount from 20 306 FTEs at end of 2000
by 1 299 employees to 19 007 FTEs at the end of 2002.

The costs and activity associated with the 2000 restructuring programs during
2002 are summarized below:

Severance costs
    
    Other costs
    
    TotalJanuary 1, 2002
    
    
    5
    
    
    
    7
    
    
    
    12Amounts utilized(1)
    
    
    (5
    )
    
    
    (7
    )
    
    
    (12
    )December 31, 2002
    
    
    0
    
    
    
    0
    
    
    
    0




---

|(1) |  | Includes currency adjustments.
|--- |  | ------------------------------

Segments results

Plastic Additives results

Sales decreased to CHF 1 813 million in 2002 or by 1 percent in Swiss francs
and increased by 6 percent in local currencies. Sales development in 2002
compared to 2001 resulted from the following factors:

Sales development
    
    2002 compared to 2001Volume/product mix(1)
    
    
    10
    %Price
    
    
    (4
    )%Currency
    
    
    (7
    )%Total in Swiss francs
    
    
    (1
    )%




---

|(1) |  | Includes acquisition effects of less than 1 percent.
|--- |  | ----------------------------------------------------

Sales increased in local currencies due to strong volume growth, particularly
in lubricant additives, while sales in Swiss francs declined slightly. Base
polymers and polymer products sales also increased in local currencies, despite
the competitive environment and pricing strategies of competitors. In response
to these market conditions, sales price reductions were necessary to maintain
the Segments market position.

46



---



##### 



Geographically, sales in Europe increased both in local currencies and to a
lesser extent in Swiss francs. Sales growth was positive in the majority of
the region in local currencies. In the Americas, sales declined in Swiss
francs but grew in local currencies, fuelled especially by a favorable second
half in the United States. In Asia Pacific, sales levels increased in local
currencies, with sales in China being particularly solid. Sales were,
however, slightly lower in Swiss francs.

Operating income (EBIT)
    
    2002
    
    2001Absolute in CHF
    
    
    245
    
    
    
    275As a percentage of sales (EBIT margin)
    
    
    13.5
    %
    
    
    15.0
    %EBITDAAbsolute in CHF
    
    
    346
    
    
    
    388As a percentage of sales (EBITDA margin)
    
    
    19.1
    %
    
    
    21.1
    %


Operating income and EBITDA were adversely affected by lower sales and
unfavorable currency fluctuations. Improvements made to the operating cost
structure in addition to productivity gains could not fully offset sales price
declines. These impacts led to a slight decline in gross profit margin levels.
Selling, general and administration costs remained stable at the prior year
level, despite a higher level of variable compensation expense in 2002 compared
to 2001. This is due to the compensation being partly linked to achieving
specified performance targets, which the Segment met in 2002, and to a lesser
extent in 2001. The Segment continued its investment in future growth through
research and development activities, which were maintained at the level of
approximately 5 percent of sales. In addition, during 2002 the Segment
completed the acquisition of Melapur B.V., a provider of environmentally
friendly, halogen-free flame retardants, strengthening the Segments position
in this market.

Coating Effects results

Sales decreased to CHF 1 920 million in 2002 or by 1 percent in Swiss francs
but increased by 5 percent in local currencies. Sales development in 2002
compared to 2001 resulted from the following factors:

Sales development
    
    2002 compared to 2001Volume/product mix(1)
    
    
    8
    %Price
    
    
    (3
    )%Currency
    
    
    (6
    )%Total in Swiss francs
    
    
    (1
    )%




---

|(1) |  | Includes acquisition effects of 2 percent.
|--- |  | ------------------------------------------

Sales grew in local currencies due to the strong volume growth, particularly in
the coatings, imaging and plastics market sectors, while in Swiss francs sales
declined slightly. Continued sales growth of patented products into the
automotive industry and the introduction of new and innovative products in the
plastic markets, where the Segment is well positioned to meet increasing demand
for materials substitutes, also contributed to the sales growth. The global
printing ink industry continued to be very challenging in the traditional
publication areas, although digital printing products continued to grow
strongly. The information storage sector remains a difficult market, whereas
growth opportunities have occurred in displays and microelectronics.

Geographically, sales in Europe increased in both Swiss francs and in local
currencies. In the Americas, sales levels increased in local currencies,
supported by a good second half of 2002 in the United States. Asia Pacific
sales increased in local currencies and were marginally lower in Swiss francs.

Operating income (EBIT)
    
    2002
    
    2001Absolute in CHF
    
    
    341
    
    
    
    312As a percentage of sales (EBIT margin)
    
    
    17.7
    %
    
    
    16.1
    %EBITDAAbsolute in CHF
    
    
    440
    
    
    
    411As a percentage of sales (EBITDA margin)
    
    
    22.9
    %
    
    
    21.1
    %


Operating income and EBITDA increased both in absolute terms and as a
percentage of sales, despite being adversely affected by slightly lower sales
and unfavorable currency fluctuations. This improvement was primarily due to
lower raw material costs, in conjunction with increased capacity utilization
and cost savings realized through continued streamlining activities at selected
production facilities. These factors contributed to a significant improvement
in gross margin levels. Selling, general and administrative costs were slightly
higher, primarily due to the higher level of variable compensation expense in
2002 compared to 2001. This is due to the compensation being partly linked to
achieving specified performance targets, which the Segment met in 2002, and to
a lesser extent in 2001. Investment in research and development continued at
the high level of the prior year, being approximately 5 percent of sales.

47



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Water & Paper Treatment results

Sales decreased to CHF 1 409 million in 2002 or by 5 percent in Swiss francs
but increased by 1 percent in local currencies.
Sales development in 2002 compared to 2001 resulted from the following factors:

Sales development
    
    2002 compared to 2001Volume/product mix
    
    
    4
    %Price
    
    
    (3
    )%Currency
    
    
    (6
    )%Total in Swiss francs
    
    
    (5
    )%


Water Treatment sales increased slightly in local currencies, but were lower in
Swiss francs. The Segment continues to operate in a difficult economic
environment, particularly in the United States where overall demand for its
products remains weak. Competitive pricing continues to negatively affect the
sales performance. Sales into the paper industry were slightly above prior year
levels in local currencies, despite strong competition and the pricing
strategies of key competitors. This was achieved, in part, as a result of new
product introductions.

Geographically, sales in Europe increased in local currencies and declined
marginally in Swiss francs. Performance was mixed in the region. In the
Americas, sales decreased in both Swiss francs and in local currencies, driven
mainly by the NAFTA region. South America again showed a strong performance in
local currencies. Sales in Asia Pacific increased both in Swiss francs and in
local currencies with sales in China being particularly solid.

Operating income (EBIT)
    
    2002
    
    2001Absolute in CHF
    
    
    98
    
    
    
    65As a percentage of sales (EBIT margin)
    
    
    7.0
    %
    
    
    4.4
    %EBITDAAbsolute in CHF
    
    
    186
    
    
    
    157As a percentage of sales (EBITDA margin)
    
    
    13.2
    %
    
    
    10.6
    %


Operating income and EBITDA increased both in absolute terms and as a
percentage of sales. This was achieved despite the weak sales development
through the successful implementation of right sizing initiatives undertaken to
reduce the operating cost base of the Segment by lowering selling, general and
administrative costs, idle capacity costs, raw material costs and energy costs.
The reduction in selling, general and administrative costs was achieved mainly
from lower personnel costs, as a consequence of the completion of the headcount
reduction programs, initiated in prior years. Investments in research and
development remained stable at approximately 2 percent of sales.

Textile Effects results

Sales decreased to CHF 1 544 million in 2002 or by 8 percent in Swiss francs
and by 2 percent in local currencies. Sales development in 2002 compared to
2001 resulted from the following factors:

Sales development
    
    2002 compared to 2001Volume/product mix
    
    
    2
    %Price
    
    
    (4
    )%Currency
    
    
    (6
    )%Total in Swiss francs
    
    
    (8
    )%


The Segment continued to face challenges from weak overall demand in the
textile dyes markets. In Europe, there were further textile mill closures. This
coupled with the continued low level of activity in the wool sector and
intensified competition in the market, contributed to the weak performance. In
the textile chemicals markets, however, the Segment was able to increase sales
in local currencies compared to the prior year, despite the difficult market
conditions. In particular, the Segment posted a strong performance in its
offering of effects chemicals, where demand for innovative oil and water
repellant products, in conjunction with close customer alliances, continues to
result in further market share gains.

Geographically, in Europe, sales were below the prior year in both Swiss francs
and in local currencies. Sales declines were experienced across all major
European markets. In the Americas, sales declined in Swiss francs and were
slightly lower in local

48



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##### 



currencies. In the United States, a slight recovery was seen in the second
half of the year, although sales remained below prior year levels in both
Swiss francs and in local currency. In the Asia Pacific region, sales
increased in local currencies, particularly in the China Region and India,
but declined in Swiss francs.

Operating income (EBIT)
    
    2002
    
    2001Absolute in CHF
    
    
    142
    
    
    
    181As a percentage of sales (EBIT margin)
    
    
    9.2
    %
    
    
    10.8
    %EBITDAAbsolute in CHF
    
    
    208
    
    
    
    248As a percentage of sales (EBITDA margin)
    
    
    13.5
    %
    
    
    14.8
    %


Operating income and EBITDA, in both absolute terms and as a percentage of
sales were adversely affected by lower sales and unfavorable currency
fluctuations. The Segment continued its initiatives to improve productivity and
to reduce its cost structures during the year. The cost savings achieved out of
these initiatives together with the reduction in raw material costs could not
fully compensate for the lower sales levels and, as a consequence, gross profit
margins were lower when compared to the prior year. Selling, general and
administrative costs were lower compared to the prior year due to the lower
cost base achieved, in part from further reductions in the number of employees.
Investment in research and development remained stable at approximately 2
percent of sales.

Home & Personal Care results

Sales decreased to CHF 399 million in 2002 or by 7 percent in Swiss francs and
increased by 1 percent in local currencies. Sales development in 2002 compared
to 2001 resulted from the following factors:

Sales development
    
    2002 compared to 2001Volume/product mix
    
    
    2
    %Price
    
    
    (1
    )%Currency
    
    
    (8
    )%Total in Swiss francs
    
    
    (7
    )%


Sales in Home & Personal Care remained relatively stable in local currency in
comparison to a strong performance last year, but declined significantly in
Swiss francs. As a significant proportion of the Segments sales are made in
the Americas, the strengthening of the Swiss franc against the U.S. dollar and
the other currencies in the region negatively affected the Swiss franc sales
performance. In the personal care market, sales increased in local currencies
as lower sales in hygiene effects were offset by growth new effects,
particularly UV-filters and hair dyes. In the home and fabric care market
sector, the negative impact of price competition and lower volumes in selected
whitener products was offset by growth in new effects products in the areas of
protection, colorants and home care specialties, resulting in a stable sales
performance compared to the prior year.

Geographically, sales in Europe increased both in Swiss francs and in local
currencies, driven by the acceleration of new product launches. Performance
among the countries was mixed. In the Americas, sales increased in local
currencies but declined in Swiss francs in all major markets in both North and
South America. In Asia Pacific, sales declined both in Swiss francs and in
local currencies.

Operating income (EBIT)
    
    2002
    
    2001Absolute in CHF
    
    
    56
    
    
    
    67As a percentage of sales (EBIT margin)
    
    
    14.0
    %
    
    
    15.7
    %EBITDAAbsolute in CHF
    
    
    82
    
    
    
    95As a percentage of sales (EBITDA margin)
    
    
    20.6
    %
    
    
    22.2
    %


Operating income and EBITDA both in absolute terms and as a percentage of sales
were adversely affected by lower sales and unfavorable currency fluctuations.
Continued tight controls on costs, reductions in raw material costs and
operational improvements could not fully compensate for the decline in sales,
resulting in a decline in EBIT and EBITDA margins. Selling, general and
administrative costs remained relatively stable compared to the prior year. In
keeping with the Segments long-term commitment to product innovation,
investments in research and development activities increased to approximately 8
percent of sales.

Treasury Management

The international financial markets in 2002 remained volatile. The major trends
in the markets, which were the focus of the Companys treasury management,
included the weakening of the major currencies against the Swiss franc, and
during the latter part of the year, the strengthening of the euro against the
U.S. dollar, and movements in interest rates.

49



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##### 



During 2002, the U.S. dollar fluctuated against the Swiss franc from a high of
approximately CHF 1.72 to a low of approximately CHF 1.38. The Swiss franc
balance sheet year-end rate was at CHF 1.43 against the U.S. dollar in 2002
versus CHF 1.63 at the end of 2001.

During 2002, the euro fluctuated against the Swiss franc from a high of
approximately CHF 1.48 to a low of approximately CHF 1.45. At the end of 2002,
the Swiss franc was at a level of CHF 1.46 against the euro versus CHF 1.47 at
the end of 2001.

As a consequence of the anticipated economic recovery not being fully realized
in the United States and the relatively flat economic growth in Europe, global
interest rates fell below 2001 levels. Through the effective anticipation of
market conditions and the use of financial instruments available in the
financial markets, the Company was able to further reduce the average cost of
its total borrowings in 2002 to 4.02 percent, which is below 2001 levels. The
Companys net interest costs decreased by CHF 24 million to CHF 110 million in
2002 compared to CHF 134 million in 2001. This decrease resulted primarily from
a reduction in interest rates globally and effective treasury management.

The Company, in accordance with its stated risk management policy, continues to
monitor its currency exposures and, where appropriate, enters into transactions
to minimize its overall exposures to volatility in the currency markets. The
Company selectively executes foreign currency transactions to protect the cash
flows of its operating companies against unfavorable foreign currency
movements. In 2002, other financial expense, net which includes foreign
currency exchange gains and losses, net hedging expenses, and losses on
financial investments, is CHF 105 million, an increase of CHF 46 million,
compared to the net expense of CHF 59 million in 2001. Included in other
financial expense in 2002 is a CHF 43 million loss on certain of the Companys
short-term investments and financial investments in unconsolidated companies,
primarily Hexcel Corporation. The Company was required to record these losses
since the decline in market values below the Companys historical cost basis in
these financial investments was, in Managements opinion, no longer deemed
temporary. The remainder of the other financial, expense, net, excluding the
loss on investments, remained relatively stable compared to the prior year,
despite the effects of the strengthening of the Swiss franc against the U.S.
dollar and the other major currencies, and the effects of currency exchange
losses caused by the devaluation of the Brazilian Real, the Mexican Peso and
the Argentinean Peso.

Throughout 2002, the Company continued to maintain its long-term debt ratings
of A from Standard & Poors and of A2 from Moodys. In Managements opinion,
based on the Companys current financial position, its credit protection ratios
are strong for its rating category.

In accordance with its risk management policy for country risk, the Company
increased short-term debt due to local funding needs by CHF 22 million. In 2001
short-term debt was reduced by CHF 48 million. When economically feasible, the
Company selectively retires portions of its long-term debt. Free cash flow
utilized for this purpose amounted to CHF 19 million in 2002 versus CHF 110
million in 2001. The Companys remaining cash reserves will be utilized in
future periods to continue to maintain short-term debt at stable levels, to
repay the straight bond debt in May 2003 and the convertible bond debt in July
2003, in accordance with their terms, and to repay of long-term debt when it is
economically advantageous to the Company. The Company may, if and when it is
economically advantageous, issue new debt either under the EMTN Program or as a
Bond issuance as partial funding of the long-term debt amounts that are due in
2003.

As of January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, which replaced
existing pronouncements and practices for derivatives and hedging activities
with a single, integrated accounting framework. Upon adoption of SFAS No. 133,
the Company recorded a net transition adjustment gain after taxes of CHF 2
million in net income. The adoption did not have any effect on accumulated
other comprehensive income. For further information, see Note 1 to Consolidated
Financial Statements.

50



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##### 



Effective tax rate

The Company reported an effective tax rate of 27 percent in 2002, a reduction
of 5 percent compared to 32 percent reported in 2001. This reduction in the
effective tax rate results, in part, from goodwill not being amortized for
financial reporting purposes, in accordance with the Companys adoption of SFAS
No. 142 Goodwill and Other Intangible Assets (see Note 1 to Consolidated
Financial Statements), as a considerable portion of the Companys goodwill is
non-deductible for tax purposes. In 2002, the effective tax rate was also
impacted by a lower amount of other non-deductible items (see Note 14 to
Consolidated Financial Statements).

In 2001, the effective tax rate was impacted by several non-recurring events.
The tax rate was negatively impacted by the effect of a tax payment in Italy
(the Imposta Sostitutiva) that permitted the future tax deductibility of
Prochimica s.r.l.s goodwill amortization and a tax adjustment. Both of these
negative effects were substantially offset by the benefit received from the
effect of certain taxable expenses in one of the Companys subsidiaries that
were recognized for income tax purposes but were not recognizable for financial
reporting purposes. Excluding the impact of these 2001 non-recurring events,
for comparability with the 2002 effective tax rate, the effective tax rate in
2001 would have been 30 percent.

Net income and earnings per share

Net income
    
    2002
    
    2001Income from continuing operations
    
    
    406
    
    
    
    380Cumulative effects of change in accounting principles
    
    
    
    
    
    
    2Net income
    
    
    406
    
    
    
    382


Earnings per share, basic and diluted
    
    2002
    
    2001Continuing operations
    
    
    5.92
    
    
    
    5.72Cumulative effects of change in accounting principles
    
    
    
    
    
    
    0.04Net income
    
    
    5.92
    
    
    
    5.76


Earnings per share amounts were computed by dividing income from continuing
operations, cumulative effects of change in accounting principles and net
income, respectively, by the weighted average number of shares outstanding.

51



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##### 



Change in accounting policy and new accounting standards

During 2003, the Company adopted several new accounting standards that were
issued by the Financial Accounting Standards Board (FASB). In addition, the
Company will be required to adopt certain other new accounting standards during
2004 that have been issued by the FASB as of December 31, 2003, but were not
required to be adopted during 2003. For further information regarding the
impact on the Companys results of operations and financial position from the
adoption of the these new FASB standards in 2003 and the potential impact from
the adoption of the new FASB standards in 2004, see Note 1 to the Consolidated
Financial Statements.

Environmental matters

Operating in the chemical industry, the Company is subject to stringent
environmental, health and safety laws and regulations. It is the Companys
policy to continuously develop and improve the environmental performance of key
manufacturing processes through an active program. In addition to process
improvements, the Company uses advanced waste treatment and disposal facilities
at all major manufacturing sites that allow the sites to comply with recent
laws and regulations applicable to waste streams. Management believes that the
Company substantially complies with all such laws. For further information, see
Note 21 to Consolidated Financial Statements and Item 4.  Information on the
Company  Property, Plant and Equipment; Manufacturing  Environmental Matters.

Use of certain supplementary financial indicators

The key financial indicators used by the Companys management to monitor
overall performance and liquidity, including the performance of reportable
segments, as well as to provide incentives for employees to produce
high-quality results with a goal of enhancing shareholder value include certain
non-U.S. GAAP financial measures. Such non-U.S. GAAP financial measures are
derived from financial measures prepared in accordance with U.S. GAAP and
include EBITDA, free cash flow and net debt. The way these non-U.S. GAAP
financial measures are derived, as well as definitions of other financial terms
used in this Managements Discussion and Analysis, is shown in the Glossary of
Financial Terms.

The Company uses EBITDA margin (EBITDA divided by net sales) and free cash flow
as two of the three components of its annual incentive compensation program.
The third component of the program is net sales growth. Under the Companys
annual incentive compensation program, employees receive annual payments if
target net sales growth, EBITDA margin or free cash flow levels are achieved.
The combination of these three indicators focuses management and employees on
the profitable (EBITDA margin) growth (sales growth) of the Company without the
utilization of unnecessary capital (free cash flow). In addition, the Company
uses net debt as an indicator of the strength of its capital structure, as well
as certain currency adjusted figures that permit it to evaluate its performance
from period to period without such comparisons being impacted by the effects of
currency exchange rate movements during these periods. For the same reasons,
management believes investors may find the non-U.S. GAAP measures useful.

As with any supplementary financial indicator, these supplementary financial
indicators should be considered in addition to, not as a substitute for,
operating income, net income, cash flows from operating, investing and
financing activities, total assets, total debt, operating income margin and
other measures of financial performance and liquidity reported in accordance
with U.S. GAAP.

EBITDA

As described in the Business Segment Data section of the Consolidated Financial
Statements, the Company evaluates the performance of its reportable segments
based on operating income as well as EBITDA. EBITDA, and EBITDA margin derived
therefrom, provide management with additional quantitative measures of the
quality of sales growth as well as the results of past and current actions
taken to manage costs.

More importantly, the Company operates in a multinational environment and
competes with companies in different countries. In some of these countries,
very significant differences in accounting exist with regard to depreciation
and amortization, including amortization of goodwill and other intangible
assets. The most notable differences occur between companies reporting using
U.S. GAAP and those reporting using International Financial Reporting Standards
(IFRS). In addition, some companies with which the Company competes calculate
and report their depreciation expense based on tax considerations. As a result,
it is very difficult to meaningfully compare operating income data of such
competitors in other countries with that of the Company. In order to adequately
evaluate the Companys performance in the markets as well as to compare and
benchmark performance with that of the Companys competitors, EBITDA was
determined to be a key performance measure because it eliminates the
above-described major differences.

The material limitation associated with using EBITDA as a performance measure
as compared to net income is that EBITDA provides a measure of the Companys
current performance without consideration of the amount of capital that has
been historically invested in order to produce the Companys results.
Management believes it compensates for this limitation by including free cash
flow as another of its key financial indicators, as discussed above.

The reconciliation of EBITDA to net income is included in the Business Segment
Data section of the Consolidated Financial Statements.

Free cash flow

Free cash flow as defined by the Company provides the amount of net cash flow
produced that is available for required or discretionary debt principle
payments, reinvestment in the Companys businesses, or the excess of
distributions to shareholders over CHF 2 per share and, as such, is limited to
being used for this consideration only.

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##### 



The reconciliation of free cash flow to net cash provided by operating
activities is included in the Liquidity and Capital Resources section of
this Managements Discussion and Analysis.

Net debt

The reconciliation of net debt to the Companys total debt is included in the
Liquidity and Capital Resources section of this Managements Discussion and
Analysis.

Invested capital

The reconciliation of invested capital to total shareholders equity is
included in the Business Segment Data section of the Consolidated Financial
Statements.

Currency exchange rates

Amounts in local currencies or currency adjusted are determined by
adjusting current period amounts reported in Swiss francs, which is the
Companys reporting currency under U.S. GAAP, using prior period exchange rates
to remove the effects of fluctuations in foreign currency rates against the
Swiss franc that occurred from the prior period to the current period. The
exchange rates of principle currencies to the Swiss franc, which form the basis
of the Companys disclosures of currency adjusted figures, are presented in
Note 2 to the Consolidated Financial Statements.

53



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##### 



Glossary of financial terms

Basic Earnings per Shareis defined as net income divided by the weighted
average number of common shares outstanding during the reporting period.

Cash Flows from Operating Activitiesis the net cash provided from the
principal revenue-producing activities of the business. It excludes
financing and investing activities.

Cash Flow Hedgesare hedges of the exposure to variability in expected future
cash flows that is attributable to a particular risk associated with a
recognized asset or liability or a forecasted transaction.

Commercial Paperare short-term borrowings in the capital markets that are
typically due within 30 to 270 days from the date of issuance and are issued
by companies with good credit ratings.

Comprehensive Incomeis the change in equity of the Company during the year
from transactions and other events, other than dividends paid, treasury stock
and common stock transactions. It includes (i) net income for the year; (ii)
the current years currency translation adjustment; (iii) the current years
unrealized gains and losses on available-for-sale securities, net of tax; (iv)
the changes in the effective portion of derivative financial instruments fair
value, net of tax, that qualify and that are designated as cash flow hedges and
(v) the change in the minimum pension liability, less the corresponding
intangible asset, net of tax.

Convertible Bondsare debt instruments that may be converted into shares based
on predefined conditions as stipulated in the debt agreement.

Defined Benefit Pension Planis a pension plan that provides employees at their
date of retirement, a predefined payment. The payment is, depending on the
benefit plan, a function of one or more factors such as age, years of service
or compensation level of the employee.

Defined Contribution Pension Planis a pension plan for employees that provides
the employees, at the date of their retirement, benefits based on the amount of
capital paid-in by the participant or the Company, plus returns earned on the
investment of those contributions.

Derivatives, Derivative Financial Instrumentsare financial contracts or
agreements, the value of which is linked to current or future interest rates,
exchange rates, prices of securities, or financial or commodity indices.
Derivative financial instruments used by the Company include forward exchange
contracts, options and interest and currency swaps. The Company uses these
instruments to reduce its exposure to adverse fluctuations in interest and
exchange rates and other market risks.

Diluted Earnings per Shareis similar to basic earnings per share (net income
divided by the weighted average number of common shares outstanding) except
that it reflects the potential dilution that could occur if dilutive
securities, such as stock options and convertible debt, were exercised or
converted into common shares or resulted in the issuance of common shares that
then shared in the earnings of the Company. Antidilutive effects are not
considered.

EBITDAis calculated as operating income plus depreciation and
amortization, and is reconciled to net income in the Business Segment Data
section of the Consolidated Financial Statements.

EBITDA Marginis EBITDA expressed as a percentage of net sales.

Equity per Shareis calculated by dividing total shareholders equity by the
number of outstanding common shares (total common shares issued less treasury
shares) at the balance sheet date.

Fair Value Hedgesare hedges of the exposure to changes in the fair value of a
recognized asset or liability, or an identified portion of such asset or
liability, (the hedged item) that is attributable to a particular risk.

Free Cash Flowis cash flows from operating activities from continuing
operations before restructuring payments, less net cash from investing
activities before sale (acquisition) of businesses, net of cash, less a pro
forma dividend of CHF 2 per share.

Goodwillis recognized in an acquisition of a business if the amount of the
consideration paid by the Company is in excess of the fair value of the
acquired entitys tangible and identifiable intangible net assets.

Gross Profit Marginis gross profit expressed as a percentage of net sales.

A Hedgeis an economic relationship between a hedged item and a derivative
financial instrument whereby losses or gains are expected to offset each other
in whole or in part.

A Hedged Itemis specifically identified as either all or a specific
portion of a recognized asset, a liability, a forecasted transaction or of
an unrecognized firm commitment.

Hedge Effectivenessis the portion of the derivative financial instruments
change in fair value that offsets the change in the fair value or cash flows of
the hedged item.

Hedge Ineffectivenessis the amount by which the derivative financial
instruments change in fair value does not equal the change in fair value or
cash flows of the hedged item.

Intensityis an amount expressed as a percentage of net sales. Intensity of
inventories is equal to the inventories divided by net sales. Intensities of
accounts receivables and accounts payable are calculated correspondingly.

54



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##### 



Invested Capitalis calculated as total assets less non-interest bearing
current liabilities (i.e. accounts payable, income taxes payable, accruals and
other current liabilities, except the current portion of deferred tax
liabilities) and less deferred tax assets.

Net Cash Provided by Operating Activitieshas the same meaning as Cash Flows
from Operating Activities.

Net Current Operating Assetsis the sum of inventories and accounts receivable
less accounts payable.

Net Debtis the sum of short-term debt and long-term debt less cash and cash
equivalents and short-term investments.

Net Sales Developmentpercentage is the change in the current periods net
sales in Swiss francs over the previous periods sales in Swiss francs
expressed as a percentage.

Net Sales Development percentage, in local currenciesis the change in the
current periods net sales in local currencies over the previous periods net
sales in local currencies expressed as a percentage.

Operating Income Marginis operating income expressed as a percentage of net
sales.

Other Intangible Assetsare assets (excluding financial assets) that lack
physical substance, not including goodwill. They may include, but are not
limited to, such assets as trademarks; trade names; patented and unpatented
developed technology and know how, trade secrets, including processes and
formulations; certain agreements such as licensing, royalty, not-to-compete,
supply contracts, operating permits; and customer relationships, lists and
contracts.

55



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Item 6. Directors, Senior Management and Employees

Corporate Governance

Numbers in square brackets refer to the Directive on Information Relating
to Corporate Governance (DCG) of SWX Swiss Exchange

The Board of Directors and its Committees

The Board of Directors of Ciba Specialty Chemicals defines the strategic
direction and supervises the overall affairs of the Company, while the
implementation of strategies and the day-to-day management is vested in the
Executive Committee [DCG 3.6]. The Board also reviews the Companys key plans
and objectives, identifies external risks and opportunities, and initiates
required activities.

The Members of the Board are elected by the General Meeting of Shareholders for
a term of between one and four years; a re-election is possible [DCG 3.4.1].
The Company has a staggered Board [DCG 3.4.1]. For an overview of the
individual election terms, see the table on the next page [DCG 3.4.2]. The
Chairman of the Board is elected by the Board from its Members. A Board Member
may tender his or her resignation during the term of his or her office. The
Shareholders Meeting may vote to remove a Board Member.

The Board continues to commit itself to maintaining the highest standards of
integrity and transparency in its governance of the Company. The Board and
Board Committee charters reflect recent developments in corporate governance
principles including the Swiss Code of Best Practice and the Sarbanes-Oxley Act
of 2002. The Board believes that it is in compliance with well recognized
corporate governance standards, in particular with regard to:



| |  | A Lead Director, having been appointed by the Board, who is entitled to
convene on his own and chair meetings of the Board; in addition, the Lead
Director chairs the Human Resources and Compensation Committee; based on
interviews with other Board Members, he prepares a review of the Chairman
of the Board. He also directs meeting modules without the Chairman being
present
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Broad supervisory and reviewing powers being held by the Board that are
directly supported by Internal Audit
|- |  | ------------------------------------------------------------------------------------------------------------



| |  | With the exception of the Chairman of the Board, the Board Members
being both non-executive directors and independent from the Company
|- |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  | Having Board Committees with a majority of non-executive, independent directors
|- |  | -------------------------------------------------------------------------------



| |  | Having an Audit Committee exclusively comprised of non-executive and independent directors
|- |  | ------------------------------------------------------------------------------------------



| |  | The Board performing an annual assessment of itself
|- |  | ---------------------------------------------------



| |  | The provision of continuous and comprehensive information to Board
Members including periodic and yearly reports prepared by management on
finances, strategies, research and development, production planning and
risk management [DCG 3.7].
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Topics of the Board in 2003

In 2003, the Board focused on the following key topics besides the overall
supervision of the Companys affairs, the preparation of the annual accounts
and the General Meeting of the Shareholders: Group business strategy, research
& development strategy, IT strategy, mergers and acquisitions, supply chain and
Managing for Growth projects, analysis of products and strategy of the
Companys segments, management development and corporate governance.

Board Committees [DCG 3.5]

Four standing Board Committees in the areas of audit, finance, human resources
and compensation and nomination provide guidance and support to the full Board:

Audit Committee

Mission: Evaluates the independence, objectivity and effectiveness of external
and internal auditors, approves and pre-approves auditing and other services to
be provided by the external auditors, evaluates business risk assessment,
evaluates scope and overall audit plan, assesses the quality of financial
accounting and reporting, reviews audit results and monitors compliance with
specific laws and regulations governing the preparation and filing of financial
statements. In addition, the Audit Committee proposes the nomination of the
external auditors to the full Board. The Audit Committee reviews complaints
regarding accounting, internal accounting controls or auditing matters. To
facilitate the submission of such complaints, the Company has set up webpages
both in its intranet (under: Corporate Governance) and on its internet site
(http://www.cibasc.com/view.asp?id=5923). The Board has determined that the
chairman of the Audit Committee, Erwin W. Heri, is the Audit Committees
financial expert as per the requirements of Item 16A of Form 20-F.

Finance Committee

Mission: Develops principles for financial planning, accounting and reporting,
disclosure and control, reviews concepts of financial objectives to optimize
shareholder value, develops finance policy, is regularly briefed on
application/implementation of principles of finance policy, approves financial
transactions, investments and acquisitions and supports the preservation and
enhancement of the Companys reputation in the financial markets.

56



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##### 



Human Resources and Compensation Committee

Mission: Develops objectives and principles of human resource policy and
internal communication, reviews the management development situation, develops
compensation guidelines in line with overall company strategies, is informed
about benefit plans for employees, is briefed in applications/implementation of
principles of human resource policy and supports the preservation and
enhancement of the Companys reputation in the human resources area. The Human
Resources and Compensation Committee assesses the emoluments of the Members of
the Board and its Committees and prepares a request to the Board concerning the
emoluments and the terms of employment of the CEO and the Members of the
Executive Committee [DCG 5.1]. The Lead Director is the chairman of the Human
Resources and Compensation Committee.

Nomination Committee

Mission: Develops the principles for the selection of candidates for election
or re-election to the Board by the Annual General Meeting (AGM) of
Shareholders and prepares a selection of candidates in accordance with these
criteria. The Nomination Committee nominates the candidates for the
appointments made by the Board. The Chairman of the Board is the chairman of
the Nomination Committee.

