e20vfza

As Filed with the Securities and Exchange Commission on January 30, 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F/A

(AMENDMENT NO. 1)

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For 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.


		Name of each exchange
Title of each class		on which registered
American Depositary shares, Each representing one half of one ordinary share, nominal value CHF 1 per share		New York Stock Exchange

Ordinary shares, par value CHF 1 per share*

*Not for trading but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the 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, 2004.

69 064 617 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 þ No o

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

Item 17 o Item 18 þ

Explanatory Note

This Form 20-F/A amends Ciba Specialty Chemicals Holding Inc.’s Annual Report on Form 20-F for the fiscal year ended December 31, 2004, which was filed on February 1, 2005. This amendment includes revisions to the consolidated financial statements and certain of the notes thereto of Ciba Specialty Chemicals Holding Inc. and its consolidated subsidiaries included in Item 18 — Financial Statements. These revisions, which are described in Note 1 to the Consolidated Financial Statements, have been made (1) to correct certain previously reported deferred income tax and pension related amounts, (2) to correct the fair value of long-term debt figure for 2004 that is disclosed in Note 9 to Consolidated Financial Statements, and (3) to reflect certain subsequent events as described in Note 24 — Subsequent Events (unaudited) to Consolidated Financial Statements. Related revisions have also been made to financial figures included in Item 3 — Key Information — Selected Financial Data, Item 4 — Information on the Company and Item 5 — Operating and Financial Review and Prospects.

Introduction
This Annual Report on Form 20-F relates to the registered shares with a nominal value of 1 Swiss franc 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, 2004, 2003, 2002, 2001 and 2000, and for each of the years in the five-year period ended December 31, 2004 (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, 2004, which was CHF 1.1412 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, 2004, 2003 and 2002, and for each of the years in the three year period ended December 31, 2004, 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 such statements and information with respect to plans, objectives and market position of the Company are based on the opinions and 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, outlook 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. For more information regarding some of these factors, see “Item 3. Key Information – Risk 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.

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, for the years 2004, 2003 and 2002, 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, 2004, 2003, 2002, 2001 and 2000, and for each of the years in the five-year period ended December 31, 2004, 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.



	2004			2003			2002			2001			2000
	As restated ⁽⁹⁾			As restated ⁽⁹⁾			As restated ⁽⁹⁾			As restated ⁽⁹⁾			As restated ⁽⁹⁾
Result of operations
Net sales		7 027			6 646			7 085			7 367			7 902
Operating income		521			563			769			753			873
Income from continuing operations, net of tax^{(1) (4) (5)}		278			345			419			375			415
Income from discontinued operations, net of tax⁽⁵⁾		28			0			0			0			34
Cumulative effect of change in accounting principles, net of tax		0			(16	)		0			2			0
Net income^{(1) (4)}		306			329			419			377			449
Earnings per share, basic and diluted
Continuing operations⁽¹⁾⁽⁴⁾		4.21			5.05			6.12	⁽¹⁰⁾		5.64			6.26
Discontinued operations⁽⁵⁾		0.43			0.00			0.00			0.00			0.50
Cumulative effect of change in accounting principles		0.00			(0.23	)		0.00			0.04			0.00
Net income per share^{(1) (4)}		4.64			4.82			6.12	⁽¹⁰⁾		5.68			6.76
Equity per share		62.78			62.76			63.55			59.36			56.96
Dividend per share⁽⁶⁾		1.00			0.00			0.00			2.00			2.00
Capital reduction per share⁽⁶⁾		2.00			3.00			3.00			1.00			0.00
Weighted average number of shares outstanding
Basic		66 059 479			68 361 123			68 549 964			66 419 147			66 311 879
Diluted		66 059 479			68 361 123			72 036 457			66 419 147			66 311 879

Other data - continuing operations
Net sales development percentage		6	%		(6	)%		(4	)%		(7	)%		9	%
Depreciation and amortization of other intangibles		394			366			385			408			406
Amortization of goodwill		0			0			0			61			64
Restructuring and special charges		91			0			0			0			2
Adjusted EBITDA⁽¹¹⁾		915			929			1 154			1 222			1 343
Operating income margin		7.4	%		8.5	%		10.9	%		10.2	%		11.0	%
Adjusted EBITDA margin		13.0	%		14.0	%		16.3	%		16.6	%		17.0	%
Capital expenditures		294			233			250			259			249
Research and development		288			281			294			276			293
Personnel costs		1 761			1 722			1 771			1 804			2 047
Number of employees at year end		19 338			18 658			19 007			19 683			20 306

Balance sheet data
Current assets		4 381			4 936			5 306			4 819			4 788
Property, plant and equipment, net		3 015			2 963			3 196			3 565			3 787
Total assets		10 996			11 095			11 811			11 732			12 127
Short-term debt		559			259			1 496			316			371
Long-term debt		2 917			3 187			2 344			3 678			3 859
Common stock		212			433			649			721			721
Shareholders’ equity		4 152			4 253			4 381			3 926			3 777



Business segment data⁽⁷⁾	2004			2003			2002			2001			2000
	As restated ⁽⁹⁾			As restated ⁽⁹⁾			As restated ⁽⁹⁾			As restated ⁽⁹⁾			As restated ⁽⁹⁾
Plastic Additives
Net sales		1 895			1 822			1 903			1 913			2 023
Operating income		224			165			225			256			285
Depreciation and amortization of other intangible assets		95			100			107			119			108
Adjusted EBITDA		319			265			332			375			393
Operating income margin		11.9	%		9.1	%		11.8	%		13.4	%		14.1	%
Adjusted EBITDA margin		16.8	%		14.6	%		17.5	%		19.6	%		19.4	%


Coating Effects
Net sales		1 818			1 807			1 920			1 944			2 118
Operating income		291			298			335			310			370
Depreciation and amortization of other intangible assets		103			97			99			99			104
Adjusted EBITDA		394			395			434			409			474
Operating income margin		16.0	%		16.5	%		17.4	%		15.9	%		17.5	%
Adjusted EBITDA margin		21.7	%		21.8	%		22.6	%		21.0	%		22.4	%


Water & Paper Treatment
Net sales		2 014			1 616			1 718			1 837			1 920
Operating income		128			125			163			147			182
Depreciation and amortization of other intangible assets		131			103			108			114			113
Adjusted EBITDA		259			228			271			261			295
Operating income margin		6.3	%		7.8	%		9.5	%		8.0	%		9.5	%
Adjusted EBITDA margin		12.8	%		14.1	%		15.8	%		14.2	%		15.4	%


Textile Effects
Net sales		1 300			1 401			1 544			1 673			1 841
Operating income		61			68			140			180			204
Depreciation and amortization of other intangible assets		56			60			66			68			71
Adjusted EBITDA		117			128			206			248			275
Operating income margin		4.7	%		4.9	%		9.1	%		10.8	%		11.1	%
Adjusted EBITDA margin		9.0	%		9.2	%		13.4	%		14.8	%		14.9	%


Discontinued operations⁽⁸⁾
Net sales														774
Operating income														57
Gain on sale, net of tax														34

Restructuring and special charges are corporate items and are therefore not reflected in the Company’s segments. Accordingly, segment operating income and adjusted EBITDA, and related margins thereof, are not impacted by restructuring and special charges.



Trading prices on the Swiss Exchange
(Price per share in CHF)
Annual highs	96.14	101.50	128.00	115.75	122.50
Annual lows	76.70	74.75	89.75	75.00	94.25
Period End	86.50	92.37	89.79	95.81	101.35


⁽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, net of tax - in 2001 CHF 436 million, in 2000 CHF 479 million; basic and diluted earnings per share for income from continuing operations - in 2001 CHF 6.56, in 2000 CHF 7.22; net income - in 2001 CHF 438 million, in 2000 CHF 513 million; basic and diluted earnings per share for net income - in 2001 CHF 6.60, in 2000 CHF 7.73. For the year 2000, net income as adjusted excludes goodwill amortization from continuing operations and from discontinued operations.

⁽²⁾		The Company applied FASB Interpretation No. 46 to a previously unconsolidated trust that leases an asset to the Company, resulting in the consolidation by the Company of the trust in 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, net of tax would have been – in 2002 CHF 408 million, in 2001 CHF 363 million, in 2000 CHF 407 million; pro forma basic earnings per share for income from continuing operations would have been – in 2002 CHF 5.96, in 2001 CHF 5.46, in 2000 CHF 6.14; pro forma diluted earnings per share for income from continuing operations would have been – in 2002 CHF 5.95, in 2001 CHF 5.46, in 2000 CHF 6.14; pro forma net income would have been – in 2002 CHF 408 million, in 2001 CHF 365 million and in 2000 CHF 441 million; pro forma basic per share for net income would have been – in 2002 CHF 5.96, in 2001 CHF 5.49 and in 2000 CHF 6.14; pro forma diluted earnings per share for net income would have been – in 2002 CHF 5.95, in 2001 CHF 5.49 and in 2000 CHF 6.14.

⁽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. The 2004 income from discontinued operations of CHF 28 million resulted from the release of previously established reserves following the settlement in 2004 of a dispute and related arbitration proceedings that had been initiated by Vantico, the purchaser of the Performance Polymers business.

⁽⁶⁾		The Board of Directors proposes a cash payment to the Company’s shareholders in 2005 totaling CHF 3 per share, based on 2004 results, consisting of a dividend of CHF 1 per share and a capital reduction of CHF 2 per share, which is reflected in the 2004 column in the table above. The dividend and capital reduction are subject to shareholder approval at the Annual General Meeting to be held on March 3, 2005. If approved the capital reduction will take the form of a reduction in the nominal value of each share from CHF 3 per share by CHF 2 per share to CHF 1 per share. The Company expects, subject to various conditions and approval that the payments of the capital reduction will be made to the shareholders on May 18, 2005.

		The proposed dividend per share and capital reduction per share, based on the USD exchange rate of December 31, 2004 is USD 0.88 and USD 1.76, respectively. Based on the USD exchange rate at the payment date of May 14, 2004, the 2003 capital reduction per share was USD 2.30, 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 and 2000 dividends, the USD equivalent of the dividend per share was USD 1.19 and USD 1.23, respectively.

		See Note 24 (unaudited) to Consolidated Financial Statements in Item 18 — Financial Statements.

⁽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. In addition, in 2004 the Company reorganized from five into four reporting segments and restated all current and prior period segment information to reflect the new structure.

⁽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.

⁽⁹⁾		As is described in note 1 to the consolidated financial statements included in Item 18 — Financial Statements, certain amounts presented for 2004, 2003 and 2002 have been restated to correct certain previously reported deferred income tax and pension related amounts. The effect of these corrections on the Company’s results of operations is as follows: 2004 — increase income tax expense by CHF 7 million, decrease net income by CHF 5 million and decrease basic and diluted net income per share by CHF 0.07; 2003 — increase income tax expense by CHF 7 million, decrease net income by CHF 15 million and decrease basic and diluted net income per share by CHF 0.21; 2002 — decrease income tax expense by CHF 32 million, increase net income by CHF 13 million and increase basic and diluted net income per share by CHF 0.20 and CHF 0.19, respectively. In addition, certain amounts presented for 2001 and 2000 have been restated to correct certain previously reported deferred income tax and pension related amounts. The effect of these corrections on the Company’s results of operations for these years is as follows; 2001 — decrease income tax expense by CHF 3 million, decrease net income by CHF 5 million and decrease basic and diluted net income per share by CHF 0.08; 2000 — increase the opening balance of shareholder’s equity by CHF 22 million, decrease income tax expense by CHF 0 million, decrease net income by CHF 3 million and decrease basic and diluted net income per share by CHF 0.05.

⁽¹⁰⁾		For 2002, the figures presented are only basic per share amounts. Diluted per share amounts for 2002 are CHF 6.11 for both income from continuing operations and net income.

⁽¹¹⁾		Adjusted EBITDA and adjusted EBITDA margin derived therefrom are non-U.S. GAAP financial measures. For further discussion of the use of this measure, see the Financial Review and Use of Certain Supplementary Indicators sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 5 — Operating and Financial Review and Prospects.

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 End
2000			1.6930		1.8250		1.5526		1.6202
2001			1.6893		1.8185		1.5878		1.6598
2002			1.5566		1.7190		1.3833		1.3833
2003			1.3374		1.4181		1.2380		1.2380
2004			1.2426		1.3202		1.1338		1.1412
Months
2004	January				1.2659		1.2190		1.2593
	February				1.2680		1.2269		1.2680
	March				1.3038		1.2560		1.2677
	April				1.3202		1.2627		1.2984
	May				1.3076		1.2460		1.2533
	June				1.2678		1.2371		1.2520
	July				1.2796		1.2243		1.2796
	August				1.2830		1.2405		1.2641
	September				1.2729		1.2471		1.2471
	October				1.2663		1.1962		1.1988
	November				1.2075		1.1389		1.1421
	December				1.1613		1.1338		1.1412
2005	January (through January 28)				1.1960		1.1466		1.1876

⁽¹⁾

Represents the average of the Noon Buying Rates on the last business day of each month during the relevant year.

Capitalization and Indebtedness (N/A)

Reasons for the Offer and use of proceeds (N/A)

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 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” We cannot assure you 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 28 countries and sells its product in more 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 many 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 2004 was, for example, characterized by a general improvement in the economic environment. The recovery in the United States that began late 2003 was more evident in 2004, with real GDP growth of 4 percent in 2004, although this was held back slightly by rising energy and oil prices. The major European economies tended to stagnate in varying degrees through 2004, with real GDP growth at below 2 percent as the impact of the strong euro hampered exports. The recovering economies in Germany and France were contrasted by negative growth in the United Kingdom. In the Asia-Pacific region, economic expansion continued in Japan, growing at 4 percent in GDP terms in 2004. The China Region continued to grow strongly, with real GDP growth remaining between 9 to 10 percent. In most of the regions of the world, with the exception of China, the industrial sector growth was below total GDP growth.

The economic conditions in NAFTA, Europe and parts of Asia-Pacific may worsen or not continue to 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.

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. 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 circum stances and governmental regulation in the United States and in other 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 communications asserting that certain of its products or their applications infringe on the proprietary rights of others. The Company has continued to experience 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 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 may result in significant additional costs for the Company.

The EU Chemicals Policy, if adopted by the appropriate EU bodies and Member States in its current draft form (as published on October 29, 2003) 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 third parties, 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 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 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 twenty-five 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 and the 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 of operation 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.

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 its operations;

• the potential incurrence of a significant amount of debt and contingent liabilities; and

• realizing little, if any, return on the Company’s investment.

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

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.

Recent acquisition and divestiture activities
To expand its flame retardant business and its offerings to combine flame retardancy with other effect additives in customized solutions, the Company, in 2002, purchased Melapur BV (“Melapur”) from DSM NV for approximately CHF 24 million, including additional purchase consideration paid or payable after 2002 based on sales growth achieved in 2003 and 2004. Melapur markets and distributes halogen-free melamine-based flame retardants.

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.

In 2004, in order to establish a stronger world-wide presence in the paper chemicals business, the Company completed three acquisitions: in June 2004 the Company acquired Raisio Chemicals from the Raisio Group, headquartered in Raisio, Finland, for approximately CHF 662 million; in July 2004 the Company acquired LPM Technologies Inc., a Canadian paper chemicals company, for approximately CHF 11 million; and in August 2004, Ciba Specialty Chemicals acquired AB CDM, a Swedish based supplier of chemicals, from Imerys SA for approximately CHF 22 million. The AB CDM acquisition also provides the Company with a direct presence in the Swedish water treatments market.

In order to enhance its Expert Services program, which provides a wide range of specialty chemicals services to customers, the Company in March 2004 acquired Pira International, based in the United Kingdom, for approximately CHF 5 million.

In December 2004, in order to expand access to Asian markets outside of Japan and build market share in pigments, the Company increased its interest in the Daihan Swiss Chemical Corporation from 50% to 100%, for approximately CHF 31 million. Daihan Swiss Chemical Corporation is a Korean manufacturer, marketer and distributor of pigments and preparations for the Korean coatings, plastics and inks markets.

Capital expenditures
Ciba Specialty Chemicals’ aggregate capital expenditures for property, plant and equipment were CHF 294 million in 2004, CHF 233 million in 2003 and CHF 250 million in 2002. In 2004, 2003 and 2002, 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.

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 28 countries and sales in more than 120 countries.

In 2004, the Company had net sales from continuing operations of CHF 7 027 million, operating income of CHF 521 million and net income of CHF 306 million.

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



	2004					2003					2002
Amounts in CHF millions, except percentages	Sales		in %			Sales		in %			Sales		in %
Europe		3 050		44	%		2 731		41	%		2 721		38	%
Americas ⁽ⁱ⁾		2 046		29	%		2 066		31	%		2 459		35	%
Asia Pacific ⁽ⁱⁱ⁾		1 931		27	%		1 849		28	%		1 905		27	%
Total net sales		7 027		100	%		6 646		100	%		7 085		100	%

⁽ⁱ⁾		The Americas are comprised of North, Central and South America.

⁽ⁱⁱ⁾		Asia Pacific is comprised of Asia, Africa, the Middle East, Australia and New Zealand.

Organization
The Company is organized into four reporting segments (“Segments”) focused on specific customer markets. The four Segments are Plastic Additives, Coating Effects, Water & Paper Treatment and Textile Effects. 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).

From 2001 until 2004, the Company had been organized into five Segments. However, in August 2004, the former Home and Personal Care Segment, which had not achieved a critical mass, was integrated into the Plastic Additives and Water and Paper Treatment Segments.

The Company’s organizational structure also includes 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 a corporate technology office under the leadership of a Chief Technology Officer. In 2004, a Chief Strategy Officer was appointed to oversee strategic development and portfolio management for the Company. 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
Net sales, by Segment, of the Company for the each of the past three years were as follows:



	2004					2003					2002
Amounts in CHF millions, except percentages	Sales		in %			Sales		in %			Sales		in %
Plastic Additives		1 895		26.9	%		1 822		27.4	%		1 903		26.9	%
Coating Effects		1 818		25.9	%		1 807		27.2	%		1 920		27.1	%
Water & Paper Treatment		2 014		28.7	%		1 616		24.3	%		1 718		24.2	%
Textile Effects		1 300		18.5	%		1 401		21.1	%		1 544		21.8	%
Total net sales		7 027		100.0	%		6 646		100.0	%		7 085		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 Segment’s service business provides customers with product application solutions.

Coating Effects is a leading global manufacturer of organic pigments and the leading supplier of photoinitiators and light stabilizers 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 as well as the detergents and hygiene 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’s research and development operations are designed to bring new and unique products and services to the global paper industry. 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. Furthermore the Segment provides whiteners for detergents and hygiene effects for a variety of personal care products.

Textile Effects serves customers throughout the textile value chain, offering full, integrated solutions for textile processing and value adding effects. The Segment’s products include dyes and chemicals for preparation, dyeing, printing, whitening and finishing of all major textiles, as well as sizing agents for fabric weaving. The Segment also provides comprehensive services to help customers achieve their color, comfort and performance requirements.

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 the supply chain process from finished product stage onwards, which includes order processing, warehousing and transportation of products. The Supply Chain Services unit maintains shared order desks on a regional/country level that service all Segments with regards to order taking, order processing, shipping and customer invoicing. Different customer service solutions are actively explored and implemented with the goal of increasing the ease with which customers are able to do business with the Company and minimizing product distribution costs. 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. The global and regional distribution networks are actively and systemically reviewed to ensure an optimized relationship between warehousing costs, distribution costs and customer service levels.

The Company maintains Business Support Centers that provide finance and accounting services to geographic 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 consolidated the functions of its Central European and Central American Business Support Centers into other existing Business Support Centers, thereby reducing the number of centers from 12 to 10. In addition, in connection with the acquisition of Raisio Chemicals in June 2004, the Company created a new Business Support Center in Finland to support business operations in the Nordic region. As a result of these actions, the Company will operate in 2005 with 11 Business Support Centers.

Beginning in 2005, the Company is consolidating responsibility for all information technology and data processing and management functions under a newly appointed Chief Information Officer. Included in these functions is the Global Infrastructure unit, which working with outsourcing partners, has the principal objective of optimizing the Company’s information technology infrastructure including its wide area networks.

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

Headquarters is responsible for strategy 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 1 million in 2004, CHF 3 million in 2003 and CHF 6 million in 2002.

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 investment in equity affiliates as of December 31, 2004 is a 50 percent interest in CIMO Compagnie Industrielle de Monthey SA, which is a joint venture with Syngenta that provides infrastructure services and utilities to the partner’s manufacturing facilities in Monthey, Switzerland.

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, DuPont, GE Water Technologies, Great Lakes, Hercules, Johnson Polymer, Kemira, Lubrizol, Nalco, Rhodia, Rohm and Haas, SNF Floerger, Songwon and Stockhausen.

Plastic Additives
Overview
Plastic Additives’ products provide, maintain and improve the desirable properties, or suppress the adverse properties, of plastics, rubber, adhesives, lubricant materials and home and personal care products. Additives increase the stability of a variety of materials during processing and use, thereby facilitating or improving the efficiency of industrial processes or enhancing their value for home and personal use. 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, light degradation, corrosion or wear. Specialty colors for home and personal care products deliver unique properties.

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, rubber and adhesive industries, and is a

leading supplier of ashless antioxidants and extreme pressure and antiwear agents to the lubricant industry. In addition, the Segment delivers high value chemical ingredients for manufacturers of non-durable home and personal care consumer goods.

Plastic Additives is managed as an integrated global business and primarily focuses on four Business Lines: (i) Polymer Products, (ii) Base Polymers, (iii) Process and Lubricant Additives and (iv) Home & Personal Care. Plastic Additives also includes the small Business Unit Ciba® Expert Services.

The additives market is mainly related to the plastics industry, which has generally been experiencing long-term growth. However, this growth is affected by shorter-term economic and industrial cycles, particularly in the oil, 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 in contact with food and drinking water or for home and fabric care and personal care. 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 Segment’s Expert Services business unit provides knowledge-based services under the Company’s Ciba® Expert Services brand to customers seeking professional consulting, testing and information support. Its global network of experts - providing environmental, regulatory, safety, testing and educational services - helps customers in highly regulated industries get products to market faster, increase productivity and improve product quality. In 2004, the Expert Services business unit was strengthened with the acquisition of Pira International Ltd, a leading consultancy and testing business with major conference and publications activities serving the packaging, paper, printing and publishing industries and their value chains.

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, 2004, 2003 and 2002.



Amounts in CHF millions, except percentages	2004			2003			2002
							As restated ^(a)
Total Segment net sales		1 895			1 822			1 903
Operating income		224			165			225
Capital expenditures		76			64			94
Research and development expenditures		97			107			107
Contribution to the consolidated Company net sales from continuing operations, in %		26.9	%		27.4	%		26.9	%

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

Products
Plastic Additives products add value to the polymer, rubber, adhesive, lubricant, and home and personal care industries. The Segment’s product offerings include:

• Polymer protection products such as antioxidants, non-staining antiozonants, 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 PET chain extenders, 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:

•   Products for polymer design such as polymerization regulators:

•   Products for lubricants such as antioxidants, metal deactivators, and antiwear additives:

•   Light absorbers for fabric and personal care, rheology modifiers, actives for skin protection, carrier systems, conditioners, specialty colors for home and personal care products, laundry additives for comfort enhancement, and stain removers.

The Segment’s leading product lines in the polymer protection category are Ciba® IRGANOX® antioxidants, Ciba® IRGAFOS® processing stabilizers, Ciba® CHIMASSORB® light stabilizers/UV absorbers, Ciba® TINUVIN® light stabilizers/UV absorbers, Ciba® IRGAMOD® additives for polyesters, Ciba® FIBERSTAB® L phenol-free processing stabilizers, Ciba® IRGASTAB® FS phenol-free processing stabilizers and Ciba® IRGAZONE™ non-staining antiozonants.

The Ciba® IRGAFOS® processing stabilizer range ensures efficiency in processing and maintenance of polymer properties across a broad range of processing conditions. Ciba® POLYAD® customer-specific blends are multi-component additive packages in easy-to-handle forms.

Ciba® TINUVIN® light stabilizers/UV absorbers constitute a complete range providing light stability to polyolefins, engineering plastics, adhesives and rubbers. Examples of new innovative products include Ciba® TINUVIN® 1577 as an innovative UV absorber for glazing, thin films and laminates, Ciba® TINUVIN® XT 833 for improved light stability and weather resistance and Ciba® TINUVIN® FR 2011/2021 providing flame retardancy and light stability.

In addition to the Segment’s traditional Ciba® IRGANOX® range, Ciba® IRGANOX® HP, Ciba® IRGANOX® XP, Ciba® IRGASTAB® PUR, Ciba® IRGASTAB® PVC and Ciba® IRGASTAB® STYL 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 for the stabilization and protection of polyolefins, polyurethane foams and adhesives during processing. Ciba® IRGASTAB® PUR, Ciba® IRGASTAB® PVC and Ciba® IRGASTAB® STYL are new liquid, environmentally friendly solutions for the polyurethane, vinyl and styrenics markets, respectively.

The Ciba® IRGAMOD® range comprises multifunctional PET additives reducing acetaldehyde and oligomers, avoiding discoloration and acting as chain extenders by modifying the properties of PET via reactive extrusion. Recent product launches are Ciba® IRGATEC® CR 76 and Ciba® IRGAMOD® RA 20.

Ciba® FIBERSTAB® L and Ciba® IRGASTAB® FS phenol-free processing stabilizers systems set with excellent gas-fade resistance a new standard in the processing stabilization of polyolefin fibers. They 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 and Ciba® IRGASTAB® PVC 11 EM is an environmentally friendly antioxidant for PVC.

Ciba® IRGAZONE™ 997 non-staining antiozonant provides rubber products with very good protection against ozone, heat, flex and fatigue. Opposite to classical rubber antiozonants, it is non-staining, is not leaching from rubber vulcanizates and has various food contact approvals.

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 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 Segment’s leading product lines in this special effects additives category are ATMER™ antifogging agents, Ciba® IRGASTAT® and ATMER™ antistatic agents, ATMER™ SA - slip and antisticking agents, Ciba® IRGAGUARD® antimicrobial line, including Ciba® IRGAGUARD® A – antialgae and Ciba® IRGAGUARD® B - antibacterial, and Ciba® IRGACLEAR® F– antifungi, 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. Ciba® SHELFPLUS® UV 4100 blocks a broad spectrum of UV radiation protecting package contents in food, home and pharmaceutical applications. The novel agricultural growth promoter Ciba® SMARTLIGHTTM RL100 utilizes photo-selective properties of the product to improve crop quality and productivity. Ciba® IRGASURF TM HL 560 delivers durable hydrophilicity for polyolefin fibers and nonwovens. Ciba® IRGAZONETM 997, launched in 2003 for rubber applications, represents a technology that offers protection against ozone, fatigue and oxygen, with non-staining properties and extraction resistance. Ciba® IRGAMOD® 195 is an effective catalyst and stabilizer for rosin esters and is an extraction resistant antioxidant for rubber applications, especially ones based on NBR and ECO.

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 Segment’s products in, for example, 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 business areas 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.

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, and additives packages for industrial lubricants.

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.

The home & personal care products market is served by five business platforms:

UV Protection & Actives for the personal care industry:

Ciba® TINOSORB® UV absorbers are used to provide protection against the harmful effects of UVA (long wave-length) and UVB (short wave-length) radiation in a variety of products applied directly to the skin, including sunscreens, lotions, and day creams. Growth prospects are particularly strong in regions where concern for effective protection from sunlight is high. Ciba® TINODERM® Actives Delivery Systems facilitate the transport of actives through the skin barrier to the site of interaction. TINOCARE® GL, a Scleroglucan polysaccharide, retains skin moisture in a natural way and improves the sensory characteristic of personal care formulations.

Polymer Systems for the personal care and home and fabric care industries:

Rheology modifiers, conditioners, and gel thickeners allow customers to produce formulations to the highest standards of quality and consistency. Ciba® RHEOVIS® and Ciba® GLASCOL® are for the home care industry and Ciba® SALCARE® and Ciba® TINOVIS® are for the personal care industry.

Colorants & Stabilizers for the personal care and home and fabric care industries:

Ciba® TINOGARD® provides product stabilization against oxidation and UV induced degradation. Ciba® VIBRACOLOR® products are hair dyes. Ciba® PURICOLOR® and Ciba® VIBRACOLOR® pigments and anionic, water-soluble dyes are used in personal care as well as home and fabric care products.

Fabric Appearance for the laundry care industry:

Ciba® TINOFIX® dye fixatives maintain the color integrity of fabrics. Ciba® TINOTEX® Comfort & Easy Care ingredients bring easy care properties to laundered fabrics. Ciba® TINOLUX® is a unique photocatalytic system that uses sun rays to safely and effectively bleach stains. Ciba® TINOSORB® UV absorbers are applied to clothing via the laundry washing process to clothing to convert cotton fabrics into effective UV shields.

Stain Removal for the laundry care industry:

Ciba® TINOCAT™ oxidation catalysts enable efficient stain removal at lower wash temperatures and with shorter wash cycles and as well provide an anti-graying effect on white fabrics.

The Expert Services business unit delivers services for regulatory, environment, safety, materials testing, and conducts training, and offers strategic and technical consulting.

Customers and End-User Markets
In 2004, end-user markets such as the packaging industry accounted for approximately 26 percent of the Segment’s sales, the construction industry for 19 percent, the durable goods industry for 9 percent, the automotive industry for 7 percent, the agricultural industry for 6 percent and the lubricants industry for 10 percent. The top ten customers of the Segment accounted for approximately 31 percent of the Segment’s 2004 sales.

Research and Development
Plastic Additives spends approximately 5 percent of sales each year on research and development activities (CHF 97 million in 2004). The primary objective of these research and development activities is to achieve and maintain a high level of the Segment’s 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 new and 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, non-staining antiozonants for rubbers, flame retardants, process chemicals for reactive monomers, new UV absorbers for sunscreens, a new photobleach agent for laundry detergents, a new class of oxidation catalysts for use in home and fabric care applications and new nanocolloid encapsulated active ingredients for skin care products.

Research and development activities focus on new product development as well as process improvements that aim to lower costs and increase 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, electronics 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 that make processing easier and more cost effective for customers in all traditionally 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.

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, 2004, 2003 and 2002.



Amounts in CHF millions, except percentages	2004			2003			2002
				As restated ^(a)			As restated ^(a)
Total Segment net sales		1 818			1 807			1 920
Operating income		291			298			335
Capital expenditures		82			79			74
Research and development expenditures		101			95			100
Contribution to the consolidated Company net sales from continuing operations, in %		25.9	%		27.2	%		27.1	%

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

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 2004, 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 27 percent of the Segment’s 2004 sales.

In 2004, the end-user markets such as the automotive industry accounted for approximately 24 percent of the Segment’s sales, the imaging and publication industry for 12 percent, the packaging industry for 19 percent, the electronics industry for 9 percent and the construction industry for 19 percent of the Segment’s sales.

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 101 million in 2004). 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.

One of the photoinitiator patents for ink applications expired in 2003. Management is of the opinion that expiration of this patent will only have a limited effect on its result of operations because of the Company’s level of customer service associated with the related 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
Water & Paper Treatment is one of the leading global suppliers to the paper industry, the municipal and industrial water treatment industries and the detergents and hygiene industries, and is managed as an integrated global business. The markets in which the Segment is present have been affected by increasing environmental and safety regulations that govern the industries of the Company’s customers. These regulations have resulted in an increased demand for more innovative products with lower environmental impact.

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, deposit control aids). Furthermore, they improve the visual appearance, optical properties and printability of the paper (paper whiteners, paper coloration, starch and latex binders, 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 Segment’s newly acquired Technical Centers in Finland further enhance our position as a total solution provider to the paper industry.

The products and services offered in the area of water treatment improve the separation of solids from liquids, purify water, dewater sludge for disposal and enhance dredging applications. In extractive and process technologies, the Segment’s products improve the efficiency of all extraction and mineral 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). The Segment’s activities in industrial water management aim to bring a service oriented approach by providing customers with complete solutions that meet all their industrial water treatment needs. Strong, local support is available through a network of partners, each providing expertise and industry leading Ciba^® IRGATREAT^TM product technology, equipment and services.

In the area of detergents and hygiene, the Segment’s products and services are used in the home and fabric care industries as well as the personal care market. Whiteners, used in detergents, enhance the whiteness and brightness of textiles while antimicrobial solutions are used in personal care products and promote good health, prevent infections and contribute to the personal well being.

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, 2004, 2003 and 2002.



Amounts in CHF millions, except percentages	2004			2003			2002
	As restated ^(a)			As restated ^(a)			As restated ^(a)
Total Segment net sales		2 014			1 616			1 718
Operating income		128			125			163
Capital expenditures		81			55			45
Research and development expenditures		42			33			33
Contribution to the consolidated Company net sales from continuing operations, in %		28.7	%		24.3	%		24.2	%

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

Products
In the paper industry, there is an ongoing demand for more efficient production processes and this is where Ciba^’ patented technologies such as the Ciba^® TELIOFORM^® retention and drainage aid system and Ciba^® PERGAFAST^TM 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 and coating and surface solutions - 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^® ZETAG^®, Ciba^® MAGNAFLOC^® and Ciba^® MAGNASOL^® 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 recently launched Ciba^® KRYSALIS^® products for the dredging industry enhance solid liquid separation and the separation of contaminants from the dredging sediment. Ciba^® RHEOMAX^TM tailings management products for the mining industry allow minimalization of water consumption and maximization of water recovery, thereby reducing disposal areas and hence generating cost savings in waste disposal. The water treatments product range also includes Ciba^® IRGATREAT^TM 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, adhesives, synthetic fibers and antistatic finishes as well as Ciba^® LIBFER^® iron chelate to correct deficiencies in crops grown intensively.

The leading product lines in detergents and hygiene include Ciba® TINOPAL® whiteners for detergents and Ciba® IRGASAN®, Ciba® IRGACARE® and Ciba® TINOSAN® antimicrobials providing hygiene effects for personal care products. Whiteners are 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 effects are high value-adding antimicrobial ingredients supplied to the personal care and 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 continue to be recognized as the industry standard for efficiency, performance and safety by key customers.

Customers and End-User Markets

In 2004 Water & Paper Treatment supplied products and services to the paper and board, municipal and industrial water treatment as well as detergents and hygiene industries. The top ten customers of the Segment accounted for approximately 23 percent of the Segment’s 2004 sales.

In 2004, end-user markets such as the paper and board industry accounted for approximately 54 percent, the detergents and hygiene industries accounted for 12 percent, the water and wastewater services industry accounted for 15 percent, the extractives and process technologies industry accounted for 8 percent and the agricultural industry accounted for 2 percent.

Research and Development
Water & Paper Treatment spends approximately 2 percent of sales each year on research and development activities (CHF 42 million in 2004). The Segment’s integrated research and development philosophy is aimed at driving process/production technology improvements, development of novel targeted offerings to the industry and expansion to novel markets using 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 2004 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 one of the leading suppliers of textile chemicals to the textile industry. Other major product offerings to these industries are whiteners, disperse dyes for polyester, antimicrobials, ultraviolet (“UV”) 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, 2004, 2003 and 2002.



Amounts in CHF millions, except percentages	2004			2003			2002
				As restated ^(a)			As restated ^(a)
Total Segment net sales		1 300			1 401			1 544
Operating income		61			68			140
Capital expenditures		35			29			34
Research and development expenditures		29			32			36
Contribution to the consolidated Company net sales from continuing operations, in %		18.5	%		21.1	%		21.8	%

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

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^® PYROVATEX^® 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 2004, the top ten customers of the Segment accounted for approximately 9 percent of the Segment’s sales. The customer base of the textile dyes and chemicals market is highly fragmented. In 2004, the end-user markets of the textile, fiber and carpet industries accounted for most 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.

Research and Development
Textile Effects spends approximately 2 percent of sales each year on research projects (CHF 29 million in 2004). 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 technical and economical performance, a range of disperse dyes with new

state-of-the-art wetfast performance, metal free dyes for polyamide with unmatched wetfast and lightfast performance, alternatives to sulphur and naphthol dyes. Textile chemicals currently being developed by the Segment include ecologically improved flame retardants, more efficient 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 research and development focus also includes technologies geared towards new effects, such as microencapsulation, application of nanoparticles and use of biotechnological processes.

Manufacturing
The Company has 85 manufacturing sites in 28 countries in important regions of the world. Currently, 55 of these sites are used primarily for chemical synthesis and the others are used for physical operations and 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 approximately 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 four non-consolidated joint ventures, all in Asia.

The Company’s production costs, excluding raw materials, amounted to approximately 22 percent of sales in 2004, 23 percent of sales in 2003 and 23 percent in 2002.

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. In 2004, the Company announced a program entitled “Shape”, which will result in the closure of certain sites and the movement of production activities to other sites in China 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 all Segments plan to dedicate considerable capital expenditure on capacity, product and process improvements spending yearly more than CHF 100 million in the next 5 years. For example, Textile Effects is spending CHF 15 million to streamline their dyestuff production facilities at Basel and Water & Paper Treatment CHF 15 million to streamline its stilbenics production facilities at Grenzach, Germany and McIntosh, USA.

Plastic Additives has invested in the Hindered Amine Stabilizer area, primarily in the NAFTA region. These projects were completed in 2004 at a total estimated total cost of approximately CHF 70 million. Plastic Additives plans to invest CHF 6 million in a new flame retardent production unit at Lampertheim, Germany and another CHF 7 million in a new GMP approved plant for a UV absorber for skin protection at Kaohsiung, Taiwan.

Coating Effects is investing CHF 30 million in a new production unit for DPP pigments at Monthey, Switzerland and plans to invest another CHF 15 million in a new DPP plant in China. Coating Effects is also investing CHF 10 million to increase its Benzotriazol capacities at McIntosh, USA and Lampertheim, Germany and CHF 30 million for the expansion of its ink production facility at Maastricht, Netherlands.

During the period from 2002 to 2004, Water & Paper Treatment has invested more than CHF 40 million to upgrade its production sites at Bradford United Kingdom and West Memphis Arkansas, United States. Water & Paper Treatment plans to invest CHF 10 million in a new acrylamide plant at Kwinana, Australia.

Textile Effects is investing CHF 7 million to increase the capacity for textile dyes at Mahachai, Thailand. 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. In 2003 another CHF 3 million have been spent at Panyu for a new solid softener plant.

The Company is further 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. Plastic Additives started in 2003 the production of UV absorbers at their Goa site in India and is investing CHF 10 million for the expansion of its antioxidants production facility at Shanghai, China.

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).

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 that lets customers place and track orders from all Segments. In addition, various complementary services are offered to customers such as on-line access to material safety data sheets, certificates of analysis and technical data sheets. Both current and potential customers also have the ability to locate the Company’s products based on their industry/sub-industry/application and desired effect using a comprehensive product finder application covering all Segments’ products. mybusiness@cibasc is available in 12 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 and desirable.