57



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##### 



Members of the Board[DCG 3, 3.1, 3.2, 3.4.2]
The Members of the Board are as follows:

Year
    
    Year
    
    Significant positions and politicalDate of
    
    
    
    appointed
    
    term
    
    mandates outside the
CompanyName
    
    Birth
    
    Nationality
    
    to Board
    
    expires
    
    [DCG 3.2.a/b/c]Armin MeyerChairman and
Chief Executive Officer
    
    July 25,
1949
    
    Swiss
    
    
    1997
    
    
    

2004
    (1)
    
    Member of the Board
of Directors, Zurich Financial Services, Zurich Member of the Board, CEFIC
(European Chemical Industry Council), Brussels
Member Foundation Board IMD 
International Institute for
Management Development, LausanneKurt FellerVice Chairman,
Lead Director
    
    August 31,
1937
    
    Swiss
    
    
    1999
    
    
    
    2007
    
    
    Chairman of the Board of Directors,
Rieter Holding Ltd., Winterthur
Chairman of the Board of Directors,
Geberit Ltd., Jona
Member of the Board of Directors, Scintilla Ltd.,
Solothurn
Member of the Board of Directors,
Büro-Fürrer Ltd., ZurichErwin W. Heri
    
    March 6,
1954
    
    Swiss
    
    
    1997
    
    
    
    2007
    
    
    Professor of Finance
Member of the Board of Directors, Hilti Ltd.,
Schaan
Chairman of the Board of Trustees,
Anlagestiftung Winterthur, Winterthur
Member of the Board of Trustees, Publica,
Pensionskasse des Bundes, Bern
Chairman of the Board of Directors, OZ Holding
AG, Pfäffikon
Chairman of the Board of Directors, OZ Bankers
AG, Pfäffikon
Member of the Board of Directors, Losinger AG,
BerneGertrud Höhler
    
    January 10,
1941
    
    German
    
    
    1997
    
    
    
    2004
    (1)
    
    Management Consultant
Member of the Board of Directors,
Bâloise-Holding, Basel
Member of the Board of Directors,
Georg Fischer Ltd., SchaffhausenJean-Marie Pierre Lehn
    
    September 30,
1939
    
    French
    
    
    1997
    
    
    
    2006
    
    
    Professor of Chemistry, Nobel Prize Winner
Member of the Scientific Advisory Board of
Aventis, Strasbourg
Member of the Scientific Board of the
Novartis Venture Fund, BaselPeter Littmann
    
    December 21,
1947
    
    German
    
    
    1997
    
    
    
    2006
    
    
    Chairman and Chief Executive Officer,
Brandinsider GmbH, Hamburg
Member of the Board of Directors,
Compass Ltd.
(Bata Shoe Company), Toronto
Member of the Advisory Board,
Nijenrode University, The Netherlands
Member of the Harvard University Art
Museums Visiting Committee,
Cambridge, MassachusettsUli Sigg
    
    April 29,
1946
    
    Swiss
    
    
    1999
    
    
    
    2007
    
    
    Vice-Chairman of the Board of Directors,
Ringier Group
Member of the Advisory Board of China
Development Bank, Beijing
Member of the Board, Infront Holding Ltd., Zug
Member of the Board of Medica Holding AG,
Rotkreuz
Member of the Supervisory Board of the
University of Lucerne, LucerneHans-Ulrich Müller
(2)Secretary (not Member
of the Board)
    
    June 25,
1941
    
    Swiss
    
    
    1997
    
    
    
    
    
    
    Member of the Board of SGCI für Chemische
(Schweiz. Gesellschaft Industrie), Zurich




---

|(1) |  | At the Companys Annual General Meeting of Shareholders to be held on
February 26, 2004, Ms. Gertrud Höhler and Mr. Armin Meyer are proposed to be
re-elected as Board Members for an additional term of four years.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Board has appointed Thomas Koch, born November 21,1954, German, as its
new Secretary effective March 1, 2004.                                                                                                   

58



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With the exception of Armin Meyer, who is also CEO of Ciba Specialty Chemicals,
all other Board Members are both non executive directors and independent from
the Company [DCG 3.1.b]. The term independent used herein satisfies the
criteria of the Swiss Code of Best Practice and of Section 303(A)(6) of the
NYSE Listed Company Manual, as approved by the SEC on November 4, 2003. None of
the non-executive Members of the Board has ever been a member of the management
of the Company or any of its subsidiaries and none of them has or had a
substantial business relationship with the Company or any of its subsidiaries
in the last four financial years [DCG 3.1.c].

More biographical details of the Board Members are available at the Companys
website (http://www.cibasc.com/bod-cv) [DCG 3.1.a].

There is no cross-involvement among the Board Members and the boards of
directors of other listed Swiss companies [DCG 3.3]. There are no service
contracts between any Member of the Board and the Company providing for
benefits upon termination of employment.

Board Committee Memberships

HumanResources andAudit
    
    Finance
    
    Compensation
    
    NominationName
    
    Committee
    
    Committee
    
    Committee
    
    CommitteeArmin Meyer
    
    
    
    
    
    
    C
    
    
    
    M
    (1)
    
    
    CKurt Feller
    
    
    M
    
    
    
    M
    
    
    
    C
    
    
    
    MErwin W. Heri
    
    
    C
    
    
    
    MGertrud Höhler
    
    
    
    
    
    
    
    
    
    
    M
    
    
    
    MJean-Marie Pierre LehnPeter Littmann
    
    
    
    
    
    
    
    
    
    
    M
    
    
    
    MUli Sigg
    
    
    M




---

|C = |  | Chairman                                                                                                                                                          
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|M = |  | Member                                                                                                                                                            
|   
|(1) |  | Armin Meyer is not present at the meetings when the Committee discusses and
prepares its proposal with regard to Armin Meyers compensation as CEO of the
Company.

All Board Committees meet four to six times per year, usually immediately
before the full Board meets. The duration of such meetings generally is between
two and four hours.

The Companys Rules Governing the Organization and Committee charters set out
in detail the powers and responsibilities of the Board and its Committees. In
order for the Board or any of its Committees to pass resolutions, at least half
of its Members must be personally present, which may be deemed satisfied if
simultaneous communication is ensured, such as by telephone or video
conference. The full Board meets at least 6 times per year.

59



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##### 



The Executive Committee[DCG 4, 4.1]

Date of
    
    
    
    
    
    Significant positions and politicalName
    
    birth
    
    Nationality
    
    Function
    
    mandates outside the Company [DCG 4.2]Armin Meyer
    
    July 25,
1949
    
    Swiss
    
    Chief Executive Officer
    
    Member of the Board of Directors, Zurich
Financial Services, Zurich
Member of the Board of CEFIC
(European Chemical Industry Council),
Brussels
Member of the Foundation Board IMD 
International Institute for
Management Development, LausanneMichael Jacobi
    
    January 30,
1953
    
    German
    
    Chief Financial Officer
    
    Chairman of the Board of Industrie-Holding,
Berne
Member of the Board of Phonak Holding,
Stäfa
Member of the commission and of the
committee of Swiss GAAP, FER, ZurichBrendan Cummins
    
    May 18,
1951
    
    Irish
    
    Executive Vice President
International
Coordination
and Human Resources
    
    NoneMartin Riediker
    
    June 28,
1952
    
    Swiss
    
    Chief Technology Officer
    
    Member of the Board, American Chemistry
Council, Arlington
Member of the Board, CIII Centers for
Health Research, North CarolinaHermann Angerer
    
    December 23,
1947
    
    Swiss
    
    Head Segment
Coating Effects
    
    NoneChristoph Biedermann
    
    March 19,
1957
    
    Swiss
    
    Head Segment
Textile Effects
    
    NoneMark Garrett
    
    May 11,
1962
    
    Australian
    
    Head Segment
Water & Paper Treatment
    
    Member of the Board of TEGEWA Industry
Association, Frankfurt am MainFelix Meyer
    
    February 18,
1953
    
    Swiss
    
    Head Segment
Plastic Additives
    
    NoneTim Schlange
    
    January 15,
1963
    
    German
    
    Head Segment
Home & Personal Care
    
    None


Mr.
Armin Meyer and Mr. Felix Meyer are not related.

Armin Meyerbecame Chairman of the Board of Ciba Specialty Chemicals in autumn
2000. Starting January 1, 2001, he in addition took over as Chief Executive
Officer. He streamlined the Company structure and shifted priority targets to
profitable growth, innovation, highly qualified people as well as cash
generation. He has been a Member of the Board of the Company since its spin-off
in 1997.

Previously, Armin Meyer was Head of the global Building Technologies Segment of
ABB Ltd. As of 1995, he was a member of the Executive Committee of ABB, a
global technology Group.

Armin Meyer started his career in 1976 when he joined the former Brown Boveri
Ltd. (BBC) as development engineer. In 1980 he became Head of Research and
Development for industrial motors and took over as Head of the international
business unit for electrical power generators in 1984. Further steps included
the presidency of ABB Drives Ltd. as well as of ABB Power Generation Ltd. In
1995, he became Head of the Power Generation Segment. In 1998, he took over as
Head of the Building Technologies Segment.

Armin Meyer, born 1949 in Zurich, Switzerland, holds a Ph.D. in electrical
engineering from the Swiss Federal Institute of Technology (ETH) in Zurich.

In addition to his responsibilities at ABB, Armin Meyer was also Professor for
Electrical Engineering and Drives at ETH, Zurich for twelve years.

Michael Jacobijoined Ciba-Geigys finance area in 1978. In 1980, Michael
Jacobi moved to Brazil as Corporate Controller and later was appointed
Treasurer. In 1986, he moved to the United States where he led the financial
department at the Toms River plant in New Jersey. After further management
training at Harvard, he returned to the Finance department in Basel in 1987 as
Head of Management Accounting. He became Group Controller of Ciba-Geigy in
1990, responsible for the Companys overall corporate financial accounting and
reporting. In 1997, he was appointed Chief Financial Officer for Ciba Specialty
Chemicals,

60



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##### 



responsible for Treasury, Mergers and Acquisitions, Investor Relations, Control
and Information Management. Michael Jacobi serves on the Council of the
Foundation for Accounting and Reporting Recommendations and plays a significant
role in setting Swiss guidelines for accounting and disclosure. He has a
Doctorate in Economics from the University of St. Gallen.

Brendan Cumminswas appointed head of International Coordination and Human
Resources on December 1, 2001. Brendan Cummins joined Ciba-Geigy in Ireland in
1971 as an Accountancy Student. In 1974, he assumed the position of Planning
and Information Manager in Ireland. In 1979, he moved to Ciba-Geigy Singapore
as Treasury Head and, in 1981, was appointed Head of Finance and Administration
South East Asia. In 1984, he transferred to Hong Kong as Head of Finance and HR
North Asia with project responsibility for China. In 1990, he moved to
Philippines as Head of Pharmaceutical Division and later that year was
appointed in combination Group Company Head. In 1994, he transferred to the
U.K. as Head of Finance and HR of Ciba-Geigy Horsham. In 1995, he returned to
the Far East as Group Company Head China and, in 1997, assumed the position of
Regional President Greater China for Ciba Specialty Chemicals. In 1999, he
moved to Basel and was appointed Global Head of Whiteners and, in 2000, he
established and headed the Global Business Unit Home & Personal Care. In 2001,
he worked for Irish Fertilizer Industries as Managing Director. He has a degree
in accounting and is a Fellow of The Institute of Company Accountants.

Martin Riedikerwas appointed Chief Technology Officer in 2001. Martin Riediker
joined Ciba-Geigy in 1982 as a photochemist in central research at Ciba-Geigy
in Basel. In 1988, he moved to the United States as Vice President, Research
and Development (R&D) for the Polymers Division and was later appointed Vice
President and General Manager of the North American Resins Business Unit in
1991. He was named Head of Cibas U.S. Polymers Division in 1994. Mr. Riediker
was named as Global President of the Consumer Care Division in 1995. He also
took direct charge of the Detergents and Cosmetics Business Units. In 1997 he
was named Global President of the Consumer Care Division and became a member of
the Executive Committee of Ciba Specialty Chemicals. Mr. Riediker has a
Doctorate in Chemistry and did Post-Doctoral Studies at Princeton University.

Hermann Angererwas appointed Head of the Coating Effects Segment in 2001. He
joined Ciba-Geigy Limited in 1981 as a development chemist in the Additives
Division in Basel. In 1985, he assumed the global marketing responsibility for
radiation curing additives in the Business Unit Imaging and Coating Additives.
In 1990, he was appointed Head of the Business Unit Additives for Lubricants.
In 1996, he moved to Japan as Head Additives Division, responsible for the
markets in Japan and South Korea. In 1999, he moved to Germany, responsible for
the German holding company of Ciba Specialty Chemicals and the Additives
Division in the Central Europe region. Mr. Angerer holds a Ph.D. in Chemical
Engineering from the Swiss Federal Institute of Technology Zurich.

Christoph Biedermannwas appointed Head of the Textile Effects Segment in 2001.
From 1982 to 1985, Christoph Biedermann worked for ABB as Project Engineer in
Switzerland and Commissioning Engineer in South Africa. From 1986 to 1989, he
was Associate and Project Manager at McKinsey in Zurich, Switzerland. In 1990
he joined ABB Drives AG as Manager of High Power Semiconductors. In 1991 he
was appointed Manager of Electrical Machines. From 1994 to 1997, he was Manager
Business Unit Total Optimization of Processes at ABB Business Area Automation &
Drives. In 1997, Christoph Biedermann was appointed President of ABB Industrie
AG Switzerland. Since 1999, he has also been a member of the Management
Committee ABB Switzerland, responsible for the Segment Automation. Mr.
Biedermann holds a Diploma in Electrical Engineering from the Swiss Federal
Institute of Technology, Zurich and has an MBA from INSEAD, Fontainebleau,
France.

Mark Garrettwas appointed Head of the Water & Paper Treatment Segment in 2001.
He joined Ciba-Geigy in Australia in 1986 and worked there as Information and
Planning Manager. In 1989, he moved to the Swiss headquarters in Basel, working
in Finance and as Marketing Center Manager and Business Development Manager. In
1995, he became head of the Business Unit Paper and in 1996 he was appointed
Global Head of the Business Segment Whiteners. In 1998, Mark Garrett became
Global Head of the Textile Chemicals business unit where he successfully
integrated three textile chemical businesses into one business unit that became
a worldwide leader in its field. Mark Garrett joined DuPont from Ciba Specialty
Chemicals in 2000, initially as Director Corporate Plans before becoming the
Global Business Director Tyvek/Typar. He rejoined Ciba in 2001. Mark Garrett
holds the following degrees: Bachelor of Arts, Economics, University of
Melbourne, Melbourne, and Master of Applied Information Systems, Royal
Melbourne Institute of Technology, Melbourne, Australia.

Felix Meyerwas appointed Head of the Plastic Additives Segment in 2001. Felix
Meyer joined Ciba-Geigy Limited in 1981 as Marketing Specialist for Polymer
Additives and was appointed Head of Marketing for Polyolefin Additives in 1984.
In 1987, he became Product Manager for Antioxidants, was promoted in 1990 to
Head of Business Product Management and then to Head of Strategic Affairs,
Additives Division in 1993. From 1994 to 1996 he was responsible for Purchasing
and Materials Management and was a member of the Executive Committee of Ciba
Additives GmbH in Lampertheim, Germany. In 1996, he assumed responsibility as
Global Head of the Polymer Additives business unit and member of the Management
Committee Additives Division. Mr. Meyer has a Diploma in Chemical Engineering
and a Ph.D. in Physical Chemistry from the Swiss Federal Institute of
Technology, Lausanne.

61



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Tim Schlangejoined Ciba-Geigys Corporate Planning staff in 1992. In 1994, Mr.
Schlange assumed a marketing and sales position with Ciba Vision. In 1996, he
began as Head of the Market Center Basic Polyolefins in a global marketing role
for the Polymer Additives business unit. In 1999, he was appointed Transition
Manager for the project management of the divestment of the Performance
Polymers Division. In 2000, he headed Strategic Business Development for the
Consumer Care Division. Since 2001, he has been Head of the Home & Personal
Care Segment. He has a Doctorate in Economics from the University of St.
Gallen.

There are no management agreements between the Company or its management bodies
and any third parties [DCG 4.3] or other agreements pertaining to which any
person referred to above was elected a Member of the Companys Executive
Committee.

Business behavior

So as to promote honest and ethical conduct, legal compliance, prompt internal
reporting, accountability, and full, fair, accurate, timely, and understandable
disclosure in public reports, the Company relies on its Code of Conduct which
can be downloaded (http://www.cibasc.com/ view.asp?id=59). In 2003, the Company
did not grant any waiver, whether implicit or explicit, from any provision of
its Code of Conduct to the CEO, the CFO, or the Group Controller.

Compensation

Non-executive Members of the Board[DCG 5.2.2.b]

In 2003, the non-executive Members of the Board in aggregate received as
remuneration, bonuses and other benefits a total of CHF 703 236 [DCG 5.2.1]. In
addition, they were granted 7 376 Shares by the Company [DCG 5.4.b] and held a
total of 18 243 Shares as at December 31, 2003 (including those allocated in
2003) [DCG 5.5.b].

In addition, these persons were granted the following options by the Company
[DCG 5.6.b]:

Term of allocation
    
    Subscription
    
    
    
    
    
    Strike priceYear of allocation
    
    (years)
    
    ratio
    
    Number
    
    (CHF)1997
    
    
    8
    
    
    1:1
    
    
    23 632
    
    
    
    107.161998
    
    
    5
    
    
    1:1
    
    
    3 284
    
    
    
    163.701999
    
    
    5
    
    
    1:1
    
    
    4 108
    
    
    
    110.602000
    
    
    5
    
    
    1:1
    
    
    2 562
    
    
    
    105.402001
    
    
    5
    
    
    1:1
    
    
    6 892
    
    
    
    109.202002
    
    
    5
    
    
    1:1
    
    
    9 280
    
    
    
    109.00


In 2003, the Company did not grant any options to non-executive Members of the
Board.

Executive Member of the Board and Members of the Executive Committee[DCG 5.2.2.a]

In 2003, the executive Member of the Board and the Members of the Companys
Executive Committee in aggregate received as salaries, bonuses and other
benefits inclusive of any voluntary Company pension contributions a total of
CHF 8 517 857 [DCG 5.2.1]. In addition, they were granted 63 925 Shares by the
Company (of which most are restricted) [DCG 5.4.a] and held a total of 122 013
Shares as at December 31, 2003 (including those allocated in 2003) [DCG 5.5.a].

In addition, these persons were granted the following options by the Company
[DCG 5.6.a]:

Term of allocation
    
    Subscription
    
    
    
    
    
    Strike priceYear of allocation
    
    (years)
    
    ratio
    
    Number
    
    (CHF)1997
    
    
    8
    
    
    
    1:1
    
    
    
    63 624
    
    
    
    107.161998
    
    
    5
    
    
    
    1:1
    
    
    
    18 613
    
    
    
    163.701999
    
    
    5
    
    
    
    1:1
    
    
    
    28 970
    
    
    
    110.602000
    
    
    5
    
    
    
    1:1
    
    
    
    23 549
    
    
    
    105.402001
    
    
    5
    
    
    
    1:1
    
    
    
    65 672
    
    
    
    109.202001 supplementary grant
    
    4 years
and10.5 months
    
    
    1:1
    
    
    
    19 572
    
    
    
    109.202002
    
    
    5
    
    
    
    1:1
    
    
    
    135 640
    
    
    
    109.00


In 2003, the Company did not grant any options to the executive Member of the
Board nor to the Members of the Companys Executive Committee.

Highest total compensation[DCG 5.9]

In 2003, the Member of the Board with the highest total compensation received
as salary, bonus and other benefits inclusive of any voluntary Company pension
contributions a total of CHF 2 521 060. In addition, in 2003, this person was
allocated 14 098 restricted Shares and 2 931 unrestricted Shares, but no
options.

62



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Additional fees and loans

None of the above mentioned persons has received any fees nor any compensation
for services rendered to the Company during 2003 other than as disclosed in this
report [DCG 5.7], nor have they been extended any loans [DCG 5.8].

Former Members[DCG 5.3]

In 2003, three former Members of the Executive Committee have received total
compensation of CHF 667 536 [DCG 5.3.2.a]. This amount includes contributions
in the form of Shares and voluntary Company pension contributions. It also
includes the salary paid to former Executive Committee Members who became
employees of the Company. In 2003, the Company did not make any payments to
former non-executive Members of the Board [DCG 5.3.2.b]. In the reporting
period, no Member of the Board nor any Member of the Executive Committee left
the Company [DCG 5.2.3].

Closely Linked Persons

The Company has not made any share [DCG 5.4], option [DCG 5.6] nor any cash
contribution [DCG 5.2] to any Closely Linked Person, i.e. to a third party
which is closely linked to Members of the Board or to Members of the Companys
Executive Committee. However, they may have acquired Shares of the Company or
options on their own. Also, the Company has not paid any fees [DCG 5.7] to such
persons nor has it granted them any loans [DCG 5.8].

Shareholdings of Closely Linked Persons, if any, are included in the figures
reported above [DCG 5.5].

Principles of allocation

Base salaries of the Members of the Board and of the Executive Committee are
established according to a comparative analysis of base salaries paid within
selected peer groups of international companies. Annual bonuses are based on
corporate performance, primarily and over proportionally in relation to free
cash flow, and EBITDA, growth and personal objectives, established at the
beginning of the year. The allocation of the compensatory elements is discussed
in the Human Resources and Compensation Committee that makes its
recommendations to the full Board. The latter takes the ultimate decision with
respect to such allocation. For a more detailed description of the Share and
option based compensation plans, see note 17 to Consolidated Financial
Statements.

Labor Relations

Membership of the Companys employees in trade unions varies from country to
country, and the Company has entered into various collective bargaining
agreements. It is the Companys practice to renew or replace its various
labor arrangements relating to continuing operations as and when they expire
and the Company is not aware of any material arrangements whose expiry is
pending and which is not expected to be satisfactorily renewed or replaced in
a timely manner. The Company has not experienced any material work stoppages
or strikes in the past three fiscal years. The Companys management is of the
opinion that relations with the Companys employees are good.

The Company requires a number of highly skilled technology, chemical and other
specialists. The supply of such employees is highly limited, and competition to
hire and retain them is consequently increasingly intense. Competition raises
the cost of hiring and retaining these employees and increases employee
turnover as competitors seek to lure away employees with particularly rare or
sought-after skills. The Company is continually seeking to recruit skilled
high-technology, chemical and other specialized workers and management is of
the opinion that the Company offers compensation, benefits and opportunities
for development and advancement which will attract and retain a sufficient
number of such employees.

Europe

A significant number of the Companys employees in Europe are represented by
trade unions. The Companys labor relations in Europe have been good and the
Company has not experienced any material work stoppages in recent years.

Wages and general working conditions are generally the subject of negotiated
collective bargaining agreements. Within the limits established by these
agreements, operating companies negotiate directly with unions and other labor
organizations representing the Companys employees. Collective bargaining
agreements relating to remuneration typically have a term of one year.

In addition to trade unions, the Company also consults from time to time with
various local, national and European work councils. Employees elect the
members of work councils. These work councils primarily serve an advisory
role. However, under certain circumstances, the Company may be required to
consult with one or more of the work councils before proceeding with a course
of action. Furthermore, the Company is obligated to apprise the European work
councils of activities which affect its workforce in Europe.

Other Regions

The Companys employees in the Western and Eastern Hemispheres are often
represented by trade unions or employed pursuant to other collective
bargaining agreements. This includes some of the Companys United States
sites. In Japan, approximately one half of the employees are represented by
labor unions. Labor relations in all of these regions have been good and the
Company has not experienced any material work stoppages in recent years.

63



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##### 



Employees

The Company employees worldwide totaled 18 658 in 2003, 19 007 in 2002 and
19 683 in 2001. The following table shows the number of employees at the end
of December 31, 2003 and 2002.

2003
    
    Europe
    
    Americas
    
    Asia-Pacific
    
    TotalPlastic Additives
    
    
    1 589
    
    
    
    1 106
    
    
    
    581
    
    
    
    3 276Coating Effects
    
    
    3 000
    
    
    
    407
    
    
    
    511
    
    
    
    3 918Water & Paper Treatment
    
    
    1 501
    
    
    
    670
    
    
    
    235
    
    
    
    2 406Textile Effects
    
    
    2 007
    
    
    
    550
    
    
    
    899
    
    
    
    3 456Home & Personal Care
    
    
    947
    
    
    
    422
    
    
    
    297
    
    
    
    1 666Unallocated Group Services
    
    
    1 980
    
    
    
    923
    
    
    
    778
    
    
    
    3 681Headquarters
    
    
    255
    
    
    
    0
    
    
    
    0
    
    
    
    255Total Company
    
    
    11 279
    
    
    
    4 078
    
    
    
    3 301
    
    
    
    18 658


2002
    
    Europe
    
    Americas
    
    Asia-Pacific
    
    TotalPlastic Additives
    
    
    1 569
    
    
    
    1 163
    
    
    
    530
    
    
    
    3 262Coating Effects
    
    
    3 023
    
    
    
    396
    
    
    
    491
    
    
    
    3 910Water & Paper Treatment
    
    
    1 541
    
    
    
    697
    
    
    
    226
    
    
    
    2 464Textile Effects
    
    
    2 120
    
    
    
    611
    
    
    
    848
    
    
    
    3 579Home & Personal Care
    
    
    987
    
    
    
    436
    
    
    
    299
    
    
    
    1 722Unallocated Group Services
    
    
    2 006
    
    
    
    969
    
    
    
    853
    
    
    
    3 828Headquarters
    
    
    242
    
    
    
    0
    
    
    
    0
    
    
    
    242Total Company
    
    
    11 488
    
    
    
    4 272
    
    
    
    3 247
    
    
    
    19 007


In 2002, the Company ceased allocating its Group Service Units employees to
the Segments or to Headquarters for internal management reporting purposes. The
December 31, 2001 employee data shown in the table below has been reclassified
to conform to the 2002 presentation of the number of employees.

2001
    
    Europe
    
    Americas
    
    Asia-Pacific
    
    TotalPlastic Additives
    
    
    1 591
    
    
    
    1 288
    
    
    
    544
    
    
    
    3 423Coating Effects
    
    
    3 096
    
    
    
    393
    
    
    
    462
    
    
    
    3 951Water & Paper Treatment
    
    
    1 597
    
    
    
    718
    
    
    
    208
    
    
    
    2 523Textile Effects
    
    
    2 261
    
    
    
    629
    
    
    
    879
    
    
    
    3 769Home & Personal Care
    
    
    1 003
    
    
    
    443
    
    
    
    304
    
    
    
    1 750Unallocated Group Services
    
    
    2 074
    
    
    
    1 083
    
    
    
    869
    
    
    
    4 026Headquarters
    
    
    241
    
    
    
    
    
    
    
    
    
    
    
    241Total Company
    
    
    11 863
    
    
    
    4 554
    
    
    
    3 266
    
    
    
    19 683


The Companys organizational structure, Shares, Share capital and shareholders

Ciba Specialty Chemicals Holding Inc. is the ultimate holding company of the
Ciba Specialty Chemicals group. Its Shares are listed on the Swiss Exchange,
traded on virt-x, and its American Depositary Shares (ADSs) trade on the New
York Stock Exchange (see Item 9  The Offer and Listing). As at December 31,
2003, the Companys market capitalization amounted to
CHF 6 485 226 871
(67 766 216 shares at a price of CHF 95.70 each).

Security
    
    Stock exchange
    
    Ticker symbol
    
    Security number
    
    ISIN codeShare with CHF 6 nominal value
    
    SWX/virt-x
    
    CIBN
    
    581 972
    
    CH 000 581972 4Share with CHF 6 nominal value
(buy-back over second trading line)
    
    SWX/virt-x
    
    CIBNE
    
    1 661 377
    
    CH 001 661377 7ADS
    
    NYSE
    
    CSB
    
    CUSIP: 17162 W206
    
    N/A


The Companys nominal Share capital amounts to CHF 432 780 702 and is divided
in 72 130 117 Shares with a nominal value of CHF 6 each. On June 28, 2002, the
nominal value per Share had been reduced from CHF 10 to CHF 9. On May 23, 2003,
the nominal value per Share was again reduced, this time to CHF 6 per Share,
giving effect to a resolution of the Companys shareholders taken on March 6,
2003 [DCG 2.1/2.3].

64



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##### 



The Board of Directors proposes to the shareholders of the Company to further
reduce the Companys Share capital from CHF 6 per Share to CHF 3 per Share and
by making a corresponding cash payment to the Companys shareholders of CHF 3
per Share. The shareholders will vote on this proposal at the Companys General
Meeting of Shareholders on February 26, 2004. In addition, the Board will
propose to the Companys shareholders to reduce the Companys share capital by
the cancellation of 1 303 500 Shares it acquired over the second trading line
in connection with its share buy-back program.

The Company only has one class of Shares and has no bonus certificates [DCG
2.4/2.5]. Each Share is entitled to any dividends proposed by the Board and
approved by the shareholders, and has one vote, subject to the limitations set
out below. The Shares do not have any preferential rights attached to them. The
Company had and has the following ordinary, authorized and conditional capital
[DCG 2.2/2.3]:

Nominalvalue of
    
    Ordinary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conditional capital forDate of Articles of Association
    
    Shares
    
    Share capital
    
    Authorized capital
    
    Conditional capital
    
    employee participationArticle in Articles of
Association
    
    4 para. 1
    
    
    
    
    
    4 para. 3
    
    
    
    
    
    4 para. 4
    
    
    
    
    
    4 para. 5number of
    
    nominal
    
    number of
    
    nominal
    
    number of
    
    nominalShares
    
    value
    
    Shares
    
    value
    
    Shares
    
    value(CHF)
    
    (CHF)
    
    (million)
    
    (CHF million)
    
    (million)
    
    (CHF million)
    
    (million)
    
    (CHF million)April 20, 1998
    
    
    10
    
    
    
    721 301 170
    
    
    
    4
    
    
    
    40
    
    
    
    4
    
    
    
    40
    
    
    
    2
    
    
    
    20March 22, 2002
    
    
    9
    
    
    
    649 171 053
    
    
    
    4
    
    
    
    36
    
    
    
    4
    
    
    
    36
    
    
    
    2
    
    
    
    18March 6, 2003
    
    
    6
    
    
    
    432 780 702
    
    
    
    4
    
    
    
    24
    
    
    
    4
    
    
    
    24
    
    
    
    2
    
    
    
    12Proposal by the
Board to AGM 2004
    
    
    3
    
    
    
    212 479 851
    (1)
    
    
    4
    
    
    
    12
    
    
    
    4
    
    
    
    12
    
    
    
    2
    
    
    
    6




---

|(1) |  | Reflects both the proposed cancellation of 1 303 500 Shares and the
reduction of the nominal value of each Share by CHF 3.
|--- |  | --------------------------------------------------------------------------------------------------------------------------

In case the shareholders approve the above mentioned Share capital reduction at
the Companys 2004 AGM through a repayment of CHF 3 per Share, the nominal
value for ordinary, authorized and conditional capital would be reduced
accordingly. For additional information please refer to article 4 of the
Companys Articles of Association, which can be downloaded
(http://www.cibasc.com/image.ASP?ID=1704). The German version, which is legally
binding, can be downloaded (http://www.cibasc. com/image.ASP?ID=1705). For
changes in capital, see also Note 17 to the Consolidated Financial Statements
[DCG 2.3].

For information about the Companys major shareholders
see Item7  Major Shareholder and Related Party Transactions in Annual Report. Updated
information can be retrieved from the SWX Swiss Exchange
(http://www.swx.com/cgi/issuers/shabSearch?dates=all&from=19980101&to=99991231&byDate=Ordered+by+date&issuer=Ciba+Spezialit%E4&holder=*&lang=en). The Company
has no cross holdings [DCG 1.3] nor has it executed any pooling or management
agreements [DCG 4.3].

Group structure[DCG 1.1]

For the Companys major subsidiaries, including listed companies and group
structure, see Item 4  Information on the Company[DCG 1.1.2 and 1.1.3]. For
the description of the operational structure of the Company, see Description
of Segment in Business Segment Data [DCG 1.1.1].

Voting cap and registration restrictions, nominees[DCG 2.6]

No shareholder may be registered as a shareholder with voting rights for more
than 2 percent of the Companys Share capital. A shareholder purchasing more
than 2 percent of the Companys share capital will be recorded in the Companys
Share register for the Shares in excess of 2 percent of the Companys Share
capital as a shareholder without voting rights. The Board or a committee
designated by the Board may, however, on a case-by-case basis allow some or all
of the excess Shares to be registered with voting rights. In 2003, the Board
granted no such exception and currently no shareholder has the benefit of any
such exception [DCG 2.6.2]. For purposes of the 2 percent rule, individuals
and/or legal entities acting in concert are considered to be one shareholder
[DCG 2.6.1].

Nominees
may be entered with the right to vote for more than 2 percent of the
voting stock if the nominee discloses the names, addresses and number of
Shares of those persons for which it holds the Shares [DCG 2.6.3].

For information about the Companys treasury stock, see Note 16 to the
Consolidated Financial Statements and the Consolidated Balance Sheets.