Throughout the first half of 2004, the Company was generally able to maintain raw material costs at the same level as 2003, but the second half of the year saw significant cost increases driven by the continued high price of crude oil and its derivatives and also by increasing demand, especially in Asia. The Company expects this trend to continue in the near future. To offset some of these cost increases, the Segments continue to source more raw materials and intermediates from newly established suppliers in Asia. The Company adjusts its currency portfolio to mitigate exchange rate fluctuations.

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.

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 Use of Ciba as a Corporate Name”. 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 were used at the of the agreement 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.

Regulatory Affairs
National and international laws regulate production, marketing and use of chemical substances. Although almost every country has its own legal procedure for control 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. Some facets of the regulations in these regions are continuously being revised but probably none more so than the control for production and import within the European Union where a complete overhaul of the requirements is being undertaken. The Company has been actively involved in the development of the regulations and does not expect significant concerns from the final changes. Within the U.S., the Environmental Protection Agency (“EPA”), have revised the High Production Volume program and

this has been evaluated by the Company. EPA and other U.S. agencies have also become increasingly active in the area of global chemical control and are taking the lead on many issues of global concern within the OECD. The Company actively supports these initiatives for more globally harmonized requirements and the effort being applied to minimize resource and cost for both industry and government.

The Company continues to actively seek approvals for their products within certain specially controlled applications. Within the U.S., the Food and Drug Administration (“FDA”), oversee the approval of specialty chemicals that will come in contact with food. For many years, the Company has been a leader in this area and is diligent in maintaining its expertise. The EPA’s Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) controls the use of such applications as material preservation and microbial control for the manufacture of polymeric, plastics and textile products together with the protection of the finished article itself. The Company, through its expertise, regularly gains approval for its products in the area and is also supporting other companies in achieving approval for these exacting requirements.

Agreements with Novartis in Connection with the Spin-off

Novartis and the Company entered into a Master Spin-off Agreement (“MSA”) 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 MSA, 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 MSA, 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 “Agreement Regarding Use of Ciba as Corporate Name”, 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.

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 Company

Selling

Manufacturing

Research

Service, Finance

AMERICAS

Argentina

Ciba Especialidades Químicas S.A., Buenos Aires

100

•

Bermuda

Chemical 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

•

Brazil

Ciba Especialidades Químicas Ltda., São Paulo

100

•

Latexia Brazil Ltda., São Paulo

100

•

Canada

Ciba Specialty Chemicals Canada Inc., Mississauga

100

•

Chile

Ciba Especialidades Químicas Ltda., Santiago de Chile

100

•

Colombia

Ciba Especialidades Químicas S.A., Bogotà

100

•

Raisio Química Andina S.A., Medellin

•

Guatemala

Ciba Especialidades Químicas, S.A. (ACC), Guatemala

100

•

Mexico

Ciba Especialidades Químicas Mexico S.A. de C.V., Mexico

100

•

Panama

Ciba Especialidades Químicas Colon S.A., Colon

100

•

United States of America

Ciba Specialty Chemicals Corporation, Tarrytown, NY

100

•

ASIA PACIFIC

Australia

Ciba Specialty Chemicals Pty. Ltd., Thomastown

100

•

Bahrain

Ciba Specialty Chemicals Middle East W.L.L., Manama (Al Seef District)

100

•

China

Ciba Specialty Chemicals (China) Ltd., Shanghai

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

•

Guangzhou Ciba Specialty Chemicals Co. Ltd., Guangzhou

•

Qingdao Ciba Dyes Co. Ltd., Qingdao

•

Qingdao Ciba Pigments Co. Ltd., Qingdao

•

Raisio Chemicals (Shanghai) Co. Ltd., Shanghai

100

•

Raisio Tianma Chemicals (Suzhou) Co. Ltd., Suzhou, Jiangsu

100

•

Shanghai Ciba Gao-Qiao Chemical Co. Ltd., Shanghai

•

Shenzhen Ciba Specialty Chemicals Co. Ltd., Shenzhen

•

Xiangtan Chemicals & Pigments Co. Ltd., Xiangtan

•

India

Ciba India Private Ltd., Mumbai

100

•

Ciba Specialty Chemicals (India) Ltd., Mumbai ⁽¹⁾

•

Diamond Dye-Chem Ltd., Mumbai ⁽²⁾

•

Indonesia

P.T. Ciba Specialty Chemicals Indonesia, Jakarta

•

PT Intercipta Kimia Pratama, Jakarta

•

PT Latexia Indonesia, Jakarta

100

•

Japan

Chemipro Fine Chemical Kaisha Ltd., Kobe

•

Ciba Specialty Chemicals K.K., Osaka

100

•

Musashino-Geigy Company Ltd., Kitaibaraki (Ibaraki)

•

Nippon Alkyl Phenol Co. Ltd., Tokyo

•

Republic of Korea (South Korea)

Ciba Specialty Chemicals Korea Ltd., Seoul

100

•

Daihan Swiss Chemical Corporation, Seoul

100

•

Doobon Fine Chemical Co., Ltd., Chongwon-kun

•

Raisio Chemicals Korea Inc., Chonan

•

Malaysia

Ciba Specialty Chemicals (Malaysia) SDN BHD, Klang

•

New Zealand

Ciba Specialty Chemicals N.Z. Ltd., Auckland

100

•

Singapore

Ciba Specialty Chemicals (Singapore) Pte. Ltd., Singapore

100

•

South Africa

Ciba Specialty Chemicals (Pty) Ltd., Spartan

100

•

Taiwan

Ciba Specialty Chemicals (Taiwan) Ltd., Kaohsiung

100

•

Thailand

Ciba Specialty Chemicals (Thailand) Ltd., Bangkok

100

•

Group Holdings in %

Principal Function of Company

Selling

Manufacturing

Research

Service, Finance

EUROPE

Austria

Ciba Spezialitätenchemie GmbH, Hard

100

•

Latexia Österreich GmbH, Pischelsdorf/Zwentendorf

100

•

Belgium

Ciba Specialty Chemicals N.V., Groot-Bijgaarden

100

•

Latexia S.A., Veurne

100

•

Raisio Belgium N.V., Veurne

100

•

Finland

Ciba Specialty Chemicals Finland OY, Helsinki

100

•

Ciba Specialty Chemicals Oy, Raisio

100

•

Finnamyl Oy, Raisio

100

•

Latexia SB Oy, Raisio

100

•

Latexia Suomi Oy, Raisio

100

•

Oy Kationi Ab, Raisio

100

•

France

Ciba Spécialités Chimiques SA, Saint Fons

100

•

Ciba Specialty Chemicals Masterbatch SA, Saint Jeoire en Faucigny

100

•

Germany

Ciba Spezialitätenchemie Grenzach GmbH, Grenzach-Wyhlen

100

•

Ciba Spezialitätenchemie Holding Deutschland GmbH, Lampertheim

100

•

Ciba Spezialitätenchemie Lampertheim GmbH, Lampertheim

100

•

Ciba Spezialitätenchemie Pfersee GmbH, Langweid/Lech

100

•

Greece

Ciba Specialty Chemicals Hellas ABEE, Thessaloniki

100

•

Hungary

Ciba Specialty Chemicals Magyarorszag Kft., Budapest

100

•

Italy

Ciba Specialty Chemicals S.p.A., Sasso Marconi (Bologna)

100

•

Magenta Master Fibers S.r.l., Milano

•

Luxembourg

Ciba Specialty Chemicals Finance Luxembourg S.A., Luxembourg

100

•

Netherlands

Ciba Specialty Chemicals International Nederland B.V., Maastricht

100

•

Ciba Specialty Chemicals (Maastricht) B.V., Maastricht

100

•

EFKA Additives B.V., Heerenveen

100

•

Portugal

Ciba Especialidades Químicas Lda., Porto

100

•

Raisio Portugal-Produtos Químicos, Lda., Nogueira Maia

•

Spain

Ciba Especialidades Químicas S.L., Barcelona

100

•

Latexia Iberia, S.L., Madrid

100

•

Raisio Echeveste, S.A., Tolosa

•

Sweden

Ciba Specialty Chemicals Sweden AB, Göteborg

100

•

AB CDM, Västra Frölunda

100

•

Raisio Svenska AB, Gothenburg

100

•

Switzerland

Ciba Specialty Chemicals Holding Inc., Basel ⁽³⁾

•

Ciba Spécialités Chimiques Monthey SA, Monthey

100

•

Ciba Spezialitätenchemie AG, Basel

100

•

Ciba Spezialitätenchemie Finanz AG, Basel

100

•

Ciba Spezialitätenchemie International AG, Basel

100

•

Ciba Spezialitätenchemie Kaisten AG, Kaisten

100

•

Ciba Spezialitätenchemie Schweizerhalle AG, Muttenz

100

•

Ciba Spezialitätenchemie Services AG, Basel

100

•

CIMO Compagnie Industrielle de Monthey SA, Monthey

•

Turkey

Ciba Özel Kimyevi Ürünler Sanayi ve Ticaret Ltd., Istanbul

100

•

United Kingdom

Ciba Specialty Chemicals PLC, Macclesfield

100

•

Ciba Specialty Chemicals Investment PLC, Macclesfield

100

•

Ciba Specialty Chemicals Water Treatments Ltd., Bradford

100

•

Pira International Limited, Leatherhead

100

•

Raisio Chemicals UK Limited, Blackburn

100

•

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 Holding Inc. and of Ciba Specialty Chemicals (India) Ltd., two publicly listed companies.

⁽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, 2004 was approximately CHF 107 million (INR 4 060 million). As of December 31, 2004 the Company held 9 200 887 Equity Shares, representing 69.28 percent of the paid-up share capital of CSCIL.

⁽²⁾		Diamond Dye-Chem Limited is a wholly owned subsidiary of CSCIL.

⁽³⁾		Ciba Specialty Chemicals Holding Inc. is the ultimate holding company of Ciba Specialty Chemicals Group. Its Shares are listed on the Swiss Exchange and, since August 2, 2000, the Company’s American Depository Shares (“ADSs”) are listed on the New York Stock Exchange. Two ADSs represent one Share of the Company’s common stock.

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.

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.


	Size in
Location	hectares ⁽¹⁾		Major Product Lines
EUROPE

Basel, 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	Water & Paper Treatment (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)

Guturrybay, Spain		2	Water & Paper Treatment (latex production)

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)

Kaipiainen, Finland		-	Water & Paper Treatment (latex production)

Kaisten, Switzerland		59	Plastic Additives (polymer additives)

Kokemaeki, Finland		10	Water & Paper Treatment (starch production)

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)

Lapua, Finland		23	Water & Paper Treatment (starch production)

Maastricht, Netherlands		11	Coating Effects (dispersions and inorganic pigments)

Mietoinen, Finland		8	Water & Paper Treatment (starch production)

Monthey, Switzerland ⁽²⁾		11	Water & Paper Treatment (whiteners) Coating Effects (high performance pigments)

Mortara & Trivolzio, Italy		17	Coating Effects (imaging and coating additives)

Paisley, United Kingdom		17	Coating Effects (classical pigments)

Pischelsdorf, Austria		-	Water & Paper Treatment (latex production)

Pontecchio Marconi, Italy		12	Plastic Additives (polymer additives and production of insecticides for a third party)

Raisio, Finland		1	Water & Paper Treatment (sizing agents and additives for the paper industry)

Ribecourt, France		-	Water & Paper Treatment (latex production)

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)

Toulouse, France		1	Water & Paper Treatment (sizing agents and additives for the paper industry)

Veurne, Belgium		1	Water & Paper Treatment (starch production)


	Size in
Location	hectares ⁽¹⁾		Major Product Lines
AMERICAS

Atotonilquillo, Mexico		43	Textile Effects (disperse, basic and acid dyes, textile chemicals) Water & Paper Treatment (whiteners, photobleach)

Berwick, USA		10	Water & Paper Treatment (sizing agents and additives for the paper industry)

Camaçari, Brazil		14	Plastic Additives (polymer additives)

Charlotte, North Carolina USA		6	Textile Effects (dyeing and printing auxiliaries)

Estrada do Colégio, Brazil		4	Water & Paper Treatment (whiteners, fabric finishing)

McIntosh, Alabama, USA		637	Plastic Additives (polymer additives and imaging and coating additives) Water & Paper Treatment (whiteners)

Medellin, Colombia		4	Water & Paper Treatment (sizing agents and additives for the paper industry)

Newport, Delaware USA		15	Coating Effects (high performance pigments)

Paulinia, Brazil		-	Water & Paper Treatment (latex production)

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)

ASIA-PACIFIC

Ai-oi, Japan ⁽³⁾		-	Plastic Additives (polymer additives and imaging and coating additives)

Ankleshwar, India		2	Water & Paper Treatment (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)

Merak, Indonesia		6	Water & Paper Treatment (latex production)

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)

Serang, Indonesia		-	Water & Paper Treatment (sizing agents and additives for the paper industry)

Shanghai, China ⁽⁹⁾		6	Plastic Additives (polymer additives)

Ulsan, South Korea		7	Coating Effects (classical pigments)

Zhenjiang, China		10	Water & Paper Treatment (latex production)

⁽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.

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 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 509 million as of December 31, 2004 and CHF 557 million as of December 31, 2003 have been recorded in the accompanying Consolidated Balance Sheets. The decrease in the provision of CHF 48 million in 2004 compared to 2003 relates to usage of the provisions of CHF 43 million and a CHF 18 million reduction related mainly to currency effects, offset in 2004 by additional reserves established in connection with the acquisition of Raisio Chemicals. The Company’s environmental protection and improvement cash expenditures were approximately CHF 54 million in 2004 (CHF 31 million in 2003), including investments in construction, operations and maintenance and usage of the provision.

Under the Company’s agreement with 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 based, 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 and/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 that is expected to take up to eight 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, 2004, 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.

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 in Item 18 – Financial Statements. 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 – 2004 compared to 2003



Results of operations	2004			2003
	As restated ^(a)			As restated ^(a)
Net sales		7 027			6 646
Gross profit		2 171			2 067
Operating income		521			563
Income from continuing operations		278			345
Income from discontinued operations, net of tax		28			0
Cumulative effect of change in accounting principles		0			(16	)
Net income		306			329
Earnings per share, basic and diluted
Continuing operations		4.21			5.05
Discontinued operations		0.43			0.00
Cumulative effect of change in accounting principles		0.00			(0.23	)
Net income per share		4.64			4.82
Other data
Depreciation and amortization of other intangible assets		394			366
Restructuring and special charges		91			0
Adjusted EBITDA ⁽¹⁾		915			929
Net cash provided by operating activities		631			1 033
Net cash used in investing activities		(1 051	)		(239	)
Net cash provided by (used in) financing activities		(304	)		(742	)
Free cash flow ⁽¹⁾		259			728
Net debt ⁽¹⁾		1 840			1 049
Shareholders’ equity at year end		4 152			4 253
Dividend per share ⁽²⁾		1.00			0.00
Capital reduction per share ⁽²⁾		2.00			3.00
Key performance ratios
Net sales development		6	%		(6	)%
Net sales development in local currencies		8	%		0	%
Expressed as a percentage of sales:
Gross profit		30.9	%		31.1	%
Operating income		7.4	%		8.5	%
Income from continuing operations		4.0	%		5.2	%
Net income		4.4	%		5.0	%
Adjusted EBITDA		13.0	%		14.0	%

(a)	See note 1 to consolidated financial statements in Item 18 — Financial Statements

⁽¹⁾ Adjusted 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⁾ The Board of Directors proposes a cash payment to the Company’s shareholders in 2005 totaling CHF 3 per share, based on 2004 results, consisting of a dividend of CHF 1 per share and a capital reduction of CHF 2 per share, which is reflected in the table above. The per share amounts presented above for 2003 reflect that no dividend was paid in 2004, based on 2003 results, as well as the capital reduction approved by the Company’s shareholders in 2004, based on 2003 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.

See Note 24 (unaudited) to Consolidated Financial Statements in Item 18 — Financial Statements.

Executive summary

Highlights

Ciba Specialty Chemicals (the “Company”) experienced in 2004 generally favorable market conditions, particularly in certain areas of the world, and unfavorable currency effects from the continued weakening of the U.S. dollar against the Swiss franc and the euro. Organic growth during 2004 resulted in net sales, excluding those of businesses acquired during the year, matching 2003 levels in Swiss francs despite negative currency effects and increasing by 2 percent in local currencies.

During 2004, the Company completed the acquisition of Raisio Chemicals Oy in addition to a number of other minor acquisitions. Comments relating to acquisition effects throughout this Management’s Discussion and Analysis refer to these acquisitions in totality, other than where specifically indicated. Acquisitions contributed 6 percent to sales growth in 2004, mainly from Raisio Chemicals. Including acquisitions, net sales in 2004 of CHF 7 027 million increased over 2003 levels by 8 percent in local currencies and by 6 percent in Swiss francs.

The Company implemented in 2004 Project Shape, a restructuring program to assure that synergies resulting from the integration of Raisio Chemicals are achieved and to address the continuing shift in the textiles market to Asia. Project Shape will take until 2007 to complete and is expected to result in after tax charges totaling CHF 125 million, the reduction of approximately 950 positions worldwide and annualized after tax earnings improvement of approximately CHF 90 million, once fully implemented.

Operational review

The global economy regained momentum to varying degrees during 2004, therefore providing the Company with opportunities for further growth in certain markets. Geographically, solid sales growth was achieved in Asia, particularly in China and Japan. In the Americas, sales benefited from stronger demand, particularly for specialty applications in market sectors such as polymers, industrial and decorative coatings and transportation. Sales in European markets were mixed, with Continental European sales flat to slightly improved and U.K. sales declining from prior year levels. Additional sales from acquired companies, mainly Raisio Chemicals, contributed strongly to sales growth in 2004. The acquisition of Raisio Chemicals enables the Segment Water and Paper Treatment to expand its already broad product range into its existing core markets and strengthen its presence in the Nordic regions and in Asia.

Gross profit increased in absolute terms in 2004 to CHF 2 171 million from CHF 2 067 million last year, benefiting from higher sales volumes and productivity improvements resulting from higher capacity utilization. Despite higher volumes, underlying production costs, excluding acquisition effects, were stable. Gross profit margin for 2004 was 31 percent, the same as prior year. Selling, general and administrative expenses, while higher than 2003 levels due to acquisition effects, decreased as a percentage of net sales due to continued cost control efforts.

Under Project Shape, the Company will close its Clayton manufacturing facility in the U.K. in a phased shutdown until 2007 and transfer production capacity mostly to Asia. The program also involves the closure of several smaller production and administrative facilities, primarily from the former Raisio Chemicals, and various other rightsizing initiatives across the Company’s global production base. This will enable the Company to optimize regional productive capacities within growing markets, particularly in textile effects, and to further balance the currency impact between the location of sales and cost generation.

Operating income decreased to CHF 521 million from CHF 563 million in 2003. Operating income margin was also lower in 2004 at 7.4 percent of sales compared to 8.5 percent in 2003. These decreases were primarily attributable to the CHF 80 million of restructuring expenses incurred in 2004 in connection with Project Shape, in addition to the expensing of acquired in-process research and development costs of CHF 11 million resulting from the Raisio Chemicals acquisition.