At the Companys general meeting, no person may vote more than 5 percent of the
Companys stock, with the exception of depositaries, corporate bodies,
independent proxies or nominees complying with their duty to disclose the
names, addresses and number of Shares of those persons for which it holds the
Shares [DCG 6.1.1]. In 2003, the Board granted no exception with regard to
voting cap restrictions [DCG 6.1.2]. In addition to those proxies, a
shareholder may also be represented by another individual at a general meeting,
but this individual is required to be a shareholder of the Company [DCG 6.1.4].
A

65



---



##### 



resolution on the restriction to vote and on the removal of such a restriction
is subject to the approval by two-thirds of the Shares represented at a
shareholders meeting [DCG 6.1.3].

Annual General Meeting and extraordinary shareholders meetings

Any shareholder may demand that an item be put on the agenda of the AGM if he
holds Shares representing a nominal value of at least
CHF 600 000. If, at the
Companys AGM to be held on February 26, 2004, the shareholders approve the
motion of the Board to reduce the nominal value of each Share from CHF 6 to CHF
3, the amount required to have an item put on the agenda will be proposed to be
reduced accordingly from CHF 600 000 to CHF 300 000.

A demand to have an item put on the agenda must be made in writing at least 60
days before the AGM [DCG 6.4]. In its third quarter report, the Company
published the deadline date (December 29, 2003) for the AGM to be held on
February 26, 2004. The record date for participation at the AGM is usually
fifteen days before the AGM while persons who have subsequently become
shareholders may register their voting rights at the AGM Office if the
shareholder can prove that he or she is the owner of the Shares and that these
Shares are not being voted otherwise [DCG 6.5]. The Articles do not contain any
provision with regard to calling the AGM that differ from the provisions of the
Swiss Code of Obligations [DCG 6.3].

There is no provision in the Articles or under Swiss law requiring a presence
quorum for the holding of shareholders meetings. Resolutions generally require
the approval of the majority of the shares represented at a shareholders
meeting (i.e. a simple majority of the shares represented at the shareholders
meeting, with abstentions having the effect of votes against the resolution). A
resolution passed at a shareholders meeting with the affirmative vote of at
least two-thirds of the shares represented at such meeting is required for [DCG
6.2]:



|(i) |  | any change to the Companys business purpose,
|--- |  | ---------------------------------------------



|(ii) |  | the creation of Shares with privileged voting rights,
|---- |  | -----------------------------------------------------



|(iii) |  | the creation of restrictions on the transferability of registered Shares,
or the elimination of transfer restrictions [DCG
2.6.4],
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------



|(iv) |  | an authorized or conditional increase in the Companys Share Capital,
|---- |  | ---------------------------------------------------------------------



|(v) |  | an increase in the Companys Share Capital by way of capitalization of
reserves (Kapitalerhöhung aus Eigenkapital), against contribution in kind,
for the acquisition of assets, or involving the grant of special privileges,
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(vi) |  | the restriction or elimination of preemptive rights of shareholders,
|---- |  | --------------------------------------------------------------------



|(vii) |  | a relocation of the domicile of the Company, or
|----- |  | -----------------------------------------------



|(viii) |  | the dissolution of the Company other than by liquidation (for example, by
way of a merger).
|------ |  | -------------------------------------------------------------------------------------------

In addition, any provision in the Articles for a greater voting requirement
than is prescribed by law or the existing Articles must be adopted in
accordance with such greater voting requirements.

Dividends and dividend policy

The amount of dividends to be paid by the Company to its shareholders depends
on general business conditions, the Companys financial performance and other
relevant factors. Under Swiss law, dividends may be paid out only if approved
at a shareholders meeting. The Board may propose that a dividend be paid out,
but cannot itself set the dividend. In practice, the shareholders usually
approve the dividend proposal of the Board.

Since its inception in 1997, the Company has paid the following amounts:

Dividend payment
    
    Capital reductionAGM year
    
    (CHF)
    
    payment (CHF)1998
    
    
    2
    
    
    
    01999
    
    
    2
    
    
    
    02000
    
    
    2
    
    
    
    02001
    
    
    2
    
    
    
    02002
    
    
    2
    
    
    
    12003
    
    
    0
    
    
    
    32004(1)
    
    
    0
    
    
    
    3




---

|(1) |  | For 2003, the Board proposes to the shareholders to carry forward the
entire retained earnings, not to pay a dividend and to make a cash payment of
CHF 3 per Share from a capital reduction. The shareholders will vote on this
proposal at the Companys AGM of shareholders on February 26, 2004.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Equity linked instruments[DCG 2.7]

With the exception of the Companys employee participation programs, the
Company had no equity linked debt outstanding since it repaid the USD 687
million convertible bond on July 10, 2003.

66



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##### 



Share and option plans[DCG 2.7]

The Companys share and option plans are further described in Note 17 to
Consolidated Financial Statements.

Change of control provisions

If a shareholder acquires securities of a listed Swiss company and thereby
exceeds the threshold of 33 1/3 percent of the voting rights, it has to offer
to acquire the remaining shares (mandatory offer obligation). By
shareholders resolution, this threshold may be raised to 49 percent (opting
up). A company may also opt out of the mandatory offer obligation. In its
articles of association, the Company has no opting out or opting up provision
[DCG 7.1].

All Members of the Companys Executive Committee have an employee retention
agreement with the Company which enables them to be involved in a transaction
with a third party that considers to take over the Company in a way which does
not affect their status as employees [DCG 7.2].

Auditors[DCG 8]

Effective August 6, 2002, Ciba Specialty Chemicals Holding Inc., Basel,
replaced its statutory and group auditors, Arthur Andersen AG, Zurich, with
Ernst & Young Ltd, Zurich, to implement a resolution taken by its shareholders
on March 22, 2002. This resolution was taken in anticipation of Arthur
Andersens inability to safeguard the Companys interests [DCG 8.1.1].
According to Swiss law, the auditors are elected by the Companys shareholders.
A respective proposal is made by the Board that bases its proposal upon a
recommendation made to it by the Audit Committee. At the Companys AGM to be
held on February 26, 2004, the shareholders will vote on this proposal.

Ernst & Young Ltds lead audit partner, Eric Ohlund, who had formerly been with
Arthur Andersen AG, has supervised the Companys audit since 1997 [DCG 8.1.2].

Fees paid by the Company in 2003 and 2002 to the Companys auditors were as
follows [DCG 8.3]:

2003
    
    2002(1)thousand
    
    in % of
    
    thousand
    
    in % ofCHF
    
    total fees
    
    CHF
    
    total feesAudit fees
    
    
    3 927
    
    
    
    76
    
    
    
    3 490
    
    
    
    60Audit-related fees
    
    
    237
    
    
    
    5
    
    
    
    1 088
    
    
    
    19Tax fees
    
    
    827
    
    
    
    16
    
    
    
    951
    
    
    
    16All other fees
    
    
    165
    
    
    
    3
    
    
    
    315
    
    
    
    5Total fees
    
    
    5 156
    
    
    
    100
    
    
    
    5 845
    
    
    
    100




---

|(1) |  | For comparability reasons, 2002 figures include payments made to Arthur
Andersen prior to its being replaced during the year 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

Audit related work included services in connection with the Companys EMTN
program and the audit of closing balance sheets. Tax services comprised: tax
filings, transfer pricing studies, tax advice, including with regard to VAT.
Other services included advice related to the Companys share repurchase
program and intended transactions. The Audit Committee has not approved a
single service pursuant to the de minimis exception according to paragraph
(c)(7)(i)(C) of rule 2-01 of regulation S-X.

The Audit Committee has introduced a policy for the pre-approval of audit and
of non-audit services. A copy of this policy can be downloaded
(http://www.cibasc.com/investors). In 2003, the Audit Committee received no
request for approval of a specific service and granted no specific
pre-approval. The Audit Committee is fully briefed on each service received
from the Companys auditors.

The auditors of the Company are present at those Board meetings during which
the annual accounts of the Company are discussed and the items and proposals to
the AGM of the shareholders of the Company are decided upon. They are also
present at one of the Companys Disclosure Committee meetings and at the
meetings of the Audit Committee where audit mandate and audit planning are
discussed. Any other participation is as required. In such meetings, the Board
and the Audit Committee also assess and discuss the findings of the auditors
and evaluate the quality of their services [DCG 8.4].

Information policy [DCG 9]

The Companys policy is to openly, clearly and regularly inform its
stakeholders of all relevant developments. As a primary tool, the Company
communicates through its internet site (http://www.cibasc.com) and by email.
The Investor Relations homepage (http://www.cibasc.com/investors) contains
comprehensive information on the Company, including Corporate Governance, its
Code of Conduct and Social Policy.

As the Company is listed on the SWX Swiss Exchange (http://www.swx.com); ticker
symbol = CIBN (CIBNE for the share buy-back) and on the New York Stock Exchange
(http://www.nyse.com); ticker symbol = CSB, it regularly files news and reports
with these exchanges. The reports submitted or filed by the Company with the
U.S. stock exchange supervision authority, the Securities and Exchange
Commission (SEC), can be downloaded (http://www.sec.gov/cgi-bin/srch-edgar?text=ciba+specialty+chemicals+holding).

67



---



##### 



The Companys official means of communication is the Swiss Official Gazette of
Commerce (http://www.shab.ch), while the invitation to the Companys annual
general meeting is sent to the shareholders by mail as well and is also
published in several newspapers in Switzerland.

For publication dates of the Companys financial reports, please
consult the Investor Relations sub-page
(http://www.cibasc.com/view.asp?id=192).

Enquiries by telephone may also be made to: Investor Relations +41 61 636 5081

Group Communications +41 61 636 4444

Share Ownership

Effective January 1, 2003, the Company adopted the fair value method of
accounting as defined in SFAS No. 123 Accounting for Stock-Based Compensation
as amended, for its stock-based compensation plans. Descriptions of the terms
of the Companys plans are presented in the following paragraphs.

In connection with the capital reduction of CHF 3 per share in 2003 (CHF 1 per
share in 2002) (see note 16), the Company, in accordance with the terms of its
stock option plans, reduced the exercise price of its outstanding stock options
(the capital reduction repricing). No compensation expense was recorded as a
result of the capital reduction repricings. For the Leveraged Executive Asset
Plan, which is described below, the capital reduction repricing was set by the
investment bank. All exercise prices disclosed herein have been accordingly
adjusted.

LEAP  In connection with the one-time Leveraged Executive Asset Plan (LEAP)
established in 1997 for the Companys then key executives and non-executive
Board members (participants), the 288 400 restricted shares of common stock of
the Company that were purchased by the participants in 1997 were released to
the participants in March 2002. As of December 31, 2003, a total of 1 042 782
share options having an expiration date of March 15, 2005 and that were granted
in connection with the LEAP and permit the holder thereof to purchase shares of
the Companys common stock at a price per share of CHF 110 (CHF 107.16 after
the capital reduction repricing), remain outstanding. Because the Company,
upon establishment of the LEAP in 1997, paid a fee to a major investment bank
to assume all of the Companys obligations to the participants in the LEAP, the
Company has no obligation to issue shares of its common stock nor any other
obligation to the participants in connection with the LEAP.

As of January 31, 2004, no additional share options have been exercised or
returned to the Company, as compared to December 31, 2003.

LTIP  The Company has a Long-Term Incentive Plan (LTIP), which grants options
and restricted shares of common stock of the Company to senior management and
other key employees and, in 2002 and 2001, to non-executive Board members. For
grants of options made to participants other than those in the United States,
vesting is at the date of grant and the right to exercise is restricted for
three years following the grant date. For grants of options made to
participants in the United States, vesting and the right to exercise occur over
three years. The options expire either five years or ten years after the date
of grant. In 2002 and 2001, no compensation expense was recorded for the
options issued under this plan as the options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant.
In connection with the Companys adoption in 2003 of SFAS No. 123 as amended,
compensation expense of approximately CHF 5 million was recorded comprising of
both current year awards and the unvested portion of prior year awards.

68



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##### 



The following table summarizes option activity under the LTIP for the three
year period ended December 31, 2003, and from January 1, 2004, through
January 30, 2004:

Weighted average
    
    Optionsexercise price
    
    outstandingBalance at December 31, 2000
    
    
    121.40
    
    
    
    1 299 900Options granted
    
    
    108.63
    
    
    
    461 444Options issued on conversion of stock appreciation rights
    
    
    160.00
    
    
    
    60 799Options canceled/forfeited
    
    
    112.38
    
    
    
    (43 694
    )Balance at December 31, 2001
    
    
    119.63
    
    
    
    1 778 449Options granted
    
    
    108.80
    
    
    
    481 401Options exercised
    
    
    108.99
    
    
    
    (32 098
    )Options canceled/forfeited
    
    
    111.07
    
    
    
    (32 413
    )Balance at December 31, 2002
    
    
    117.53
    
    
    
    2 195 339Options granted
    
    
    82.60
    
    
    
    176 627Options exercised
    
    
    0
    
    
    
    0Options canceled/forfeited
    
    
    105.02
    
    
    
    (26 989
    )Options expired
    
    
    160.00
    
    
    
    (264 355
    )Balance at December 31, 2003
    
    
    109.34
    
    
    
    2 080 622Options granted
    
    
    0
    
    
    
    0Options exercised
    
    
    0
    
    
    
    0Options canceled/forfeited
    
    
    128.88
    
    
    
    (3 549
    )Options expired
    
    
    0
    
    
    
    0Balance at January 30, 2004
    
    
    109.30
    
    
    
    2 077 073


The following table summarizes the status of stock options outstanding and
exercisable at January 30, 2004:

Stock options outstanding
    
    Stock options exercisableWeighted average
    
    
    
    
    
    Weighted average
    
    
    
    
    
    Weighted averageexercise price
    
    Number of
    
    remaining
    
    Number of
    
    remaining outstanding/
    
    outstanding
    
    contractual life
    
    outstanding
    
    contractual lifeExercise price range
    
    exercisable
    
    options
    
    (in years)
    
    options
    
    (in years)82.60  111.88
    
    106.03/107.99
    
    
    1 951 243
    
    
    
    3.7
    
    
    
    1 349 347
    
    
    
    2.9160.00
    
    160.00/160.00
    
    
    125 830
    
    
    
    3.9
    
    
    
    125 830
    
    
    
    3.92 077 073
    
    
    
    
    
    
    
    1 475 177


In connection with the LTIP 2001, the Company granted 96 729 restricted Shares
of common stock, which are restricted for three years from the date of grant,
to 639 participants. These restricted shares were granted as part of the
payment of the 2000 incentive bonus, which was recorded as compensation expense
in 2000. The market value of the common stock at date of grant was CHF 112 per
Share.

In connection with the LTIP 2002, the Company granted 85 128 restricted Shares
of common stock, which are restricted for three years from the date of grant,
to 683 participants. The market value of the common stock at date of grant was
CHF 112 per Share. Compensation expense of approximately CHF 10 million has
been recognized in 2002 related to the grant of these Shares.

In connection with the LTIP 2003, the Company granted 186 503 restricted Shares
of common stock, which are restricted for three years from the date of grant,
to 720 participants. The market value of the common stock at date of grant was
CHF 85.30 per Share. Compensation expense of approximately CHF 16 million has
been recognized in 2003 related to the grant of these Shares.

ESOP
 The Company has an Employee Stock Ownership Plan (ESOP) that enables
substantially all employees to purchase annually up to 20 Shares of common
stock at a price equal to 85 percent of the average market price, defined as
the average closing price of the Shares on the Swiss Exchange for
10 trading
days prior to the purchase date of the Shares. During 2003, 1 768 employees
(2002: 1 660 employees; 2001: 2 279 employees) purchased
32 221
Shares (2002: 29 499 Shares; 2001: 40 069 Shares) for which
approximately CHF 2 million
(2002: CHF 3 million; 2001: CHF 4 million) was paid to the Company. In 2002 and
2001, no compensation expense was recorded under this plan. In 2003,
CHF 0.4 million compensation expense was recorded in connection with the adoption of
SFAS No. 123.

In
the period from January 1, 2004 through January 30, 2004, no Shares have
been purchased under the plan.

69



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##### 



MAB  The Company has a Mitarbeiterbeteiligungsplan (Employee Investment
Plan) which grants annually to most employees in Switzerland (as an enhancement
to their pension plan arrangements) the right to purchase 20 Shares (beginning
in 2003, 25 shares) of common stock at CHF 15 per Share (so long as the share
price is not greater than CHF 200 at which level the Employee Investment Plan
price may be adjusted). The rights vest at the grant date and become
exercisable at the date of the employees retirement or termination. The
following table summarizes rights activity under the MAB during 2003, 2002 and
2001:

RightsExercise price
    
    outstandingBalance at December 31, 2000
    
    
    15
    
    
    
    232 760Rights granted
    
    
    15
    
    
    
    86 240Rights exercised
    
    
    15
    
    
    
    (16 260
    )Balance at December 31, 2001
    
    
    15
    
    
    
    302 740Rights granted
    
    
    15
    
    
    
    86 040Rights exercised
    
    
    15
    
    
    
    (18 500
    )Balance at December 31, 2002
    
    
    15
    
    
    
    370 280Rights granted
    
    
    15
    
    
    
    105 275Rights exercised
    
    
    15
    
    
    
    (20 005
    )Balance at December 31, 2003
    
    
    15
    
    
    
    455 550Rights granted
    
    
    15
    
    
    
    104 200Rights exercised
    
    
    15
    
    
    
    (2 900
    )Balance at January 30, 2004
    
    
    15
    
    
    
    556 850


Compensation expense is recorded in the year the rights are granted and, in
2003, CHF 9 million (2002: CHF 8 million; 2001: CHF 8 million) of
compensation expense was recorded under this plan.

PSP  In 2001, the Company established a Performance Share Plan (PSP) for
selected senior and key management and non-executive Board Members
(participants). In accordance with the PSP, participants are granted rights to
receive shares of common stock of the Company if the performance of the
Company, defined and measured as Total Shareholder Return (TSR), during the
measurement period under the PSP meets or exceeds specified conditions and the
Share price of the Company is equal to or higher than the market value of
Shares at the beginning of the measurement period. The TSR includes three
parameters: (i) the change in the Share price from the close of the first
trading day at the beginning of the measurement period to the Share price at
the close of the last trading day at the end of the measurement period,
expressed as a percentage; (ii) any dividends paid or payable for the
measurement period and (iii) any extraordinary returns paid to the shareholders
during the measurement period. In 2001, 86 700 rights were granted to 137
participants with a measurement period from January 1, 2001 through December
31, 2003. The Share price as of the beginning of the measurement period was CHF
109.25, the market value of the shares on January 3, 2001. The rights vest
ratably over a three year period except when a participant voluntarily
terminates employment, in which case all rights are forfeited. Each right is
entitled to receive from one Share up to a maximum of four Shares of Company
common stock, depending on the Companys Share price and the Companys TSR
ranking within the benchmark group at the end of the measurement period. As a
result of terminations from the plan, a total of 2 627 rights (2002: 1 675
rights, 2001: 1 250 rights) have been returned to the Company. As the
conditions of the PSP were not met, no compensation expense was recorded
related to the fulfillment of the terms of the plan. In 2003 however, in
accordance with the adoption of No. SFAS 123, as amended, the Company recorded
CHF 1 million compensation expense for the fair value of the rights that vested
during 2003.

As
of January 30, 2004, no additional rights have been granted by, or returned
to, the Company as compared to December 30, 2003.

Change in control and reserve of shares

Upon a change in control of the Company (defined as 30 percent for LEAP, 33.33
percent other than 1998, which is 50 percent, for LTIP program, and 20 percent
for PSP, such percentage, in each case, as being a percentage of total voting
power. Additionally, for the PSP in a merger where the Companys shareholders
retain less than 50 percent of total voting power or the Companys Board does
not maintain a majority of the voting rights in the board of the combined
company), the vesting and restriction periods for the plans stated above (if
still current) will cease to apply and a cash or share payment for the value of
the outstanding plans and related taxes and duties will be due to the
participants.

At December 31, 2003, the Company had approximately 2.2 million Shares (2002:
2.0 million Shares; 2001: 1.8 million shares) of treasury stock reserved for
issuance under the various stock based compensation plans.

For
further information see Item 18  Financial
Statements and pages F-1 through F-36.

70



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##### 



Item 7. Major Shareholders and Related Party Transactions.

Major Shareholders

According to the Share Registrar of the Company and other publicly available
information as of January 30, 2004, the following persons in the table below
were known by the Company to be the owner of 2 percent or more of the Companys
Shares. These shareholders may use their voting rights up to 2 percent of the
common stock.

January 30, 2004
    
    January 31, 2003
    
    January 31, 2002Artisan Partners Limited, USA-Wisconsin
    
    
    
    
    
    
    5.0
    %
    
    
    BNP Paribas (Suisse) SA, Geneva*
    
    
    
    
    
    
    
    
    
    
    Chase Nominees Ltd, London*
    
    
    5.6
    %
    
    
    5.3
    %
    
    
    3.1
    %Mellon
Bank N.A., Everett*
    
    
    2.6
    %Putnam
Group, Boston(1)
    
    
    
    
    
    
    5.2
    %
    
    
    5.2
    %Euroclear Nominees Ltd., Bruxelles*
    
    
    
    
    
    
    
    
    
    
    Hanover Nominees Ltd., London*
    
    
    
    
    
    
    
    
    
    
    




---

|(*) |  | Registered as nominees.                                                                        
|--- |  | -----------------------------------------------------------------------------------------------
|   
|(1) |  | Of which 0.7 percent was entered into the Share Register of the Company
with the right to vote.

As
of January 30, 2004, according to the Share Register, there were
193 registered holders of ordinary shares in the United States. These ordinary
shareholders in the United States collectively held 1 326 221 ordinary shares, or
approximately 1.8 percent of the Companys total issued and outstanding Shares
as of that date. Also as of January 30, 2004, there were 266 registered holders
of American depositary receipts under an ADR program (including Cede & Co., the
DTCs nominee). Each ADR issued under the program represents one American
Depositary Share, which in turn, represents one-half of one share of the common
stock of the Company. All these registered ADR holders have addresses in the
United States. They collectively held 1 034 988 ADRs, or
approximately 0.7 percent
of the issued and outstanding ordinary Shares as of such date.

To its knowledge, the Company is not owned or controlled, directly or
indirectly, by another corporation, by any government or by any other
natural or legal person, severally or jointly.

Related Party Transactions

The Company and its subsidiaries have not entered into any material
transactions in the last three years in which any director, officer or any
associate of any director or officer of the Company has or had any interest.
No director, officer or associate of any director or officer is or was during
the last three years indebted to the Company or any of its subsidiaries. For
further information see Item 18  Financial Statements and pages F-1 through
F-36.

71



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##### 



Item 8. Financial Information.

Consolidated Financial Statements

See Item 18. Financial Statements and pages F-1 through F-36

Other Financial Information

Export Sales

The Companys products and services are primarily sold outside of its home
market, Switzerland. In 2003, approximately 99 percent of the Companys sales
of products and services produced in Switzerland were exported to other
countries.

Legal, Administrative and Arbitration Proceedings

The Company operates in countries where political, economic, social, and
regulatory developments could have a significant impact on its operational
activities. The effects of such risks on the Companys results, which arise
during the normal course of business, are not foreseeable and are therefore not
included in the accompanying Consolidated Financial Statements of this Annual
Report.

In the ordinary course of business, the Company is involved in lawsuits,
claims, investigations and proceedings, including product liability,
commercial, environmental, and health and safety matters. Although the outcome
of any such proceedings cannot be predicted, management is of the opinion that
there are no such matters pending which would be likely to have any material
adverse effect in relation to its business, financial position or results of
operations.

As a result of a dispute over certain agreements with third parties, in the
context of the Companys divestment of the Performance Polymers Business in
2000, some third parties initiated arbitration proceedings against the Company.
This dispute has been settled and will not have any material adverse effect on
the financial position or results of operations of the Company. In connection
with its Toms River, New Jersey site in the United States, the Company was
named as a defendant in several actions, most of which were
settled by the end of 2002 (see Item 4. Information on the
Company 
Environmental Matters of this Annual Report).

Dividends and Dividend Policy

The amount of dividends to be paid by the Company to its shareholders depends
on general business conditions, the Companys financial performance and other
relevant factors. The Board has adopted a policy on the proposal of dividends
which is to provide shareholders with dividend growth in line with the
underlying growth in the earnings of the Company. Under Swiss law, dividends
are paid out only if approved at the shareholders meeting. The Board may
propose that a dividend be paid out, but cannot itself set the dividend. In
practice, the shareholders usually approve the dividend proposal of the Board.

At the Companys Annual General Meeting held on March 22, 2002, the
shareholders approved the Boards proposal to pay a dividend of CHF 2.00 per
share, in respect of the fiscal year 2001. The Company paid the dividend on
March 27, 2002, which totaled CHF 134 million. At this meeting, the
shareholders also approved the Boards proposal to pay an extraordinary payment
to the shareholders in the form of a capital reduction of CHF 1 per share. The
capital reduction was in the form of a reduction in the nominal value of each
common share from CHF 10 per share by CHF 1 per share to CHF 9 per share. The
Company paid the capital reduction on June 28, 2002, which totaled CHF 69
million.

For 2002 the Board of Directors proposed to carry forward the entire retained
earnings of Ciba Specialty Chemicals Holding Inc. and not to pay a dividend.
The Board of Directors, however, proposed a cash payment to its shareholders
resulting from a capital reduction of CHF 3 per share. The capital reduction
found shareholder approval at the Annual General Meeting on March 6, 2003. The
capital reduction was effected by a reduction in the nominal value of each
share from CHF 9 per share by CHF 3 per share to CHF 6 per share. The Company
has made the payment of the capital reduction on May 23, 2003.

For 2003 the Board of Directors proposes to carry forward the entire retained
earnings of Ciba Specialty Chemicals Holding Inc. and not to pay a dividend.
The Board of Directors, however, proposes a cash payment to its shareholders
resulting from a capital reduction of CHF 3 per Share. The capital reduction is
subject to shareholder approval at the Annual General Meeting to be held on
February 26, 2003. If approved the capital reduction will take the form of a
reduction in the nominal value of each Share from CHF 6 per Share by
CHF 3 per
Share to CHF 3 per Share. The Company expects, subject to various conditions
and approval, that the payment of the capital reduction will be made to the
shareholders on May 14, 2004.

For additional information on dividends, see Item 6  Directors, Senior Management and Employees section of this Annual Report.

Significant Changes

Except as otherwise disclosed in this Annual Report, no significant change has
occurred since the date of the Consolidated Financial Statements included in
this Annual Report.

72



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##### 



Item 9. The Offer and Listing

Principal Trading Market and Price Range

The Shares are listed on the Swiss Exchange and principally traded on London
based virt-x, a Recognized Investment Exchange supervised by the Financial
Services Authority (FSA) in the U.K. and are also quoted on International
Retail Service, the London Stock Exchanges automated quotation system for
non-U.K. equity securities. The prices for Shares as quoted in the official
list of the Swiss Exchange are expressed in Swiss francs. As of August 2, 2000,
the ADRs, each representing one-half of one ordinary share of the Companys
common stock, have been listed on the New York Stock Exchange.

The information presented in the table below represents, for the periods
indicated, (i) the reported high and low closing sales prices quoted in Swiss
francs for the Shares on the Swiss Exchange and (ii) the U.S. dollar
equivalent of the price per Share based on the Noon Buying Rate on the last
trading day of the periods presented. The Shares began trading on the Swiss
Exchange on March 13, 1997, at a price of CHF 116.25 per share.

Trading Prices on the Swiss Exchange

Price per ShareHigh
    
    Low
    
    High
    
    Lowin CHF
    
    in USDAnnual highs and lows1999
    
    
    128.00
    
    
    
    103.00
    
    
    
    80.05
    
    
    
    64.412000
    
    
    122.50
    
    
    
    94.25
    
    
    
    75.61
    
    
    
    58.172001
    
    
    115.75
    
    
    
    75.00
    
    
    
    69.74
    
    
    
    45.192002
    
    
    128.00
    
    
    
    89.75
    
    
    
    92.53
    
    
    
    64.882003
    
    
    101.50
    
    
    
    74.75
    
    
    
    81.99
    
    
    
    60.38Quarterly highs and lows2001First Quarter
    
    
    115.75
    
    
    
    102.75
    
    
    
    66.68
    
    
    
    59.19Second Quarter
    
    
    110.25
    
    
    
    98.75
    
    
    
    61.36
    
    
    
    54.96Third Quarter
    
    
    108.75
    
    
    
    75.00
    
    
    
    67.18
    
    
    
    46.33Fourth Quarter
    
    
    112.00
    
    
    
    91.35
    
    
    
    67.48
    
    
    
    55.042002First Quarter
    
    
    128.00
    
    
    
    103.25
    
    
    
    76.25
    
    
    
    61.51Second Quarter
    
    
    128.00
    
    
    
    113.53
    
    
    
    85.79
    
    
    
    76.09Third Quarter
    
    
    122.00
    
    
    
    89.75
    
    
    
    82.67
    
    
    
    60.81Fourth Quarter
    
    
    108.75
    
    
    
    93.75
    
    
    
    78.62
    
    
    
    67.772003First Quarter
    
    
    101.50
    
    
    
    74.75
    
    
    
    74.18
    
    
    
    55.21Second Quarter
    
    
    94.00
    
    
    
    79.85
    
    
    
    70.17
    
    
    
    60.66Third Quarter
    
    
    98.65
    
    
    
    80.25
    
    
    
    74.69
    
    
    
    58.42Fourth Quarter
    
    
    98.20
    
    
    
    84.50
    
    
    
    79.32
    
    
    
    65.42Monthly highs and lows2003January
    
    
    101.50
    
    
    
    81.75
    
    
    
    74.18
    
    
    
    59.75February
    
    
    89.05
    
    
    
    84.00
    
    
    
    65.69
    
    
    
    61.96March
    
    
    92.85
    
    
    
    74.75
    
    
    
    68.58
    
    
    
    55.21April
    
    
    94.00
    
    
    
    85.65
    
    
    
    69.40
    
    
    
    63.23May
    
    
    91.38
    
    
    
    79.85
    
    
    
    70.17
    
    
    
    61.32June
    
    
    91.10
    
    
    
    82.00
    
    
    
    67.39
    
    
    
    60.66July
    
    
    93.25
    
    
    
    80.25
    
    
    
    67.89
    
    
    
    58.42August
    
    
    98.30
    
    
    
    89.55
    
    
    
    70.19
    
    
    
    63.94September
    
    
    98.65
    
    
    
    88.55
    
    
    
    74.69
    
    
    
    67.04October
    
    
    94.00
    
    
    
    88.10
    
    
    
    70.24
    
    
    
    65.83November
    
    
    92.00
    
    
    
    84.50
    
    
    
    71.22
    
    
    
    65.42December
    
    
    98.20
    
    
    
    90.65
    
    
    
    79.32
    
    
    
    73.222004January (through January 30)
    
    
    100.50
    
    
    
    95.25
    
    
    
    79.81
    
    
    
    75.64


The information presented in the table below represents, for the periods
indicated, the reported high and low closing sales prices quoted in USD on the
New York Stock Exchange. The Shares began trading on the New York Stock
Exchange on August 2, 2000 at a price of USD 29.50 per ADR.

73



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##### 



Trading Prices on the New York Stock Exchange

Price per ADR(1)High
    
    Lowin USDAnnual highs and lows2000 (from August 2, 2000)
    
    
    33.25
    
    
    
    26.882001
    
    
    35.44
    
    
    
    24.002002
    
    
    40.60
    
    
    
    30.832003
    
    
    38.75
    
    
    
    28.25Quarterly highs and lows2001First Quarter
    
    
    35.44
    
    
    
    29.81Second Quarter
    
    
    31.50
    
    
    
    28.88Third Quarter
    
    
    32.31
    
    
    
    24.00Fourth Quarter
    
    
    34.00
    
    
    
    26.692002First Quarter
    
    
    38.61
    
    
    
    31.44Second Quarter
    
    
    40.20
    
    
    
    37.31Third Quarter
    
    
    40.60
    
    
    
    30.83Fourth Quarter
    
    
    36.75
    
    
    
    31.752003First Quarter
    
    
    36.60
    
    
    
    28.25Second Quarter
    
    
    35.31
    
    
    
    30.29Third Quarter
    
    
    35.57
    
    
    
    30.05Fourth Quarter
    
    
    38.75
    
    
    
    31.50Monthly highs and lows2003January
    
    
    36.60
    
    
    
    30.15February
    
    
    32.60
    
    
    
    30.90March
    
    
    33.25
    
    
    
    28.25April
    
    
    34.41
    
    
    
    31.76May
    
    
    35.31
    
    
    
    30.90June
    
    
    34.35
    
    
    
    30.29July
    
    
    33.82
    
    
    
    30.05August
    
    
    34.90
    
    
    
    32.80September
    
    
    35.57
    
    
    
    33.43October
    
    
    35.22
    
    
    
    33.20November
    
    
    35.24
    
    
    
    31.50December
    
    
    38.75
    
    
    
    35.662004January
    
    
    40.61
    
    
    
    37.86




---

|(1) |  | One ADR represents one half of one share of the Company.
|--- |  | --------------------------------------------------------

On January 30, 2004, the last reported sale price was for Shares on the Swiss
Exchange CHF 95.30 and for ADRs on the New York Stock Exchange USD 38.30.
According to the Share Registrar of the Company, as of December 31, 2003, there
were 198 United States resident shareholders holding 1 283 538 Shares,
representing approximately 1.8 percent of the issued and outstanding Shares as
of such date, and there were 313 registered United States resident holders of
American Depositary Receipts holding 1 028 988 ADRs, representing approximately
0.7 percent of the issued and outstanding Shares as of such date.