Cash flow and balance sheet review

Cash flows from operating activities in 2004 were, as expected, substantially lower than 2003, which had benefited by CHF 229 million from reductions in inventories and receivables. During 2004, approximately CHF 46 million of cash outflows were attributable directly to specific events at Raisio Chemicals, consisting of the build up of current assets for two new plants in China, higher receivables following the cessation of factoring and seasonal cash flow patterns in the starch business. In addition, the Company had higher payments for taxes, interest and contributions to certain of its pension plans. These factors, together with a combined CHF 107 million of higher capital expenditures and lower proceeds from sales of assets, resulted in lower free cash flow of CHF 259 million compared to CHF 728 million in 2003.

Net cash flows from investing activities was an outflow of CHF 1 051 million in 2004, an increase in outflow of CHF 812 million from CHF 239 million last year. The increase primarily consisted of the cash paid for the acquisition of Raisio Chemicals. Capital expenditures increased by CHF 61 million to CHF 294 million in 2004 from CHF 233 million last year. Such expenditures remain focused primarily on productivity improvement projects and maintenance of existing capacity.

Net cash flows used in financing activities were CHF 304 million in 2004 primarily consisting of a further capital reduction payment to shareholders totaling CHF 197 million and treasury stock purchases, net of sales, of CHF 162 million.

Net debt increased by CHF 791 million to CHF 1 840 million in 2004, due primarily to the reduction in cash used for the Raisio Chemicals acquisition, the capital reduction payment to shareholders and treasury stock purchases. Of the Company’s CHF 3.5 billion of total debt, more than 80 percent has long-term maturity dates. In addition, the Company continues to maintain a strong cash balance in excess of CHF 1.6 billion.

The Board of Directors will propose at the Annual General Meeting of shareholders on March 3, 2005 that the 1.8 million shares that were purchased in 2004 in connection with the share buy-back program initiated in 2003, be cancelled; this proposal is subject to shareholder approval. In 2003 under this program, the Company purchased 1.3 million treasury shares. The shareholders approved the cancellation of these shares in 2004; consequently, the shares were cancelled.

Significant other events

As a result of a dispute, Vantico International SA (now owned by the Huntsman Group) had initiated arbitration proceedings against the Company. The dispute and related arbitration proceedings were settled during 2004 resulting in the release of previously established reserves totaling CHF 28 million, net of tax. During 2004, the Company released CHF 15 million of previously established reserves following the settlement of certain outstanding tax matters.

To streamline the Group structure, the Company in 2004 integrated the Home & Personal Care Segment into two other existing segments. In recent years, the Company has evaluated numerous potential acquisitions in the home and personal care market, however none met the Company’s strict criteria for strategic fit and return on investment. This left the segment with a lack of critical mass and the Company therefore decided to save the cost of the segment support structure. The segment information presented herein reflects the new segment structure and all current and prior period segment information has been restated accordingly.

To further streamline processes, the Company plans over the next few years to harmonize business processes and implement a company-wide, unified system structure with new software. The project is expected to take up to 4 years.

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 Item 18 – Financial Statements 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 in Item 18 – 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 Consolidated Financial Statements in Item 18 – Financial Statements and Item 4 – Information on the Company – Environmental Matters.

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 2004 and 2003, 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 in Item 18 – 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 tax 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

Total sales higher, comparable sales also higher in local currencies and stable in Swiss francs

Sales increased by 6 percent overall to CHF 7 027 million including acquisition effects. Comparable sales excluding acquisition effects increased by 2 percent in local currencies and were stable in Swiss francs. Sales development in 2004 compared to 2003 resulted from the following factors :



Consolidated sales development	2004 compared to 2003
Volume/product mix		5	%
Price		(3	)%
Currency		(2	)%
Total in Swiss francs excluding acquisitions		0	%
Acquisitions		6	%
Total in Swiss francs		6	%

Market conditions mostly improved in 2004 across the majority of the Company’s core businesses, as an overall more favorable economic environment led to a pick-up in industry activity and underlying demand levels. Consequently, higher sales volumes resulted in most segments reporting higher sales in local currencies. The ongoing impact of a strongly competitive sales environment particularly in the first half of the year resulted in further downward pressure on selling prices. However, the Company was successful in abating this trend in the second semester. These factors, in addition to adverse currency development and a slightly weakening sales trend in the last quarter resulted in stable sales in Swiss francs, excluding acquisition effects.

In Europe, the major economies failed to gain momentum in 2004, particularly in the second half of the year, which was characterized by generally weak business months towards the year-end. Conditions were more favorable across the NAFTA regions, where good sales development in the U.S. was generally in keeping with an improved economic environment. Consequently sales increased in local currency. Further economic growth in Asia enabled another good performance in the region.

Sales levels were adversely impacted by the continued appreciation of the Swiss franc against the U.S. dollar in particular. This was partially offset by the strengthening of the euro and the British pound against the Swiss franc. Volume gains compensated for further price erosion resulting from the strongly competitive sales environment. As a result, comparable sales were 2 percent higher in local currencies and were stable in Swiss francs. Sales including acquisition effects were 6 percent higher than prior year in Swiss francs.

Sales in local currencies excluding acquisition effects were lower in Europe. However the appreciation of the euro resulted in slightly higher sales in Swiss francs. Most major sales territories experienced slow market conditions to varying degrees, although both Germany and France posted slight increases in local currencies. Sales including acquisition effects were higher in all major territories, with the exception of the U.K., where sales declined after a difficult year across the major businesses. In the Americas, sales in the U.S. increased in local currency but were lower in Swiss francs, both excluding and including acquisition effects. Sales in South America were well ahead in local currencies and to a lesser extent in Swiss francs. In Asia Pacific, sales again increased in local currencies and to a lesser extent also in Swiss francs. Region China again achieved double-digit growth in local currencies, and Japan also reported strong sales increases in both local currency and in Swiss francs.



Geographic sales distribution	2004			2003
Europe		44	%		41	%
Americas⁽¹⁾		29	%		31	%
Asia Pacific⁽²⁾		27	%		28	%

⁽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.

Gross profit benefits from sales growth and acquisition effects

In absolute terms gross profit levels increased by 5 percent to CHF 2 171 million but decreased to 30.9 percent of sales compared to 31.1 percent in prior year. The increase in absolute terms resulted from sales volume gains and positive acquisition effects that offset both selling price reductions and adverse currency impact. Higher sales volumes in turn generated productivity improvements leading to lower levels of unabsorbed fixed costs that combined with further savings in base production costs to positively affect margins. Raw material costs were relatively stable overall but showed an increasing trend towards year-end. Gross margins however decreased slightly as a percentage of sales, mainly due to the effect of relatively higher variable to total cost ratio of Raisio Chemicals that was partially offset in operating income.

Selling, general and administrative costs increase; lower in sales terms

Selling, general and administrative expenses in Swiss francs increased by CHF 32 million to CHF 1 225 million in 2004, an increase of 3 percent from CHF 1 193 million last year. This was mainly due to acquisition effects. However as a percentage of sales selling, general and administrative expenses decreased to 17.4 percent of sales in 2004 from 18.0 percent in 2003, partially due to the relatively lower fixed to total cost structure of Raisio Chemicals. Underlying costs on a comparable basis were stable.

Investment in research and development sustained

Research and development expenses as a percentage of sales were 4.1 percent in 2004, a slight decrease from 4.2 percent last year. In absolute terms, research and development expenses increased slightly by CHF 7 million to CHF 288 million in 2004 from CHF 281 million in 2003.

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 maintains 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 adjusted EBITDA lower due to acquisition and restructuring effects



	2004			2003
	As restated ^(a)			As restated ^(a)
Operating income		521			563
Adjusted EBITDA		915			929
Operating income margin		7.4	%		8.5	%
Adjusted EBITDA margin		13.0	%		14.0	%
2004 compared to 2003
Operating income		(7	)%		(27	)%
Adjusted EBITDA		(2	)%		(20	)%

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income decreased by 7 percent to CHF 521 million in 2004 from CHF 563 million in 2003. Expressed as a percentage of sales, operating income fell to 7.4 percent in 2004 from 8.5 percent in the prior year. Despite higher sales volumes and positive acquisition effects that helped offset price erosion and adverse currency development, operating income decreased due to restructuring charges totaling CHF 80 million incurred in connection with Project Shape and special charges totaling CHF 11 million consisting of the expensing of the fair value of acquired in-process research and development activities in connection with the acquisition of Raisio Chemicals. Without these items, in 2004 operating income would have been CHF 612 million, or 8.7 percent of sales. See Note 23 to Consolidated Financial Statements in Item 18 – Financial Statements.

As a result of the decline in operating income as described above, adjusted EBITDA in 2004 decreased to CHF 915 million, a decrease of CHF 14 million from CHF 929 million in the prior year. Currency adjusted EBITDA increased by CHF 29 million from 2003. Adjusted EBITDA margin decreased to 13.0 percent of sales in 2004 from 14.1 percent in 2003.

Segments results

Plastic Additives results

Sales increased to CHF 1 895 million in 2004 or by 4 percent in Swiss francs and by 7 percent in local currencies. Sales development in 2004 compared to 2003 resulted from the following factors:



Sales development	2004 compared to 2003
Volume/product mix		9	%
Price		(2	)%
Currency		(3	)%
Total in Swiss francs		4	%

Sales development across the Segment was generally positive both in local currencies and to a lesser extent in Swiss francs. In base polymers an upturn in the final quarter of the year helped to offset an intentional reduction in low-margin businesses.

Strong sales growth was achieved in polymer products, with all core markets performing well. Process and lubricant additives sales were well above prior year levels, with good market conditions evident across all major territories. Home and personal care sales were significantly higher, with new product launches in colors and stabilization applications and further gains in UV absorbers as the main growth drivers. The effect on sales of ongoing downward pressure on selling prices was fully offset by increased sales volume.

Geographically, sales in Europe increased in Swiss francs and to a lesser extent in local currencies. Sales performance was mixed, with a good result in Germany contrasting more sluggish conditions elsewhere across the region. In the Americas, sales levels increased in both Swiss francs and in local currencies. Sales levels rebounded in the U.S. benefiting from the gradual economic recovery there, and were much higher in local currency and to a lesser extent in Swiss francs. Sales in South America were higher in both local currencies and Swiss francs. Further sales growth was also achieved in Asia Pacific, with China and Japan again achieving excellent results in both local currencies and in Swiss francs. Sales development in local currencies was generally positive across the remainder of the region, and to a lesser extent also in Swiss francs.



Operating income and adjusted EBITDA	2004			2003
Operating Income:
Absolute in CHF		224			165
As a percentage of sales (operating income margin)		11.9	%		9.1	%
Adjusted EBITDA:
Absolute in CHF		319			265
As a percentage of sales (adjusted EBITDA margin)		16.8	%		14.6	%

Operating income and adjusted EBITDA increased both in absolute terms and as a percentage of sales. Despite an increase in raw material costs in the latter part of the year, gross margins improved due to the combined effects of positive sales volume mix development and also productivity gains that resulted from higher plant utilization levels. Selling, general and administration expenses were higher, both in local currencies and to a lesser extent in Swiss francs. The Segment maintained its investment level in research and development activities at approximately 5 percent of sales.



Asset management	2004			2003
	As restated ^(a)
Net current operating assets:
Absolute in CHF		393			362
As a percentage of sales		21	%		20	%
Capital expenditures in CHF		76			64
Invested capital in CHF		1 321			1 247
Total assets in CHF		1 603			1 514

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

Net operating assets increased from 2003 levels. This was due to higher levels of receivables and inventories, both in absolute terms and as a percentage of sales. Payable levels were higher than prior year levels. Capital expenditures were mainly focused on debottlenecking and productivity improvement programs, and were well below the level of depreciation. Both invested capital and total assets increased slightly over prior year.

Coating Effects results

Sales in Swiss francs increased to CHF 1 818 million in 2004 or by 1 percent and increased by 3 percent in local currencies. Sales development in 2004 compared to 2003 resulted from the following factors:



Sales development	2004 compared to 2003
Volume/product mix		6	%
Price		(3	)%
Currency		(2	)%
Total in Swiss francs		1	%

Strong volume gains across most of the Segment’s key businesses contributed to overall sales growth in both Swiss francs and in local currencies. In the coatings business, sales increased in both Swiss francs and in local currencies, benefiting from strong demand for new product applications in the industrial and decorative coating markets, coupled with higher sales in the transportation market despite downward pressure on automobile sales. The Segment again managed to increase sales into the highly competitive plastics market and also posted higher sales in electronic materials due to further gains in the fast-growing displays sector, although demand slowed in the latter part of the year. Sales of Optical Information Storage products deteriorated throughout the year due principally to overcapacity in the CD-R market. The imaging and inks business continued to experience tougher conditions particularly in the publications market, although this was partially offset by a positive mix effect resulting from sales of higher margin pigments in packaging.

Geographically, in Europe sales levels were stable in Swiss francs and were slightly lower in local currencies. Of the major sales regions, France and Italy delivered positive sales growth both in local currencies and in Swiss francs, as did Germany to a lesser extent. This was contrasted by a difficult year in the U.K. where sales decreased markedly both in Swiss francs and in local currency. In the Americas in general and in the USA in particular, sales levels increased in local currencies but were lower in Swiss francs. Sales in Central and South America increased both in local currencies and in Swiss francs. Asia Pacific sales grew in local currencies and to a lesser extent in Swiss francs, enabled by an excellent result in Japan. Sales in Region China were stable in local currencies, but decreased in Swiss francs. Of the remaining sales territories in the region, growth was generally positive in local currencies and to a lesser extent in Swiss francs.



Operating income and adjusted EBITDA	2004			2003
				As restated ^(a)
Operating Income:
Absolute in CHF		291			298
As a percentage of sales (operating income margin)		16.0	%		16.5	%
Adjusted EBITDA:
Absolute in CHF		394			395
As a percentage of sales (adjusted EBITDA margin)		21.7	%		21.8	%

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income and adjusted EBITDA decreased both in absolute terms and as a percentage of sales. Margins deteriorated due to sales price erosion, higher production costs that resulted mainly from higher personnel costs, and adverse currency development. These were partially offset by positive volume mix gains and lower residual capacity costs resulting from increased capacity utilization. Selling, general and administrative costs increased due to higher personnel costs. Investment in research and development was approximately 6 percent of sales.



Asset management	2004			2003
	As restated ^(a)			As restated ^(a)
Net current operating assets:
Absolute in CHF		501			520
As a percentage of sales		28	%		29	%
Capital expenditures in CHF		82			79
Invested capital in CHF		1 843			1 762
Total assets in CHF		2 090			2 009

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

Net operating assets decreased from prior year levels. Both receivables and inventory levels were lower, in absolute terms as well as in percentage of sales. Payable levels were higher than in prior year. Capital expenditures increased slightly; these remain focused primarily on enhancement of existing capacity and were below the level of depreciation. Both invested capital and total assets increased slightly.

Water & Paper Treatment results

Sales increased to CHF 2 014 million in 2004 or by 25 percent in Swiss francs and by 27 percent in local currencies. Sales development in 2004 compared to 2003 resulted from the following factors:



Sales development	2004 compared to 2003
Volume/product mix		6	%
Price		(4	)%
Currency		(2	)%
Total in Swiss francs before acquisitions		0	%
Acquisitions		25	%
Total in Swiss francs		25	%

The acquisition effect of Raisio Chemicals is included from June 1, 2004; all comments regarding sales that follow are on a comparable basis with 2003 thereby excluding acquisition effects other than where specifically indicated.

Sales in water treatments exceeded prior year levels both in Swiss francs and in local currencies, driven by good performances across most major markets despite further competitive downward pressure on selling prices in the sector. Business line paper reported sales growth in local currencies with most markets outperforming the prior year, although sales remained stable in Swiss francs. Sales in detergents and hygiene suffered from the adverse competitive impact of the weak U.S. dollar, especially in whiteners, resulting in sales decreases both in local currencies and in Swiss francs.

Geographically, sales in Europe increased in Swiss francs and were stable in local currencies. Germany achieved sales growth in both Swiss francs and local currency, benefiting from slightly improved economic conditions. Performance was more muted across the remainder of the region amid tighter markets. In the Americas, sales increases in local currencies were achieved in all regions to varying degrees. Sales in the U.S. were slightly higher than prior year in local currency, but were much lower in Swiss francs. Canada posted growth in both local currency and in Swiss francs, while Central America delivered sales growth in local currencies but sales were stable in Swiss francs. Sales increased in Asia Pacific, particularly in Region China where sales were once again well ahead in both Swiss francs and in local currency, augmented by another good performance in Africa and Middle East where sales increased in both local currency and in Swiss francs.

Including acquisition effects, sales development was positive across all regions in both local currencies and to a lesser extent in Swiss francs.

Operating income and adjusted EBITDA

2004

2003

As restated ^(a)

As restated ^(a)

Operating Income:

Absolute in CHF

128

125

As a percentage of sales (operating income margin)

6.3

7.8

Adjusted EBITDA:

Absolute in CHF

259

228

As a percentage of sales (adjusted EBITDA margin)

12.8

14.1

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income decreased both in absolute terms and as a percentage of sales. Adjusted EBITDA increased in absolute terms but decreased as a percentage of sales. Gross profit was higher in absolute terms, benefiting from higher capacity utilization levels in addition to favorable acquisition and volume mix gains that compensated for sales price reductions and higher costs for raw materials. Gross margins overall however decreased as a percentage of sales due to relatively higher variable to total cost ratio of Raisio Chemicals’ sales. Selling, general and administrative costs were much higher in both Swiss francs and in local currencies, chiefly due to acquisition effects, leading to a further reduction in net margins. Investments in research and development remained at the prior year level of approximately 2 percent of sales.



Asset management	2004				2003
	As restated ^(a)			As restated ^(a)
Net current operating assets:
Absolute in CHF		458			346
As a percentage of sales		23	%		21	%
Capital expenditures in CHF		81			55
Invested capital in CHF		3 164			2 411
Total assets in CHF		3 508			2 640

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

The Segment’s operating assets were higher than prior year levels both in absolute and intensity terms. Both inventories and receivables increased in both absolute and intensity terms. The increase in intensities was mostly due to acquisition effects that did not include a full year’s sales. Payables were higher than in prior year. Capital expenditures increased from prior year but

were well below depreciation expense and were again targeted primarily on productivity improvement projects. These factors led to an overall increase in both invested capital and total assets.

Textile Effects results

Sales decreased to CHF 1 300 million in 2004 or by 7 percent in Swiss francs and by 5 percent in local currencies. Sales development in 2004 compared to 2003 resulted from the following factors:



Sales development	2004 compared to 2003
Volume/product mix		(2	)%
Price		(3	)%
Currency		(2	)%
Total in Swiss francs		(7	)%

The textiles market remained difficult in 2004 and continues to present the Segment with many challenges. Textile dyes sales were lower both in local currencies and in Swiss francs, characterized by heavy competitive pressures and slow core markets. Sales in textile chemicals were stable in local currencies, where most key markets held up reasonably well, notably sizing and pretreatments.

Geographically, sales in Europe decreased from prior year levels both in Swiss francs and in local currencies. All major sales territories suffered sales declines in local currencies, particularly in the second half of the year, with the exception of Turkey where sales increased both in local currencies and in Swiss francs. In the Americas, sales declined in Swiss francs and in local currencies across all regions. In the Asia Pacific region, sales remained stable in local currencies but were lower in Swiss francs. A strong result in both China and in India in local currencies and to a lesser extent in Swiss francs helped to offset sales declines across the remainder of the region.



Operating income and adjusted EBITDA	2004			2003

				As restated ^(a)
Operating Income:
Absolute in CHF		61			68
As a percentage of sales (operating income margin)		4.7	%		4.9	%
Adjusted EBITDA:
Absolute in CHF		117			128
As a percentage of sales (adjusted EBITDA margin)		9.0	%		9.2	%


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income and adjusted EBITDA decreased in both absolute terms and as a percentage of sales, mainly due to the difficult sales environment. The Segment again managed to partially mitigate this effect through further cost reductions in the production area combined with lower raw material costs. Selling, general and administrative costs were also lower in Swiss francs and in local currencies compared to the prior year. Investment in research and development remained stable at approximately 2 percent of sales.



Asset management	2004			2003

	As restated ^(a)			As restated ^(a)
Net current operating assets:
Absolute in CHF		393			439
As a percentage of sales		30	%		31	%
Capital expenditures in CHF		35			29
Invested capital in CHF		1 158			1 111
Total assets in CHF		1 361			1 300


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

The Segment managed to reduce net operating assets below prior year levels. Both receivables and inventory levels decreased in absolute terms and were stable in intensity terms compared to prior year. Payable levels were higher than last year. Capital expenditures increased slightly from last year, but remain well below depreciation expense for the period. Both invested capital and total assets increased slightly.

Subsequent event -Impairment in 2005 of certain long-lived assets of Segment Textile Effects

In 2005, certain of the Segment’s long-lived assets were tested for impairment of their carrying values. As a result, an impairment charge of CHF 583 million was recorded in December 2005. See Note 24 (unaudited) to Consolidated Financial Statements in Item 18 - Financial Statements.

Consolidated balance sheets

Selected balance sheet data as of December 31,

2004

2003

As restated ^(a)

As restated ^(a)

Cash and cash equivalents and short-term investments

1 636

2 397

Total assets

10 996

11 095

Total shareholders’ equity

4 152

4 253


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Cash and cash equivalents and short-term investments decreased by CHF 761 million from 2003 to 2004 primarily due to cash used for acquisitions. Totals assets were slightly lower than prior year levels. The Company continues to target further reductions in its operating assets base but the same levels of reductions as in 2003 could not be achieved, which was partially due to higher sales and resulting production activities. Proposed 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, 2003 and 2004 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. During 2004, the U.S. dollar depreciated by a further 8 percent and the Chinese renminbi by 8 percent from prior 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. 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 remained volatile in 2004. 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 the further strengthening of the euro against the U.S. dollar.

As a consequence of the improving economic recovery especially in the U.S. and receding political instability in 2004, global interest rates started to rise during 2004. Through the effective anticipation of market conditions and the use of financial instruments available in the financial markets, the Company was able to keep the average cost of its total borrowings almost constant at 4.03 percent in 2004 compared to 3.84 percent in 2003. The Company’s net interest cost, which is interest expense less interest income, was stable at CHF 108 million in 2004 as for 2003.

During 2004, the U.S. dollar fluctuated against the Swiss franc from a high of approximately CHF 1.32 to a low of approximately CHF 1.13. The Swiss franc balance sheet year-end rate was at CHF 1.15 against the U.S. dollar in 2004 versus CHF 1.25 at the end of 2003. During 2004, the euro fluctuated against the Swiss franc from a high of approximately CHF 1.59 to a low of approximately CHF 1.50. At the end of 2004, the Swiss franc was at a level of CHF 1.54 against the euro versus CHF 1.56 at the end of 2003.

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 2004, other financial expense, net which includes foreign currency exchange gains and losses, net hedging expenses, and losses on financial investments, was CHF 39 million, an increase of CHF 15 million from CHF 24 million in 2003. The increase in 2004 is mainly due to the fact that in 2003, the Company sold its remaining shares in Hexcel Corporation realizing a CHF 16 million gain. Otherwise, other financial expenses, net were relatively stable between the two periods.

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 2004, 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.

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 in Item 18 – Financial Statements.

Net debt

The table below shows the components of net debt at December 31, 2004 and 2003:



Net debt	2004			2003
Short-term debt		559			259
Long-term debt		2 917			3 187
Total debt		3 476			3 446
Less: cash and cash equivalents		(1 614	)		(2 386	)
Less: short-term investments		(22	)		(11	)
Net debt		1 840			1 049

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 in Item 18 – Financial Statements.

The Company’s long-term debt in 2004 and 2003 consisted primarily of Euro Medium-Term Notes (EMTN Program) and straight bonds, which are described in Note 13 to the Consolidated Financial Statements in Item 18 – Financial Statements. The current portion of long-term debt totaled CHF 258 million at December 31, 2004 and CHF 1 million at December 31, 2003.

Net debt levels increased by CHF 791 million in 2004 due to a number of factors, being mainly the cash used to fund the acquisition of Raisio Chemicals, totaling CHF 662 million. Also, the Company made a capital reduction payment of CHF 197 million in 2004. The Company also used a total of CHF 162 million to purchase treasury stock. These uses of cash were partially offset by cash flows from operating activities totaling CHF 631 million.

Long-term debt levels, including current portion, were similar to prior year levels. See Note 13 to Consolidated Financial Statements in Item 18 – Financial Statements.

The Company’s commercial paper program is uncommitted and the availability of future funds thereunder depends to a large extent on market conditions. The Company may, if and when it is economically advantageous, issue new debt.

Cash flows

The net decrease in cash and cash equivalents of CHF 772 million from December 31, 2003 to December 31, 2004 resulted from cash flows provided by or used in the Company’s operating, investing and financing activities.

Cash flows from operating activities

2004

2003

As restated ^(a)

As restated ^(a)

Net income

306

329

Deduct net income form discontinued operatons, net of tax

(28

)

Depreciation and amortization

394

366

Net change in operating assets and liabilities

(226

)

302

Other, net

185

Net cash provided by operating activities

631

1 033


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Cash flows provided by operating activities of CHF 631 million did not reach the same high levels of recent years, which was partially due to higher working capital requirements necessary to fund higher sales volumes. Also in 2004, the Company had higher cash payments for interest, taxes and pensions that together resulted in an adverse development of CHF 144 million compared to the prior year. Together, these factors contributed to the decline in operating cash flows.

The Company continues to prioritize cash flow generation and is satisfied that operating cash flow levels are sufficient to satisfy both short-term and mid-term funding requirements.



Cash flows from investing activities	2004			2003
Capital expenditures		(294	)		(233	)
Sale (acquisition) of businesses, net of cash		(810	)		(71	)
Proceeds from sale of assets and changes in loans and other long- term assets		53			65
Cash flows used in investing activities, discontinued operations		0			0
Net cash used in investing activities		(1 051	)		(239	)

Net cash used in acquisition and divestment activities in 2004 consisted primarily of the cash used for the acquisition of Raisio Chemicals, of CHF 662 million. In addition, the Company completed a number of other minor acquisitions during 2004 for an aggregate consideration of CHF 91 million. Also included in cash flows from investing activities in 2004 was the receipt of a long-term note receivable of CHF 42 million in connection with the sale in 2000 of the Company’s investment in Hexcel Corporation.

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.



Cash flows from financing activities	2004			2003
Increase (decrease) in short-term and long-term debt, net		55			(394	)
Dividends paid		0			0
Capital reduction paid		(197	)		(206	)
Treasury stock transactions and other		(162	)		(142	)
Net cash flows (used in) provided by financing activities		(304	)		(742	)

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 in Item 18 – Financial Statements.

At the Company’s Annual General Meeting on February 26, 2004, 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 6 per share to CHF 3 per share. The Company paid the capital reduction on May 14, 2004, which totaled CHF 197 million.

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.

In connection with its share buy-back program initiated in 2004, the Company purchased 1.8 million treasury shares in 2004 for CHF 157 million. The Board of Directors will propose at the Annual General Meeting of shareholders on March 3, 2005 that these shares be cancelled; this proposal is subject to shareholder approval. In 2003 in connection with the share buy-back

program, the Company purchased 1.3 million treasury shares for CHF 117 million. The shareholders approved the cancellation of these shares at the Company’s Annual General Meeting on February 26, 2004; consequently, the shares were cancelled on May 7, 2004. For further details, refer to Note 16 to Consolidated Financial Statements in Item 18 – Financial Statements.



Free cash flow	2004			2003
Net cash from continuing operations		631			1 033
Less: net cash used in investing activities		(1 051	)		(239	)
Add: (sale) acquisition of businesses, net of cash		810			71
Less: dividends⁽¹⁾		(131	)		(137	)
Free cash flow		259			728

⁽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 was lower by CHF 469 million in 2004 compared to prior year. This was mainly due to lower cash from operating activities in 2004, as the Company’s investment in working capital increased due to sales growth.

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, 2004, various long-term obligations that will become due in 2005 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, 2004, the Company’s current estimate of their annual maturities.

Payments by year, as from December 31, 2004



	Total	Less than 1 year	1 to 3 years	3 to 5 years	More than 5 years
Long-term debt, including current⁽ⁱ⁾	3 129	258	8	1 311	1 552
Long-term obligations, including current portion⁽ⁱⁱ⁾	1 366	87	158	159	962
Raw material purchase commitments	402	226	176	—	—
Fixed assets and other purchase commitments	375	156	161	48	10
Lease commitments	128	41	41	21	25
Total	5 400	768	544	1 539	2 549

⁽ⁱ⁾	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 in Item 18 – Financial Statements are net of discounts and premiums, in accordance with U.S. GAAP.

⁽ⁱⁱ⁾ 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, 2004. 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 Item 18 – 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, 2004, the Company has provided guarantees to third parties for indebtedness of others of approximately CHF 17 million of which CHF 12 million expire in 2005 and CHF 5 million thereafter.

Effective income tax rate

The Company reported an effective income tax rate of 23 percent in 2004, an increase of 6 percent compared to 17 percent reported in 2003. The 2004 rate is reduced by 4 percent due to a non-recurring release of previously established tax reserves following the settlement during 2004 of certain outstanding tax matters. The 2003 effective income tax rate of 17 percent had been reduced by 10 percent from different non-recurring releases of previously established tax reserves, consisting principally of 9 percent resulting from the settlement in 2003 of a dispute with Novartis. Excluding the effects of these different non-recurring events, the Company’s 2004 and 2003 effective income tax rates would have each been 27 percent. See Note 14 to Consolidated Financial Statements in Item 18 — Financial Statements.

Year in review – 2003 compared to 2002



Results of operations	2003			2002

	As restated ^(a)			As restated ^(a)
Net sales		6 646			7 085
Gross profit		2 067			2 356
Operating income		563			769
Income from continuing operations		345			419
Income from discontinued operations, net of tax		0			0
Cumulative effect of change in accounting principles		(16	)		0
Net income		329			419
Earnings per share, basic and diluted
Continuing operations		5.05			6.12	⁽³⁾
Discontinued operations		0.00			0.00
Cumulative effect of change in accounting principles		(0.23	)		0.00
Net income per share		4.82			6.12	⁽³⁾
Other data
Depreciation and amortization of other intangible assets		366			385
Adjusted EBITDA ⁽¹⁾		929			1 154
Net cash provided by operating activities		1 033			1 038
Net cash used in investing activities		(239	)		(349	)
Net cash provided by (used in) financing activities		(742	)		144
Free cash flow ⁽¹⁾		728			671
Net debt ⁽¹⁾		1 049			1 463
Shareholders’ equity at year end		4 253			4 381
Dividend per share ⁽²⁾		0.00			0.00
Capital reduction per share ⁽²⁾		3.00			3.00
Key performance ratios
Net 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		8.5	%		10.9	%
Income from continuing operations		5.2	%		5.9	%
Net income		5.0	%		5.9	%
Adjusted EBITDA		14.0	%		16.3	%


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements


⁽¹⁾	Adjusted 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⁾ The per share amounts presented above reflect that no dividends were paid in 2004, based on 2003 results, nor in 2003, based on 2002 results, as well as the capital reductions approved by the Company’s shareholders in 2004, based on 2003 results, and in 2003, based on 2002 results.

⁽³⁾ For 2002, the figures presented are only basic per share amounts. Diluted per share amounts for 2002 are CHF 6.11 for both income from continuing operations and net income.

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.

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 206 million to CHF 563 million compared to CHF 769 million in 2002. Operating income margin was also lower in 2003 at 8.5 percent compared to 10.9 percent in 2002.

Income from continuing operations was CHF 345 million or CHF 5.05 per share in 2003, compared to CHF 419 million or CHF 6.11 per share in the prior year. Net income was CHF 329 million or CHF 4.82 per share in 2003 compared to CHF 419 million or CHF 6.11 per share in the prior year.

The Company’s adjusted EBITDA and adjusted EBITDA margin, respectively, were CHF 929 million and 14.0 percent in 2003 compared to CHF 1 154 million and 16.3 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 8 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.

In connection with a share buy-back program initiated in 2003, the Company purchased 1.3 million treasury shares for CHF 117 million.

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.

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 2002
Volume/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 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			2002
Europe		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 73 million, from CHF 1 266 million in 2002 to CHF 1 193 million in 2003. In local currencies, these costs remained stable. Selling, general and administrative expenses expressed as a percentage of sales were 18.0 percent in 2003 compared to 17.9 percent in the prior year. Higher costs for pensions and insurance were incurred in 2003. 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 approximately 4 percent of sales in research and development activities.

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



	2003			2002

	As restated ^(a)			As restated ^(a)
Operating income		563			769
Adjusted EBITDA		929			1 154
Operating income margin		8.5	%		10.9	%
Adjusted EBITDA margin		14.0	%		16.3	%
2003 compared to 2002
Operating income		(27	)%		2	%
Adjusted EBITDA		(20	)%		(6	)%


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income fell by CHF 206 million in 2003, and operating income margin deteriorated to 8.5 percent of sales in 2003 from 10.9 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 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.

Adjusted EBITDA decreased to CHF 929 million in 2003 compared to CHF 1 154 million in the prior year, of which approximately CHF 134 million was due to unfavorable currency developments. Adjusted EBITDA margin decreased to 14.0 percent of sales in 2003 from 16.3 percent in 2002.

Segments results

During 2004, the Company integrated the Home & Personal Care Segment into two other existing segments. Accordingly, the following 2003 compared to 2002 segment information has been restated to reflect the new segment structure.

Plastic Additives results

Sales decreased to CHF 1 822 million in 2003 or by 4 percent in Swiss francs and increased by 2 percent in local currencies. Sales development in 2003 compared to 2002 resulted from the following factors:



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

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. Sales in home and personal care were boosted by strong sales of UV absorbers. 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 Europe increased 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 and adjusted EBITDA	2003			2002

				As restated ^(a)
Operating Income:
Absolute in CHF		165			225
As a percentage of sales (operating income margin)		9.1	%		11.8	%
Adjusted EBITDA:
Absolute in CHF		265			332
As a percentage of sales (adjusted EBITDA margin)		14.6	%		17.5	%


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income and adjusted 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 6 percent of sales.



Asset management	2003			2002

				As restated ^(a)
Net current operating assets:
Absolute in CHF		362			409
As a percentage of sales		20	%		22	%
Capital expenditures in CHF		64			94
Invested capital in CHF		1 247			1 352
Total assets in CHF		1 514			1 625


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

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 2002
Volume/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 Europe sales 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 Pacific sales 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 and adjusted EBITDA	2003			2002

	As restated ^(a)			As restated ^(a)
Operating Income:
Absolute in CHF		298			335
As a percentage of sales (operating income margin)		16.5	%		17.4	%
Adjusted EBITDA:
Absolute in CHF		395			434
As a percentage of sales (adjusted EBITDA margin)		21.8	%		22.6	%


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income and adjusted 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			2002

	As restated ^(a)			As restated ^(a)
Net current operating assets:
Absolute in CHF		520			575
As a percentage of sales		29	%		30	%
Capital expenditures in CHF		79			74
Invested capital in CHF		1 762			1 826
Total assets in CHF		2 009			2 098


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

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 1 616 million in 2003 or by 6 percent in Swiss francs, but increased by 1 percent in local currencies. Sales development in 2003 compared to 2002 resulted from the following factors:



Sales development	2003 compared to 2002
Volume/product mix		3	%
Price		(2	)%
Currency		(7	)%
Total in Swiss francs		(6	)%

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. Sales levels in detergents and hygiene were below prior year in both Swiss francs and in local currency.

Geographically, sales in Europe increased 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 Americas both 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 and adjusted EBITDA	2003			2002

	As restated ^(a)			As restated ^(a)
Operating Income:
Absolute in CHF		125			163
As a percentage of sales (operating income margin)		7.8	%		9.5	%
Adjusted EBITDA:
Absolute in CHF		228			271
As a percentage of sales (adjusted EBITDA margin)		14.1	%		15.8	%


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income and adjusted 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			2002

	As restated ^(a)			As restated ^(a)
Net current operating assets:
Absolute in CHF		346			397
As a percentage of sales		21	%		23	%
Capital expenditures in CHF		55			45
Invested capital in CHF		2 411			2 590
Total assets in CHF		2 640			2 813


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

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.

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 2002
Volume/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. 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 Europe were 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 Pacific region, sales increased slightly in local currencies, particularly in the China and South Asia regions, but declined overall in Swiss francs.



Operating income and adjusted EBITDA	2003			2002

	As restated ^(a)			As restated ^(a)
Operating Income:
Absolute in CHF		68			140
As a percentage of sales (operating income margin)		4.9	%		9.1	%
Adjusted EBITDA:
Absolute in CHF		128			206
As a percentage of sales (adjusted EBITDA margin)		9.2	%		13.4	%


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Operating income and adjusted 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			2002

	As restated ^(a)			As restated ^(a)
Net current operating assets:
Absolute in CHF		439			532
As a percentage of sales		31	%		34	%
Capital expenditures in CHF		29			34
Invested capital in CHF		1 111			1 287
Total assets in CHF		1 300			1 492


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

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.

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.

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 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.

Cash flows



Cash flows from operating activities	2003		2002

	As restated ^(a)		As restated ^(a)
Net income		329		419
Depreciation and amortization		366		385
Net change in operating assets and liabilities		302		8
Other, net		36		226
Net cash provided by operating activities		1 033		1 038


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

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
Capital expenditures		(233	)		(250	)
Sale (acquisition) of businesses, net of cash		(71	)		(116	)
Proceeds from sale of assets and changes in loans and other long-term assets		65			17
Net cash used in investing activities		(239	)		(349	)

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. 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
Increase (decrease) in short-term and long-term debt, net		(394	)		4
Dividends paid		0			(134	)
Capital reduction paid		(206	)		(69	)
Treasury stock transactions and other		(142	)		343
Net cash flows provided by (used in) financing activities		(742	)		144

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).

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.



Free cash flow	2003			2002
Net cash from continuing operations		1 033			1 038
Less: net cash used in investing activities		(239	)		(349	)
Add: (sale) acquisition of businesses, net of cash		71			116
Less: dividends⁽¹⁾		(137	)		(134	)
Free cash flow		728			671

(1)

Free cash flow generation in 2003 remained strong, growing by CHF 57 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.

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.

Change in accounting policy and new accounting standards

There were no new accounting standards issued by the Financial Accounting Standards Board (FASB) or other authoritative standard setters that became effective during 2004 and that had a material effect on the Company’s financial statements. In addition, several other new accounting standards were issued by the FASB as of December 31, 2004 that were not required to be adopted during 2004, but will require adoption in 2005 or later. None of these issued but not yet adopted new accounting

standards is expected to have a material effect on the Company’s results of operations or financial position when adopted in the future. See Note 1 to Consolidated Financial Statements in Item 18 – 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 in Item 18 – 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, 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 adjusted 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 adjusted EBITDA margin (adjusted 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, adjusted EBITDA margin or free cash flow levels are achieved. The combination of these three indicators focuses management and employees on the profitable (adjusted 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.