The information presented in the table below represents, for the periods
indicated, the approximate average daily volumes of the Shares traded on the
Swiss Exchange:

First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter2003
    
    
    419 000
    
    
    
    316 000
    
    
    
    343 000
    
    
    
    496 0002002
    
    
    440 000
    
    
    
    300 000
    
    
    
    370 000
    
    
    
    275 000


74



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##### 



The information presented in the table below represents, for the periods
indicated, the average approximate daily volumes of the ADRs traded on the New
York Stock Exchange:

First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter2003
    
    
    5 150
    
    
    
    3 140
    
    
    
    2 930
    
    
    
    3 6802002
    
    
    4 130
    
    
    
    4 094
    
    
    
    5 720
    
    
    
    4 386


The above information was supplied by the Swiss Exchange via the Swiss Market
Feed, Citibank N.A., and Reuters, all of which supply such data to their
customers, subscribers and other information providers.

Trading Practices and Procedures on the Swiss Exchange/virt-x

The Swiss Exchange is a private organization comprised of 94 members. As of
December 31, 2003, 289 Swiss companies and 130 foreign companies were listed
on the Swiss Exchange. Securities traded on the Swiss Exchange include Swiss
and foreign bonds, equities, investment funds, rights and warrants.

The aggregate market value of domestic equity securities (free float) listed on
the Swiss Exchange as of December 31, 2003, was CHF 746 billion. As of December
31, 2003, the 10 largest companies in terms of market capitalization (free
float) represented CHF 593 billion, or approximately 80 percent of the Swiss
Exchanges aggregate market capitalization. Average monthly trading volume
during 2003 was CHF 76.1 billion.

With the creation of virt-x in London in 2001, the SWX Group swiftly put in
place a securities exchange approved by the UK authorities and based on
existing SWX technology. The value-added chain already established in
Switzerland was thus extended to cross border trading. The virt-x market is
based on an integrated trading, clearing and settlement model, which not only
simplifies the process of trading pan-European blue chips but also
significantly reduces the costs associated with trading cross border at every
stage of the process. The volume of trades in Swiss blue chips has been
expanded since virt-x was opened, and the exchange has continued to hold its
own in the intensely competitive international market for trading in highly
capitalized equity securities. Its market share in Swiss blue chip trading has
increased significantly, from 74% in 2001 to 81% at the end of 2002.
Participants rate the technology provided by the SWX Swiss Exchange as
efficient, reliable and cost-effective.

75



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##### 



Item 10. Additional Information

Memorandum and Articles of Incorporation (Articles)

Set out below is a summary of certain provisions of the Companys Articles and
of the Swiss Code of Obligations relating to the Shares. This description does
not purport to be complete and is qualified in its entirety by reference to the
Articles, which are an exhibit to this Annual Report, and Swiss law.

Purpose of the Company

Section 2 of the Companys Articles establishes that the purpose of the Company
is the acquisition, holding and disposition of enterprises which are also
active in the area of specialty chemicals. The Company may acquire, mortgage,
liquidate or sell real estate and intellectual property rights in Switzerland
or abroad and finance other companies.

Conflict of interest

Swiss law does not have a general provision regarding conflicts of interest.
However, the Swiss Code of Obligations requires directors and members of senior
management to safeguard the interests of the Company and, in this connection,
imposes a duty of care and a duty of loyalty on directors and officers. The
breach of these provisions may result in personal liability for the directors
and officers towards the Company or its shareholders. Swiss law also provides
that payments made to a shareholder or a director or any person(s) associated
therewith other than at arms length must be repaid to the Company if the
shareholder, director or associated person(s) has or have acted in bad faith.
In addition, the by-laws of the Company provide that the Members of the Board
of Directors are required to abstain from voting on matters which relate to
their own personal interests or to the interests of legal or natural persons
with whom they are associated.

Directors

According to Section 25 of the Articles, the Board of Directors can pass
resolutions with respect to all matters which are not reserved to the authority
of the General Meeting of Shareholders, by law or by the Articles. The power to
borrow falls within the competencies of the Board of Directors which has
delegated part of this power to the Finance Committee. Exercise of this power
does not require shareholder approval. Neither Swiss law nor the Articles
restrict in any way the Companys power to borrow or otherwise raise funds.

Members of the Board retire upon their 68th birthday. The retirement is
effective on the date of the next Ordinary Shareholders Meeting. Under
special circumstances the Board can make exceptions to this rule. Both Swiss
law and the Articles require that the Directors be shareholders of the
Company. Ownership of one share is sufficient to satisfy this condition.

Shares and Transfer of Shares

For
information on the Shares, see also Item 6  Directors, Senior
Management and Employees section of this Annual Report.

The transfer of Shares (for as long as they are book-entry Shares) is effected
by an entry in the books of a bank or depositary institution following an
assignment in writing by the selling shareholder and notification of such
assignment to the Company. In the event that the Shares are printed, the
transfer is effected by delivery of the endorsed Share certificate. The right
to exercise voting rights with regard to the Shares further requires that the
name of the purchaser be registered in the share register (Aktienbuch) of the
Company. Failing such registration, the purchaser may not vote at shareholders
meetings.

There are no restrictions on the transfer of Shares. However, no shareholder
may be registered as a shareholder with voting rights for more than 2 percent
of the Companys share capital. A shareholder purchasing more than 2 percent of
the Companys share capital will be recorded in the Companys share register
for the Shares in excess of 2 percent of the Companys share capital as a
shareholder without voting rights. The Board or a committee designated by the
Board may, however, on a case-by-case basis allow some or all of the excess
shares to be registered with voting rights. For purposes of the 2 percent rule,
natural persons and/or legal entities acting in concert are considered to be
one shareholder.

A purchaser of Shares will be recorded in the Companys share register if the
purchaser discloses its name, citizenship and address and gives a declaration
that it has acquired the Shares in its own name and for its own account. The
Articles provide that shareholders may register their Shares in the name of a
nominee approved by the Company, including Euroclear Bank S.A./NV as operator
of the Euroclear System (Euroclear), Clearstream Banking, société anonyme
(Clearstream Luxembourg), and the Depositary, and may exercise their voting
rights by giving instructions to such nominee to vote on their behalf. However,
the Company has agreed to exempt the Depositary and the custodian and their
respective nominees, if any (but no individual Holder or Beneficial Owner of
ADSs), from the 2 percent limitation in respect of Deposited Securities held in
connection with the ADR facility created by the Deposit Agreement (as defined
therein)to the extent that (a) the Depositary requires each Holder who provides
voting instructions to the Depositary upon the terms of the Deposit Agreement
to certify (the Voter Certification) that (i) such Holder does not
beneficially own, directly or indirectly, more than 2 percent of the share
capital of the Company in the form of Shares or ADSs and (ii) neither such
Holder nor any of its affiliates has filed, or is under any obligation to file,
a Schedule 13D or 13G under the Exchange Act in respect of the Shares or the
ADSs (if any such Holder fails to provide such Voter Certification to the
Depositary, the Depositary will disregard any voting instructions received from
such Holder unless otherwise instructed by the Company), and (b) the Deposited
Securities held in the ADR facility do not exceed the 5 percent limitation.

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Annual General Meetings

For
information on annual general meetings, see also Item 6  Directors,
Senior Management and Employees section of this Annual Report.

Under Swiss law, an annual, ordinary shareholders meeting must be held within
six months after the end of the Companys business year. Shareholders
meetings may be convened by the Board or, if necessary, by the statutory
auditors. The Board is further required to convene an extraordinary
shareholders meeting if so resolved by a shareholders meeting or if so
requested by holders of Shares holding in aggregate at least 10 percent of the
nominal Share capitals of the Company.

The shareholders at a shareholders meeting also have the power to vote on
amendments to the Articles, to elect the members of the Board and the statutory
auditors, to approve the annual report and the annual Company accounts, to set
the annual dividend, to grant the Members of the Board and management discharge
from liability for matters disclosed to the shareholders meeting, and to order
an independent investigation into the specific matters proposed to the
shareholders meeting (Sonderprüfung).

At shareholders meetings, shareholders can be represented by proxy but only by
another shareholder, a proxy appointed by the Company, an independent
representative nominated by the Company or a depositary institution. Proxy may
also be given to the legal representative of the shareholder. Subject to
certain exceptions set forth in the Articles, no shareholder (or group of
shareholders acting in concert) may represent more than 5 percent of the
Companys share capital at any shareholders meeting. For purposes of this 5
percent limit, natural persons and/or legal entities acting in concert are
considered to be one shareholder. The 5 percent limit does not apply to banks
exercising proxies granted by their customers, to shareholders representatives
acting under statutory rules or to nominees, provided such nominees comply with
the disclosure requirement discussed above (see  Shares and Transfer of
Shares). Votes are taken on a show of hands unless it is resolved at the
shareholders meeting to have a ballot or such ballot is ordered by the
Chairman of the meeting.

Liquidation

According to Swiss Law, each shareholder is entitled to receive the part of
the assets of a company remaining after its liquidation which is
proportional to its paid in shareholding.

Redemption provision

Swiss law limits the number of Shares which the Company may hold or repurchase.
The Company and its subsidiaries may repurchase Shares only if (i) the Company
has sufficient free reserves to pay the purchase price and (ii) the aggregate
nominal value of such Shares does not exceed 10 percent of the nominal Share
capital of the Company. Shares held by the Company and its subsidiaries do not
have any voting rights. Furthermore, the Company must create a reserve on its
balance sheet in the amount of the purchase price of the acquired Shares. Share
buy-backs by the Company may be subject to certain adverse tax consequences in
Switzerland.

Sinking fund provision

If liabilities exceed assets, the Board of Directors must notify the competent
court at the registered office of the Company thereof.

Further capital calls by the Company

Since all of the Companys issued and outstanding Shares have been fully paid
in, the Company has no further capital calls.

Mandatory bid rule

For
information on the mandatory bid rule, see Item 6  Directors, Senior
Management and Employees section of this Annual Report.

Preemptive rights

Under Swiss law, any share issue, whether for cash or non-cash consideration,
is subject to the prior approval at the shareholders meeting. Shareholders of
the Company have certain preemptive rights to subscribe for new issues of
Shares in proportion to the nominal amount of Shares held. A resolution adopted
at a shareholders meeting with a two-thirds majority may, however, limit or
suspend preemptive rights in certain limited circumstances.

At the 1998 shareholders meeting, the shareholders of the Company authorized
the Board to issue from time to time up to two million Shares for the purpose
of accommodating options and conversion rights granted to the Companys
employees and excluded the subscription rights of the holders of the Shares
regarding thereto.

At the same meeting, the shareholders of the Company also authorized the Board
to issue from time to time up to four million additional Shares at its
discretion and to allot preferential subscription rights relating thereto to
third parties in the event that the additional Shares are used by shareholders
to takeover a business, in whole or in part, or to participate in or finance
such takeover. According to article 651 of the Swiss Code of Obligations, this
authorization was only valid for two years. At the Annual General Meeting held
on April 13, 2000 and again on March 22, 2002, the shareholders consented to
extend this authorization for another two years. The Board proposes to the
shareholders another two year extension at the next Annual General Meeting
which takes place on February 26, 2004.

In addition to the above, the shareholders also authorized the Board to issue
from time to time up to four million additional Shares in connection with the
execution of option and conversion rights and to exclude the subscription
rights of the holders of Shares regarding thereto.

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Notices

Notices to shareholders are validly made by publication in the Swiss Official
Gazette of Commerce. The Board may designate further means of communication for
publishing notices to shareholders.

Duration and Liquidation

The Articles do not limit the Companys duration.

The Company may be dissolved at any time by a shareholders resolution which
must be passed by (i) a simple majority of the Shares represented at the
meeting if the Company is being dissolved by way of liquidation and (ii)
two-thirds of the Shares represented at the meeting if the Company is being
dissolved for other reasons (for example, in a merger where the Company is not
the surviving entity).

Under Swiss law, any surplus arising out of a liquidation (after
settlement of all claims of creditors) is distributed to shareholders in
proportion to the paid-up nominal value of Shares held.

Disclosure of Principal Shareholders

Under the applicable provisions of the Swiss Stock Exchange Act, shareholders
(and groups of shareholders acting in concert) who own shares or other
securities representing more than 5 percent, 10 percent, 20 percent, 33 1/3
percent, 50 percent or 66 2/3 percent of the voting rights of a company
incorporated in Switzerland of which at least one class of equity securities is
listed on the Swiss Exchange are required to notify the company and the Swiss
Exchange of such holdings, whether or not the voting rights can be exercised.
Following receipt of such notification, the company is required to inform the
public. The same disclosure obligation applies to subsequent reductions in the
holding of voting rights below the thresholds described above.

An additional disclosure obligation exists under Swiss corporate law pursuant
to which the Company must disclose the identity of all of its shareholders (or
related groups of shareholders) who hold more than 2 percent of its voting
rights (i.e. shareholders owning shares in excess of the limit set forth in the
Articles; see  Shares and Transfer of Shares). Disclosure of shareholders
owning more than 2 percent but less than 5 percent of the voting rights in the
Company must only be made once a year in the notes to the financial statements
published in the annual report. See Item 7.  Major Shareholders and Related
Party Transactions in this Annual Report.

Material Contracts

ADR Deposit Agreement

Pursuant to Second Amended and Restated Deposit Agreement (including all
exhibits thereto, the Deposit Agreement) dated as of August 2, 2000 among the
Company, Citibank, N.A., and the registered holders and beneficial owners from
time to time of the ADRs of the Company, ADRs evidencing ADSs are issuable by
Citibank on behalf of the Company. Each ADS represents the right to receive
one-half of one Share deposited under the Deposit Agreement. Shares are
deposited to an account maintained by Citibank, N.A., Zürich Branch, as the
custodian and agent of the Depositary in Switzerland. Only persons in whose
names ADRs are registered on the books of the Depositary are treated by the
Depositary and the Company as the absolute owners of such ADRs.

EMTN Program

In 1997, the Company set up a Euro Medium Term Notes program under which
certain specified subsidiaries of the Company may issue bonds up to an
aggregate amount of USD 2 billion. The program documentation, among Ciba
Specialty Chemicals Corporation, Ciba Specialty Chemicals Eurofinance Ltd.,
Ciba Specialty Chemicals PLC, Ciba Spezialitätenchemie Holding Deutschland
GmbH, the Company and the Dealers named thereon, includes an offering circular,
a program agreement, a deed of covenant and a guarantee by the Company, and is
updated annually, most recently on March 27, 2003. As of December 31, 2003,
approximately CHF 707 million (USD 566 million) of indebtedness was outstanding
under the program. The Company currently has no plans to utilize this program
in the future.

Exchange Controls

There are no legislative or other legal provisions currently in force in
Switzerland or arising under the Articles restricting the export or import of
capital, including, but not limited to, the availability of cash and cash
equivalents for use by the Companys group, or that affect the remittance of
dividends, interest or other payments to nonresident holders of securities of
the Company. Cash dividends payable in Swiss francs on Shares and ADSs may be
officially transferred from Switzerland and converted into any other
convertible currency. There are no limitations imposed by Swiss laws or the
Companys Articles on the right of non-Swiss residents to hold or vote the
Shares or ADSs, as described above under Memorandum and Articles of
Incorporation (Articles).

Taxation

Swiss Taxation

Swiss Tax Consequences of Holding Shares or ADSs

The following is a summary of the material Swiss tax consequences of the
ownership of Shares or ADSs, in particular by United States holders (as defined
below; see  United States Taxation). The summary does not purport to be a
comprehensive description of all of the tax considerations that may be relevant
to a decision to purchase Shares or ADSs, and prospective investors should
consult their professional advisors as to the tax consequences of their
purchase, ownership and disposition of Shares and ADSs. In particular, the
summary does not address the tax treatment of holders subject to special tax
rules, such as banks, insurance companies and dealers in securities, investors
liable for alternative minimum tax or

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investors who hold Shares or ADSs as part of a straddle or hedging or a
conversion transaction, some of which may be subject to special rules. This
summary should not be read as extending by implication to matters not
specifically discussed herein. Additional rules may apply to holders of 10
percent or more in voting power or value of the Shares and ADSs. With respect
to United States holders, this discussion generally applies only to such
holders who hold Shares or ADSs as a portfolio investment.

The description of the Swiss and United States tax laws and practices set forth
below is based on the statutes, regulations, rulings, judicial decisions and
other authorities as in force and as applied in practice on the date of this
Annual Report and is subject to changes to those laws and practices, subsequent
to that date, which changes could be made on a retroactive basis.

It is assumed for purpose of this summary that a United States holder is
entitled to the benefits of the Swiss-American Treaty on Double Taxation (the
Treaty). A United States holder would generally be eligible for the benefits
of the Treaty. However, certain exceptions apply, including (a) United States
citizens or residents that do not have a substantial presence, permanent home
or habitual abode in the United States, and (b) United States corporations that
fail to satisfy the limitations on benefits provisions of Article 22 of the
Treaty because of the nature of their activities in the United States and the
nature of their shareholders.

Swiss Withholding Tax on Dividends and Distributions

Dividends paid and similar cash or in kind distributions made by the Company to
a holder of Shares or ADSs (including dividends on liquidation proceeds and
stock dividends) are subject to a Swiss federal withholding tax (the
Withholding Tax) at a rate of 35 percent. The Withholding Tax must be
withheld by the Company from the gross distribution and be paid to the Swiss
Federal Tax Administration. The Withholding Tax is refundable in full to a
Swiss resident who receives a distribution if such resident is the beneficial
owner of the payment and duly reports the gross distribution received on his
tax return.

An individual or corporation that is a resident of a country other than
Switzerland and that owns or is deemed to own Shares or ADSs will be subject to
the 35 percent Withholding Tax. The Withholding Tax, however, is a final charge
for non-residents unless, such an individual or corporation could be eligible
for a partial exemption or refund of the Withholding Tax if a tax treaty is in
effect between such individuals or corporations country of residence and
Switzerland. Switzerland has concluded such treaties with the United States,
Canada, Japan, all European Union member states and certain other countries.

The Depositary intends to make use of informal procedures under which it will
submit a certificate to the Swiss tax authorities in respect of all United
States holders who have provided certifications of their entitlement to Treaty
benefits. So long as these procedures remain available it generally should be
possible for qualifying United States holders to recover on a timely basis
Withholding Tax in excess of the 15 percent rate as provided in the Treaty.
There can be no assurance that these informal procedures will remain available.

Alternatively, a United States holder that qualifies for Treaty benefits (a
United States resident) may apply on an individual basis for a refund of the
Withholding Tax withheld in excess of the 15 percent Treaty rate. The claim for
refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse
65, 3003 Berne, Switzerland (http://www.estv.admin.ch). The form used for
obtaining a refund is Swiss Tax Form 82I for individuals, Form 82C for
corporations, Form 82 E for other United States citizens, and Form 829 for
Swiss citizens resident in the United States, which may be obtained from any
Swiss Consulate General in the United States or from the Swiss Federal Tax
Administration at the address above. The form must be filled out in triplicate
with each copy duly completed and signed before a notary public in the United
States. The form may be filed no earlier than July 1 or January 1 following the
dividend date but no later than December 31 of the third year following the
calendar year that includes the dividend date. The form must be accompanied by
evidence of the deduction of Withholding Tax withheld at the source.

Stamp Duties upon Transfer of Securities (Umsatzabgabe)

The sale of Shares may be subject to a Swiss securities transfer stamp duty of
0.15 percent calculated on the sale proceeds if it occurs through or with a
Swiss bank or other Swiss securities dealer as defined in the Swiss Federal
Stamp Tax Act.

Summary of Swiss Tax Consequences

A non-resident holder of Swiss shares will not be liable for any Swiss taxes
other than the Withholding Tax described above and the Swiss Securities
transfer stamp duty if the transfer occurs through or with a Swiss securities
dealer. If, however, the Shares can be attributed to a permanent establishment
or fixed place of business maintained by such person within Switzerland, the
Shares may be subject to Swiss taxes generally.

United States Taxation

The following is a general summary of certain United States federal income tax
consequences of the purchase, ownership, and disposition of Shares and ADSs.
The summary does not purport to be a comprehensive description of all of the
tax considerations that may be relevant to a decision to purchase Shares or
ADSs, and prospective investors should consult their professional advisors as
to the tax consequences of their purchase, ownership and disposition of Shares
and ADSs.

For purposes of this discussion, a United States holder means any individual,
citizen or resident of the United States for United States federal income tax
purposes, corporations created or organized under the laws of the United States
or any state thereof or the District of Columbia, or estates or trusts which
are residents in the United States for United States federal income tax
purposes, in each case who:

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| |  | is not also resident of, or ordinarily resident in Switzerland for Swiss tax
purposes;
|- |  | --------------------------------------------------------------------------------------



| |  | is not engaged in a trade or business in Switzerland through a permanent
establishment; and
|- |  | -------------------------------------------------------------------------------------------



| |  | does not own, directly, indirectly or by attribution, 10 percent or more of
the Shares (by vote or value).
|- |  | ----------------------------------------------------------------------------------------------------------

This summary is of a general nature only and does not discuss all aspects of
United States and Swiss taxation that may be relevant to a particular investor.
This summary deals only with Shares and ADSs held as capital assets and does
not address special classes of purchasers, such as dealers in securities,
United States holders whose functional currency is not the U.S. dollar and
certain United States holders (including, but not limited to, insurance
companies, tax-exempt organizations, financial institutions and persons subject
to the alternative minimum tax) who may be subject to special rules. In
particular, the following summary does not address the adverse tax treatment of
United States holders who own, directly, or by attribution, one or more of the
Companys outstanding classes of voting stock in the event that the Company
were to be classified as a Controlled Foreign Corporation for United States
federal income tax purposes. The Company was not classified as a Controlled
Foreign Corporation at December 31, 2003. There can, however, be no assurance
that it will not be a Controlled Foreign Corporation in the future.

Owners of ADSs are advised to consult their own tax advisors with respect to
the United States federal, state and local tax consequences, of the ownership
of ADSs and Shares applicable to their particular tax situations.

For purposes of tax treaties and United States tax laws, United States
holders will be treated as the owners of the Shares represented by ADSs.

United States Income Tax on Dividends

The gross amount of any dividends received with respect to the ADSs or Shares
(including amounts withheld in respect of the Withholding Tax) generally will
be subject to United States federal income taxation as foreign source dividend
income, and will not be eligible for the dividends received deduction allowed
to corporations. For this purpose, a dividend will include any distribution
paid by the Company with respect to the ADSs or Shares, as the case may be, but
only to the extent such distribution is not in excess of the Companys current
and accumulated earnings and profits as defined for United States federal
income tax purposes. Any distribution that exceeds the Companys earnings and
profits will be treated as a nontaxable return of capital to the extent of the
United States holders tax basis in the ADSs or Shares and thereafter as
capital gain. Dividends paid in Swiss francs will be includable in the income
of United States holders in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the date of receipt by the holder, or in the case of
Shares held in ADS form, by the Depositary. If dividends paid in Swiss francs
are converted into U.S. dollars on the date of receipt, holders generally
should not be required to recognize foreign currency gain or loss in respect of
the dividend income.

Subject to generally applicable limitations under United States tax law, the
non-recoverable portion of the Withholding Tax (at the 15 percent rate as
provided in the Treaty) will be treated as a foreign income tax that is
eligible for credit against a holders United States federal income tax
liability or, at the holders election, may be deducted in computing taxable
income.

United States residents that receive a Treaty refund may be required to
recognize foreign currency gain or loss to the extent the amount of the refund
(in U.S. dollars) received by the United States resident differs from the U.S.
dollar equivalent of the Treaty refund on the date the dividends were received
by the United States resident or (in the case of ADSs) the Depositary.

United States Capital Gains Tax upon Disposal of ADSs or Shares

Gains realized by a United States holder on the sale or other disposition of
ADSs or Shares generally will be subject to United States federal income
taxation as capital gain, and generally will be treated as United States source
income. A United States holder will recognize capital gain or loss on the
disposition of ADSs or Shares equal to the difference between the amount
realized upon the disposition and the United States holders tax basis in the
ADSs or Shares. Such capital gain will be long-term capital gain if the ADSs or
Shares were held for more than one year. Deposits and withdrawals of Shares in
exchange for ADSs will not result in the realization of gain or loss for United
States federal income tax purposes.

United States Information Reporting and Backup Withholding Obligations

Dividends paid on ADSs or Shares to a United States person are generally
subject to information reporting and may be subject to backup withholding at
the rate of 30 percent for payments made in 2003 and 2004, unless the holder
(i) is a corporation or other exempt recipient or (ii) provides a taxpayer
identification number and certifies that no loss of exemption from backup
withholding has occurred.

Dividends paid on ADSs or Shares to a holder that is not a United States person
are generally exempt from information reporting and backup withholding under
current law. However, such a holder may be required to provide a certification
to ensure such exemption.

Documents on Display

The following documents referred to herein can be obtained from the Company at
its registered office at Klybeckstrasse 141, 4002 Basel, Switzerland.

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Item 11. Quantitative and Qualitative Disclosures About Market Risk

Market risk due to fluctuating foreign currency exchange rates and interest rates

As a result of its global operating and financial activities, the Company is
exposed to market risk from changes in foreign currency exchange rates and
interest rates. The Company actively manages the resulting exposure through its
regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. In accordance with the
written policies of the Company, such instruments are used only as risk
management tools and not for speculative or trading purposes. The Companys
written policy with respect to the use of risk management tools has not changed
since 1997.

The Company collects global cash flow information on a monthly basis and, based
on these cash flows, prepares a consolidated exposure forecast by currency and
determines to what extent these consolidated currency exposures will be hedged.
Foreign currency forwards and swaps as well as options may be used to reduce
the Companys exposure that results from the market risk arising from the
fluctuation of foreign currency exchange rates. To reduce the cost of such
activities, the Company may sell covered options. Potential losses, if any, on
these sold options would be substantially offset by gains on the underlying
transactions that are hedged. The Companys primary net foreign currency market
exposures include the U.S. dollar, the euro, the British pound and the Japanese
yen. In 2003, the Companys hedging activities have to a large extent focused
on the U.S. dollar. However, hedging activities on the other major currencies
as well as on selected minor currencies have also been undertaken.

The fair value of foreign currency exchange contracts is sensitive to changes
in foreign currency exchange rates. As of December 31, 2003, a 10 percent
appreciation in foreign currency exchange rates against the Swiss franc, with
all other variables held constant, would have resulted in a decrease in the
fair value of the Companys financial instruments of CHF 81 million.
Conversely, a 10 percent depreciation in these currencies would have resulted
in an increase in the fair value of the Companys financial instruments of CHF
93 million as of December 31, 2003. As the impact of offsetting changes in the
fair value of the underlying positions is not included in the sensitivity
model, these results are not indicative of an increase or decrease in the
Companys actual exposure to foreign currency exchange risk. Consistent with
the nature of the economic hedge of such foreign currency exchange contracts,
such unrealized gains or losses would be compensated by the corresponding
decreases or increases of the underlying transaction being hedged. The fair
value of foreign currency forwards and swaps is calculated by separating the
two components and applying the forward rate and the balance sheet rate as well
as a discount factor. The discount factor is composed of the respective yield
curves as well as the number of days until maturity. The fair value of options
is calculated by applying the Black-Scholes model.

The Company is exposed to market risks due to fluctuating interest rates
primarily through its borrowing activities and less so through its investments.
The Company utilizes borrowings denominated in Swiss francs and in foreign
currencies to fund its working capital and investment needs. The majority of
short-term borrowings are in foreign currencies and floating interest rate
instruments whereas the majority of long-term borrowings are in fixed interest
rate instruments. The Company manages its ratio of fixed to floating interest
rate instruments with the objective of achieving a mix which is appropriate
both in terms of risk and cost. To manage this mix effectively, the Company,
selectively, enters into interest rate swaps and forward rate agreements, in
which it agrees to exchange various combinations of fixed and variable interest
rates based on agreed-upon nominal amounts.

There is inherent roll-over risk for borrowings as they mature and are renewed
at current market rates. Based on the short-term and long-term debt balance
outstanding at December 31, 2003, a hypothetical one percentage point increase
in interest rates for a one-year period would have reduced net income by CHF
14 million. The assumption is that the floating rate debt would be impacted by
this hypothetical one percentage point increase but not fixed rate agreements.

Item 12. Description of Securities Other than Equity Securities

Not applicable.

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds

None.

Item 15. Controls and Procedures

Based on managements evaluation (with the participation of the Chief Executive
Officer and Chief Financial Officer), the Chief Executive Officer and Chief
Financial Officer have concluded that as of December 31, 2003, the disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, (the Exchange Act)) are
effective to provide reasonable assurance that information required to be
disclosed in this Annual Report on Form 20-F is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.

Since the last evaluation by the Company of the Companys internal controls
there have not been any significant changes in the internal controls, or in
factors that could significantly affect the internal controls.

Item 16A. Audit Committee Financial Expert

For information related to the Audit Committee Financial Expert see Item 6,
Directors, Senior Management and Employees

Item 16B. Code of Ethics

For information related the Companys Code of Ethics see Item 6, Directors,
Senior Management and Employees

Item 16C. Principal Accountant Fees and Services

For information related to the Audit Committee Financial Expert see Item 6,
Directors, Senior Management and Employees. For information with regard to
pre-approval procedures and fees paid to the auditor, please see Auditors in
Item 6.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not
applicable.

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PART III

Item 17. Financial Statements

The Company is furnishing financial statements pursuant to the instructions of
Item 18 of Form 20-F.

Item 18. Financial Statements

See pages F-1 through F-36

Item 19. Exhibits

(a) The following consolidated financial statements, together with the
auditors reports of Ernst & Young Ltd and Arthur Andersen AG, are filed as
part of this Annual Report:

Index to Consolidated Financial Statements
    
    PageReport of Independent Auditors  Ernst & Young Ltd.
    
    F-2Independent Auditors Report  Arthur Andersen AG
    
    F-3Consolidated Statements of Income
for the Years ended December 31, 2003, 2002 and 2001
    
    F-4Consolidated Balance Sheets at
December 31, 2003 and 2002
    
    F-5Consolidated Statements of Cash
Flows for the Years ended December 31, 2003, 2002 and 2001
    
    F-6Consolidated Statements of
Shareholders Equity for the Years ended December 31, 2003,
2002 and 2001
    
    F-7Business Segment Data
    
    F-8Geographic Data
    
    F-11Notes to Consolidated Financial Statements
    
    F-12


All schedules are omitted because they are not applicable or because the
required information is contained in the Consolidated Financial
Statements or Notes thereto.

(b) Documents filed as exhibits to this registration statement:

+1.1
    
    Articles of Association of Ciba Specialty Chemicals Holding Inc. dated March 22, 2002.**1.2
    
    Specimen share certificate of Ciba Specialty Chemicals Holding Inc.*  2.1
    
    Second Amended and Restated Deposit Agreement dated as of August 2, 2000, between Ciba Specialty
Chemicals Holding Inc., Citibank, N.A., and the additional parties named therein.*  2.2
    
    Form of American Depositary Receipt of Ciba Specialty Chemicals Holding Inc.4.1
    
    EMTN Programme Agreement in respect of a USD 2 billion Euro Medium Term Note Programme dated
March 27, 2003, among Ciba Specialty Chemicals PLC, Ciba Specialty Chemicals Corporation, Ciba
Specialty Chemicals Eurofinance Ltd., Ciba Spezialitätenchemie Holding Deutschland GmbH, Ciba Specialty
Chemicals Holding Inc., Credit Suisse First Boston (Europe) Limited and the additional parties named therein.4.2
    
    EMTN Deed of Covenant in respect of a USD 2 billion Euro Medium Term Note Programme dated March 27,
2003, by each of Ciba Specialty Chemicals Corporation, Ciba Specialty Chemicals Eurofinance Ltd., Ciba
Specialty Chemicals PLC, Ciba Spezialitätenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals
Holding Inc., in favor of the account holders of Clearstream Banking, société anonyme and the additional
beneficiaries named therein.4.3
    
    EMTN Deed of Guarantee in respect of a USD 2 billion Euro Medium Term Note Programme dated March
27, 2003, by Ciba Specialty Chemicals Holding Inc.4.4
    
    EMTN Agency Agreement in respect of a USD 2 billion Euro Medium Term Note Programme dated March
27, 2003, among Ciba Specialty Chemicals PLC, Ciba Specialty Chemicals Corporation, Ciba Specialty
Chemicals Eurofinance Ltd., Ciba Spezialitätenchemie Holding Deutschland GmbH, Ciba Specialty Chemicals
Holding Inc., The JP Morgan Chase Bank and J.P. Morgan Bank Luxembourg S.A.
The total amount of long-term debt securities of the Company or of its subsidiaries authorized under any
other instrument does not exceed 10 percent of the total assets of the Company on a consolidated basis.
The Company hereby agrees to furnish to the Commission, upon its request, a copy of any instruments


83



---



##### 



defining the rights of holders of long-term debt of the Company or of its subsidiaries for which consolidated
or unconsolidated financial statements are required to be filed.**4.8
    
    Master Spin-off Agreement dated December 20, 1996, between Novartis AG and Ciba Specialty Chemicals
Holding Inc.**4.9
    
    Transaction Agreement re: Sale of the Performance Polymers division to Morgan Grenfell Private Equity
dated December 14, 1999, by and between Ciba Specialty Chemicals Holding Inc. and Avanti N03.8.1
    
    List of Certain Subsidiaries.10.1
    
    Consent of Ernst & Young Ltd.12.1
    
    Certification Pursuant to Rule 13a-14(A)/15d-14(A)12.2
    
    Certification Pursuant to Rule 13a-14(A)/15d-14(A)13.1
    
    Certification Pursuant to 18 U.S.C. Section 1350




---

|+  |  | Incorporated by reference from the Form 6-K of Ciba Specialty
Chemicals Holding Inc., filed May 23, 2003. (File No. 333-56040)                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|*  |  | Incorporated by reference to Post-Effective Amendment No. 1 to
the Registration Statement of Ciba Specialty Chemicals Holding
Inc. on Form F-6, filed August 2, 2000. (File No. 082-04541)
|  
|** |  | Incorporated by reference to the Registration Statement of Ciba
Specialty Chemicals Holding Inc. on Form 20-F                                                                             

84



---



##### 



Signature

Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, Ciba Specialty Chemicals Holding Inc. certifies that it has reasonable
grounds to believe that it meets all requirements for filing on Form 20-F and
has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Ciba Specialty Chemicals Holding Inc.,-s- Michael JacobiBy:
    
    /s/ Michael JacobiName: Michael JacobiTitle: Chief Financial Officer


Date: February 3, 2004

85



---



##### 



Index to consolidated financial statements

Report of independent auditors  Ernst & Young Ltd.
    
    
    F-2Independent auditors report  Arthur Andersen AG
    
    
    F-3Consolidated
statements of income for the years ended December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated balance sheets at December 31, 2003 and 2002
    
    
    F-5Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001
    
    
    F-6Consolidated statements of shareholders equity for the years ended December 31, 2003, 2002 and 2001
    
    
    F-7Business segment data
    
    
    F-8Geographic data
    
    
    F-11Notes to consolidated financial statements
    
    
    F-12


F-1



---



##### 



Report of independent auditors

To the Board of Directors and Shareholders of Ciba Specialty Chemicals Holding Inc.

We have audited the accompanying consolidated balance sheets of Ciba Specialty
Chemicals Holding Inc. (the Company) as of
December 31, 2003 and 2002, and the
related consolidated statements of income, shareholders equity, and cash flows
for the years then ended, appearing on pages F-4 to F-36 of this Annual Report.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements of Ciba Specialty
Chemicals Holding Inc. for the year ended December 31, 2001, were audited by
other auditors who have ceased operations as a foreign associated firm of the
Securities and Exchange Commission Practice Section of the American Institute
of Certified Public Accountants and whose report dated January 18, 2002
expressed an unqualified opinion on those statements.

We
conducted our audits in accordance with auditing standards generally
accepted in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ciba Specialty
Chemicals Holding Inc. at December 31, 2003 and 2002, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, in 2003 the Company adopted Financial Accounting
Standards Board Interpretation No. 46 Consolidation of Variable Interest Entities and changed its method of accounting for stock-based employee compensation respectively.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets. As
discussed above, the financial statements of Ciba Specialty Chemicals Holding
Inc. as of December 31, 2001, and for the year ended December 31, 2001, were
audited by other auditors who have ceased operations as a foreign associated
firm of the Securities and Exchange Commission Practice Section of the American
Institute of Certified Public Accountants. As described in Note 1, these
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards (Statement) No. 142,
Goodwill and Other Intangible Assets, which was adopted by the Company as of
January 1, 2002. Our audit procedures with respect to the disclosures in Note 1
with respect to 2001 included (a) agreeing the previously reported net income
to the previously issued financial statements and the adjustments to reported
net income representing amortization expense (including any related tax
effects) recognized in those periods related to goodwill, intangible assets
that are no longer being amortized, deferred credits related to an excess over
cost, equity method goodwill, and changes in amortization periods for
intangible assets that will continue to be amortized as a result of initially
applying Statement No. 142 (including any related tax effects) to the Companys
underlying records obtained from management, and (b) testing the mathematical
accuracy of the reconciliation of adjusted net income to reported net income,
and the related earnings-per-share amounts. In our opinion, the disclosures for
2001 in Note 1 are appropriate. However, we were not engaged to audit, review,
or apply any procedures to the 2001 financial statements of the Company other
than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 financial statements taken as
a whole.

Zurich,
Switzerland, January 16, 2004

Ernst & Young Ltd

|                |  |                  
|--------------- |  | -----------------
|/s/ Eric Ohlund |  | /s/ Martin Mattes
|                |  |                  
|Eric Ohlund     |  | Martin Mattes    

F-2



---



##### 



Independent auditors report(1)

To the Shareholders of Ciba Specialty Chemicals Holding Inc.

We have audited the accompanying consolidated balance sheets of Ciba Specialty
Chemicals Holding Inc. (a Swiss corporation) and subsidiaries (the Company) as
of December 31, 2001, and the related consolidated statements of income, cash
flows and shareholders equity for each of the three years in the period ended
December 31, 2001, appearing on pages F-3 to F-34 of this Annual Report. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Ciba
Specialty Chemicals Holding Inc. and subsidiaries as of December 31, 2001, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.

ARTHUR ANDERSEN AG

|                   |  |                  
|------------------ |  | -----------------
|/s/ Eric G. Ohlund |  | /s/ Patrick Fawer
|                   |  |                  
|Eric G. Ohlund     |  | Patrick Fawer    

Basel, Switzerland, January 18, 2002



---

|(1) |  | The report is a copy of the previously issued report. The predecessor
auditor has not reissued the report.
|--- |  | ----------------------------------------------------------------------------------------------------------

F-3



---



##### 



Consolidated statements of income
(in millions of Swiss francs, except share and per share data)

Year ended December 31,
    
    Notes
    
    2003
    
    2002
    
    2001(i)Net sales
    
    
    
    
    
    
    6 646
    
    
    
    7 085
    
    
    
    7 367Cost of goods sold
    
    
    
    
    
    
    4 579
    
    
    
    4 729
    
    
    
    4 988Gross profit
    
    
    
    
    
    
    2 067
    
    
    
    2 356
    
    
    
    2 379Selling, general and administrative
    
    
    
    
    
    
    1 185
    
    
    
    1 247
    
    
    
    1 258Research and development
    
    
    
    
    
    
    281
    
    
    
    294
    
    
    
    276Amortization of goodwill(i)
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    61Amortization of other intangible assets
    
    
    8
    
    
    
    33
    
    
    
    33
    
    
    
    31Income from earnings of equity affiliates
    
    
    9
    
    
    
    (3
    )
    
    
    (6
    )
    
    
    (8
    )Operating income
    
    
    
    
    
    
    571
    
    
    
    788
    
    
    
    761Interest expense
    
    
    
    
    
    
    (142
    )
    
    
    (159
    )
    
    
    (203
    )Interest income
    
    
    
    
    
    
    34
    
    
    
    49
    
    
    
    69Other financial expense, net
    
    
    
    
    
    
    (24
    )
    
    
    (105
    )
    
    
    (59
    )Income from continuing operations before
income taxes and minority interest
    
    
    
    
    
    
    439
    
    
    
    573
    
    
    
    568Provision for income taxes
    
    
    14
    
    
    
    74
    
    
    
    154
    
    
    
    178Income from continuing operations before minority interest
    
    
    
    
    
    
    365
    
    
    
    419
    
    
    
    390Minority interest
    
    
    
    
    
    
    5
    
    
    
    13
    
    
    
    10Income from continuing operations(ii)
    
    
    
    
    
    
    360
    
    
    
    406
    
    
    
    380Cumulative effect of change in accounting principles, net of tax
    
    
    1
    
    
    
    (16
    )
    
    
    0
    
    
    
    2Net income(ii)
    
    
    
    
    
    
    344
    
    
    
    406
    
    
    
    382Earnings per share, basic and diluted
    
    
    19Continuing operations(ii)
    
    
    
    
    
    
    5.26
    
    
    
    5.92
    
    
    
    5.72Cumulative effect of change in accounting principles
    
    
    
    
    
    
    (0.23
    )
    
    
    0.00
    
    
    
    0.04Net income per share(ii)
    
    
    
    
    
    
    5.03
    
    
    
    5.92
    
    
    
    5.76Weighted average shares outstandingBasic
    
    
    
    
    
    
    68 361 123
    
    
    
    68 549 964
    
    
    
    66 419 147Diluted
    
    
    
    
    
    
    68 361 123
    
    
    
    68 575 058
    
    
    
    66 419 147




---

|(i)  |  | Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No.
142 Goodwill and Other Intangible Assets. In 2001, on an adjusted basis,
excluding goodwill amortization, operating income would have been CHF 822
million, income from continuing operations before income taxes and minority
interest CHF 629 million, income from continuing operations before minority
interest CHF 451 million, income from continuing operations CHF 441 million,
net income CHF 443 million and basic and diluted earnings per share CHF 6.68.                                                                                             
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(ii) |  | Effective January 1, 2003, the Company adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 123, as
amended. Had the Company applied the fair value method for all periods prior to
2003, pro forma income from continuing operations in 2002 would have been CHF
395 million (2001: CHF 368 million); pro forma basic and diluted earnings per
share for income from continuing operations in 2002 would have been CHF
5.76 (2001: CHF 5.53); pro forma net income in 2002 would have been CHF 395
million (2001: CHF 370 million); and pro forma basic and diluted earnings per share
for net income in 2002 would have been CHF 5.76 (2001:
CHF 5.57). See Note 17.

See notes to consolidated financial statements

F-4



---



##### 



Consolidated balance sheets
(in millions of Swiss francs, except share and per share data)

December 31,
    
    Notes
    
    2003
    
    2002AssetsCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    2 386
    
    
    
    2 361Short-term investments
    
    
    
    
    
    
    11
    
    
    
    16Accounts receivable, net
    
    
    4
    
    
    
    940
    
    
    
    1 014Inventories
    
    
    5
    
    
    
    1 231
    
    
    
    1 446Prepaid and other current assets
    
    
    
    
    
    
    371
    
    
    
    477Total current assets
    
    
    
    
    
    
    4 939
    
    
    
    5 314Property, plant and equipment, net
    
    
    6
    
    
    
    2 963
    
    
    
    3 196Goodwill
    
    
    1,7
    
    
    
    1 358
    
    
    
    1 382Other intangible assets, net
    
    
    8
    
    
    
    647
    
    
    
    694Financial investments
    
    
    9
    
    
    
    147
    
    
    
    172Other assets
    
    
    10
    
    
    
    1 044
    
    
    
    1 034Total assets
    
    
    
    
    
    
    11 098
    
    
    
    11 792Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable
    
    
    
    
    
    
    528
    
    
    
    549Short-term debt
    
    
    12
    
    
    
    259
    
    
    
    1 496Income taxes payable
    
    
    
    
    
    
    152
    
    
    
    108Accruals and other current liabilities
    
    
    11
    
    
    
    841
    
    
    
    942Total current liabilities
    
    
    
    
    
    
    1 780
    
    
    
    3 095Long-term debt
    
    
    13
    
    
    
    3 187
    
    
    
    2 344Deferred income taxes
    
    
    14
    
    
    
    407
    
    
    
    386Other liabilities
    
    
    15
    
    
    
    1 417
    
    
    
    1 537Total liabilities
    
    
    
    
    
    
    6 791
    
    
    
    7 362Minority interest
    
    
    
    
    
    
    62
    
    
    
    76Shareholders equity
    
    
    16Common stock(i)
    
    
    
    
    
    
    433
    
    
    
    649Additional paid-in capital
    
    
    
    
    
    
    4 210
    
    
    
    4 186Retained earnings
    
    
    
    
    
    
    541
    
    
    
    198Accumulated other comprehensive income (loss)
    
    
    
    
    
    
    (493
    )
    
    
    (360
    )Treasury stock, at cost(ii)
    
    
    
    
    
    
    (446
    )
    
    
    (319
    )Total shareholders equity
    
    
    
    
    
    
    4 245
    
    
    
    4 354Total liabilities and shareholders equity
    
    
    
    
    
    
    11 098
    
    
    
    11 792




---

|(i)  |  | Par value CHF 6 per share (December 31, 2002: CHF 9 per share), 82 130 117
shares authorized and 72 130 117 shares issued in 2003 and 2002.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|    
|(ii) |  | December 31, 2003: 4 363 901 treasury shares; December 31, 2002: 3 192 087
treasury shares.                                                

See notes to consolidated financial statements

F-5



---



##### 



Consolidated statements of cash flows
(in millions of Swiss francs)

Year ended December 31,
    
    2003
    
    2002
    
    2001Cash flows from operating activitiesNet income
    
    
    344
    
    
    
    406
    
    
    
    382Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:Depreciation and amortization
    
    
    366
    
    
    
    385
    
    
    
    469Deferred income taxes
    
    
    24
    
    
    
    50
    
    
    
    87Restructuring payments
    
    
    0
    
    
    
    (12
    )
    
    
    (46
    )Loss (gain) on sale/disposal of assets, net
    
    
    (7
    )
    
    
    2
    
    
    
    (5
    )Realized (gain) loss on available-for-sale securities
    
    
    (12
    )
    
    
    38
    
    
    
    0Minority interest and other non-cash items, net
    
    
    16
    
    
    
    161
    
    
    
    71Changes in operating assets and liabilities:Short-term investments
    
    
    5
    
    
    
    25
    
    
    
    27Accounts receivable, net
    
    
    56
    
    
    
    4
    
    
    
    53Inventories
    
    
    173
    
    
    
    (11
    )
    
    
    117Accounts payable
    
    
    (9
    )
    
    
    90
    
    
    
    (33
    )Other operating assets and liabilities
    
    
    77
    
    
    
    (100
    )
    
    
    (68
    )Net cash provided by operating activities
    
    
    1 033
    
    
    
    1 038
    
    
    
    1 054Cash flows from investing activitiesCapital expenditures
    
    
    (233
    )
    
    
    (250
    )
    
    
    (259
    )Proceeds from sale of assets
    
    
    67
    
    
    
    22
    
    
    
    34Sale (acquisition) of businesses, net of cash(i)
    
    
    (71
    )
    
    
    (116
    )
    
    
    (144
    )Loans and other long-term assets
    
    
    (2
    )
    
    
    (5
    )
    
    
    35Net cash used in investing activities
    
    
    (239
    )
    
    
    (349
    )
    
    
    (334
    )Cash flows from financing activitiesIncrease (decrease) in short-term debt, net
    
    
    (25
    )
    
    
    22
    
    
    
    (48
    )Proceeds from long-term debt
    
    
    715
    
    
    
    1
    
    
    
    6Repayments of long-term debt
    
    
    (1 084
    )
    
    
    (19
    )
    
    
    (110
    )Dividends paid
    
    
    0
    
    
    
    (134
    )
    
    
    (132
    )Capital reduction paid
    
    
    (206
    )
    
    
    (69
    )
    
    
    0Treasury stock transactions
    
    
    (142
    )
    
    
    344
    
    
    
    9Other
    
    
    0
    
    
    
    (1
    )
    
    
    0Net cash provided by (used in) financing activities
    
    
    (742
    )
    
    
    144
    
    
    
    (275
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (27
    )
    
    
    (74
    )
    
    
    (22
    )Net increase in cash and cash equivalents
    
    
    25
    
    
    
    759
    
    
    
    423Cash and cash equivalents, beginning of year
    
    
    2 361
    
    
    
    1 602
    
    
    
    1 179Cash and cash equivalents, end of year
    
    
    2 386
    
    
    
    2 361
    
    
    
    1 602Supplemental cash flow informationCash paid for interest
    
    
    (103
    )
    
    
    (177
    )
    
    
    (204
    )Cash paid for income taxes
    
    
    (60
    )
    
    
    (90
    )
    
    
    (49
    )




---

|(i) |  | Sale (acquisition) of businesses, net of cash, includes cash paid for
minor strategic acquisitions and cash payments for separation and transaction
taxes attributable to the divestment of the Performance Polymers business.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements

F-6



---



##### 



Consolidated statements of shareholders equity
(in millions of Swiss francs, except share and per share data)

Accumulated
    
    Treasury
    
    TreasuryAdditional
    
    
    
    
    
    other
    
    stock:
    
    stock:Common
    
    paid-in
    
    Retained
    
    comprehensive
    
    unreserved
    
    reservedNotes
    
    stock
    
    capital
    
    earnings
    
    income (loss)
    
    shares
    
    shares
    
    TotalBalance at December 31, 2000
    
    
    
    
    
    
    721
    
    
    
    3 955
    
    
    
    (324
    )
    
    
    (116
    )
    
    
    (72
    )
    
    
    (410
    )
    
    
    3 754Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    
    
    
    
    
    
    
    
    (83
    )Unrealized loss on available-for-sale securities, net of tax of CHF 14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    (23
    )Minimum pension liability adjustment,
net of tax of CHF 12
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    (19
    )Comprehensive income(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    (125
    )
    
    
    
    
    
    
    
    
    
    
    257Cash dividends declared and paid(i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (132
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (132
    )Treasury stock transactions
    
    
    16
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    19
    
    
    
    21Other
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    8Balance at December 31, 2001
    
    
    
    
    
    
    721
    
    
    
    3 957
    
    
    
    (74
    )
    
    
    (240
    )
    
    
    (65
    )
    
    
    (391
    )
    
    
    3 908Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    (86
    )Realization of previously unrealized
loss on available-for-sale securities,
net of tax of CHF 16
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Unrealized loss on available-for-sale
securities, net of tax of CHF 2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Unrealized gain on cash flow hedges,
net of tax of CHF 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Minimum pension liability adjustment,
net of tax of CHF 37
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    (58
    )Comprehensive income(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    (120
    )
    
    
    
    
    
    
    
    
    
    
    286Cash dividends declared and paid(i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )Capital reduction paid(ii)
    
    
    
    
    
    
    (72
    )
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69
    )Treasury stock transactions
    
    
    16
    
    
    
    
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    150
    
    
    
    353Other
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balance at December 31, 2002
    
    
    
    
    
    
    649
    
    
    
    4 186
    
    
    
    198
    
    
    
    (360
    )
    
    
    (78
    )
    
    
    (241
    )
    
    
    4 354Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    (131
    )Realization of previously unrealized
gain on available-for-sale securities,
net of tax of CHF 4
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Unrealized gain on available-for-sale securities,
net of tax of CHF 4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Minimum pension liability adjustment,
net of tax of CHF 1
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    (133
    )
    
    
    
    
    
    
    
    
    
    
    211Capital reduction paid(ii)
    
    
    
    
    
    
    (216
    )
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (206
    )Treasury stock transactions
    
    
    16
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    (138
    )
    
    
    (124
    )Other
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balance at December 31, 2003
    
    
    
    
    
    
    433
    
    
    
    4 210
    
    
    
    541
    
    
    
    (493
    )
    
    
    (67
    )
    
    
    (379
    )
    
    
    4 245




---

|(i)  |  | Cash dividends declared and paid in 2002 and
2001 were CHF 2.00 per share.       
|---- |  | ---------------------------------------------------------------------------------
|    
|(ii) |  | Capital reduction paid was in 2003 CHF 3.00 per share
(2002: CHF 1.00 per share).

See notes to consolidated financial statements

F-7



---



##### 



Business segment data
(in millions of Swiss francs, except percentages)

Water &
    
    
    
    
    
    Home &Plastic
    
    Coating
    
    Paper
    
    Textile
    
    PersonalAdditives
    
    Effects
    
    Treatment
    
    Effects
    
    Care
    
    Corporate
    
    Consolidated2003Net sales
    
    
    1 722
    
    
    
    1 807
    
    
    
    1 349
    
    
    
    1 401
    
    
    
    367
    
    
    
    
    
    
    
    6 646EBITDA(i)
    
    
    272
    
    
    
    397
    
    
    
    168
    
    
    
    129
    
    
    
    58
    
    
    
    (87
    )
    
    
    937Depreciation & amortization
    
    
    94
    
    
    
    97
    
    
    
    83
    
    
    
    60
    
    
    
    26
    
    
    
    6
    
    
    
    366Operating income(i)
    
    
    178
    
    
    
    300
    
    
    
    85
    
    
    
    69
    
    
    
    32
    
    
    
    (93
    )
    
    
    571Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142
    )
    
    
    (142
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    34Other financial expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    74Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Cumulative effect of change in accounting principles, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (16
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344EBITDA margin(ii)
    
    
    15.8
    %
    
    
    22.0
    %
    
    
    12.5
    %
    
    
    9.2
    %
    
    
    15.7
    %
    
    
    
    
    
    
    14.1
    %Operating income margin
    
    
    10.3
    %
    
    
    16.6
    %
    
    
    6.3
    %
    
    
    4.9
    %
    
    
    8.8
    %
    
    
    
    
    
    
    8.6
    %Research and development expenditures
    
    
    82
    
    
    
    95
    
    
    
    27
    
    
    
    32
    
    
    
    31
    
    
    
    14
    
    
    
    281Capital expenditures
    
    
    59
    
    
    
    79
    
    
    
    42
    
    
    
    29
    
    
    
    18
    
    
    
    6
    
    
    
    2332002Net sales
    
    
    1 813
    
    
    
    1 920
    
    
    
    1 409
    
    
    
    1 544
    
    
    
    399
    
    
    
    
    
    
    
    7 085EBITDA(i)
    
    
    346
    
    
    
    440
    
    
    
    186
    
    
    
    208
    
    
    
    82
    
    
    
    (89
    )
    
    
    1 173Depreciation & amortization
    
    
    101
    
    
    
    99
    
    
    
    88
    
    
    
    66
    
    
    
    26
    
    
    
    5
    
    
    
    385Operating income(i)
    
    
    245
    
    
    
    341
    
    
    
    98
    
    
    
    142
    
    
    
    56
    
    
    
    (94
    )
    
    
    788Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159
    )
    
    
    (159
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    49Other financial expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    (105
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    154Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    13Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406EBITDA margin(ii)
    
    
    19.1
    %
    
    
    22.9
    %
    
    
    13.2
    %
    
    
    13.5
    %
    
    
    20.6
    %
    
    
    
    
    
    
    16.6
    %Operating income margin
    
    
    13.5
    %
    
    
    17.7
    %
    
    
    7.0
    %
    
    
    9.2
    %
    
    
    14.0
    %
    
    
    
    
    
    
    11.1
    %Research and development expenditures
    
    
    81
    
    
    
    100
    
    
    
    29
    
    
    
    36
    
    
    
    30
    
    
    
    18
    
    
    
    294Capital expenditures
    
    
    86
    
    
    
    74
    
    
    
    35
    
    
    
    34
    
    
    
    18
    
    
    
    3
    
    
    
    250


Water &
    
    
    
    
    
    Home &Plastic
    
    Coating
    
    Paper
    
    Textile
    
    Personal
    
    
    
    
    
    Amortization ofAdditives
    
    Effects
    
    Treatment
    
    Effects
    
    Care
    
    Corporate
    
    Goodwill
    
    Consolidated2001Net sales
    
    
    1 834
    
    
    
    1 944
    
    
    
    1 486
    
    
    
    1 673
    
    
    
    430
    
    
    
    
    
    
    
    
    
    
    
    7 367EBITDA(i)
    
    
    388
    
    
    
    411
    
    
    
    157
    
    
    
    248
    
    
    
    95
    
    
    
    (69
    )
    
    
    
    
    
    
    1 230Depreciation & amortization
    
    
    113
    
    
    
    99
    
    
    
    92
    
    
    
    67
    
    
    
    28
    
    
    
    9
    
    
    
    61
    
    
    
    469Operating income(i)
    
    
    275
    
    
    
    312
    
    
    
    65
    
    
    
    181
    
    
    
    67
    
    
    
    (78
    )
    
    
    (61
    )
    
    
    761Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (203
    )
    
    
    
    
    
    
    (203
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    69Other financial expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    
    
    
    
    (59
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    178Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Cumulative effect of change in accounting principles, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382EBITDA margin(ii)
    
    
    21.1
    %
    
    
    21.1
    %
    
    
    10.6
    %
    
    
    14.8
    %
    
    
    22.2
    %
    
    
    
    
    
    
    
    
    
    
    16.7
    %Operating income margin
    
    
    15.0
    %
    
    
    16.1
    %
    
    
    4.4
    %
    
    
    10.8
    %
    
    
    15.7
    %
    
    
    
    
    
    
    
    
    
    
    10.3
    %Research and development
expenditures
    
    
    73
    
    
    
    96
    
    
    
    34
    
    
    
    39
    
    
    
    24
    
    
    
    10
    
    
    
    
    
    
    
    276Capital expenditures
    
    
    80
    
    
    
    66
    
    
    
    52
    
    
    
    32
    
    
    
    25
    
    
    
    4
    
    
    
    
    
    
    
    259


See notes to consolidated financial statements

F-8



---



##### 



Business segment data
(in millions of Swiss francs, except percentages)

Net assets
    
    2003
    
    2002Plastic Additives
    
    
    1 127
    
    
    
    1 236Coating Effects
    
    
    1 773
    
    
    
    1 834Water & Paper Treatment
    
    
    2 271
    
    
    
    2 429Textile Effects
    
    
    1 115
    
    
    
    1 291Home & Personal Care
    
    
    281
    
    
    
    294Shared operating net assets not allocated to segments(iii)
    
    
    (79
    )
    
    
    (8
    )Non-operating net assets(iv)
    
    
    2 852
    
    
    
    2 874Invested capital(v)
    
    
    9 340
    
    
    
    9 950Items not included in invested capital
    
    
    (5 095
    )
    
    
    (5 596
    )Total
shareholders equity (total net assets)
    
    
    4 245
    
    
    
    4 354Components of items not included in invested capitalNet deferred tax liabilities
    
    
    (170
    )
    
    
    (143
    )Short-term debt
    
    
    (259
    )
    
    
    (1 496
    )Long-term debt
    
    
    (3 187
    )
    
    
    (2 344
    )Other liabilities
    
    
    (1 417
    )
    
    
    (1 537
    )Minority interest
    
    
    (62
    )
    
    
    (76
    )Total
items not included in invested capital
    
    
    (5 095
    )
    
    
    (5 596
    )Total assetsPlastic Additives
    
    
    1 378
    
    
    
    1 493Coating Effects
    
    
    2 020
    
    
    
    2 107Water & Paper Treatment
    
    
    2 460
    
    
    
    2 606Textile Effects
    
    
    1 304
    
    
    
    1 495Home & Personal Care
    
    
    337
    
    
    
    356Shared operating assets not allocated
to segments(iii)
    
    
    290
    
    
    
    426Non-operating assets(iv)
    
    
    3 309
    
    
    
    3 309Total assets
    
    
    11 098
    
    
    
    11 792




---

|(i)   |  | The Company uses EBITDA and operating income as its measures
of profit/loss for segment reporting purposes.                                                                                                                                                                     
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | EBITDA margin is EBITDA expressed as a percentage of net sales.                                                                                                                                                                                                                 
|     
|(iii) |  | Shared net operating assets not allocated to segments and shared
operating assets not allocated to segments include certain net assets and
shared assets of Group Service Units and Headquarters. Group Service Units
provide services to the segments.                         
|     
|(iv)  |  | Non-operating net assets and non-operating assets include primarily cash
and cash equivalents and certain financial investments. Also included in
non-operating net assets are certain Group Service Units current
liabilities.                                                
|     
|(v)   |  | Invested capital is the sum of total assets less non-interest bearing
current liabilities (i.e., accounts payable, income taxes payable as well as
accruals and other current liabilities, except the current portion of deferred
tax liabilities) and less deferred tax assets.

See notes to consolidated financial statements

F-9



---



##### 



Business segment data
(in millions of Swiss francs, except share and per share data)

The Company is organized into five reporting segments: Plastic Additives,
Coating Effects, Water & Paper Treatment, Textile Effects and Home & Personal
Care. The Companys reporting segments develop, manufacture and market
different products, services and solutions. They are managed separately because
each segment has different customer markets and requires different technology
and marketing strategies. The same accounting policies are consistently applied
to reportable segments across the Company and all segments generate revenue in
the same manner. Reported sales reflect only sales to third parties.
Intersegment sales are not material.

The Company evaluates the performance of its reportable segments based on
operating income as well as EBITDA, which for the Companys Segments is
calculated as operating income plus depreciation and amortization. Operating
income includes all operating items relating to the segments and excludes items
that principally apply to the Company as a whole. EBITDA and EBITDA margin
together provide management with additional quantitative measures of the
quality of sales growth as well as the results of past and current actions
taken to manage costs. In addition, as the Company operates in a multinational
environment and competes with companies in different countries, the use of
EBITDA as a performance measure provides improved comparability of the
reportable segments results with those of their competitors, many of which
report their results using International Financial Reporting Standards (IFRS)
and therefore employ significantly different methods of depreciation and
amortization, including amortization of goodwill and other intangible assets.
Management is therefore of the opinion that these financial indicators are an
important measure of comparative operating performance for the businesses of
the Company.

EBITDA, EBITDA margin and invested capital are non-United States Generally
Accepted Accounting Principles (U.S. GAAP) supplementary financial
indicators. As with any supplementary financial indicator these supplementary
financial indicators should be considered in addition to, not as a substitute
for, operating income, net income, cash flow from operating activities, total
assets, operating income margin and other measures of financial performance and
liquidity reported in accordance with U.S. GAAP. The Company derives EBITDA,
EBITDA margin and invested capital from financial measures prepared in
accordance with U.S. GAAP.

In 2002, the Company implemented Statement of Financial Accounting Standard
(SFAS) No. 142 Goodwill and Other Intangible Assets (see Notes 1 and 7). As a
result of adopting this standard, the Company reclassified certain goodwill and
intangible assets to the segments that were previously reported as corporate
items and not allocated to the segments. In addition, the Company reclassified
the 2001 goodwill amortization that was previously allocated to the segments to
corporate and reclassified intangible amortization from corporate to the
segments corresponding to the intangible asset reclassification. The amounts
reported for 2001 have been reclassified to conform to the 2003 and
2002 presentation.

Description of Segments

The segment Plastic Additives develops, manufactures and markets products and
provides services to the plastic and lubricant industries. The Segments
products are additives, which are ingredients added in small quantities to
polymers and lubricants that prevent aging and corrosion and help improve
appearance, durability and performance of finished goods such as polyolefins
and engineering plastics as well as high-performance motor oils and lubricants.
The service business adds value to customers by providing solutions in product
applications.

The segment Coating Effects is a leading global manufacturer of organic
pigments and the leading supplier of photoinitiators and lightstabilizers to
the coatings, graphic arts and electronic industries. The Segment develops,
manufactures and markets additives, pigments, as well as additive and pigment
concentrates, for the coatings, printing, imaging, electronic, plastics and
fibers industries. The end-user markets for its products and services are,
among others, the automotive, packaging, publication, electronics,
construction, photographic and digital printing industries.

The segment Water & Paper Treatment serves the paper and water treatment
industries. The Segment offers products and services to the global paper and
board industry focused on increasing mill productivity as well as effect
chemicals which provides solutions for its customers in order to determine
appearance, handling and performance of the paper or board. The Segment also
offers products and services used to treat the water streams in industrial and
municipal applications and to improve the efficiency of mineral and oil
processing as well as soil additives and specialty monomers.

The segment Textile Effects serves the textile industry, offering dyes and
chemicals, services and integrated solutions to customers along the whole
textile value chain. The Segments products include dyes and chemicals for
dyeing and printing of almost all textile fibers, optical brighteners and
textile finishing products for protection and easy-care. Services offered by
the Segment include color matching via the Internet and technical consultancy
regarding textile color and effects management for international brand houses
and retailers.

The segment Home & Personal Care is one of the leading global manufacturers of
whiteners and a leading supplier of antimicrobials to the personal care market.
It develops, manufactures and markets products for home and personal care
end-use industries. Among its broad product offerings are whiteners for
detergents, hygiene effects for a variety of home and personal care products,
UV absorbers for sunscreens and innovative hair dyes.