Adjusted EBITDA

Adjusted EBITDA, and adjusted 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 have existed with regard to depreciation as some companies with which the Company competes have calculated and reported their depreciation expense based on tax considerations. As a result, it historically has been 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, adjusted EBITDA was determined to be a key performance measure because it eliminates the above-described major differences. For these reasons, management believes adjusted EBITDA also provides useful information to investors.

The material limitations associated with using adjusted EBITDA as a performance measure as compared to net income are that adjusted EBITDA:

does not include interest expense which, because the Company has borrowed money in order to finance its operations, is a necessary element of costs and ability to generate revenue. Therefore, any measure that excludes interest expense has material limitations. Management believes it compensates for this limitation by including net income, which includes interest expense, as another of its key financial indicators,

does not include depreciation and amortization expense which, because the Company uses capital assets is a necessary element of costs and ability to generate revenue. Therefore, any measure that excludes depreciation and amortization expense has material limitations. Management believes it compensates for this limitation by including net income, which includes depreciation and amortization expense, as another of its key financial indicators,

does not include taxes, the payment of which is a necessary element of the Company’s operations. Therefore, any measure that excludes tax expense has material limitations. Management believes it compensates for this limitation by including net income, which includes tax expense, as another of its key financial indicators, and

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 adjusted 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 distributions to shareholders in excess of CHF 2 per share and, as such, is limited to being used for this consideration only. Free cash flow should not be used to measure the residual cash flow that may be available for discretionary expenditures because of mandatory debt service requirements and other non-discretionary expenditures that are not deducted from the measure.

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 Consolidated Financial Statements.

Glossary of financial terms

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

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

Cash Flow Hedges are 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 Paper are 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 Income is 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 Bonds are debt instruments that may be converted into shares based on predefined conditions as stipulated in the debt agreement.

Defined Benefit Pension Plan is 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 Plan is 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 Instruments are 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 Share is 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.

Adjusted EBITDA is 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.

Adjusted EBITDA Margin is adjusted EBITDA expressed as a percentage of net sales.

Equity per Share is 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 Hedges are 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 Flow is 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.

Goodwill is 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 Margin is gross profit expressed as a percentage of net sales.

A Hedge is 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 Item is 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 Effectiveness is 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 Ineffectiveness is 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.

Intensity is 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.

Invested Capital is 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 Activities has the same meaning as Cash Flows from Operating Activities.

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

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

Net Sales Development percentage 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 currencies is 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 Margin is operating income expressed as a percentage of net sales

Other Intangible Assets are 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.

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. An overview of major differences between the Swiss and the U.S. corporate governance practices can be found at: http://www.cibasc.com/investors

The Board of Directors and its Committees
The Board of Directors of Ciba Specialty Chemicals (“Board”) 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 to allow for a staggered board [DCG 3.4.1]; a re-election is possible [DCG 3.4.1]. For an overview of the individual election terms, see the table on the next page [DCG 3.4.2]. 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 (to complement the Chairman of the Board) entitled to convene on his own and chair meetings of the Board; in addition the Lead Director chairs the Compensation Committee; based on interviews with other Board members, he prepares a review of the Chairman. He may act as a liaison between the Board and the Chairman in delicate matters

- broad supervisory and reviewing powers for the Board, directly supported by Internal Audit

- independence of Board Members who are all non-executives of the Company, with the exception of the Chairman

- independence of Board Committee Members who are equally all non-executives, with one exception being the Chairman serving on the Human Resources and Nomination and the Finance Committees

- having Audit Committee Members who are all non-executives with significant expertise particularly in the area of finance

- having Compensation Committee Members who are non-executives with broad practical experience in the area of employee and executive compensation

- an annual self-assessment of the Board

- receiving and providing continuous and comprehensive information 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 2004
Apart from the ongoing overall supervision of the Company’s affairs, corporate governance and the preparation of the annual accounts and the Annual General Meeting of the Shareholders, the Board put particular emphasis for the financial year 2004 on the following topics: group business strategy, M&A, IT and ERP strategy, and an assessment of Internal Audit.

Board Committees [DCG 3.5]
Four standing Board Committees in the areas of audit, finance, compensation and human resources/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, 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/ - About Us – Corporate Governance). 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.

Compensation Committee
Mission: Develops, recommends and reviews the group compensation principles in accordance with the overall Company objectives. Proposes compensation of the Members of the Board and of the Executive Committee to the full Board for approval [DCG 5.1]. The Lead Director is the chairman of the Compensation Committee.

Human Resources and Nomination Committee
Mission: Develops the principles for the selection of candidates for election or re-election to the Board by the AGM and prepares a selection of candidates in accordance with these criteria. In addition, the Human Resources and Nomination Committee recommends and reviews the objectives and principles of the human resource policy and its implementation. The Chairman of the Board is the chairman of the Human Resources and Nomination Committee.

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

Year

Date of

appointed

Year term

Significant positions and political mandates

Name

Birth

Nationality

to Board

expires

outside the Company [DCG 3.2.a/b/c]

Armin Meyer
Chairman and CEO

July 25, 1949

Swiss

1997

2008

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, Lausanne

Kurt Feller
Vice 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., Zurich

Erwin W. Heri

March 6, 1954

Swiss

1997

2007

Chairman of the Board of Directors, OZ Bankers AG, Pfäffikon
Member of the Board of Directors, Losinger AG, Berne
Member of the Board of Directors, Hilti AG, Schaan/FL
Chairman of the Investment Committee of State Pension (Publica), Berne

Gertrud Höhler

January 10, 1941

German

1997

2008

Management Consultant
Member of the Board of Directors, Bâloise-Holding, Basel
Member of the Board of Directors, Georg Fischer Ltd., Schaffhausen

Jean-Marie Pierre
Lehn

September
30, 1939

French

1997

2006

Professor of Chemistry, Nobel Prize Winner
Member of the Scientific Board of the Novartis Venture Fund, Basel

Peter 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, Massachusetts

Uli Sigg

April 29, 1946

Swiss

1999

2007

Vice-Chairman of the Board of Directors, Ringier Group

Thomas Koch
Secretary (not member of the Board)

November
21, 1954

German

2004

—

The Chairman of the Board and CEO [DCG 3.5.1]
The Chairman of the Board is elected by the Board from its Members. As such, Armin Meyer is responsible for the invitation to and the agenda of the Board meetings. He is responsible for the implementation of the Group strategy as defined by the Board, for optimizing shareholder value and for safeguarding the interests of other stakeholders. He represents the overall interests of the Company, ensures close cooperation between the Board and the Executive Committee and supervises the implementation of the resolutions adopted by the Board.

The Company has opted to combine the functions of Chairman and CEO. In the Board’s view the advantages of having fast decision making processes as well as the timely, complete and accurate information flow between the Board and the management of the Company, complemented by a strong Lead Director outweigh the potential risk the combination of the functions may have.

The CEO is appointed by the Board. In this function, Armin Meyer is responsible for the operational management and the overall financial results of the Group. He chairs the meetings of the Executive Committee and ensures the information flow inside and outside the Company.

The Vice-Chairman and Lead Director [DCG 3.5.1]
As Vice-Chairman, Kurt Feller represents the Chairman in the latter’s absence. As Lead Director, Kurt Feller’s primary function is to provide for effective checks and balances in the governance of the Company. He may convene and chair meetings without the Chairman being present. In addition he is, together with the Compensation Committee, responsible for the performance review of the Chairman and CEO and may act as a liaison between the Board and the Chairman in delicate matters.

Additional Information
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]. Other than as disclosed under “Change of Control Provisions” hereunder, there is no service contract between any Member of the Board and the Company providing for benefits upon termination of employment.

Board Committee Memberships [DCG 3.5.2]

Human Resources and

Compensation

Name

Audit Committee

Finance Committee

Nomination Committee

Committee

A. Meyer

K. Feller

E.W. Heri

G. Höhler

J.-M. P. Lehn

P. Littmann

U. Sigg

Δ = Chairman

l = Member

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 full Board meets at least 5 times per year. Normally, the duration of these meetings ranges between four and eight hours. In addition, in 2004, the Board held a two consecutive days retreat [DCG 3.5.3].

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 their Members must be personally present, which may be deemed satisfied if simultaneous communication is ensured, such as by telephone or video conference.

The Executive Committee [DCG 4, 4.1, 4.2]

Date of

Significant positions and political mandates

Name

Birth

Nationality

Function

outside the Company [DCG 4.2.a/b/c]

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, Lausanne

Michael Jacobi

January 30, 1953

German

Chief Financial Officer

Chairman of the Board of Industrie-Holding, Berne
Member of the Board of Phonak Holding AG, Stäfa

Christoph Biedermann

March 19, 1957

Swiss

Executive Vice President International Coordination and Human Resources

Member of the Board of SGCI (Schweiz. Gesellschaft für Chemische Industrie), Zurich

Martin Riediker

June 28, 1952

Swiss

Chief Technology
Officer

Member of the Board, American Chemistry Council, Arlington
Member of the Board, CIIT Centers for Health Research

Hermann Angerer

December 23, 1947

Swiss

Head Segment Coating
Effects

None

Eric Marohn

June 3, 1959

American

Head Segment Textile
Effects

None

Date of

Significant positions and political mandates

Name

Birth

Nationality

Function

outside the Company [DCG 4.2.a/b/c]

Mark Garrett

May 11, 1962

Australian

Head Segment Water &
Paper Treatment

Member of the Board of TEGEWA Industry Association, Frankfurt am Main

Brendan Cummins

May 18, 1951

Irish

Head Segment Plastic
Additives

None

Armin Meyer became 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 and 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 Jacobi joined 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, Switzerland in 1987 as Head of Management Accounting. He became Group Controller of Ciba-Geigy in 1990, and is responsible for the Company’s overall corporate financial accounting and reporting. In 1997, he was appointed Chief Financial Officer for Ciba Specialty Chemicals, and is responsible for Treasury, Mergers and Acquisitions, Investor Relations and Control. Michael Jacobi served on the Council of the Foundation for Accounting and Reporting Recommendations and played a significant role in setting Swiss guidelines for accounting and disclosure. He has a Doctorate in Economics from the University of St. Gallen.

Christoph Biedermann was appointed Head of International Coordination and Human Resources effective as of April 1, 2004. In 2001, Christoph Biedermann joined Ciba Specialty Chemicals as Member of the Executive Committee. He was global Head, Textile Effects Segment from 2001 to 2004. 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. From 1999 until he joined Ciba Specialty Chemicals, he was also 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.

Martin Riediker was 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 Angerer was 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 of the 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 (ETH) in Zurich.

Eric Marohn was appointed Head of the Textile Effects Segment effective as of April 1, 2004. He joined Ciba-Geigy in 1988 in the United States. He held a number of positions in the U.S. and in Basel, Switzerland, as Manager of Production Cost Accounting, Manager of Planning and Reporting and as Controller. In 1997, he took on the role of Global Marketing Head of the Business Segment Whiteners in the Consumer Care Division at Ciba Specialty Chemicals’ headquarters in Basel. In 2000, he returned to the U.S. where he was responsible for the Business Unit Textile Chemicals for North and Central America. Starting in 2001, he was Regional Head for the Business Line Paper and the Segment Representative for Water & Paper Treatment in NAFTA. From 2003 until becoming Head of the Textile Effects Segment, he

headed Marketing and Sales for the Textile Effects Segment in North and South America. Eric Marohn has a B.S.B.A. degree from Appalachian State University and holds an MBA from the University of North Carolina at Greensboro.

Mark Garrett was 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, Australia and Master of Applied Information Systems, Royal Melbourne Institute of Technology, Melbourne.

Brendan Cummins was appointed Head of the Plastic Additives Segment effective as of April 1, 2004. 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 the 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. In December 2001, he joined Ciba Specialty Chemicals as a Member of the Executive Committee. From 2001 to 2004, he was Executive Vice-President, International Coordination and Human Resources. He has a degree in accounting and is a Fellow of The Association of International Accountants.

There are no management agreements or other agreements between the Company or its management bodies and any third parties [DCG 4.3] providing for any persons referred to above to be elected a Member of the Company’s Executive Committee.

Changes since December 31, 2003
Felix Meyer, Head of the Plastic Additives Segment, resigned from the Company at the end of March, 2004. With effect from April 1, 2004, Brendan Cummins took over Felix Meyer’s position and was succeeded by Christoph Biedermann as Head of International Coordination and Human Resources. At the same date, Eric Marohn took over as Head of the Textile Effects Segment. Tim Schlange was Head of the Home & Personal Care Segment until the end of August, 2004, when the integration of the Segment’s businesses in two other of the Company’s segments began. Tim Schlange then became Ciba’s Chief Strategy Officer.

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/code-of-conduct-revised-2003_en.pdf). In 2004, 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
Principles of allocation [DCG 5.1]
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 short term bonuses are based on corporate financial performance, i.e. on free cash flow, adjusted EBITDA and sales growth measured against relevant targets which are established at the beginning of the year. Long term incentives are awarded primarily based on how individual and personal performances contribute to the overall success of the Company. The allocation of these compensatory elements is discussed in the Compensation Committee of the Board of Directors, which 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.

Deviation from accrual principle [DCG 5]
The official commentary to the Directive on Information Relating to Corporate Governance requires the disclosure of management compensation according to the accrual principle. Adherence to this principle would entail that payments received and payments made are not to be accounted for at the time of their receipt or transfer, but rather allocated to the specific periods to which they are attributable in economic terms. As the Company reports its financial results in early February and holds its AGM in early March, there is not enough time for all the performance reviews to be conducted with the Company’s top executives. These reviews are a pre-condition for the determination of the incentive payments. The Company therefore reports amounts effectively paid in the reporting period, irrespective of the period to which they are economically attributable.

Non-executive Members of the Board [DCG 5.2.2.b]
In 2004, the non-executive Members of the Board in the aggregate received as gross remuneration, bonuses and other benefits a total of CHF 702,549 [DCG 5.2.1]. In addition, they were granted 6,740 Shares by the Company [DCG 5.4.b] and held a total of 23,292 Shares as at December 31, 2004 (including those allocated in 2004) [DCG 5.5.b].

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



							Strike price
Year	Term of allocation (years)		Subscription ratio		Number		(CHF)
1997		8		1:1		23632		107.16
1998		5		1:1		3284		163.70
1999		5		1:1		4108		110.60
2000		5		1:1		2562		105.40
2001		5		1:1		6892		109.20
2002		5		1:1		9280		109.00

The Company did not grant any options to non-executive Members of the Board in 2003 or in 2004.

Executive Member of the Board and Members of the Executive Committee [DCG 5.2.2.a]
In 2004, the executive Member of the Board and the Members of the Company’s Executive Committee in the aggregate received as gross salaries, bonuses and other benefits, inclusive of any voluntary Company pension contributions, a total of CHF 8,199,355 [DCG 5.2.1]. In addition, they were granted 56,593 Shares by the Company (of which most are restricted) [DCG 5.4.a] and held a total of 133,859 Shares as at December 31, 2004 (including those allocated in 2004) [DCG 5.5.a].

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



							Strike price
Year	Term of allocation (years)		Subscription ratio		Number		(CHF)
1997		8		1:1		63624		107.16
1998		5		1:1		18613		163.70
1999		5		1:1		28970		110.60
2000		5		1:1		23549		105.40
2001		5		1:1		65672		109.20
2001 Supplementary grant	4y and 10.5 months			1:1		19572		109.20
2002		5		1:1		135640		109.00

The Company did not grant any options to the executive Member of the Board nor to the Members of the Company’s Executive Committee in 2003 or in 2004.

Highest total compensation [DCG 5.9]
In 2004, 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 gross CHF 2,407,477. In addition, in 2004, this person was allocated 13,641 restricted Shares and 2,623 unrestricted Shares.

Additional fees and loans
None of the above mentioned persons has received any fees or any compensation for services rendered to the Company during 2004 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 2004, one former Member of the Executive Committee has received total compensation of gross CHF 292,063 [DCG 5.3.2.a]. This amount includes voluntary Company pension contributions. In 2004, the Company did not make any payments to former non-executive Members of the Board [DCG 5.3.2.b]. In the reporting period, Felix Meyer, Member of the Executive Committee, left the Company. In the same period, no Member of the Board left the Company [DCG 5.2.3].

Closely Linked Persons
The Company has not made any share [DCG 5.4], option [DCG 5.6] or any cash contribution [DCG 5.2] to any Closely Linked Person, i.e. to a third party that 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].

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 are 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 that 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.

Employees
The Company employees worldwide totaled 19 337 in 2004, 18 658 in 2003 and 19 007 in 2002. The following table shows the number of employees at the end of December 31, 2004, 2003 and 2002.



2004	Europe		Americas		Asia-Pacific		Total
Plastic Additives		1 927		1 127		655		3 709
Coatings Effects		2 956		409		543		3 908
Water & Paper Treatment		2 569		995		626		4 190
Textile Effects		2 007		586		935		3 528
Non-Segment		2 274		930		798		4 002
Total Company		11 733		4 047		3 557		19 337



2003	Europe		Americas		Asia-Pacific		Total
Plastic Additives		1 821		1 179		639		3 639
Coatings Effects		3 000		407		511		3 918
Water & Paper Treatment		2 136		1 019		474		3 629
Textile Effects		2 087		550		899		3 536
Non-Segment		2 235		923		778		3 936
Total Company		11 279		4 078		3 301		18 658



2002	Europe		Americas		Asia-Pacific		Total
Plastic Additives		1 806		1 236		583		3 625
Coatings Effects		3 023		396		491		3 910
Water & Paper Treatment		2 209		1 060		472		3 741
Textile Effects		2 202		611		848		3 661
Non-Segment		2 248		969		853		4 070
Total Company		11 488		4 272		3 247		19 007

Organizational and capital 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 American Depositary Shares (“ADSs”) trade on the New York Stock Exchange See Item 9 — The Offer and Listing. As at December 31, 2004, the Company’s market capitalization amounted to CHF 5 721 139 843 (66 140 345 shares at a price of CHF 86.50 each).


Security	Stock exchange	Ticker symbol	Security number	ISIN code

Share with CHF 3 nominal value	SWX/virt-x	CIBN	581 972	CH 000 581972 4

ADS	NYSE	CSB	CUSIP: 17162 W206	N/A

The Company’s nominal Share capital amounts to CHF 212 459 871 and is divided in 70 826 617 Shares with a nominal value of CHF 3 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. On May 7, 2004, the nominal value per Share was reduced for a third time, to CHF 3 per Share, giving effect to a resolution of the Company’s shareholders taken on February 26, 2004 [DCG 2.1/2.3].

The Board of Directors proposes to the shareholders of the Company to further reduce the Company’s Share capital from CHF 3 per Share to CHF 1 per Share and by making a corresponding cash payment to the Company’s shareholders of CHF 2 per Share. The shareholders will vote on this proposal at the Company’s AGM on March 3, 2005. In addition, the Board will propose to the Company’s shareholders to reduce the Company’s share capital by the cancellation of 1 762 000 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 capitals [DCG 2.2/2.3]:



	Nominal		Ordinary
Date of Articles of	value of		share							Conditional capital for
Association	Shares		capital			Authorized capital		Conditional capital		employee participation
Article in Articles
of Association	4 para. 1					4 para. 3		4 para. 4		4 para. 5
						number	nominal	number of	nominal	number of	nominal
						of Shares	value	Shares	value	Shares	value
						(million)	(CHF)	(million)	(CHF)	(million)	(CHF)
	(CHF)		(CHF)				(million)		(million)		(million)
April 20, 1998		10		721 301 170		4	40	4	40	2	20
March 22, 2002		9		649 171 053		4	36	4	36	2	18
March 6, 2003		6		432 780 702		4	24	4	24	2	12
February 26, 2004		3		212 479 851		4	12	4	12	2	6
Proposal to AGM 2005		1		69 064 617	⁽ⁱ⁾	4	4	4	4	2	2

(i)

Reflects both the proposed cancellation of 1 762 000 Shares and the reduction of the nominal value of each Share to CHF 1.