See notes to consolidated financial statements

F-10



---



##### 



Geographic data
(in millions of Swiss francs)

Net Sales to Customers
    
    2003
    
    2002
    
    2001EuropeGermany
    
    
    584
    
    
    
    567
    
    
    
    572United Kingdom
    
    
    293
    
    
    
    334
    
    
    
    373Italy
    
    
    340
    
    
    
    343
    
    
    
    351France
    
    
    304
    
    
    
    298
    
    
    
    311Rest of European Union
    
    
    846
    
    
    
    841
    
    
    
    846Switzerland
    
    
    99
    
    
    
    86
    
    
    
    75Rest of Europe
    
    
    265
    
    
    
    252
    
    
    
    227Total Europe
    
    
    2 731
    
    
    
    2 721
    
    
    
    2 755AmericasUnited States of America
    
    
    1 415
    
    
    
    1 703
    
    
    
    1 819Canada
    
    
    199
    
    
    
    223
    
    
    
    243Central America
    
    
    167
    
    
    
    209
    
    
    
    227South America
    
    
    285
    
    
    
    324
    
    
    
    365Total Americas
    
    
    2 066
    
    
    
    2 459
    
    
    
    2 654Asia-PacificJapan
    
    
    381
    
    
    
    384
    
    
    
    431Region China
    
    
    440
    
    
    
    439
    
    
    
    424Rest of Asia
    
    
    627
    
    
    
    677
    
    
    
    686Australia and New Zealand
    
    
    159
    
    
    
    155
    
    
    
    154Africa and Middle East
    
    
    242
    
    
    
    250
    
    
    
    263Total Asia-Pacific
    
    
    1 849
    
    
    
    1 905
    
    
    
    1 958Total net sales to customers
    
    
    6 646
    
    
    
    7 085
    
    
    
    7 367


Net sales to customers are based on the final destination of the sale.

Long-Lived Assets
    
    2003
    
    2002EuropeGermany
    
    
    378
    
    
    
    361United Kingdom
    
    
    519
    
    
    
    561Italy
    
    
    176
    
    
    
    165France
    
    
    134
    
    
    
    128Rest of European Union
    
    
    87
    
    
    
    82Switzerland
    
    
    588
    
    
    
    614Rest of Europe
    
    
    2
    
    
    
    2Total Europe
    
    
    1 884
    
    
    
    1 913AmericasUnited States of America
    
    
    743
    
    
    
    869Canada
    
    
    3
    
    
    
    3Central America
    
    
    94
    
    
    
    123South America
    
    
    18
    
    
    
    17Total Americas
    
    
    858
    
    
    
    1 012Asia-PacificJapan
    
    
    23
    
    
    
    42Region China
    
    
    132
    
    
    
    157Rest of Asia
    
    
    40
    
    
    
    46Australia and New Zealand
    
    
    19
    
    
    
    18Africa and Middle East
    
    
    7
    
    
    
    8Total Asia-Pacific
    
    
    221
    
    
    
    271Total long-lived assets
    
    
    2 963
    
    
    
    3 196


Long-lived assets represent property, plant and equipment, net and are shown by
the location of the assets.

See notes to consolidated financial statements

F-11



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##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)



|1. |  | Summary of significant accounting policies
|-- |  | ------------------------------------------

Company operations

Ciba Specialty Chemicals Holding Inc. and its consolidated subsidiaries (the
Company) is a global leader in the discovery and manufacture of innovative
specialty chemicals that provide color, performance and care for plastics,
coatings, textile, paper, home and personal care and other products. The
Companys products and services are also used to provide clean water and to
treat water streams in industrial and municipal applications.

Basis of consolidation and presentation

The accompanying consolidated financial statements of the Company have been
prepared in accordance with United States Generally Accepted Accounting
Principles (U.S. GAAP). The assets, liabilities and results of operations of
entities in which the Company has a controlling financial interest have been consolidated.
Investments in which the Company exercises significant influence (generally
20-50 percent ownership interest), but does not control, are accounted for
under the equity method of accounting. All significant intercompany accounts
and transactions have been eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Although these estimates are based on
managements best knowledge of current events and actions the Company may
undertake in the future, actual results ultimately may differ from those
estimates.

Foreign currency translation

The
Companys financial statements are prepared in millions of Swiss francs (CHF
million). For most operations outside Switzerland, where the functional
currency is the local currency, income, expense and cash flows are translated
at average exchange rates during the period, and assets and liabilities are
translated at period-end exchange rates. The translation adjustments are
included as a component of accumulated other comprehensive income in
shareholders equity. The financial statements of subsidiaries that operate in
economic environments that are highly inflationary maintain financial
information for reporting purposes in U.S. dollars or Swiss francs and include
gains and losses from translation in income. For foreign currency transactions,
changes in exchange rates that arise between transaction, reporting and
settlement dates result in both realized and unrealized exchange gains and
losses. These amounts are included in net income for the period.

Cash equivalents

All highly liquid investments with original maturities of three months or less
are considered to be cash equivalents.

Short-term investments

Short-term investments consist of securities that are traded in highly liquid
markets. Because they are held for the purpose of investing liquid funds and
are readily convertible to cash, they are classified as trading securities and
are carried at fair value. Gains and losses are recorded as a component of
financial income/expense in the Consolidated Statements of Income.

Accounts receivable

Accounts receivable are recorded at their net realizable value after deducting
an allowance for doubtful accounts. Such deductions reflect either specific
cases or estimates based on historical incurred losses. This also includes an
allowance for country specific transfer risks.

Inventories

The Company values its inventories at the lower of cost, determined
principally on a first-in, first-out (FIFO) method, or market. Costs include
all costs of production, including applicable portions of plant overhead.
Allowances are made for obsolete and slow-moving inventory.

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets ranging from approximately 20 to 50 years
for buildings, 10 to 20 years for machinery and equipment, and 3 to 10 years
for office furniture and fixtures and other equipment. The Company assesses its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. In such cases, if
the sum of the assets expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the excess of the
assets carrying amount over its fair value.

Property, plant and equipment acquired through finance lease arrangements are
recorded as assets at the lesser of the present value of the minimum future
lease payments or their fair value at the date of acquisition and depreciated
over the useful life of the asset or, if the lease does not provide for the
transfer of ownership of the assets to the Company, the lease term if it is
shorter than the useful life of the asset. The corresponding obligation is
recorded as a liability in the Consolidated Balance Sheets.

F-12



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

Goodwill and other intangible assets

Goodwill

Change in accounting policy In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142
Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142
effective January 1, 2002. An initial impairment test of goodwill was required
to be performed as of January 1, 2002. The Company completed the initial
impairment test and determined that its reported goodwill was not impaired.

SFAS No. 142 requires that goodwill acquired in a business combination be
capitalized at acquisition cost, no longer be amortized to earnings, and be
annually evaluated at the reporting unit level for impairment using a two-step
impairment test. In the first step, the book value of the reporting units
assets, including goodwill and other intangibles, and liabilities (the net
assets) is compared to the fair value of the reporting unit. If the fair value
of the reporting unit exceeds the book value of its net assets, goodwill is
deemed not impaired and the second step is not required. If, however, the fair
value of the reporting unit is less than the book value of its net assets, the
second step is required to measure the amount of impairment loss, if any.

In the second step, the current fair value of the reporting unit is allocated
to all of its tangible assets, other intangible assets (including unrecognized
intangible assets but excluding goodwill) and liabilities (the assets and
liabilities). This fair value allocation to the assets and liabilities is made
as if the reporting unit had been acquired as of the impairment testing date in
a business combination and the fair value of the reporting unit was the price
that would have been paid to acquire the reporting unit. The excess, if any, of
the total current fair value of the reporting unit over the sum of the
individual fair values assigned to its assets and liabilities is considered to
be the current implied goodwill value of the reporting unit. If the book value
of the reporting units goodwill exceeds this implied goodwill value, that
excess is an impairment loss, which is recorded as a component of operating
income in the Consolidated Statements of Income. If the book value of the
reporting units goodwill is less than the implied goodwill value, goodwill is
not impaired.

During 2003 and 2002, the Company completed the annual impairment test of
goodwill and determined that its reported goodwill is not impaired.

In 2001, goodwill acquired on or before June 30, 2001 was amortized on a
straight-line basis over the estimated periods to be benefited, which ranged
from 5 to 33 years. Goodwill acquired after June 30, 2001 was not amortized. In
2001, prior to the adoption of SFAS No. 142, goodwill was assessed for
impairment whenever events or changes in circumstances indicated that the book
value might not be recoverable. If the sum of the expected future undiscounted
cash flows was less than the book value of the goodwill, a loss would have been
recognized for the difference between the fair value and the book value of the
goodwill.

The following is a reconciliation of previously reported financial
information to the adjusted basis amounts excluding goodwill amortization,
which is no longer required under SFAS No. 142:

2001Adjusted
    
    Goodwill
    
    As2003
    
    2002
    
    basis
    
    amortization
    
    reportedOperating income
    
    
    571
    
    
    
    788
    
    
    
    822
    
    
    
    61
    
    
    
    761Income from continuing operations, before taxes and minority interest
    
    
    439
    
    
    
    573
    
    
    
    629
    
    
    
    61
    
    
    
    568Income from continuing operations, before minority interest
    
    
    365
    
    
    
    419
    
    
    
    451
    
    
    
    61
    
    
    
    390Income from continuing operations
    
    
    359
    
    
    
    406
    
    
    
    441
    
    
    
    61
    
    
    
    380Net income
    
    
    344
    
    
    
    406
    
    
    
    443
    
    
    
    61
    
    
    
    382Basic and diluted earnings per shareContinuing operations
    
    
    5.26
    
    
    
    5.92
    
    
    
    6.64
    
    
    
    0.92
    
    
    
    5.72Net income per share
    
    
    5.03
    
    
    
    5.92
    
    
    
    6.68
    
    
    
    0.92
    
    
    
    5.76


Other intangible assets

In accordance with SFAS No. 142, purchased identifiable intangible assets
(other intangible assets) are capitalized at acquisition cost. Other
intangible assets with finite lives are amortized on a straight-line basis over
the estimated periods that such assets are expected to contribute to the cash
flows of the Company (5 to 33 years). Other intangible assets with indefinite
lives are not amortized.

The Company assesses other intangible assets with finite lives for impairment
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. Other intangible assets with indefinite lives are
reviewed at least annually for impairment, or on an interim basis if certain
circumstances are present. For all other intangible assets that are tested for
impairment, if the sum of the assets expected future undiscounted cash flows
is less than the carrying amount of the asset, a loss is recognized for the
excess of the assets carrying amount over its fair value.

F-13



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

Financial investments

Financial investments comprise primarily investments in equity affiliates that
are not controlled by the Company and investments in unconsolidated companies
(less than 20 percent ownership and not otherwise controlled by the Company).

The investments in unconsolidated companies are accounted for as
available-for-sale securities and are recorded at fair value unless no quoted
market price exists for such investments, in which case they are accounted for
under the cost method. For investments accounted for at fair value, unrealized
gains and losses thereon, net of tax, are included as a component of
shareholders equity in accumulated other comprehensive income (loss). The
Company uses the specific identification method to determine the cost base of
financial investments related to sales or reclassifications from other
comprehensive income to earnings. For financial investments where the Company
deems a loss in value to be other than temporary, such loss is recorded in the
Consolidated Statement of Income.

Derivative financial instruments

Change in accounting policy Effective January 1, 2001, the Company adopted
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as
amended, which replaced existing pronouncements and practices for derivatives
and hedging activities with a single, integrated accounting framework. This
statement, as amended, expands the previous accounting definition of
derivatives to include embedded derivatives and many commodity contracts. Upon
adoption of this statement, as amended, the Company, in 2001, recorded a net
transition adjustment gain after taxes of CHF 2 million in net income. The
adoption did not have any effect on accumulated other comprehensive income.

For derivative financial instruments designated and that qualify as fair value
hedges, changes in the fair values of the derivative financial instrument and
the hedged item are recognized currently in earnings. The changes in fair value
of the hedged item are recorded as adjustments to its carrying amount on the
balance sheet. If the derivative financial instrument in a subsequent period is
no longer designated or no longer qualifies as a fair value hedge, then the
changes in fair value of the hedged item are not recognized in income. The
previous changes in fair value that had been recorded as adjustments to the
carrying amount of the hedged item are generally amortized to earnings as the
hedged item affects earnings.

For derivative financial instruments designated and that qualify as cash flow
hedges, changes in the effective portion of the derivative financial
instruments fair value are recorded in accumulated other comprehensive income
in the balance sheet until the hedged item is recognized in earnings. The
ineffective portion of the change in fair value of the derivative financial
instrument is immediately recognized in the income statement as a component of
financial income/expense. If the hedged item is a forecasted transaction that
later is not expected to or will not occur, then the derivative financial
instrument no longer qualifies as a cash flow hedge. As a result, fair value
changes that were previously recorded in accumulated other comprehensive income
are immediately recognized in earnings as a component of financial
income/expense. In all other instances, when a derivative financial instrument
ceases to be designated or to qualify as a cash flow hedge, the previously
recorded changes in fair value remain in accumulated other comprehensive income
until the hedged item affects earnings.

For derivative financial instruments that are not designated or that do not
qualify as accounting hedges, the changes in the fair value of the derivative
financial instruments are recognized currently in income as a component of
financial income/expense.

Revenue recognition

Revenue is recognized upon shipment of goods to customers. Provisions for
discounts and rebates to customers, product returns and other adjustments are
provided for in the same period the related sales are recorded.

Income taxes

The provision for income taxes has been determined using the asset and
liability approach and consists of income taxes currently paid or payable to
taxing authorities in the jurisdictions in which the Company operates plus the
change in deferred taxes for the current year. Deferred taxes represent the
estimated future tax consequences of temporary differences between the amounts
of assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. Valuation allowances are recorded to
reduce deferred tax assets when it is more likely than not that a future tax
benefit will not be realized.

Provision has also been made for taxes that would be levied upon the remittance
to the parent company of currently unremitted earnings of foreign operations.
However, no such provision is made for unremitted earnings of foreign
operations that are intended to be reinvested indefinitely or that can be
remitted substantially free of tax. The provision for income taxes also
includes income taxes from earnings of equity affiliates.

Environmental compliance and expenditures

The measurement of environmental liabilities is based on an evaluation of
currently available facts with respect to each individual site and considers
factors such as existing technology, presently enacted laws and regulations and
prior experience in remediation of contaminated sites. Environmental operations
and maintenance as well as remediation costs
are accrued when environmental assessments and the need for remediation are
probable and the costs can be reasonably estimated. The

F-14



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

estimated liability is not discounted. Actual costs to be incurred at identified sites in future periods
may vary from the estimates given the inherent uncertainties in evaluating
environmental exposures.

Earnings per share

Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is similar to basic earnings per share except that it
reflects the potential dilution that could occur if dilutive securities, such
as stock options and convertible debt, were exercised or converted into
common shares or resulted in the issuance of common shares that then shared
in the earnings of the Company.

New accounting standards

Stock based compensation

Effective January 1, 2003, the Company adopted the fair value method of
accounting for stock option plans as defined in SFAS No. 123 Accounting for
Stock-Based Compensation as amended. As a consequence, employee stock option
grants and other stock based compensation plans are recorded as expense over
the vesting period of the award based on their fair values at the date the
stock based compensation is granted. In December 2002 the FASB issued SFAS No.
148 Accounting for Stock-Based Compensation  Transition and Disclosure, an
amendment to FASB Statement No. 123 that allows companies adopting the fair
value method under SFAS No. 123 to choose from three alternative transition
methods. The Company elected to adopt the modified prospective method that
recognizes stock-based compensation expense from January 1, 2003 as if the fair
value based accounting method had been used to account for all outstanding
unvested employee awards granted, modified or settled in prior years.

In 2002 and prior years, the Company applied the disclosure-only provisions of
SFAS No. 123 in accounting for its stock-based compensation plans that
permitted the application of the intrinsic value method, as defined in
Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued
to Employees and related interpretations. Under APB Opinion No. 25, the
Company recognized no compensation expense related to certain stock based
compensation plans, as certain stock options have been granted at a price equal
to the market price on the day of the grant and the discount offered under its
employee share ownership plan was at a discount rate permitted without
requiring compensation costs to be recorded.

Pro forma disclosure

The pro forma net income and earnings per share for 2003, 2002 and 2001 have
been determined as if the Company had used the fair value method of accounting
for its stock option based compensation plans for all years presented. The pro
forma amounts presented below reflect the portion of the estimated fair value
of awards granted in 2003, 2002 and 2001, based on the vesting or service
period over which the awards are earned.

Year ended December 31,
    
    2003
    
    2002
    
    2001Net income, as reported
    
    
    344
    
    
    
    406
    
    
    
    382Add: Stock-based employee compensation expense included in reported net income,
net of related tax effects
    
    
    22
    
    
    
    12
    
    
    
    8Deduct: Stock-based employee compensation expense determined as if the fair value
based method was used for all plans, net of related tax effects
    
    
    (22
    )
    
    
    (23
    )
    
    
    (20
    )Pro forma net income
    
    
    344
    
    
    
    395
    
    
    
    370Earnings per share  basic and diluted:As reported
    
    
    5.03
    
    
    
    5.92
    
    
    
    5.76Pro forma
    
    
    5.03
    
    
    
    5.76
    
    
    
    5.57


Consolidation of Variable Interest Entities

In 2003, the FASB issued Interpretation No. 46, as revised (FIN No. 46)
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51. FIN No. 46 introduces a variable interests model to
determine control and consolidation of variable interest entities (VIE). A
VIE is an entity that, by design, lacks sufficient equity or is structured such
that the decision-making ability of its equity holders is limited. FIN No. 46
generally requires consolidation of a VIE by its primary beneficiary. A VIEs
primary beneficiary is the enterprise that, as a result of its interest in the
VIE, absorbs a majority of the VIEs expected losses, receives a majority of
the VIEs expected residual returns, or both. FIN No. 46 applies to those
entities that are considered to be special purpose entities under previously
existing U.S. GAAP for financial statement reporting periods ending after
December 15, 2003, or may optionally be selectively applied to individual VIEs
effective July 1, 2003. For all remaining entities that are subject to FIN No.
46, the interpretation applies for financial statement reporting periods ending
after March 15, 2004.

The Company participates in a leasing arrangement with a trust that is a VIE
where the Company is the primary beneficiary. The trust was previously
appropriately not consolidated consistent with then existing requirements. The
leasing arrangement was entered into in 1995 by Ciba-Geigy, a predecessor of
the Company and has been accounted for
as an operating lease. The trust was created to issue debt and interest-bearing
equity to fund the acquisition of land and construction of a facility

F-15



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

thereon that it leased to the Company. The Company has not modified the leasing
arrangement since its inception and currently utilizes the facility in its
business operations. The lease provides the Company the option to purchase the
facility in 2005 for a termination value of CHF 91 million
(USD 68 million),
which the trust would use to repay its debt. Should the Company choose not to
purchase the facility, it will be liable for any shortfall between the market
value of the facility and the termination value. Conversely, any excess market
value of the facility above the termination value would be retained by the
Company.

The
Company applied the provisions of FIN No. 46 to the trust effective July 1,
2003 resulting in the consolidation of the trust in the Companys consolidated
financial statements and the recording of a charge to net income of CHF 16
million (CHF 26 million pre-tax less CHF 10 million income taxes) for the
cumulative effect of the change in accounting principle. The Companys
consolidated balance sheet as of December 31, 2003 includes fixed assets, net
of accumulated depreciation, totaling CHF 60 million that are pledged as
collateral on the obligations of the trust.

The Company is not involved with any other entities in which it has ownership
or other financial interests and that it currently does not
consolidate, that are considered to be VIEs under FIN No. 46. Therefore, except as described
above, the adoption of FIN No. 46 is not expected to have a material effect on
the Companys results of operations or financial position.

Disclosures about pensions and other postretirement benefits

In December 2003, the FASB issued SFAS No. 132 (revised 2003),Employers
Disclosures about Pensions and Other Postretirement Benefits, which
requires additional disclosures to those in the original SFAS No. 132 about
the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement
plans. The Company elected to fully adopt the revised standard in 2003 (see
Note 18).

Other

Certain other existing authoritative pronouncements have been amended to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The Company does not expect the
adoption of any of these amendments to have a material effect on the results
of its operations and financial position.

Reclassifications

Beginning in 2002, minority interest is no longer reported as a component of
financial expense, net and is reported separately on the Consolidated
Statements of Income. On the Consolidated Balance Sheets, minority interest is
no longer classified with liabilities, but rather presented as a separate line
after total liabilities and before shareholders equity. Reclassifications
have been made to the 2001 Consolidated Statement of Income to conform to the
2003 and 2002 presentations.

Certain other minor reclassifications to the 2002 financial statements and
related footnotes amounts have been made to conform to the 2003 presentation.



|2. |  | Exchange rates of principal currencies
|-- |  | --------------------------------------

Statement of income average rates
    
    Balance sheet year-end rates2003
    
    2002
    
    2001
    
    2003
    
    20021
    
    
    U.S. dollar
    
    (USD)
    
    
    1.35
    
    
    
    1.56
    
    
    
    1.68
    
    
    
    1.25
    
    
    
    1.431
    
    
    British pound
    
    (GBP)
    
    
    2.20
    
    
    
    2.34
    
    
    
    2.43
    
    
    
    2.21
    
    
    
    2.281
    
    
    Euro
    
    (EUR)
    
    
    1.52
    
    
    
    1.47
    
    
    
    1.51
    
    
    
    1.56
    
    
    
    1.46100
    
    
    Japanese yen
    
    (JPY)
    
    
    1.16
    
    
    
    1.24
    
    
    
    1.39
    
    
    
    1.17
    
    
    
    1.18




|3. |  | Acquisitions and divestitures
|-- |  | -----------------------------

Minor acquisitions and divestitures

In May 2002, the Company purchased Melapur B.V. (Melapur) from DSM N.V. for
CHF 22 million (EUR 15 million). Melapur is a provider of halogen-free
melamine-based flame retardants. The business acquired expands the range of
flame retardants of the Plastic Additives Segment. The purchase terms provide
that if the Melapur business achieves certain sales growth percentages during
any of the three calendar years after 2001, additional purchase consideration
of up to CHF 5.4 million (EUR 3.5 million) would be paid to the sellers. The
2002 sales growth percentage was not achieved, therefore no additional purchase
consideration was payable for 2002. The 2003 sales growth percentage was
achieved, therefore CHF 1.9 million (EUR 1.2 million) additional purchase
consideration is payable for 2003 and has been accrued. The maximum additional
purchase consideration that would be payable should the business achieve the
target sales growth percentage for 2004 is CHF 1.9 million (EUR 1.2 million).
The other intangible assets acquired are being amortized over a weighted
average useful life of 12 years. The results of operations for Melapur have
been included in the Companys statement of income from the date of
acquisition.

F-16



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

In June 2001, the Company completed the acquisition of EFKA Additives B.V.
(EFKA), a manufacturer of additives for the coatings and inks industries, for
a total purchase price of approximately CHF 65 million. The acquisition was
accounted for under the purchase method of accounting with the resulting
intangibles being amortized over a weighted average of 11 years. The results of
operations for EFKA have been included in the Companys statement of income
from the date of acquisition. The business acquired will expand the service
element and the high added value products for the Coating Effects Segment.

In March 2001, the Company sold its 50 percent interest in TFL Ledertechnik
GmbH & Co. KG for net proceeds of CHF 62 million. The net proceeds received
approximated the carrying value of the investment at the date of sale.



|4. |  | Accounts receivable
|-- |  | -------------------

2003
    
    2002Accounts receivable
    
    
    1 025
    
    
    
    1 110Allowance for doubtful accounts
    
    
    (85
    )
    
    
    (96
    )Total
    
    
    940
    
    
    
    1 014




|5. |  | Inventories
|-- |  | -----------

2003
    
    2002Raw materials
    
    
    159
    
    
    
    180Work in process and finished goods
    
    
    1 072
    
    
    
    1 266Total
    
    
    1 231
    
    
    
    1 446


Work in process and finished goods are shown after deducting allowances for
obsolete, slow-moving and lower of cost or market adjustments of CHF 50
million as of December 31, 2003 and CHF 58 million as of December 31, 2002.



|6. |  | Property, plant and equipment
|-- |  | -----------------------------

Changes in the components of property, plant and equipment and accumulated
depreciation for the years ended December 31, 2003 and 2002 were as follows:

Machineryand
    
    ConstructionLand
    
    Buildings
    
    equipment
    
    in progress
    
    Total
    
    Total2003
    
    2003
    
    2003
    
    2003
    
    2003
    
    2002Cost at January 1,
    
    
    114
    
    
    
    1 844
    
    
    
    5 585
    
    
    
    157
    
    
    
    7 700
    
    
    
    8 042Additions
    
    
    0
    
    
    
    3
    
    
    
    38
    
    
    
    192
    
    
    
    233
    
    
    
    250Retirements/disposals
    
    
    (22
    )
    
    
    (28
    )
    
    
    (101
    )
    
    
    (6
    )
    
    
    (157
    )
    
    
    (101
    )Changes in consolidation scope(i)
    
    
    10
    
    
    
    70
    
    
    
    10
    
    
    
    0
    
    
    
    90
    
    
    
    1Currency adjustments
    
    
    (2
    )
    
    
    (52
    )
    
    
    (158
    )
    
    
    (1
    )
    
    
    (213
    )
    
    
    (466
    )Other
    
    
    (1
    )
    
    
    18
    
    
    
    73
    
    
    
    (190
    )
    
    
    (100
    )
    
    
    (26
    )Cost at December 31,
    
    
    99
    
    
    
    1 855
    
    
    
    5 447
    
    
    
    152
    
    
    
    7 553
    
    
    
    7 700Accumulated depreciation at January 1,
    
    
    
    
    
    
    (907
    )
    
    
    (3 597
    )
    
    
    
    
    
    
    (4 504
    )
    
    
    (4 477
    )Depreciation
    
    
    
    
    
    
    (53
    )
    
    
    (280
    )
    
    
    
    
    
    
    (333
    )
    
    
    (352
    )Accumulated depreciation on
retirements/disposals
    
    
    
    
    
    
    15
    
    
    
    83
    
    
    
    
    
    
    
    98
    
    
    
    78Changes in consolidation scope(i)
    
    
    
    
    
    
    (13
    )
    
    
    (8
    )
    
    
    
    
    
    
    (21
    )
    
    
    0Currency adjustments
    
    
    
    
    
    
    14
    
    
    
    77
    
    
    
    
    
    
    
    91
    
    
    
    234Other
    
    
    
    
    
    
    5
    
    
    
    74
    
    
    
    
    
    
    
    79
    
    
    
    13Accumulated depreciation
at December 31,
    
    
    
    
    
    
    (939
    )
    
    
    (3 651
    )
    
    
    
    
    
    
    (4 590
    )
    
    
    (4 504
    )Net book value at December 31,
    
    
    99
    
    
    
    916
    
    
    
    1 796
    
    
    
    152
    
    
    
    2963
    
    
    
    3196




---

|(i) |  | Effective July 1, 2003, with the adoption of FIN No. 46, the Company began
consolidating an entity from which it has leased a facility. See Note 1.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

The insurance value of the property, plant and equipment was approximately CHF
10 485 million at December 31, 2003 and CHF 10 325 million at December 31,
2002.

F-17



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)



|7. |  | Goodwill
|-- |  | --------

Changes in the carrying amount of goodwill by Segment from December 31, 2002 to
December 31, 2003 were as follows:

Foreign CurrencyTranslation
    
    Other
    
    Dec. 31,Dec. 31, 2002
    
    Adjustments
    
    Changes(i)
    
    2003Plastic Additives
    
    
    21
    
    
    
    (2
    )
    
    
    4
    
    
    
    23Coating Effects
    
    
    189
    
    
    
    0
    
    
    
    0
    
    
    
    189Water & Paper Treatment
    
    
    972
    
    
    
    (29
    )
    
    
    5
    
    
    
    948Textile Effects
    
    
    160
    
    
    
    (5
    )
    
    
    1
    
    
    
    156Home & Personal Care
    
    
    40
    
    
    
    (1
    )
    
    
    3
    
    
    
    42Total
    
    
    1 382
    
    
    
    (37
    )
    
    
    13
    
    
    
    1 358




---

|(i) |  | Other changes represents additional goodwill recorded for minor acquisitions
|--- |  | ----------------------------------------------------------------------------

Goodwill as of December 31, 2001 was reclassified to Segments in connection
with the adoption of SFAS No. 142 effective January 1, 2002 as follows:

December 31, 2001As reported
    
    Reclass to Segments
    
    ReclassifiedPlastic Additives
    
    
    20
    
    
    
    0
    
    
    
    20Coating Effects
    
    
    70
    
    
    
    128
    
    
    
    198Water & Paper Treatment
    
    
    7
    
    
    
    984
    
    
    
    991Textile Effects
    
    
    0
    
    
    
    166
    
    
    
    166Home & Personal Care
    
    
    1
    
    
    
    41
    
    
    
    42Corporate
    
    
    1 319
    
    
    
    (1 319
    )
    
    
    0Total
    
    
    1 417
    
    
    
    0
    
    
    
    1 417


Changes in the carrying amount of goodwill by Segment from December 31, 2001 to
December 31, 2002 were as follows:

December 31,
    
    Foreign Currency2001
    
    Translation
    
    Other
    
    Dec. 31,Reclassified
    
    Adjustments
    
    Changes(ii)
    
    2002Plastic Additives
    
    
    20
    
    
    
    (3
    )
    
    
    4
    
    
    
    21Coating Effects
    
    
    198
    
    
    
    (9
    )
    
    
    0
    
    
    
    189Water & Paper Treatment
    
    
    991
    
    
    
    (34
    )
    
    
    15
    
    
    
    972Textile Effects
    
    
    166
    
    
    
    (6
    )
    
    
    0
    
    
    
    160Home & Personal Care
    
    
    42
    
    
    
    (2
    )
    
    
    0
    
    
    
    40Total
    
    
    1 417
    
    
    
    (54
    )
    
    
    19
    
    
    
    1 382




---

|(ii) |  | Other changes represents a reclassification from other intangible assets
and additional goodwill recorded resulting from minor acquisitions.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

F-18



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)



|8. |  | Other intangible assets
|-- |  | -----------------------

Other intangible assets by major class consist of the following:

Gross
    
    
    
    
    
    Netcarrying
    
    Accumulated
    
    carryingDecember 31, 2003
    
    value
    
    amortization
    
    valueDeveloped technology and know-how
    
    
    752
    
    
    
    (150
    )
    
    
    602Patents
    
    
    35
    
    
    
    (9
    )
    
    
    26Trademarks and tradenames
    
    
    4
    
    
    
    0
    
    
    
    4Minimum pension liability 
intangible asset
    
    
    10
    
    
    
    
    
    
    
    10Other
    
    
    8
    
    
    
    (3
    )
    
    
    5Total
    
    
    809
    
    
    
    (162
    )
    
    
    647


Gross
    
    
    
    
    
    Netcarrying
    
    Accumulated
    
    carryingDecember 31, 2002
    
    value
    
    amortization
    
    valueDeveloped technology and know-how
    
    
    763
    
    
    
    (125
    )
    
    
    638Patents
    
    
    37
    
    
    
    (6
    )
    
    
    31Trademarks and tradenames
    
    
    3
    
    
    
    0
    
    
    
    3Minimum pension liability 
intangible asset
    
    
    19
    
    
    
    
    
    
    
    19Other
    
    
    4
    
    
    
    (1
    )
    
    
    3Total
    
    
    826
    
    
    
    (132
    )
    
    
    694


The intangible asset related to the minimum pension liability is not subject to
amortization. For the remaining other intangible assets, 2003 amortization
amounted to CHF 33 million (2002: CHF 33 million and 2001: CHF 31 million).
Based on the other intangible assets values at December 31, 2003, the estimated
future annual other intangible assets amortization expense is expected to be as
follows: 2004: CHF 34 million, 2005: CHF 33 million, 2006: CHF 33 million,
2007: CHF 32 million, 2008: CHF 32 million, 2009 and thereafter CHF 473 million.



|9. |  | Financial investments and instruments
|-- |  | -------------------------------------

Fair value of financial investments and instruments

The fair value of financial investments and instruments is the price at which
one party would assume the rights and duties of another party. Fair values of
financial investments and instruments have been determined with reference to
available market information at the balance sheet date and, when such
information is not readily available, using valuation methodologies as
described below. Considering the variability of their value-determining
factors, the fair values used for financial reporting purposes might differ
from the amounts that the Company would realize if assets were sold under
current market conditions.

Financial assets and liabilities with book values approximating fair market
value due to their short-term nature include cash and cash equivalents,
accounts receivable, accounts payable and short-term debt.

The fair value of short-term investments is estimated using quoted market
prices.

The fair value of publicly traded long-term debt is estimated using quoted
market prices. The fair value of other long-term debt is estimated by
discounting future cash flows using interest rates currently available for
similar debt with similar terms, credit ratings and remaining maturities. The
book value and fair value of the Companys long-term debt is as follows.

2003
    
    2002Book
    
    Fair
    
    Book
    
    Fairvalue
    
    value
    
    value
    
    valueLong-term debt, including current portion
    
    
    3 188
    
    
    
    3 202
    
    
    
    3 542
    
    
    
    3 601


The fair value of financial investments for which quoted market prices are
available are based on such market prices. Financial investments for which
quoted market prices do not exist and where it is not practical to estimate
fair value are reflected at their book value. Investments in unconsolidated
companies are reported at fair value with the unrealized gains and losses
reported in accumulated other comprehensive income. For investments accounted
for using the equity method,

F-19



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

the Company originally records these at cost and subsequently adjusts the
carrying amount to reflect its share of earnings less any dividends received.
Quoted market prices are not available for investments in equity affiliates.

Financial investments

2003
    
    2002Investments in equity affiliates
    
    
    137
    
    
    
    147Investments in unconsolidated companies
    
    
    10
    
    
    
    25Total financial investments
    
    
    147
    
    
    
    172


At December 31, 2003, the cumulative unrealized loss before tax on investments
in unconsolidated companies, which is recorded in accumulated other
comprehensive income, was CHF 1 million (December 31, 2002: no gain or loss and
December, 31, 2001: CHF 37 million loss). These unrealized losses were the
result of market weakness in the industry segments in which these companies
participate. In 2002, the decline in the market values below the Companys cost
basis in its financial investments in unconsolidated companies, primarily the
Companys investment in Hexcel Corporation, was in managements opinion no
longer deemed to be temporary. As a result, a loss was realized in the
Consolidated Statement of Income for 2002 of CHF 38 million (CHF 23 million,
net of tax). In 2003, the Company sold its investment in Hexcel Corporation for
net proceeds of CHF 21 million and realized a gain on the sale
of CHF 16 million, which is
included in the Consolidated Statement of Income for 2003.

The most significant of the Companys investments in equity affiliates are
Compagnie Industrielle de Monthey SA
(50 percent) and Daihan Swiss Chemical Corp. (50 percent), both of which have
maintained the same level of investment in 2003, 2002 and 2001. In March 2001,
the Company sold its 50 percent investment in TFL Ledertechnik GmbH & Co. KG
(see Note 3). Effective January 1, 2001, the Company acquired a controlling
interest in Musashino-Geigy Co. Ltd increasing its holdings from 50 percent to
60 percent.

The following table presents as of December 31, 2003, 2002 and 2001, summarized
financial information on a 100 percent basis for investments in companies
accounted for as investments in equity affiliates.

2003
    
    2002
    
    2001Sales
    
    
    127
    
    
    
    152
    
    
    
    213Income before taxes
    
    
    4
    
    
    
    21
    
    
    
    16Net income
    
    
    2
    
    
    
    16
    
    
    
    11Total assets
    
    
    110
    
    
    
    136
    
    
    
    161Shareholders equity
    
    
    259
    
    
    
    280
    
    
    
    293


The income from earnings of equity affiliates of CHF 3 million (CHF 6 million
in 2002 and CHF 8 million in 2001) are shown before taxes as a separate line
item in the operating income section of the Consolidated Statements of Income.
The related income tax provision of CHF 1 million (CHF 2 million in 2002 and
CHF 3 million in 2001) is included in the Companys provision for income taxes.

Derivative financial instruments

The Company enters into derivative financial instruments in the ordinary course
of business to mitigate its exposure to adverse changes in foreign exchange
rates and to manage its interest rate exposures. Various risk exposures,
arising from existing assets and liabilities, from future transactions in which
the Company is firmly committed and from future anticipated transactions, are
assessed and managed centrally by the Companys treasury function based on the
Companys aggregate exposure. Under the Companys written hedging policy,
treasury management continuously monitors and reports the results of its risk
management programs to senior management and may choose to partially or fully
hedge exposures. The Companys risk management policies do not permit the
utilization of financial instruments for speculative or trading purposes.

The Company has procedures to monitor the credit exposure amounts and manages
exposure to counter-party credit risk through specific minimum credit
standards and diversification of counter-parties. The counter-parties to
financial instruments generally are financial institutions with a minimum A
credit rating or its equivalent and with significant experience with such
instruments.

Foreign currency risk management

A substantial portion of the Companys cash flows is denominated in foreign
currencies. The Company collects global expected cash flow information on a
monthly basis and, based on these cash flows, prepares a consolidated exposure
forecast by currency and determines to what extent these consolidated currency
exposures will be hedged. To hedge the balance sheet and income exposure
associated with diminution in value of foreign currency cash flows
(principally U.S.

F-20



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

dollars, euro, British pounds, Australian dollars and Japanese yen), the
Company primarily utilizes foreign currency forwards and swaps as well as
options, which generally expire within twelve months. In order to lower the
overall hedging costs, the Company may issue derivatives on existing or future
positions.

Generally, the Company does not designate foreign exchange contracts as
accounting hedges. For specific anticipated transactions, the Company may
designate the foreign exchange contract as a cash flow hedge. For specific firm
purchase or sale commitments or for recognized foreign currency denominated
assets and liabilities, the Company may designate the foreign exchange contract
as a fair value hedge.

Interest rate risk management

The Company is exposed to market risks due to fluctuating interest rates
primarily through its borrowing activities and to a lesser extent through its
investments. The Company issues debt using the most efficient capital markets
and products to fund its working capital and investment needs, which can result
in a currency or interest rate mismatch with the underlying assets. Most
short-term borrowings are in foreign currencies and floating interest rate
instruments, whereas the majority of long-term borrowings are in fixed interest
rate instruments. The Company manages its ratio of fixed to floating interest
rate with financial instruments and the objective of achieving a mix that is
appropriate both in terms of risk and cost. To manage this mix effectively, the
Company selectively enters into interest rate swaps and forward rate
agreements, in which it agrees to exchange various combinations of fixed and
variable interest rates based on agreed-upon nominal amounts.

Interest rate swaps that qualify and are designated as a hedge against the
change in the fair value of the Companys fixed-rate debt obligations are
recorded as fair value hedges. Interest rate swaps and forward rate agreements
that qualify and are designated as a hedge against the variability of cash
flows associated with Companys variable-rate long-term debt are recorded as
cash flow hedges.

Information with respect to fair value hedges

In 2003, there was no hedge ineffectiveness for the Companys fair value
hedges. Gains resulting from hedge ineffectiveness of fair value hedges of CHF
1 million for 2002 and CHF 6 million for 2001 were recorded in other financial
expenses, net, in the consolidated statements of income.

Information with respect to cash flow hedges

The Company has entered into natural gas forward contracts that are designated
as cash flow hedges of price risk related to a portion of the Companys
forecasted natural gas purchases in the United States. The Company used natural
gas forward contracts to minimize its exposure to increases in natural gas
prices in 2003, 2002 and 2001. At December 31, 2003, the Company had open
forward contracts with maturity dates ranging from January 2004 to March 2004.

At December 31, 2003, the fair value of open natural gas forward contracts was
an unrealized gain of CHF 1.2 million, before taxes (2002: CHF 1.7 million;
2001: CHF 0 million) recorded in other comprehensive income. If this amount were
to be realized, all of it would be reclassified into cost of goods sold during
the next twelve months. During 2003, both realized gains and losses recorded in
cost of goods sold and hedge ineffectiveness were not significant.



|10. |  | Other assets
|--- |  | ------------

2003
    
    2002Prepaid pension costs
    
    
    739
    
    
    
    699Deferred taxes
    
    
    173
    
    
    
    183Loans to third parties and equity affiliates
    
    
    73
    
    
    
    86Other
    
    
    59
    
    
    
    66Total
    
    
    1 044
    
    
    
    1 034




|11. |  | Accruals and other current liabilities
|--- |  | --------------------------------------

2003
    
    2002Payroll and employee benefits
    
    
    201
    
    
    
    208Taxes other than income taxes
    
    
    63
    
    
    
    50Interest
    
    
    87
    
    
    
    53Rebates
    
    
    52
    
    
    
    52Environmental remediation and compliance
    
    
    28
    
    
    
    33Retirement and post employment benefits
    
    
    30
    
    
    
    27Deferred income taxes
    
    
    68
    
    
    
    84Other
    
    
    312
    
    
    
    435Total
    
    
    841
    
    
    
    942


F-21



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)



|12. |  | Short-term debt
|--- |  | ---------------

2003
    
    2002Bank overdrafts
    
    
    23
    
    
    
    38Loans
    
    
    81
    
    
    
    102Commercial paper
    
    
    1
    
    
    
    5Other(i)
    
    
    153
    
    
    
    153Current portion of long-term debt
    
    
    1
    
    
    
    1 198Total
    
    
    259
    
    
    
    1 496




---

|(i) |  | Other includes employee and retiree deposits totaling CHF 146 million at
December 31, 2003 and CHF 147 million at December 31, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------

The Companys principle commercial paper programs are in the United States and
provide for short-term borrowings up to USD 1 000 million. At December 31, 2003
and 2002, no amounts were outstanding under these programs in the United
States.

On January 24, 2003, the Company entered into a multicurrency revolving loan
facility agreement that provides for borrowings in USD up to CHF 200 million
equivalent as back-up support for the Companys commercial paper program in the
United States, and aggregate borrowings in multiple currencies up to CHF 500
million. A commitment fee of 45 percent of the applicable margin per annum,
currently at 0.1125 percent, is paid on the unused portion of the facility. The
loans bear interest at an interest rate of LIBOR plus 25 basis points, subject
to adjustment on a sliding scale, in the range of LIBOR plus 22.5 to 42.5 basis
points, depending on the Companys debt rating. The facility expires on January
23, 2006. As of December 31, 2003, there were no borrowings outstanding under
this facility.

The weighted average interest rate for short-term debt (excluding the current
portion of long-term debt) calculated at December 31, 2003 was 3.7 percent
and at December 31, 2002 was 4.9 percent. Unused short-term credit lines
totaled CHF 601 million at December 31, 2003 and CHF 753 million at December
31, 2002.



|13. |  | Long-term debt
|--- |  | --------------

2003
    
    2002Bonds and Euro Medium-Term Notes
    
    
    3 071
    
    
    
    2 583Convertible bonds
    
    
    0
    
    
    
    889Amounts owed to credit institutions
    
    
    100
    
    
    
    5Other long-term debt
    
    
    17
    
    
    
    65Total
    
    
    3 188
    
    
    
    3 542Less: current portion of long-term debt
    
    
    1
    
    
    
    1 198Total long-term debt
    
    
    3 187
    
    
    
    2 344


Bonds and Euro Medium-Term Notes
    
    2003
    
    2002CHF 1 000
    
    3.25% Straight Bonds, principal due 2008
    
    
    1 060
    
    
    
    1 065EUR 500
    
    4.875% Unsecured Notes, principal due 2018
    
    
    777
    
    
    
    0CHF 300
    
    3.25% Straight Bonds, principal due 2009
    
    
    303
    
    
    
    303USD 178
    
    U.S. pollution control and industrial development bonds, principal duebetween 2008 and 2028 (weighted average interest rate of 2.76%)
    
    
    224
    
    
    
    256Total Bonds
    
    
    
    
    
    
    2 364
    
    
    
    1 624USD 175
    
    6.125% Euro Medium-Term Note, principal due 2003
    
    
    0
    
    
    
    247EUR 114(i)
    
    4.875% Euro Medium-Term Note, principal due 2005
    
    
    178
    
    
    
    168GBP 243
    
    6.50% Euro
Medium-Term Note, principal due 2013
    
    
    529
    
    
    
    544Total Euro Medium-Term Notes
    
    
    707
    
    
    
    959Total Bonds and Euro Medium-Term Notes
    
    
    3 071
    
    
    
    2 583




---

|(i) |  | The underlying note was denominated in German Marks (DEM 223 million).
|--- |  | ----------------------------------------------------------------------

The Company maintains a Euro Medium-Term Note program, under which the Company
may issue up to USD 2 000 million multicurrency unsecured, unsubordinated notes
with a minimum maturity of one month at fixed, floating or indexed interest
rates.

F-22



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

In May 2003, the Company repaid USD 175 million, 6.125 percent Euro Medium-Term
Notes at their scheduled maturity date. In July 2003, the Company repaid all
convertible bonds at their scheduled maturity date. None of the bonds had been
converted into the Companys common stock.

In June 2003, the Company issued EUR 500 million of unsecured notes (the
Notes). The Notes mature June 2018, bear interest at a fixed rate of 4.875
percent, and had an issue price of 99.922 percent. The net proceeds from the
issuance of these notes totaled CHF 738 million.

The annual maturities of long-term debt outstanding at December 31, 2003 are as
follows: 2004 CHF 1 million; 2005 CHF 264 million; 2006 CHF 1 million; 2007 CHF
2 million; 2008 CHF 1 210 million; 2009 and thereafter CHF 1 656 million.



|14. |  | Income taxes
|--- |  | ------------

Income from continuing operations before income taxes and minority interest
consists of the following:

2003
    
    2002
    
    2001Domestic
    
    
    222
    
    
    
    258
    
    
    
    319Foreign
    
    
    217
    
    
    
    315
    
    
    
    249Total income from continuing operations before income taxes
and minority interest
    
    
    439
    
    
    
    573
    
    
    
    568


The provision for income taxes in 2003, 2002 and 2001 from continuing
operations consists of the following:

2003
    
    2002
    
    2001Domestic
    
    
    47
    
    
    
    62
    
    
    
    34Foreign
    
    
    48
    
    
    
    42
    
    
    
    57Total current provision
    
    
    95
    
    
    
    104
    
    
    
    91Domestic
    
    
    (3
    )
    
    
    3
    
    
    
    35Foreign
    
    
    (19
    )
    
    
    45
    
    
    
    49Total deferred provision
    
    
    (22
    )
    
    
    48
    
    
    
    84Share of taxes from earnings of equity affiliates
    
    
    1
    
    
    
    2
    
    
    
    3Total provision for income taxes
    
    
    74
    
    
    
    154
    
    
    
    178


The Company is incorporated in Switzerland, but operates in numerous countries
with differing tax laws and rates. Consequently, substantial portions of the
Companys income before income taxes and provision for income taxes are
generated outside of Switzerland. The Companys expected tax rate
consists of the weighted average rate applicable in the countries in which the
Company operates. The main factors causing the effective tax rate to differ
from the expected tax rate are:

2003
    
    2002
    
    2001%
    
    %
    
    %Expected tax rate
    
    
    30
    
    
    
    30
    
    
    
    30Non-deductible items
    
    
    5
    
    
    
    2
    
    
    
    7Tax free income
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )Income taxed at reduced rates
    
    
    (8
    )
    
    
    (3
    )
    
    
    (3
    )Changes in valuation allowance
    
    
    1
    
    
    
    0
    
    
    
    1Other
    
    
    (10
    )
    
    
    0
    
    
    
    (1
    )Effective tax rate
    
    
    17
    
    
    
    27
    
    
    
    32


Non-deductible items include the tax effect of amortization of other
intangible assets in 2003 and 2002, and in 2001 additionally the effect of
amortization of goodwill.

Income taxed at reduced rates includes the tax effect of certain
financing-related subsidiaries of the Company that operate in countries having
low tax rates.

Changes in valuation allowance are primarily the result of not recognizing
the full benefit from loss carryforwards in certain tax jurisdictions as
their realization was not certain.

In 2003, Other includes: (10) percent for the release of previously
established reserves, mostly the reserve released due to the settlement of a
dispute between Novartis and the Company (see Note 21); (4) percent for the
effect of tax deductions in

F-23



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

certain of the Companys subsidiaries that were not recognized for
financial reporting purposes; (2) percent for other adjustments; offset by
6 percent for taxes not based on profit such as franchise taxes and tax
risk accruals.

In 2002, Other includes approximately 4 percent for tax adjustments, offset
by (4) percent reflecting the effect of certain taxable expenses in certain of
the Companys subsidiaries that were not recognized for financial reporting
purposes.

In 2001, Other includes approximately 3 percent for the effect of a tax
payment in Italy (the Imposta Sostitutiva) that permitted the future tax
deductibility of Prochimica s.r.l.s goodwill amortization, 3 percent for tax
adjustments, offset by (4) percent reflecting the effect of certain taxable
expenses in one of the Companys subsidiaries that was not recognized for
financial reporting purposes.

The significant components of activities that gave rise to deferred tax assets
and liabilities on the balance sheet at December 31, 2003 and 2002, were as
follows:

Deferred tax assets
    
    2003
    
    2002Pensions and other employee compensation
    
    
    120
    
    
    
    120Inventory
    
    
    21
    
    
    
    32Restructuring and special charges
    
    
    10
    
    
    
    26Environmental reserves
    
    
    164
    
    
    
    186Tax loss carryforwards
    
    
    152
    
    
    
    181Other
    
    
    74
    
    
    
    34Gross deferred tax assets
    
    
    541
    
    
    
    579Valuation allowance
    
    
    (121
    )
    
    
    (131
    )Net deferred tax assets
    
    
    420
    
    
    
    448Deferred tax liabilitiesProperty, plant and equipment
    
    
    (391
    )
    
    
    (398
    )Other
    
    
    (199
    )
    
    
    (193
    )Gross deferred tax liabilities
    
    
    (590
    )
    
    
    (591
    )Net deferred tax liabilities
    
    
    (170
    )
    
    
    (143
    )Included inPrepaid and other current assets
    
    
    132
    
    
    
    144Other assets
    
    
    173
    
    
    
    183Accruals and other current liabilities
    
    
    (68
    )
    
    
    (84
    )Deferred income taxes
    
    
    (407
    )
    
    
    (386
    )Net deferred tax liabilities
    
    
    (170
    )
    
    
    (143
    )


In managements opinion, the majority of deferred tax assets will be realized
because of the depletion of certain significant tax deductions and anticipated
future taxable income resulting from the Companys operations. Valuation
allowances have been established for certain tax loss carryforwards and certain
long-term deferred tax assets of the Company.

For tax return purposes, the Company has available tax loss carryforwards of
approximately CHF 425 million, of which CHF 41 million will expire in the next
five years and CHF 285 million will expire between five and twenty years. The
remaining carryforwards do not expire.

At December 31, 2003, unremitted earnings of subsidiaries outside of
Switzerland of approximately CHF 300 million were deemed to be permanently
invested. Therefore, no deferred tax liability has been recognized for taxes
that might be incurred if such earnings were remitted to Switzerland.



|15. |  | Other liabilities
|--- |  | -----------------

2003
    
    2002Environmental remediation and compliance
    
    
    529
    
    
    
    581Retirement and postemployment benefits
    
    
    693
    
    
    
    679Other
    
    
    195
    
    
    
    277Total
    
    
    1 417
    
    
    
    1 537


The environmental remediation and compliance accrual, including the current
portion, decreased by CHF 57 million (2002: CHF 134 million) as a result of a
CHF 22 million (2002: CHF 82 million) usage of the accrual in 2003 (see Note
21) and a CHF 35 million (2002: CHF 52 million) reduction related mainly to
currency effects.

F-24



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)



|16. |  | Shareholders equity
|--- |  | --------------------

On April 20, 1998, the Companys shareholders approved the creation of
authorized and conditional capital of the
Company. The approval allows for the issuance of a maximum of 10 million
registered shares with a par value of CHF 6 per share (2002: 9 CHF per share;
2001: 10 CHF per share). After a re-approval by the shareholders due to
requirements of Swiss law, another 4 million shares may also be issued until
March 22, 2004 without any restriction.

At the Companys Annual General Meeting on March 6, 2003, the shareholders
voted in favor of a proposal made by the Board of Directors not to pay a
dividend in 2003 (2002: CHF 134 million paid on March 27, 2002). The
shareholders approved an extraordinary payment to the shareholders in the form
of a capital reduction of CHF 3 per share. The capital reduction was in the
form of a reduction in the nominal value of each common share from CHF 9 per
share to CHF 6 per share. The capital reduction payment was made on May 23,
2003, totaling CHF 206 million (2002: CHF 69 million paid on June 28, 2002).

According to the Swiss Code of Obligations, the Company may under certain
conditions, as defined, acquire up to
10 percent of its own shares. The Company sold 1 202 797 shares in 2003 (4 970 437 shares in 2002 and 1 929 453 shares in 2001) of previously acquired
treasury stock at market prices. In addition, in 2003, the Company purchased 2 374 611 shares of treasury stock (2002: 2 174 577 shares of treasury stock and
1 855 966 in 2001) at market prices. At December 31, 2003, the Company held 4 363 901 of treasury shares (2002: 3 192 087 treasury shares).

The Company designated a total of 3 496 234 shares in 2003 (1 978 567 shares in
2002 and 5 278 224 shares in 2001) of its treasury stock as reserved shares
primarily for satisfaction of future share requirements under its various
outstanding employee stock option plans, and also in 2003, for
possible future cancellation under the Companys share buyback program. The remaining 867 667 shares in 2003
(1 213 520 shares in 2002 and 709 723 shares in 2001) of treasury stock have
been designated as unreserved shares.

The after-tax components of accumulated other comprehensive income (loss) are
as follows:

2003
    
    2002Currency translation adjustment
    
    
    (416
    )
    
    
    (285
    )Unrealized gain on cash flow hedges, net of tax
    
    
    1
    
    
    
    1Unrealized gains on available-for-sale securities, net of tax
    
    
    1
    
    
    
    0Minimum pension liability, net of tax
    
    
    (79
    )
    
    
    (77
    )Other, net of tax
    
    
    0
    
    
    
    1Accumulated other comprehensive income (loss)
    
    
    (493
    )
    
    
    (360
    )


There
was no deferred tax effect on the unrealized gains/(losses) on
available-for-sale securities in either 2003 or in 2002. There was no
deferred tax effect on cash flow hedges in 2003, (in 2002 a tax
expense of CHF 1 million). The
deferred tax effect on the minimum pension liability adjustment is a deferred
tax benefit of CHF 50 million in 2003 (2002: CHF 49 million). The currency
translation adjustment is not adjusted for income taxes as it relates primarily
to indefinite investments in non-Swiss subsidiaries.



|17. |  | Stock based compensation plans
|--- |  | ------------------------------

Effective January 1, 2003, the Company adopted the fair value method of
accounting as defined in SFAS No. 123 Accounting for Stock-Based Compensation
as amended, for its stock-based compensation plans. Descriptions of the terms
of the Companys plans are presented in the following paragraphs.

In connection with the capital reduction of CHF 3 per share in 2003 (CHF 1 per
share in 2002) (see note 16), the Company, in accordance with the terms of its
stock option plans, reduced the exercise price of its outstanding stock options
(the capital reduction repricing). No compensation expense was recorded as a
result of the capital reduction repricings. For the Leveraged Executive Asset
Plan, which is described below, the capital reduction repricing was set by the
investment bank. All exercise prices disclosed herein have been accordingly
adjusted.

LEAP  In connection with the one-time Leveraged Executive Asset Plan (LEAP)
established in 1997 for the Companys then key executives and non-executive
Board members (participants), the 288 400 restricted shares of common stock of
the Company that were purchased by the participants in 1997 were released to
the participants in March 2002. As of December 31, 2003, a total of 1 042 782
share options having an expiration date of March 15, 2005 and that were granted
in connection with the LEAP and permit the holder thereof to purchase shares of
the Companys common stock at a price per share of CHF 110 (CHF 107.16 after
the capital reduction repricing), remain outstanding. Because the Company,
upon establishment of the LEAP in 1997, paid a fee to a major investment bank
to assume all of the Companys obligations to the participants in the LEAP, the
Company has no obligation to issue shares of its common stock nor any other
obligation to the participants in connection with the LEAP.

F-25



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

LTIP
 The Company has a Long-Term Incentive Plan (LTIP), which grants options
and restricted shares of common stock of the Company to senior management and
other key employees and, in 2002 and 2001, to non-executive Board members. For
grants of options made to participants other than those in the United States,
vesting is at the date of grant and the right to exercise is restricted for
three years following the grant date. For grants of options made to
participants in the United States, vesting and the right to exercise occur over
three years. The options expire either five years or ten years after the date
of grant. In 2002 and 2001, no compensation expense was recorded for the
options issued under this plan as the options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant.
In connection with the Companys adoption in 2003 of SFAS No. 123 as amended,
compensation expense of approximately CHF 5 million was recorded comprising of
both current year awards and the unvested portion of prior year awards.

The following table summarizes option activity under the LTIP during 2003, 2002
and 2001:

Weighted average
    
    Optionsexercise price
    
    outstandingBalance at December 31, 2000
    
    
    121.40
    
    
    
    1 299 900Options granted
    
    
    108.63
    
    
    
    461 444Options issued on conversion of stock appreciation rights
    
    
    160.00
    
    
    
    60 799Options canceled/forfeited
    
    
    112.38
    
    
    
    (43 694
    )Balance at December 31, 2001
    
    
    119.63
    
    
    
    1 778 449Options granted
    
    
    108.80
    
    
    
    481 401Options exercised
    
    
    108.99
    
    
    
    (32 098
    )Options canceled/forfeited
    
    
    111.07
    
    
    
    (32 413
    )Balance at December 31, 2002
    
    
    117.53
    
    
    
    2 195 339Options granted
    
    
    82.60
    
    
    
    176 627Options exercised
    
    
    0
    
    
    
    0Options canceled/forfeited
    
    
    105.02
    
    
    
    (26 989
    )Options expired
    
    
    160.00
    
    
    
    (264 355
    )Balance at December 31, 2003
    
    
    109.34
    
    
    
    2 080 622


The following table summarizes the status of stock options outstanding and
exercisable at December 31, 2003:

Stock Options Outstanding
    
    Stock Options ExercisableWeighted average
    
    
    
    
    
    Weighted average
    
    
    
    
    
    Weighted averageexercise price
    
    Number of
    

remaining
    
    Number of
    
remainingExercise price
    
    outstanding/
    
    outstanding
    
    contractual life
    
    outstanding
    
    contractual liferange
    
    exercisable
    
    options
    
    (in years)
    
    options
    
    (in years)82.60  111.88
    
    
    106.04/107.79
    
    
    
    1 953 359
    
    
    
    3.7
    
    
    
    1 033 193
    
    
    
    3.2160.00
    
    
    160.00/160.00
    
    
    
    127 263
    
    
    
    4.0
    
    
    
    127 263
    
    
    
    4.02 080 622
    
    
    
    
    
    
    
    1 160 456


In connection with the LTIP 2001, the Company granted 96 729 restricted shares
of common stock, which are restricted for three years from the date of grant,
to 639 participants. These restricted shares were granted as part of the
payment of the 2000 incentive bonus, which was recorded as compensation expense
in 2000. The market value of the common stock at date of grant was CHF 112 per
share.

In connection with the LTIP 2002, the Company granted 85 128 restricted shares
of common stock, which are restricted for three years from the date of grant,
to 683 participants. The market value of the common stock at date of grant was
CHF 112 per share. Compensation expense of approximately CHF 10 million has
been recognized in 2002 related to the grant of these shares.

In connection with the LTIP 2003, the Company granted 186 503 restricted shares
of common stock, which are restricted for three years from the date of grant,
to 720 participants. The market value of the common stock at date of grant was
CHF 85.30 per share. Compensation expense of approximately CHF 16 million has
been recognized in 2003 related to the grant of these shares.

ESOP
 The Company has an Employee Stock Ownership Plan (ESOP) that enables
substantially all employees to purchase annually up to 20 shares of common
stock at a price equal to 85 percent of the average market price, defined as
the average closing price of the shares on the Swiss Exchange for 10 trading
days prior to the purchase date of the shares. During 2003, 1 768 employees
(2002: 1 660 employees; 2001: 2 279 employees) purchased 32 221 shares (2002:
29 499 shares; 2001:

F-26



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

40 069 shares) for which approximately CHF 2 million (2002: CHF 3 million;
2001: CHF 4 million) was paid to the Company. In 2002 and 2001, no compensation
expense was recorded under this plan. In 2003, CHF 0.4 million compensation
expense was recorded in connection with the adoption of SFAS No. 123.

MAB  The Company has a Mitarbeiterbeteiligungsplan (Employee Investment
Plan) which grants annually to most employees in Switzerland (as an enhancement
to their pension plan arrangements) the right to purchase 20 shares (beginning
in 2003, 25 shares) of common stock at CHF 15 per share (so long as the share
price is not greater than CHF 200 at which level the Employee Investment Plan
price may be adjusted). The rights vest at the grant date and become
exercisable at the date of the employees retirement or termination. The
following table summarizes rights activity under the MAB during 2003, 2002 and
2001:

RightsExercise price
    
    outstandingBalance at December 31, 2000
    
    
    15
    
    
    
    232 760Rights granted
    
    
    15
    
    
    
    86 240Rights exercised
    
    
    15
    
    
    
    (16 260
    )Balance at December 31, 2001
    
    
    15
    
    
    
    302 740Rights granted
    
    
    15
    
    
    
    86 040Rights exercised
    
    
    15
    
    
    
    (18 500
    )Balance at December 31, 2002
    
    
    15
    
    
    
    370 280Rights granted
    
    
    15
    
    
    
    105 275Rights exercised
    
    
    15
    
    
    
    (20 005
    )Balance at December 31, 2003
    
    
    15
    
    
    
    455 550


Compensation expense is recorded in the year the rights are granted and, in
2003, CHF 9 million (2002: CHF 8 million; 2001: CHF 8 million) of compensation
expense was recorded under this plan.

PSP  In 2001,the Company established a Performance Share Plan (PSP) for
selected senior and key management and non-executive Board members
(participants). In accordance with the PSP, participants are granted rights to
receive shares of common stock of the Company if the performance of the
Company, defined and measured as Total Shareholder Return (TSR), during the
measurement period under the PSP meets or exceeds specified conditions and the
share price of the Company is equal to or higher than the market value of
shares at the beginning of the measurement period. The TSR includes three
parameters: (i) the change in the share price from the close of the first
trading day at the beginning of the measurement period to the share price at
the close of the last trading day at the end of the measurement period,
expressed as a percentage; (ii) any dividends paid or payable for the
measurement period and (iii) any extraordinary returns paid to the shareholders
during the measurement period. In 2001, 86 700 rights were granted to 137
participants with a measurement period from January 1, 2001 through December
31, 2003. The share price as of the beginning of the measurement period was CHF
109.25, the market value of the shares on January 3, 2001. The rights vest
ratably over a three year period except when a participant voluntarily
terminates employment, in which case all rights are forfeited. Each right is
entitled to receive from one share up to a maximum of four shares of Company
common stock, depending on the Companys share price and the Companys TSR
ranking within the benchmark group at the end of the measurement period. As a
result of terminations from the plan, a total of 2 627 rights (2002: 1 675
rights, 2001: 1 250 rights) have been returned to the Company. As the
conditions of the PSP were not met, no compensation expense was recorded
related to the fulfillment of the terms of the plan. In 2003 however, in
accordance with the adoption of No. SFAS 123, as amended, the Company recorded
CHF 1 million compensation expense for the fair value of the rights that vested
during 2003.

Change in control and reserve of shares

Upon a change in control of the Company (defined as 30 percent for LEAP, 33.33
percent other than 1998, which is 50 percent, for LTIP program, and 20 percent
for PSP, such percentage, in each case, as being a percentage of total voting
power. Additionally, for the PSP in a merger where the Companys shareholders
retain less than 50 percent of total voting power or the Companys board of
directors does not maintain a majority of the voting rights in the board of the
combined company), the vesting and restriction periods for the plans stated
above (if still current) will cease to apply and a cash or share payment for
the value of the outstanding plans and related taxes and duties will be due to
the participants.

At December 31, 2003, the Company had approximately 2.2 million shares (2002:
2.0 million shares; 2001: 1.8 million shares) of treasury stock reserved for
issuance under the various stock based compensation plans.

F-27



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

The Company used the Black-Scholes model to value the stock options granted.
The weighted-average assumptions used to estimate the fair value of the options
included in the pro forma amounts are as follows:

Year-ended December 31,
    
    2003
    
    2002
    
    2001Expected option lives in years
    
    
    10.00
    
    
    
    6.07
    
    
    
    7.04Expected volatility in percentage
    
    
    25.00
    
    
    
    23.00
    
    
    
    29.93Risk-free interest rate in percentage
    
    
    2.28
    
    
    
    3.23
    
    
    
    3.60Expected dividend yield in percentage
    
    
    2.79
    
    
    
    1.81
    
    
    
    1.80Weighted average fair value in CHF
    
    
    19.60
    
    
    
    24.05
    
    
    
    33.13




|18. |  | Retirement benefits
|--- |  | -------------------

The Company sponsors pension and other postretirement benefits in accordance
with the applicable laws and customs in the countries in which the Company
operates. The Company has both contributory and non-contributory defined
contribution and defined benefit pension plans.

Defined contribution pension plans.

In countries in which employees are covered by defined contribution plans,
employer contributions charged to income from continuing operations were CHF 14
million in 2003, CHF 16 million in 2002 and CHF 19 million in 2001.

Defined benefit pension plans

Benefits to participants in the Companys defined benefit pension plans are
generally based on employees years of service, levels of compensation or
stated amounts for each year of service.

The majority of the defined benefit pension plans are funded,
whereby contributions made by the Company and plan participants are invested,
and the resulting assets necessary to fund future benefit obligations are held
by independent trustees for the benefit of plan participants. Accordingly, the
assets acquired and maintained by these plans are not included in the Companys
consolidated balance sheets. These plans are referred to as funded plans in
this note.

In certain countries in which the Company operates, principally Germany, local
practice is that pension plans are not funded. In accordance with this
practice, the Company does not fund these plans. The Company charges income
from continuing operations for benefits earned in each period with a
corresponding increase in pension liability. Benefit payments made each period
to retirees are charged against this liability. These plans are referred to as
unfunded plans in this note.

Each year, the projected benefit obligation (PBO), which is the present value
of projected future benefits payable to current plan participants allowing for
estimated future employee compensation increases, is calculated for each plan.
The measurement date for the Companys pension plans that make up the majority
of plan assets and benefit obligations is December 31st for each year
presented.