Should the shareholders approve the above mentioned Share capital reduction at the Company’s 2005 AGM through a repayment of CHF 2 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 (“Articles”), which can be downloaded (http://www.cibasc.com/index/cmp-index/cmp-about/cmp-abo-corporategovernance.htm). The German version, which is legally binding, can be downloaded from the same internet address.

For information about the Company’s major shareholders see Item 7 — Major Shareholder and Related Party Transactions in the Annual Report. Updated information can be retrieved from the SWX Swiss Exchange (http://www.swx.com/admission/being_public/disclosure_en.html). 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 Segments 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 2004, 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 2004, 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 resolution on the restriction to vote and on the removal of such a restriction is subject to the approval of 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 she or he holds Shares representing a nominal value of at least CHF 300 000. If, at the Company’s AGM to be held on March 3, 2005, the shareholders approve the motion of the Board to reduce the nominal value of each Share from CHF 3 to CHF 1, the amount required to have an item put on the agenda will be proposed to be reduced accordingly from CHF 300 000 to CHF 100 000.

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]. For the AGM to be held on March 3, 2005, the Company published the deadline date (January 3, 2005) on its web-site on December 10, 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 provisions 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 or proposed to pay the following amounts per Share:



	dividend payment		capital reduction payment
AGM Year	(CHF)		(CHF)
1998		2		0
1999		2		0
2000		2		0
2001		2		0



	dividend payment		capital reduction payment
AGM Year	(CHF)		(CHF)
2002		2		1
2003		0		3
2004		0		3
2005⁽ⁱ⁾		1		2

⁽ⁱ⁾

For the financial year 2004, the Board proposes to the shareholders to pay a dividend of CHF 1 per Share and to make an additional cash payment of CHF 2 per Share from a capital reduction. The shareholders will vote on these proposals at the Company’s AGM of shareholders on March 3, 2005. If the shareholders approve these proposals, the dividend payment is expected to be made on March 8, 2005, while the payment stemming from the capital reduction is expected to be made on May 18, 2005.

Equity linked instruments [DCG 2.7]

With the exception of the Company’s employee participation programs, the Company had no equity linked debt outstanding.

Additional Information

Change of control provisions [DCG 7.1]

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, the Company has no opting out or opting up provisions [DCG 7.1].

According to employee retention agreements with the Company, all members of the Executive Committee plus three senior managers are entitled to payments for severance resulting from a change of control. For ten executives, such payments would on average amount to less than twice that of a total annual compensation. One member of the Executive Committee has a contractual provision according to which he would be entitled to receive somewhat less than two and a half times that of his total annual compensation. [DCG 7.2].

Auditors [DCG 8]

The Company’s auditors are Ernst & Young Ltd, Zurich. They have been elected by the shareholders at the 2004 AGM until the AGM 2005 [DCG 8.1.1]. The Board, which bases its proposal upon a recommendation made to it by the Audit Committee, will propose that Ernst & Young Ltd be re-elected for another year. At the Company’s AGM to be held on March 3, 2005, the shareholders will vote on this proposal.

Ernst & Young Ltd’s lead audit partner, Cherrie Chiomento, has supervised the Company’s audit since 2004 [DCG 8.1.2].

Fees paid by the Company in 2004 and 2003 to its auditors were as follows [DCG 8.2/8.3]:



	2004				2003
	thousand		in % of		thousand		in % of
	CHF		total fees		CHF		total fees
Audit fees		5 704		93		3 927		76
Audit-related fees		2		0		237		5
Tax fees		381		6		827		16
All other fees		44		1		165		3
Total fees		6 131		100		5 156		100

Audit related work includes services in connection with the Company’s pension plans. Tax services include tax filings, transfer pricing studies and tax advice, including with regard to VAT. Other services included assistance with translation and credit agency matters. 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). 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 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 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 furnished 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/browse-edgar?action=getcompany&CIK=0001035497&owner=include).

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 AGM is also sent to the registered shareholders by mail. In addition, the Company publishes the AGM meeting notice in several newspapers in Switzerland. The site http://www.cibasc.com/agm contains all AGM relevant information, including the AGM minutes.

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 and to Group Communications +41 61 636 4444.

Share Ownership

The Company applies 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 reduced the exercise price of its then outstanding stock options (“the capital reduction repricing”). No compensation expense was recorded as a result of those capital reduction repricings. For the Leveraged Executive Asset Plan, which is described below, the capital reduction repricing in 2003 was set by the investment bank. All exercise prices disclosed herein have been adjusted to reflect the capital reduction repricings. In connection with the capital reduction of CHF 3 per share in 2004, the exercise price of outstanding stock options was not changed.

LEAP — As of December 31, 2004, a total of 1 042 782 share options that were granted in connection with one-time Leveraged Executive Asset Plan (LEAP) were outstanding. The options were granted in 1997 to the Company’s then key executives and non-executive Board members (participants), have an expiration date of March 15, 2005, and permit the holder thereof to purchase shares of the Company’s common stock at a price per share of CHF 107.16. 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 28, 2005, no additional share options have been exercised or returned to the Company, as compared to December 31, 2004.

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, other key employees and, in 2002, 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, 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. As a result of the adoption by the Company in 2003 of SFAS No. 123 as amended, compensation expense of approximately CHF 3 million in 2004 (CHF 5 million in 2003) 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 for the three year period ended December 31, 2004 and from January 1, 2005 through January 28, 2005:



	Weighted average		Stock options
	exercise price		outstanding

Balance at December 31, 2001		119.63		1 778 449
Options granted		108.80		481 401
Options exercised		108.99		(32 098	)
Options canceled/forfeited		111.07		(32 413	)

Balance at December 31, 2002		117.53		2 195 339

Options granted		82.60		176 627
Options exercised		0		0
Options canceled/forfeited		105.02		(26 989	)
Options expired		160.00		(264 355	)

Balance at December 31, 2003		109.34		2 080 622

Options granted		95.30		81 024
Options exercised		82.60		(2 762	)
Options canceled/forfeited		114.48		(72 239	)
Options expired		109.60		(314 888	)

Balance at December 31, 2004		108.32		1 771 757

Options granted		0		0
Options exercised		0		0
Options canceled/forfeited		0		0
Options expired		111.40		(3 792)

Balance at January 28, 2005		108.31		1 767 965

The following table summarizes the status of stock options outstanding and exercisable at January 28, 2005:

Stock options outstanding

Stock options exercisable

Weighted average

exercise price

Number of

remaining

Number of

remaining

Exercise price

- outstanding/

outstanding

contractual life

outstanding

contractual life

range

exercisable

options

(in years)

options

(in years)

82.60-111.40

104.76/106.09

1 654 233

3.6

1 062 287

3.2

160.00

160.00/160.00

113 732

2.9

113 732

2.9

1 767 965

1 176 019

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.

In connection with the LTIP 2004, the Company granted 154 996 restricted shares of common stock, which are restricted for three years from the date of grant, to 705 participants. The market value of the common stock at date of grant was CHF 95.30 per share. Compensation expense of approximately CHF 15 million has been recognized in 2004 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. These shares are restricted from resale for a period of three years from the date of purchase. During 2004, 1 590 employees (2003: 1 768 employees; 2002: 1 660 employees) purchased 28 715 shares (2003: 32 221 shares; 2002: 29 499 shares) for which approximately CHF 2 million (2003: CHF 2 million; 2002: CHF 3 million) was paid to the Company. In 2002, no compensation expense was recorded under this plan. In 2004, CHF 0.4 million (2003: CHF 0.4 million) compensation expense was recorded in connection with the application of SFAS No. 123.

In the period from January 1, 2005 through January 28, 2005, no shares have been purchased under the plan.

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 25 shares (prior to 2003, 20 shares) of common stock at CHF 15 per share (as 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 for the three year period ended December 31, 2004 and from January 1, 2005 through January 28, 2005:



	Exercise price		Rights outstanding

Balance at December 31, 2001		15		302 740
Rights granted		15		86 040
Rights exercised		15		(18 500	)

Balance at December 31, 2002		15		370 280

Rights granted		15		105 275
Rights exercised		15		(20 005	)

Balance at December 31, 2003		15		455 550

Rights granted		15		104 200
Rights exercised		15		(22 955	)

Balance at December 31, 2004		15		536 795

Rights granted		15		102 475
Rights exercised		15		(2 750)

Balance at January 28, 2005		15		636 520

Compensation expense is recorded in the year the rights are granted and, in 2004, CHF 9 million (2003: CHF 9 million; 2002: CHF 8 million) of compensation expense was recorded under this plan.

PSP — The Company’s Performance Share Plan (PSP) expired in 2004. The PSP in 2001 had granted selected senior and key management and non-executive Board members the right to receive up to an aggregate 346 800 shares of common stock of the Company if certain future conditions were met. As these conditions were not met, no shares were issued under the PSP. In 2003, in accordance with the adoption of SFAS No. 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 and 33.33 percent for LTIP, each such amount being a percentage of total voting rights), the vesting and restriction periods for the plans stated above 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, 2004, the Company had approximately 2.0 million shares (2003: 2.2 million shares; 2002: 2.0 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-47

Item 7. Major Shareholders and Related Party Transactions.
Major Shareholders

According to the Share Registrar of the Company and other publicly available information (Database on Disclosure of Shareholdings maintained by SWX Swiss Exchange). As of January 28, 2005 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			January 30,			January 31,
	28, 2005			2004			2003
Artisan Partners Limited, USA-Wisconsin		—			—			5.0	%
Chase Nominees Ltd, London*		4.8	%		5.6	%		5.3	%
Mellon Bank N.A., Everett*		—			2.6	%		—
Putnam Group, Boston		2.0	%		—			5.2	%

(*) Registered as nominees.

As of January 28, 2005, according to the Share Register, there were 182 registered holders of ordinary shares in the United States. These ordinary shareholders in the United States collectively held 1 357 492 ordinary shares, or approximately 1.92 percent of the Company’s total issued and outstanding Shares as of that date. Also as of January 28, 2005, there were 269 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 923 122 ADRs, or approximately 0.65 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-47.

The Company has a number of joint ventures with, and other equity investments in other companies. It has relationships with many of these entities in the ordinary course of business whereby it buys and sells a wide variety of products and services.

Item 8. Financial Information.
Consolidated Financial Statements

See Item 18 — Financial Statements and pages F-1 through F-47

Other Financial Information
Export Sales

The Company’s products and services are primarily sold outside of its home market, Switzerland. In 2004, approximately 98 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.

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.

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 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.

For 2001, the shareholders approved the Board’s proposal to pay a dividend of CHF 2 per share at the Company’s Annual General Meeting held on March 22, 2002. 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 made the payment of the capital reduction on May 23, 2003.

For 2003 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 February 26, 2003. The capital reduction was effected by 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 made the payment of the capital reduction on May 14, 2004.

For 2004 the Board of Directors proposes to pay a dividend of CHF 1 per share and to make an additional cash payment to its shareholders resulting from a capital reduction of CHF 2 per Share. Both dividend payment and capital reduction are subject to shareholder approval at the Annual General Meeting to be held on March 3, 2004. If approved, the capital reduction will take the form of a reduction in the nominal value of each share from CHF 3 per Share by CHF 2 per Share to CHF 1 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 18, 2005. Dividend payment is expected to be made on March 8, 2005.

For additional information on dividends, see Item 6 — Directors, Senior Management and Employees.

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.

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 Share
	High		Low		High		Low
Annual highs and lows	in CHF				in USD

2000		122.50		94.25		75.61		58.17

2001		115.75		75.00		69.74		45.19

2002		128.00		89.75		92.53		64.88

2003		101.50		74.75		81.99		60.38

2004		96.14		76.70		81.81		59.77

Quarterly highs and lows

2003

First Quarter		101.50		74.75		74.18		55.21

Second Quarter		94.00		79.85		70.17		60.66

Third Quarter		98.65		80.25		74.69		58.42

Fourth Quarter		98.20		84.50		79.32		65.42

2004

First Quarter		96.14		82.24		75.84		64.87

Second Quarter		90.70		82.05		72.44		65.54

Third Quarter		89.70		76.70		71.93		61.50

Fourth Quarter		86.50		78.00		75.80		68.35

Monthly highs and lows

2004

July		89.50		85.55		69.94		66.86

August		89.65		76.90		70.92		60.83

September		79.75		76.70		63.95		61.50

October		82.95		78.00		69.19		65.07

November		83.95		82.25		73.50		72.02

December		86.50		82.60		75.80		72.38

2005

January (through January 28)		86.55		83.40		72.88		70.23

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.


Trading Prices on the New York Stock Exchange	Price per ADR⁽¹⁾
	High		Low
	in USD
Annual highs and lows

2000 (from August 2, 2000)		33.25		26.88

2001		35.44		24.00

2002		40.60		30.83

2003		38.75		28.25

2004		40.61		30.10

Quarterly highs and lows

2003

First Quarter		36.60		28.25

Second Quarter		35.31		30.29

Third Quarter		35.57		30.05

Fourth Quarter		38.75		31.50

2004

First Quarter		40.61		33.80

Second Quarter		36.35		31.92

Third Quarter		36.58		30.10

Fourth Quarter		38.23		31.25

Monthly highs and lows

2004

July		36.58		34.19

August		35.20		30.10

September		31.41		30.45

October		34.54		31.25

November		36.39		34.21

December		38.23		35.88

2005

January (through January 28)		37.73		35.45

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

On January 28, 2005, the last reported sale price was for Shares on the Swiss Exchange CHF 85.05 and for ADRs on the New York Stock Exchange USD 35.86. According to the Share Registrar of the Company, as of December 31, 2004, there were 180 United States resident shareholders holding 1 315 011 Shares, representing approximately 1.86 percent of the issued and outstanding Shares as of such date, and there were 269 registered United States resident holders of American Depositary Receipts holding 923 122 ADRs, representing approximately 0.65 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 Quarter
2004		380 762		342 204		287 579		289 824
2003		419 000		316 000		343 000		496 000

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 Quarter
2004		4 287		2 511		5 353		3 073
2003		5 150		3 140		2 930		3 680

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, which is supervised by the Swiss Federal Banking Commission. Securities traded on the Swiss Exchange include shares (374), investment funds (20), exchange traded funds (26), bonds (1 268) and derivatives (4 527). In 2004, the exchange turnover achieved in a total of 14.7 million transactions amounted to CHF 766.5 billion.

The Company is included in the SMI®, the Swiss Market Index, an index that as at December 31, 2004, comprised shares of the 27 largest most liquid stocks in the Swiss equity market. At the same date, the market capitalization of the SMI® issuers amounted to CHF 697 billion.

With the creation of virt-x in London in 2001, the SWX Group 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.

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 that 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 that 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 70th 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.

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./N.V. 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.

Annual General Meetings

For information on annual general meetings, see also Item 6 — Directors, Senior Management and Employees.

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 capital 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 that 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.

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 each Annual General Meeting held on April 13, 2000, March 22, 2002, and February 26, 2004, the shareholders consented to extend this authorization for another two years.

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.

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.

Material Contracts
ADR Deposit Agreement

Pursuant to the 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. As of December 31, 2004, approximately CHF 705 million (USD 613 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 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. However, the Company might be entitled to settle its withholding tax obligations by simply notifying the Swiss Federal Tax administration if the distribution is paid to a Swiss resident company holding at least 20 percent of the Company’s equity. 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 an 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:

•   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, 2004. 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

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 2004, 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, 2004, 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 60 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 81 million as of December 31, 2004. 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, 2004, a hypothetical one percentage point increase in interest rates for a one-year period would have reduced net income by CHF 3 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.

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, 2004, 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 ensure that information required to be disclosed by the Company in the reports that it files or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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 to 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 Company's auditors, see Item 6 — Directors, Senior Management and Employees — Auditors.

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

Not applicable

Item 16E. Purchases of Equity Securities by the Company


	Number of shares purchased
	Purchases outside		Purchases under				Percentage of the
	share buy-back		share buy-back				monthly trading		Monthly trading		Average price paid
Period	program		program		Total purchases		volume		volume		(CHF)

January		25 000		0		25 000		0.35		7 149 141		96.54

February		169 439		1 068 000		1 237 439		9.90		12 502 878		94.37

March		298 265		694 000		992 265		9.56		10 382 276		88.72

April		95 325		0		95 325		0.90		10 646 944		86.70

May		294 158		0		294 158		3.15		9 335 232		88.14

June		64 343		0		64 343		0.66		9 798 848		86.28

July		0		0		0		0.00		5 529 864		0.00

August		381 536		0		381 536		2.98		12 795 714		79.44

September		440 527		0		440 527		5.53		7 972 302		77.67

October		0		0		0		0.00		13 780 748		0.00

November		49 648		0		49 648		0.60		8 211 086		80.84

December		9 221		0		9 221		0.11		8 393 362		81.70




Average		152 289		146 833		299 122				9 708 200		88.11

Total		1 827 462		1 762 000		3 589 462		3.08		116 498 395

The Company’s Share buy-back program over the second trading line began on August 27, 2003 and ended on August 26, 2004. Until the end of 2003, the Company had repurchased 1 303 500 shares. Its Annual General Meeting approved the cancellation of these Shares. From January 1, 2004 until the end of the Share buy-back program, the Company purchased another 1 762 000 Shares, which are proposed to be cancelled. The shareholders will vote on this proposal at the Company’s Annual General Meeting on March 3, 2005.

Under Swiss law (art. 659 para. 1 Swiss Code of Obligations), a company is allowed to purchase and to hold a maximum of 10 percent of its own shares, subject to certain exceptions. Before May 7, 2004, these 10 percent corresponded to a maximum of 7 213 011 Shares the Company could have acquired; as a consequence of the cancellation of 1 303 500, the maximum number of Shares the Company would have been allowed to acquire after the said amounted to 7 082 662.

Shares purchased but not cancelled are held as treasury stock and may be sold back to the market.

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-47

Item 19. Exhibits

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


Index to Consolidated Financial Statements	Page

Report of Independent Auditors — Ernst & Young Ltd		F-2

Consolidated Statements of Income for the Years ended December 31, 2004, 2003 and 2002		F-3

Consolidated Balance Sheets at December 31, 2004 and 2003		F-4

Consolidated Statements of Cash Flows for the Years ended December 31, 2004, 2003 and 2002		F-5

Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2004, 2003 and 2002		F-6

Business Segment Data		F-7

Geographic Data		F-10

Notes to Consolidated Financial Statements		F-11

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 February 26, 2004.

**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 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)

Report of Independent Registered Public Accounting Firm

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, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

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”. The Company also changed its method of accounting for stock-based employee compensation in 2003.

As discussed in Note 1 to the consolidated financial statements, the Company has restated its consolidated financial statements as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004.