F-28



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

The following table provides a reconciliation from beginning of year to end of
year of the changes in PBO and the changes in the fair value of plan assets, as
well as the PBO funded status of the plans. The PBO funded status consists of
the excess (deficit) of the fair value of plan assets over (under) PBO.

2003
    
    2002Funded
    
    Unfunded
    
    
    
    
    
    Funded
    
    Unfundedplans
    
    plans
    
    All plans
    
    plans
    
    plans
    
    All plansChange in benefit obligation (PBO)PBO, beginning of year
    
    
    2 984
    
    
    
    473
    
    
    
    3 457
    
    
    
    3 092
    
    
    
    440
    
    
    
    3 532Service cost
    
    
    76
    
    
    
    8
    
    
    
    84
    
    
    
    87
    
    
    
    8
    
    
    
    95Interest cost
    
    
    143
    
    
    
    28
    
    
    
    171
    
    
    
    154
    
    
    
    28
    
    
    
    182Participant contributions
    
    
    22
    
    
    
    0
    
    
    
    22
    
    
    
    22
    
    
    
    0
    
    
    
    22Actuarial (gain) loss
    
    
    62
    
    
    
    11
    
    
    
    73
    
    
    
    (146
    )
    
    
    32
    
    
    
    (114
    )Plan amendments
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )
    
    
    7
    
    
    
    (4
    )
    
    
    3Benefits paid
    
    
    (149
    )
    
    
    (25
    )
    
    
    (174
    )
    
    
    (145
    )
    
    
    (26
    )
    
    
    (171
    )Foreign currency translation
    
    
    (76
    )
    
    
    29
    
    
    
    (47
    )
    
    
    (100
    )
    
    
    (2
    )
    
    
    (102
    )Other
    
    
    49
    
    
    
    1
    
    
    
    50
    
    
    
    13
    
    
    
    (3
    )
    
    
    10PBO, end of year
    
    
    3 110
    
    
    
    525
    
    
    
    3 635
    
    
    
    2 984
    
    
    
    473
    
    
    
    3 457Change in plan assetsFair value of plan assets,
beginning of year
    
    
    2 789
    
    
    
    0
    
    
    
    2 789
    
    
    
    3 292
    
    
    
    0
    
    
    
    3 292Actual return on plan assets
    
    
    240
    
    
    
    
    
    
    
    240
    
    
    
    (384
    )
    
    
    
    
    
    
    (384
    )Employer contributions
    
    
    46
    
    
    
    25
    
    
    
    71
    
    
    
    77
    
    
    
    27
    
    
    
    104Participant contributions
    
    
    22
    
    
    
    0
    
    
    
    22
    
    
    
    22
    
    
    
    0
    
    
    
    22Benefits paid
    
    
    (149
    )
    
    
    (25
    )
    
    
    (174
    )
    
    
    (145
    )
    
    
    (26
    )
    
    
    (171
    )Foreign currency translation
    
    
    (58
    )
    
    
    0
    
    
    
    (58
    )
    
    
    (77
    )
    
    
    0
    
    
    
    (77
    )Other
    
    
    46
    
    
    
    0
    
    
    
    46
    
    
    
    4
    
    
    
    (1
    )
    
    
    3Fair value of plan assets, end of year
    
    
    2 936
    
    
    
    0
    
    
    
    2 936
    
    
    
    2 789
    
    
    
    0
    
    
    
    2 789PBO funded status
    
    
    (174
    )
    
    
    (525
    )
    
    
    (699
    )
    
    
    (195
    )
    
    
    (473
    )
    
    
    (668
    )


For both years presented, substantially all of the Companys funded pension
plans had PBO in excess of plan assets.

Accumulated benefit obligation (ABO) status of defined benefit pension plans

Accumulated benefit obligation (ABO) is less than PBO because ABO excludes
assumptions as to future increases in employee compensation when calculating
the present value of the future benefit obligation.

ABO status of funded pension plans

The table below shows the ABO status at December 31, 2003 and 2002 of the
Companys funded pension plans separated between those having plan assets that
are greater than or equal to ABO (fully-funded) and those having plan assets
that are less than ABO (under-funded):

2003
    
    2002Fully
    
    Under
    
    Total
    
    Fully
    
    Under
    
    TotalFunded plans
    
    funded
    
    funded
    
    funded plans
    
    funded
    
    funded
    
    funded plansAccumulated benefit obligation (ABO)
    
    
    2 392
    
    
    
    428
    
    
    
    2 820
    
    
    
    2 057
    
    
    
    448
    
    
    
    2 505Fair value of plan assets
    
    
    2 628
    
    
    
    308
    
    
    
    2 936
    
    
    
    2 472
    
    
    
    317
    
    
    
    2 789ABO status  fully (under) funded
    
    
    236
    
    
    
    (120
    )
    
    
    116
    
    
    
    415
    
    
    
    (131
    )
    
    
    284


Minimum pension liability

For funded plans with ABO in excess of the fair value of plan assets, SFAS No.
87 requires that the Company record on its consolidated balance sheets a
minimum pension liability amount such that the Companys net pension liability
is at least equal to the amount of the under-funded ABO. Net pension liability
is the excess of pension liabilities over prepaid pension assets, on the
Companys balance sheet.

When recording a minimum pension liability, SFAS No. 87 requires the Company to
record a corresponding intangible asset equal to the amount of any unrecognized
prior service cost, with the remainder, if any, charged to other comprehensive
income in shareholders equity. Therefore, the recording of this additional
minimum pension liability has no impact on the Companys income from
operations.

F-29



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

The following table shows the components of the additional minimum pension
liability as of December 31, 2003 and 2002 for those plans where such a
liability was required to be recorded, mainly in the United States; together
with a reconciliation to the ABO status of all of the Companys under-funded
pensions plans:

2003
    
    2002Unrecognized prior service cost recorded as intangible asset
    
    
    10
    
    
    
    19Recorded as other comprehensive income
    
    
    129
    
    
    
    126Currency adjustments
    
    
    (22
    )
    
    
    (9
    )Additional minimum pension liability
    
    
    (117
    )
    
    
    (136
    )Prepaid pension asset already recorded
    
    
    7
    
    
    
    14ABO status, plans where additional minimum liability required
    
    
    (110
    )
    
    
    (122
    )Other under-funded plans, no additional minimum liability required
    
    
    (10
    )
    
    
    (9
    )ABO status  All under-funded plans
    
    
    (120
    )
    
    
    (131
    )


ABO status of unfunded pension plans

For the Companys unfunded plans, the accrued pension liability exceeds the
amount of existing unfunded ABO, therefore no additional minimum pension
liability is required. The table below shows the ABO and related liabilities
recorded at December 31, 2003 and 2002 for the Companys unfunded defined
benefit pension plans:

Unfunded plans
    
    2003
    
    2002Accumulated benefit obligation
    
    
    490
    
    
    
    423Accrued pension liability
    
    
    500
    
    
    
    463Liability recognized in excess of ABO
    
    
    10
    
    
    
    40


Defined benefit pension related assets and liabilities

For each of its defined benefit pension plans, the Company records a
pension-related asset (liability) initially based upon the excess (deficit) of
the fair value of plan assets over (under) PBO. However, as required under SFAS
No. 87, differences that result from using expected rather than actual rates of
return on plan assets, as well as differences that result from the evolution
assumed to occur from period to period in the calculation of PBO versus actual
evolution, represent gains (losses) that are not given immediate recognition in
the Companys consolidated statements of income or consolidated balance sheets.
Instead, this accumulated unrecognized gain (loss) amount is amortized if it
meets certain criteria; that is, where the unrecognized net gain or loss
exceeds 10 percent of the greater of the fair value of plan assets or PBO, the
excess is required to be amortized to future income over the average remaining
service life of active employee participants.

In addition, where the Company amends pension plans resulting in changes to
future benefits based on participants prior service, any change in PBO
resulting there from is not required to be immediately charged to income from
continuing operations. Rather, such increases in pension obligations are
amortized over the average remaining service life of active employees.

Accordingly, the following table shows the components of the Companys net
pension asset (liability) and the reconciliation of these amounts to the PBO as
of December 31, 2003 and 2002:

2003
    
    2002Funded
    
    Unfunded
    
    
    
    
    
    Funded
    
    Unfundedplans
    
    plans
    
    All plans
    
    plans
    
    plans
    
    All plansPrepaid benefit cost(1)
    
    
    740
    
    
    
    
    
    
    
    740
    
    
    
    700
    
    
    
    
    
    
    
    700Accrued benefit liability(1)
    
    
    (132
    )
    
    
    (500
    )
    
    
    (632
    )
    
    
    (142
    )
    
    
    (463
    )
    
    
    (605
    )Minimum pension liability -
intangible asset
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    19
    
    
    
    
    
    
    
    19Accumulated other comprehensive
income, pre tax
    
    
    129
    
    
    
    
    
    
    
    129
    
    
    
    126
    
    
    
    
    
    
    
    126Currency adjustments(2)
    
    
    (22
    )
    
    
    
    
    
    
    (22
    )
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Net pension asset (liability)
on consolidated balance sheets
    
    
    725
    
    
    
    (500
    )
    
    
    225
    
    
    
    694
    
    
    
    (463
    )
    
    
    231Unrecognized net gain (loss)
    
    
    (882
    )
    
    
    (27
    )
    
    
    (909
    )
    
    
    (877
    )
    
    
    (13
    )
    
    
    (890
    )Unrecognized prior service cost
    
    
    (17
    )
    
    
    2
    
    
    
    (15
    )
    
    
    (12
    )
    
    
    3
    
    
    
    (9
    )PBO funded status
    
    
    (174
    )
    
    
    (525
    )
    
    
    (699
    )
    
    
    (195
    )
    
    
    (473
    )
    
    
    (668
    )




---

|(1) |  | Current and long-term portion                                         
|--- |  | ----------------------------------------------------------------------
|   
|(2) |  | Currency effect on the prior year additional minimum pension liability

F-30



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

Net defined benefit plan pension expense

The components of net pension expense for the Companys defined benefit pension
plans during the years ended December 31, 2003, 2002 and 2001 were:

Funded plans
    
    Unfunded plans
    
    All plans2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Service cost
    
    
    76
    
    
    
    88
    
    
    
    84
    
    
    
    8
    
    
    
    7
    
    
    
    8
    
    
    
    84
    
    
    
    95
    
    
    
    92Interest cost
    
    
    143
    
    
    
    155
    
    
    
    157
    
    
    
    28
    
    
    
    27
    
    
    
    28
    
    
    
    171
    
    
    
    182
    
    
    
    185Expected return on plan assets
    
    
    (211
    )
    
    
    (230
    )
    
    
    (252
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (211
    )
    
    
    (230
    )
    
    
    (252
    )Amortization of prior service cost
    
    
    2
    
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    1
    
    
    
    0Other (gains), losses and
amortization, net
    
    
    (8
    )
    
    
    (26
    )
    
    
    (38
    )
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    (7
    )
    
    
    (25
    )
    
    
    (36
    )Total net pension expense (income)
    
    
    2
    
    
    
    (12
    )
    
    
    (49
    )
    
    
    37
    
    
    
    35
    
    
    
    38
    
    
    
    39
    
    
    
    23
    
    
    
    (11
    )


Key assumptions

The weighted average key actuarial assumptions used to determine the Companys
pension benefit obligations were as follows:

2003
    
    2002Discount (interest) rate
    
    
    4.9
    %
    
    
    5.1
    %Rate of increase in compensation levels
    
    
    2.3
    %
    
    
    2.4
    %


The weighted average key actuarial assumptions used to determine the Companys
net periodic benefit cost were as follows:

2003
    
    2002
    
    2001Discount (interest rate)
    
    
    5.1
    %
    
    
    5.3
    %
    
    
    5.5
    %Rate of increase in compensation levels
    
    
    2.4
    %
    
    
    2.9
    %
    
    
    3.2
    %Expected long-term rate of return on plan assets
    
    
    6.2
    %
    
    
    6.5
    %
    
    
    6.3
    %


The determination of the overall expected long-term rate of return on plan
assets for the Companys funded plans is based on the following parameters:
long-term expected inflation rates, long-term inflation-adjusted interest
rates, and long-term risk premium of equity investments above risk free rates
of return. In addition, long-term historical rates of return adjusted, where
appropriate, to reflect more recent developments, are used.

Funded defined benefit pension plan assets

The Companys investment policies and strategies for plan assets held by its
funded defined benefit pension plans are directed toward the overriding target
of achieving, on a long-term basis, the necessary return on plan assets to meet
benefit obligations as they become payable. Factors included in the Companys
investment strategy for plan assets include achievement of consistent
year-over-year results, effective risk management based on the level of each
plans funding status, and effective plan cash flow management. Further, the
Companys plan investment policies generally exclude direct investments in the
Companys equity or debt securities.

For the Companys funded defined benefit pension plans, the weighted average
actual plan asset allocation percentages as of December 31, 2003 and 2002, and
the range of weighted average target plan asset allocation percentages in
effect as of December 31, 2003, are as follows:

Actual plan asset allocationpercentages atDecember 31
    
    Target plan assetallocation percentages at2003
    
    2002
    
    December 31, 2003Asset CategoryEquity securities
    
    
    34
    %
    
    
    46
    %
    
    
    35% -- 45
    %Debt securities
    
    
    42
    %
    
    
    36
    %
    
    
    40% -- 50
    %Real estate
    
    
    10
    %
    
    
    10
    %
    
    
    5% -- 15
    %Other
    
    
    14
    %
    
    
    8
    %
    
    
    0% -- 10
    %Total
    
    
    100
    %
    
    
    100
    %


At December 31, 2003, the Companys pension plans did not own any Company
common stock. Plan assets at December 31, 2002 included 86 211 shares of
Company common stock with a market value of approximately CHF 8 million
representing 0.3 percent of total plan assets.

F-31



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

The following table shows the undiscounted benefit amounts expected to be paid
for each of the next five successive fiscal years and for the aggregate next
five years thereafter:

Undiscounted expected benefit payments
    
    Funded plans
    
    Unfunded plans
    
    All plans2004
    
    
    146
    
    
    
    26
    
    
    
    1722005
    
    
    149
    
    
    
    26
    
    
    
    1752006
    
    
    155
    
    
    
    26
    
    
    
    1812007
    
    
    161
    
    
    
    27
    
    
    
    1882008
    
    
    169
    
    
    
    27
    
    
    
    196Aggregate for 2009 through 2013
    
    
    825
    
    
    
    152
    
    
    
    977


The amount expected to be contributed by the Company to its various pension
plans during 2004 is CHF 128 million.

Other postretirement benefits

These plans principally provide for postretirement healthcare benefits for
eligible employees in the United States, and are not funded by the Company. The
following table shows the components of the amounts charged to income from
operations in 2003, 2002 and 2001 related to other postretirement benefits:

2003
    
    2002
    
    2001Service cost
    
    
    1
    
    
    
    1
    
    
    
    1Interest cost
    
    
    4
    
    
    
    5
    
    
    
    5Expected return on plan assets
    
    
    0
    
    
    
    0
    
    
    
    0Amortization of prior service cost
    
    
    0
    
    
    
    (1
    )
    
    
    (1
    )Other (gains), losses and amortization, net
    
    
    0
    
    
    
    (2
    )
    
    
    0Benefit expense (income) major plans
    
    
    5
    
    
    
    3
    
    
    
    5


The measurement date for the Companys other postretirement benefit plans that
make up the majority of benefit obligations is December 31st for both years
presented. The following table provides a reconciliation of the changes in the
benefit obligation, the funded status of the plans and the amounts recognized
on the consolidated balance sheets as of December 31, 2003 and 2002:

2003
    
    2002Benefit obligation, beginning of year
    
    
    70
    
    
    
    67Service cost
    
    
    1
    
    
    
    1Interest cost
    
    
    4
    
    
    
    5Participant contributions
    
    
    3
    
    
    
    2Actuarial (gain) loss
    
    
    4
    
    
    
    12Benefits paid
    
    
    (8
    )
    
    
    (9
    )Foreign currency translation
    
    
    (8
    )
    
    
    (9
    )Other
    
    
    0
    
    
    
    1Benefit obligation, end of year
    
    
    66
    
    
    
    70Unrecognized net gain (loss)
    
    
    (2
    )
    
    
    7Unrecognized prior service cost
    
    
    5
    
    
    
    1Total net liability recognized on consolidated balance sheets
    
    
    69
    
    
    
    78


The weighted average discount rate used in the key actuarial assumptions to
compute the other postretirement benefit obligation was 6.4 percent in 2003
(2002: 6.9 percent).

The weighted average healthcare cost trend rate is 9 percent for 2003 and is
assumed to decrease to an ultimate trend rate of 5.0 percent in 2010. A one
percent annual increase in the assumed healthcare cost trend rate would
increase the 2003 accumulated postretirement benefit obligation by
approximately CHF 4 million and the annual postretirement benefit cost by CHF
0.3 million. A one percent annual decrease in the assumed healthcare cost trend
rate would decrease the 2003 accumulated postretirement benefit obligation by
approximately CHF 3 million and the annual postretirement benefit cost by
approximately CHF 0.2 million.

F-32



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

The Company expects its contributions to other postretirement plans in 2004 to
be approximately CHF 5 million. The following table shows the undiscounted
amounts expected to be paid from the Companys other postretirement plans for
each of the next five successive fiscal years and for the aggregate five years
thereafter:

Undiscounted expected benefit payments2004
    
    
    82005
    
    
    82006
    
    
    82007
    
    
    82008
    
    
    8Aggregate for 2009 through 2013
    
    
    39




|19. |  | Earnings per share
|--- |  | ------------------

In 2003, 2002 and 2001, there was no difference between basic and diluted
earnings per share for income from continuing operations. In 2003 the basic
weighted average number of shares outstanding were 68 361 123 (2002: 68 549 964
and 2001: 66 419 147) and the diluted weighted average number of shares
outstanding were 68 361 123 (2002: 68 575 058 and 2001: 66 419 147).

The calculation of diluted earnings per share assumes (i) that the 1.25 percent
convertible bonds, issued in July 1998 and repaid in July 2003, were converted
at the beginning of the year in 2003, 2002 and 2001, with related interest and
common shares adjusted accordingly, and (ii) that the weighted average shares
outstanding were increased by shares issuable upon exercise of the granted
employee stock options, less shares which could have been purchased by the
Company with the related proceeds receivable from the exercise of the stock
options. Either of these two items are not considered in calculating diluted
earnings per share if their effect would be antidilutive, that is, diluted
earnings per share would be higher than basic earnings per share.

In 2002, the difference of 25 094 in the weighted average number of shares
outstanding was due to the inclusion of the dilutive effect of previously
granted stock options with exercise prices between CHF 107.09 and CHF 111.09,
as their exercise prices were less than the average market price of the
Companys shares for 2002. In 2003 and 2001, the calculation of diluted
earnings per share did not include any stock options as their inclusion would
have been antidilutive. For purposes of calculating basic and diluted earnings
per share in 2003, 2002 and 2001 there was no required adjustment to the
reported income from continuing operations or net income.

For the years ended December 31, 2003, 2002 and 2001, the calculation of
diluted earnings per share excluded the assumed conversion of these bonds as
their inclusion would have been antidilutive. The calculation of diluted
earnings per share in 2003 excluded 2 092 090 stock options outstanding with
exercise prices between CHF 82.60 and CHF 179.30, in 2002 excluded 878 036
stock options outstanding with exercise prices between CHF 112.09 and CHF
181.70, and in 2001 excluded 1 768 952 stock options outstanding with exercise
prices between CHF 108 and CHF 183, as their inclusion would have been
antidilutive.



|20. |  | Related party transactions
|--- |  | --------------------------

Transactions with associated companies

Investments in affiliates of CHF 137 million in 2003 and CHF 147 million in
2002 are included in financial investments and are described in Note 9.

Loans receivable from equity affiliates of CHF 10 million in 2003 and CHF 10
million in 2002 are included in other assets. Included is a loan to Compagnie
Industrielle de Monthey SA, of CHF 10 million in 2003 and 2002, which bears
interest at 1 percent in 2003 (2002: 2 percent).

The Company had payables and accrued expenses to equity affiliates of CHF 9
million in 2003 and CHF 12 million in 2002.



|21. |  | Commitments and contingencies
|--- |  | -----------------------------

Lease commitments

The Company leases certain facilities under operating leases. The future
minimum lease commitments required under fixed term leases are: 2004 CHF 39
million; 2005 CHF 23 million; 2006 CHF 10 million; 2007 CHF 6 million; 2008 CHF
4 million; 2009 and thereafter CHF 4 million. Rental expense amounted to CHF 64
million in 2003, CHF 67 million in 2002 and CHF 74 million in 2001.

F-33



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

Purchase commitments

The Company has various purchase commitments for materials, supplies and items
of permanent investment incident to the ordinary course of business. In the
aggregate, these commitments are not in excess of current market prices and
reflect normal business operations.

In addition to the leasing arrangement described in Note 1 that was
consolidated in connection with the adoption of FIN No. 46, the Company has the
option to purchase another leased facility for CHF 26 million (USD 21 million).
The Company utilizes this facility in its business operations. Under the terms
of the lease, the Company will be liable for the shortfall between the market
value of the facility and the settlement value at the lease termination date,
which has been extended to 2004 from its original 2003 date. During 2003, the
Company recorded a charge of CHF 6 million to income from operations for the
estimated amount of this shortfall.

Guarantees

In the normal course of business, the Company has provided guarantees to third
parties. The Company estimates that the fair value of these guarantees is not
material and does not expect to incur losses as a result of these guarantees.
As of December 31, 2003, the Company has provided guarantees to third parties
for indebtedness of others of approximately CHF 17 million of which CHF 15
million expire in 2004, CHF 1 million expire in 2005 and CHF 1 million expire in
2009 and thereafter.

In connection with past divestments of businesses, the Company has issued
certain indemnifications to the purchasers of those businesses related to the
past actions of the Company in the area of compliance with environmental and
tax regulations. At December 31, 2003 the Company had issued CHF 34 million of
environmental indemnifications that decrease to CHF 24 million in 2008 and
which expire in 2009. In addition, the Company has outstanding environmental
indemnifications that were issued to the purchaser of its Performance Polymers
business, which was sold in May 2000. These environmental indemnifications are
further discussed in the Environmental Matters section below. The Company has
issued certain tax indemnifications in connection with divestments of
businesses and in connection with certain debt financing arrangements of the
Company, that are unlimited in amount and, in certain instances, in time. As of
December 31, 2003, the Company has recorded a liability related to the
environmental indemnifications in the amount of CHF 12 million (2002: CHF 13
million) and for the tax indemnifications a liability has been recorded in the
amount of CHF 1 million (2002: CHF 1 million).

Contingencies

The Company operates in countries where political, economic, social, legal and
regulatory developments can have an impact on the operational activities. The
effects of such risks on the Companys results, which arise during the normal
course of business, are not foreseeable and are therefore not included in the
accompanying financial statements.

In the ordinary course of business, the Company is involved in lawsuits,
claims, investigations and proceedings, including product liability,
intellectual property, commercial, environmental, and health and safety
matters. Although the outcome of any legal proceedings cannot be predicted with
certainty, management is of the opinion that there are no such matters pending
which would be likely to have any material adverse effect in relation to its
business, financial position or results of operations.

As a result of a dispute over an agreement with a third party, in the context
of the Companys divestment of the Performance Polymers Business in 2000,
Vantico International SA (now owned by the Huntsman Group) has initiated
arbitration proceedings against the Company. Although the outcome cannot be
predicted with certainty, management is of the opinion that this matter will
not have any material adverse effect on the financial position or results of
operations of the Company.

In connection with its Toms River, New Jersey site in the United States, the
Companys subsidiary in the United States received a claim from the New Jersey
Department of Environmental Protection for alleged natural resource damages
(see Environmental Matters below). In connection with certain polyacrylamide
products, the Companys subsidiary in the United States has been named as one
of the defendants in two class action lawsuits in West Virginia (see
Litigation Matters below).

Taxes

In their past tax audit of the Companys operations in Grenzach, Germany, the
German tax authorities had made a substantial tax adjustment. In accordance
with the Master Spin-off Agreement with Novartis and with Swiss commercial law,
management was of the opinion that the total liability owed resulting from this
adjustment was the responsibility of Novartis. This opinion was disputed by
Novartis and, in 2001, it initiated arbitration proceedings against the Company
in relation to this matter. This dispute was settled in 2003, resulting in the
release by the Company of CHF 39 million of previously established tax
reserves.

F-34



---



##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

Environmental matters

Operating in the chemical industry, the Company is subject to stringent
environmental, health and safety laws and regulations. It is the Companys
policy to continuously develop and improve the environmental performance of
key manufacturing processes through an active program to address
environmental matters. In addition to process improvements, the Company uses
advanced waste treatment and disposal facilities at all major manufacturing
sites that allow the sites to comply with recent laws and regulations
applicable to waste streams. In managements opinion, the Company
substantially complies with all such laws.

For outstanding environmental matters that are currently known and estimable by
the Company, provisions of approximately CHF 557 million at December 31, 2003
and CHF 614 million at December 31, 2002 have been recorded in the accompanying
Consolidated Balance Sheets. The decrease in the provision of CHF 57 million in
2003 compared to 2002 relates to usage of the provisions of CHF 22 million and
mainly to foreign currency exchange rate effects of CHF 35 million. The
Companys environmental protection and improvement cash expenditures were
approximately CHF 31 million in 2003 (CHF 96 million in
2002), including
investments in construction, operations and maintenance and usage of the
provision.

In the agreement on the Companys spin-off from Novartis, Novartis agreed to
reimburse the Company 50 percent of United States environmental liabilities
arising from past operations of the Company in excess of the agreed reserves.
Outside the United States, environmental liabilities are allocated between
Novartis and the Company based on the ownership of the site or, if
environmental liabilities do not relate to production sites or these are not
owned by either entity, according to the polluter pays principle. If causation
between the parties cannot be determined, costs are shared equally. The
agreement with Novartis is not subject to any time or amount limits but could
terminate for certain liabilities in the United States (i) upon a sale of
substantially all of the Companys assets, (ii) upon a change in control of the
Company, or (iii) for individual facilities, upon the sale of the facility
(unless the Company retains responsibility for any clean-up at such site).

The contractual terms of the sale of the Performance Polymers business
stipulate that, in general, the Company will retain responsibility for
environmental claims relating to the operations of the Performance Polymers
business prior to May 31, 2000, whereby damages for remediation in connection
with sites outside the United States shall cover only 80 percent of the
respective costs. The responsibility with respect to any non-United States
sites covers environmental liabilities incurred within fifteen years from
May 31, 2000 and is limited to CHF 75 million. With respect to any such
environmental liabilities in the United States, the Companys obligation to
indemnify is unlimited in time or amount. Novartis environmental
indemnification obligations to the Company described above are not affected by
the sale of the Performance Polymers business.

The Company continues to participate in environmental assessments and
clean-ups at a number of locations, including operating facilities,
previously owned facilities and United States Superfund sites. The Company
accrues reserves for all known environmental liabilities for remediation
costs when a clean-up program becomes probable and costs can be reasonably
estimated. Clean-up of the most significant sites has been or is nearly
completed, except as described in the following paragraphs.

At its Toms River, New Jersey remediation site, the Companys subsidiary in
the United States is engaged in a large bio-remediation project which will
take eight to ten years to complete. Based on managements current
estimates, the Companys environmental provisions are adequate to cover the
expected costs to complete this remediation plan.

In October 2003, the Companys subsidiary in the United States received a
letter from the New Jersey Department of Environmental Protection (NJDEP)
seeking to begin discussions on natural resource damage liability issues
(NRDs) at the Toms River Site for alleged injury to groundwater. The
subsidiary is engaged in on-going settlement discussions with the State to see
if it can reach a mutually beneficial settlement to avoid litigation. If a
mutual agreement cannot be reached and NJDEP decides to initiate litigation,
the Company believes that it has significant defenses to these potential NRD
claims.

The planning for the total remediation of the waste disposal site in Bonfol,
Switzerland, which was closed in 1976, is ongoing. The responsibility for the
remediation lies with eight chemical enterprises including among others the
Company. The responsible companies cooperate with the governmental authorities
to define the necessary measures in view of a final remediation of the site.
The planning and remediation effort could require up to fifteen years to
complete. In managements opinion, based on the current remediation plans, the
Companys environmental provisions are adequate to cover the Companys share of
the expected costs to complete the remediation at this site.

In the Basel region, several landfills (Switzerland, France and Germany)
contain chemical waste besides other industrial and household wastes. Presently
eleven landfills are the subject of investigations carried out with the
authorities by the Interessengemeinschaft Deponiesicherheit Regio Basel, an
association of the involved pharmaceutical and chemical enterprises (including
the Company). As of December 31, 2003, no remedial actions have been defined or
required in a legally binding form.

In managements opinion, the environmental reserves accrued are sufficient to
meet all currently known and estimable environmental claims and contingencies.
Because of the nature of the Companys operations, however, there can be no
assurance that significant costs and liabilities from ongoing or past
operations will not be incurred in the future. In addition,
environmental clean-up periods are protracted in length and environmental costs
in future periods are subject to changes in environmental remediation
regulations.

F-35



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##### 



Notes to consolidated financial statements
(in millions of Swiss francs, except share and per share data)

Litigation matters

Two class action lawsuits have been filed against Companys subsidiary in the
United States and other chemical suppliers in two separate state courts in West
Virginia relating to the sales of certain products to coal preparation plants.
In both cases, plaintiffs claim, on behalf of a class of all workers in coal
preparation plants, that these workers are entitled to medical monitoring for
exposure to residual acrylamide from the use of polyacrylamide products
supplied by the defendants.

Based on knowledge and use of acrylamide in its own manufacturing operations
for several years, the Company does not believe that these claims have merit.
However, if any liability were found, there most likely would be a sharing of
the liability among many of the defendants, although it is too soon to assess
what share any defendant would have of that liability, if any. Finally, the
Company has sufficient insurance coverage for these claims to prevent them from
having a material adverse effect on its financial position or results of
operations.



|22. |  | Valuation and qualifying accounts and reserves
|--- |  | ----------------------------------------------

Allowance for doubtful accounts

For the year ended December 31,
    
    2003
    
    2002
    
    2001Balance at beginning of year
    
    
    96
    
    
    
    120
    
    
    
    118Additions (deductions) charged (credited) to cost and expenses, net
    
    
    9
    
    
    
    31
    
    
    
    22Other, net(1)
    
    
    (18
    )
    
    
    (43
    )
    
    
    (20
    )Currency adjustments
    
    
    (2
    )
    
    
    (12
    )
    
    
    0Balance at end of year
    
    
    85
    
    
    
    96
    
    
    
    120


Allowance for obsolete and slow moving inventory

For the year ended December 31,
    
    2003
    
    2002
    
    2001Balance at beginning of year
    
    
    58
    
    
    
    66
    
    
    
    73Additions (deductions) charged (credited) to cost and expenses, net
    
    
    (2
    )
    
    
    5
    
    
    
    5Other, net(1)
    
    
    (4
    )
    
    
    (9
    )
    
    
    (13
    )Currency adjustments
    
    
    (2
    )
    
    
    (4
    )
    
    
    1Balance at end of year
    
    
    50
    
    
    
    58
    
    
    
    66


Deferred income tax valuation allowance

For the year ended December 31,
    
    2003
    
    2002
    
    2001Balance at beginning of year
    
    
    131
    
    
    
    146
    
    
    
    143Additions (deductions) charged (credited) to cost and expenses, net
    
    
    3
    
    
    
    1
    
    
    
    3Currency adjustments
    
    
    (13
    )
    
    
    (16
    )
    
    
    0Balance at end of year
    
    
    121
    
    
    
    131
    
    
    
    146




---

|(1) |  | Other, net is primarily additions and deductions applicable to acquisitions
and divestitures, amounts written-off and miscellaneous other adjustments and
for allowance for doubtful accounts in 2002, Other, net also included a
reclassification to accrued liabilities for provisions that did not relate to
accounts receivable.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|23. |  | Restructuring and special charges
|--- |  | ---------------------------------

Prior year programs

In 2001, the Company implemented a program (Fit For Growth!) that aligned the
Companys operational activities with its customers industries. This new
structure was designed to bring the Companys businesses closer to its
customers and allows for a greater focus on providing not just products, but
total integrated solutions. This program resulted in the establishment of five
business segments, a Chief Technology Officer at the Executive Committee level
and a new, cross-segment Research and Technology Board, which was formed to
leverage the Companys existing technological core competencies and to identify
new technology platforms for future growth. The Fit for Growth! program was
also designed to speed up decision-making by eliminating the former divisional
layer, as well as to improve efficiency by harmonizing several support areas.
The major initiatives in these efficiency projects are the merging of the
existing three supply chains into one coordinated global supply chain system,
the rationalization of Information Technology support structures and
infrastructure and the reduction of personnel in the Water & Paper Treatment
Segment as part of the strategy to streamline operations, improve profitability
and grow the business.

In 2001, under the Fit For Growth! program, the Company eliminated 262
full-time equivalents (FTEs) under severance programs. The total cost of
these severances was approximately CHF 33 million. The Company also released to
income excess restructuring provisions of CHF 8 million and special charges
provisions of CHF 25 million that were established in prior years.

F-36