/s/ ERNST & YOUNG LTD

Zurich, Switzerland
January 30, 2005,
except for the Restatement section of Note 1
the date of which is January 30, 2006

F-2

Consolidated Statements of Income

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



Year ended December 31,	Notes		2004			2003			2002

			As restated^(a)			As restated^(a)			As restated^(a)
Net sales				7 027			6 646			7 085
Cost of goods sold				(4 856	)		(4 579	)		(4 729	)
Gross profit				2 171			2 067			2 356
Selling, general and administrative				(1 225	)		(1 193	)		(1 266	)
Research and development				(288	)		(281	)		(294	)
Amortization of other intangible assets		8		(47	)		(33	)		(33	)
Income from earnings of equity affiliates		9		1			3			6
Restructuring and special charges		23		(91	)		0			0
Operating income				521			563			769
Interest expense				(141	)		(142	)		(159	)
Interest income				33			34			49
Other financial expense, net				(39	)		(24	)		(105	)
Income from continuing operations before income taxes
and minority interest				374			431			554
Provision for income taxes		14		(92	)		(81	)		(122	)
Minority interest				(4	)		(5	)		(13	)
Income from continuing operations ⁽ⁱ⁾				278			345			419
Income from discontinued operations, net of tax		21		28			0			0
Income before cumulative effect of change in accounting principles				306			345			419
Cumulative effect of change in accounting principles, net of tax		1		0			(16	)		0
Net income ⁽ⁱ⁾				306			329			419
Earnings per share, basic and diluted		19
Continuing operations ⁽ⁱ⁾				4.21			5.05			6.12	⁽ⁱⁱ⁾
Discontinued operations				0.43			0.00			0.00
Cumulative effect of change in accounting principles				0.00			(0.23	)		0.00
Net income per share ⁽ⁱ⁾				4.64			4.82			6.12	⁽ⁱⁱ⁾

Weighted average shares outstanding
Basic				66 059 479			68 361 123			68 549 964
Diluted				66 059 479			68 361 123			72 036 457


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

⁽ⁱ⁾

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, net of tax would have been — in 2002 CHF 408 million; pro forma basic earnings per share for income from continuing operations would have been - in 2002 CHF 5.96; pro forma diluted earnings per share for income from continuing operations would have been — in 2002 CHF 5.95; pro forma net income would have been — in 2002 CHF 408 million; pro forma basic per share for net income would have been — in 2002 CHF 5.96; pro forma diluted earnings per share for net income would have been — in 2002 CHF 5.95. See note 17.


⁽ⁱⁱ⁾	For 2002, the figures presented are only basic per share amounts. Diluted per share amounts for 2002 are CHF 6.11 for both income from continuing operations and net income.

See notes to consolidated financial statements

F-3

Consolidated Balance Sheets

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



December 31,	Notes		2004			2003

			As restated^(a)			As restated^(a)
Assets
Current assets
Cash and cash equivalents				1 614			2 386
Short-term investments				22			11
Accounts receivable, net		4		1 064			940
Inventories		5		1 292			1 231
Prepaid and other current assets				389			368
Total current assets				4 381			4 936
Property, plant and equipment, net		6		3 015			2 963
Goodwill		7		1 561			1 358
Other intangible assets, net		8		823			647
Financial investments		9		180			147
Other assets		10		1 036			1 044
Total assets				10 996			11 095

Liabilities and shareholders’ equity
Current liabilities
Accounts payable				634			528
Short-term debt		12		559			259
Income taxes payable				116			152
Accruals and other current liabilities		11		831			841
Total current liabilities				2 140			1 780
Long-term debt		13		2 917			3 187
Deferred income taxes		14		413			396
Other liabilities		15		1 306			1 417
Total liabilities				6 776			6 780
Minority interest				68			62
Shareholders’ equity		16
Common stock ⁽ⁱ⁾				212			433
Additional paid-in capital				4 146			4 229
Retained earnings				843			536
Accumulated other comprehensive loss				(575	)		(499	)
Treasury stock, at cost ⁽ⁱⁱ⁾				(474	)		(446	)
Total shareholders’ equity				4 152			4 253
Total liabilities and shareholders’ equity				10 996			11 095


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements


(i)	Par value CHF 3 per share (December 31, 2003: CHF 6 per share), 80 826 617 shares authorized and 70 826 617 shares issued as of December 31, 2004 (82 130 117 shares authorized and 72 130 117 shares issued as of December 31, 2003).

(ii) December 31, 2004: 4 686 272 treasury shares; December 31, 2003: 4 363 901 treasury shares.

See notes to consolidated financial statements

F-4

Consolidated Statements of Cash Flows

(in millions of Swiss francs)



Year ended December 31,	2004			2003			2002

	As restated^(a)			As restated^(a)			As restated^(a)
Cash flows from operating activities
Net income		306			329			419
Deduct income from discontinued operations, net of tax		(28	)		0			0
Income from continuing operations		278			329			419
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		394			366			385
Deferred income taxes		24			30			18
Restructuring and special charges		91			0			0
Restructuring payments		(11	)		0			(12	)
Loss (gain) on sale/disposal of assets, net		(2	)		(7	)		2
Realized (gain) loss on available-for-sale securities		0			(12	)		38
Minority interest and other non-cash items, net		83			25			180
Changes in operating assets and liabilities:
Short-term investments		(8	)		5			25
Accounts receivable, net		(60	)		56			4
Inventories		(45	)		173			(11	)
Accounts payable		34			(9	)		90
Other operating assets and liabilities		(147	)		77			(100	)
Net cash provided by operating activities		631			1 033			1 038

Cash flows from investing activities
Capital expenditures		(294	)		(233	)		(250	)
Proceeds from sale of assets		21			67			22
Sale (acquisition) of businesses, net of cash ⁽ⁱ⁾		(810	)		(71	)		(116	)
Loans and other long-term assets		32			(2	)		(5	)
Net cash used in investing activities		(1 051	)		(239	)		(349	)

Cash flows from financing activities
Increase (decrease) in short-term debt, net		51			(25	)		22
Proceeds from long-term debt		31			715			1
Repayments of long-term debt		(27	)		(1 084	)		(19	)
Dividends paid		0			0			(134	)
Capital reduction paid		(197	)		(206	)		(69	)
Treasury stock transactions		(162	)		(142	)		344
Other		0			0			(1	)
Net cash provided by (used in) financing activities		(304	)		(742	)		144

Effect of exchange rate changes on cash and cash equivalents		(48	)		(27	)		(74	)
Net (decrease) increase in cash and cash equivalents		(772	)		25			759
Cash and cash equivalents, beginning of year		2 386			2 361			1 602
Cash and cash equivalents, end of year		1 614			2 386			2 361

Supplemental cash flow information
Cash paid for interest		(144	)		(103	)		(177	)
Cash paid for income taxes		(108	)		(60	)		(90	)


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements


(i)	Sale (acquisition) of businesses, net of cash, includes cash paid for acquisitions and cash payments attributable to the divestment in 2000 of the Performance Polymers business. See note 21.

See notes to consolidated financial statements

F-5

Consolidated Statements of Shareholders’ Equity

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



												Accumulated			Treasury			Treasury
						Additional						other compre-			stocks:			stocks:
			Common			paid-in			Retained			hensive			Unreserved			Reserved
	Notes		stock			capital			earnings			loss			shares			shares			Total

						As restated^(a)			As restated^(a)			As restated^(a)									As restated^(a)
Balance at December 31, 2001 as previously reported				721			3 957			(74	)		(240	)		(65	)		(391	)		3 908
Correction of errors in previously reported amounts							20			(5	)		3									18
Balance at December 31, 2001							3 977			(79	)		(237	)		(65	)		(391	)		3 926
Net income										419												419
Currency translation adjustments													(91	)								(91	)
Realization of previously unrealized loss on available-for-sale securities, net of tax of CHF 16		9											28									28
Unrealized 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									1
Minimum pension liability adjustment, net of tax of CHF 37		18											(58	)								(58	)
Comprehensive income (loss)										419			(125	)								294
Cash dividends declared and paid ⁽ⁱ⁾										(134	)											(134	)
Capital reduction paid ⁽ⁱⁱ⁾				(72	)		3															(69	)
Treasury stock transactions		16					216									(13	)		150			353
Other							9			2												11
Balance at December 31, 2002				649			4 205			208			(362	)		(78	)		(241	)		4 381
Net income										329												329
Currency translation adjustments													(135	)								(135	)
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									5
Minimum pension liability adjustment, net of tax of CHF 1		18											(2	)								(2	)
Other													(1	)								(1	)
Comprehensive income (loss)										329			(137	)								192
Capital reduction paid ⁽ⁱⁱ⁾				(216	)		10															(206	)
Treasury stock transactions		16					3									11			(138	)		(124	)
Other							11			(1	)											10
Balance at December 31, 2003				433			4 229			536			(499	)		(67	)		(379	)		4 253
Net income										306												306
Currency translation adjustments													(76	)								(76	)
Other ⁽ⁱⁱⁱ⁾													0									0
Comprehensive income (loss)										306			(76	)								230
Capital reduction paid ⁽ⁱⁱ⁾				(213	)		16															(197	)
Share cancellation		16		(8	)		(110	)											118			0
Treasury stock transactions		16					2									(3	)		(143	)		(144	)
Other							9			1												10
Balance at December 31, 2004				212			4 146			843			(575	)		(70	)		(404	)		4 152


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements


(i)	Cash dividend declared and paid in 2002 was CHF 2.00 per share.

(ii) Capital reduction paid in 2004 and 2003 was CHF 3.00 per share (2002: CHF 1.00 per share).

(iii) In 2004, other includes CHF 1 million for the movement in minimum pension liability, net of tax. See note 16.

See notes to consolidated financial statements

F-6

Business Segment Data

(in millions of Swiss francs except percentages)



	Plastic			Coating			Water & Paper			Textile						Total
	Additives			Effects			Treatment			Effects			Corporate			Consolidated
	As restated ^(a)			As restated ^(a)			As restated ^(a)			As restated ^(a)			As restated ^(a)			As restated ^(a)
2004
Net sales		1 895			1 818			2 014			1 300			—			7 027
Adjusted EBITDA		319			394			259			117			(174	)		915
Depreciation & amortization		(95	)		(103	)		(131	)		(56	)		(9	)		(394	)
Operating income		224			291			128			61			(183	)		521
Interest expense														(141	)		(141	)
Interest income														33			33
Other financial expense, net														(39	)		(39	)
Provision for income taxes														(92	)		(92	)
Minority interest														(4	)		(4	)
Income from discontinued operations, net of tax														28			28
Net income																	306
Adjusted EBITDA margin		16.8	%		21.7	%		12.8	%		9.0	%		—			13.0	%
Operating income margin		11.9	%		16.0	%		6.3	%		4.7	%		—			7.4	%
Research and development expenditures		97			101			42			29			19			288
Capital expenditures		76			82			81			35			20			294

2003
Net sales		1 822			1 807			1 616			1 401			—			6 646
Adjusted EBITDA		265			395			228			128			(87	)		929
Depreciation & amortization		(100	)		(97	)		(103	)		(60	)		(6	)		(366	)
Operating income		165			298			125			68			(93	)		563
Interest expense														(142	)		(142	)
Interest income														34			34
Other financial expense, net														(24	)		(24	)
Provision for income taxes														(81	)		(81	)
Minority interest														(5	)		(5	)
Cumulative effect of change in accounting principles, net of tax														(16	)		(16	)
Net income																	329
Adjusted EBITDA margin		14.6	%		21.8	%		14.1	%		9.2	%		—			14.0	%
Operating income margin		9.1	%		16.5	%		7.8	%		4.9	%		—			8.5	%
Research and development expenditures		107			95			33			32			14			281
Capital expenditures		64			79			55			29			6			233

2002
Net sales		1 903			1 920			1 718			1 544			—			7 085
Adjusted EBITDA		332			434			271			206			(89	)		1 154
Depreciation & amortization		(107	)		(99	)		(108	)		(66	)		(5	)		(385	)
Operating income		225			335			163			140			(94	)		769
Interest expense														(159	)		(159	)
Interest income														49			49
Other financial expense, net														(105	)		(105	)
Provision for income taxes														(122	)		(122	)
Minority interest														(13	)		(13	)
Net income																	419
Adjusted EBITDA margin		17.5	%		22.6	%		15.8	%		13.4	%		—			16.3	%
Operating income margin		11.8	%		17.4	%		9.5	%		9.1	%		—			10.9	%
Research and development expenditures		107			100			33			36			18			294
Capital expenditures		94			74			45			34			3			250


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

F-7

Business Segment Data

(in millions of Swiss francs)



Net assets	2004			2003
	As restated ^(a)			As restated ^(a)
Plastic Additives		1 321			1 247
Coating Effects		1 843			1 762
Water & Paper Treatment		3 164			2 411
Textile Effects		1 158			1 111
Shared operating net assets not allocated to segments ⁽ⁱ⁾		37			(80	)
Non-operating net assets ⁽ⁱⁱ⁾		1 636			2 852
Invested capital ⁽ⁱⁱⁱ⁾		9 159			9 303
Items not included in invested capital		(5 007	)		(5 050	)
Total shareholders’ equity (total net assets)		4 152			4 253



Components of items not included in invested capital	2004			2003
	As restated^(a)			As restated^(a)
Net deferred tax liabilities		(157	)		(125	)
Short-term debt		(559	)		(259	)
Long-term debt		(2 917	)		(3 187	)
Other liabilities		(1 306	)		(1 417	)
Minority interest		(68	)		(62	)
Total items not included in invested capital		(5 007	)		(5 050	)

Total assets

2004

2003

As restated^(a)

Plastic Additives

1 603

1 514

Coating Effects

2 090

2 009

Water & Paper Treatment

3 508

2 640

Textile Effects

1 361

1 300

Shared operating assets not allocated to segments ⁽ⁱ⁾

357

290

Non-operating assets ⁽ⁱⁱ⁾

2 077

3 342

Total assets

10 996

11 095


(a)	See note 1 to consolidated financial statements in Item 18 — Financial Statements

(i)   Shared operating net 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.

(ii)   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.

(iii)   Invested capital equals 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-8

Business Segment Data

(in millions of Swiss francs)

During 2004, the Company reorganized from five into four reporting segments and restated all current and prior period segment information to reflect the new segment structure. The Company’s four segments are: Plastic Additives, Coating Effects, Water & Paper Treatment and Textile Effects. 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 Earnings Before Interest, Taxes, Depreciation, Amortization and Minority Interest (adjusted EBITDA). Segment operating income includes all operating items relating to the segments and excludes restructuring and special charges and other items that principally apply to the Company as a whole. Segment adjusted EBITDA and adjusted 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 adjusted EBITDA as a performance measure provides improved comparability of the reportable segments’ results with those of their competitors, some of which employ significantly different methods of depreciation. Management is therefore of the opinion that these financial indicators are an important measure of comparative operating performance for the businesses of the Company.

Invested capital is a non-United States Generally Accepted Accounting Principles (“U.S. GAAP”) supplementary financial indicator. As with any supplementary financial indicator this supplementary financial indicator 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 invested capital from financial measures prepared in accordance with U.S. GAAP.

Description of Segments

The segment Plastic Additives develops, manufactures and markets products and provides services to the plastic, rubber, adhesives lubricant, home and personal care 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, elastomers and engineering plastics as well as adhesives, high-performance motor oils and industrial lubricants. The Segment’s service business provides customers with product application solutions.

The segment Coating Effects is a leading global manufacturer of organic pigments and the leading supplier of photoinitiators and light stabilizers 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 as well as the detergents and hygiene 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. Furthermore the Segment provides whiteners for detergents and hygiene effects for a variety of personal care products.

The segment Textile Effects serves customers throughout the textile value chain, offering full, integrated solutions for textile processing and value adding effects. The Segment’s products include dyes and chemicals for preparation, dyeing, printing, whitening and finishing of all major textiles, as well as sizing agents for fabric weaving. The Segment also provides comprehensive services to help customers achieve their color, comfort and performance requirements.

See notes to consolidated financial statements

F-9

Geographic Data

(in millions of Swiss francs)



Net sales to customers	2004		2003		2002
Europe
Germany		635		584		567
United Kingdom		297		293		334
Italy		355		340		343
France		353		304		298
Rest of European Union ⁽ⁱ⁾		1 140		933		933
Switzerland		80		99		86
Rest of Europe ⁽ⁱ⁾		190		178		160
Total Europe		3 050		2 731		2 721

Americas
United States of America		1 366		1 415		1 703
Canada		212		199		223
Central America		154		167		209
South America		314		285		324
Total Americas		2 046		2 066		2 459

Asia Pacific
Japan		406		381		384
Region China		482		440		439
Rest of Asia		641		627		677
Australia and New Zealand		158		159		155
Africa and Middle East		244		242		250
Total Asia Pacific		1 931		1 849		1 905
Total net sales to customers		7 027		6 646		7 085

Net sales to customers are based on the final destination of the sale.



Long-lived assets	2004		2003
Europe
Germany		366		378
United Kingdom		453		519
Italy		171		176
France		161		134
Rest of European Union ⁽ⁱ⁾		232		88
Switzerland		593		588
Rest of Europe ⁽ⁱ⁾		1		1
Total Europe		1 977		1 884

Americas
United States of America		663		743
Canada		3		3
Central America		86		94
South America		24		18
Total Americas		776		858

Asia Pacific
Japan		20		23
Region China		165		132
Rest of Asia		52		40
Australia and New Zealand		18		19
Africa and Middle East		7		7
Total Asia Pacific		262		221
Total long-lived assets		3 015		2 963

Long-lived assets represent property, plant and equipment, net and are shown by the location of the assets.

(i)	Rest of European Union includes all other European Union member countries as of December 31, 2004, that are not specifically listed. Amounts for 2003 and 2002 have been adjusted to include the same member countries.

See notes to consolidated financial statements

F-10

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 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. The fair value of short-term investments is estimated using quoted market prices. Gains and losses thereon are recorded as a component of other financial expense, net 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, 5 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.

F-11

Notes to Consolidated Financial Statements

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

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.

Goodwill and other intangible assets

Goodwill

Goodwill acquired in business combinations is capitalized at acquisition cost and 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 2004, 2003 and 2002, the Company completed the annual impairment test of goodwill and determined that its reported goodwill is not impaired.

Other intangible assets

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 37 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.

Financial investments

Financial investments comprise primarily investments in equity affiliates that are not controlled by the Company, but in which the Company maintains a significant equity ownership or other interest, and investments in unconsolidated companies (less than 20 percent ownership and not otherwise controlled by the Company).

Investments in equity affiliates are accounted for using the equity method under which the Company originally records these at cost and subsequently adjusts the carrying amount to reflect its share of earnings less any dividends received.

Investments in unconsolidated companies are designated as available-for-sale securities and, where quoted market prices are available, are recorded at fair value. Unrealized gains and losses on these securities, net of tax, are included as a component of shareholders’ equity in “accumulated other comprehensive income (loss)”. Where quoted market prices do not exist and where it is not cost beneficial to estimate fair value, such investments are accounted for at cost. For financial investments where the Company deems a loss in value to be other than temporary, such loss is recorded in the Consolidated Statements of Income.

Derivative financial instruments

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

F-12

Notes to Consolidated Financial Statements

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

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 other financial expense, net.

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 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.

Restructuring

Costs associated with exit or disposal activities that do not involve discontinued operations are included in Restructuring and special charges in the Company’s Consolidated Statements of Income. Liabilities for costs associated with exit or disposal activities are initially recognized and measured at fair value in the period in which the liability is incurred. Liabilities for one-time termination benefits provided to employees that are involuntarily terminated are recognized and measured at their fair value at the communication date unless the employees are required to render service beyond a minimum retention period in order to receive the termination benefits. If employees are required to render service beyond a minimum retention period, liabilities for the termination benefits are measured initially at the communication date based on the fair value of the liabilities as of the termination date and recognized ratably over the future service period.

Liabilities for costs to terminate contracts before the end of their term are recognized and measured at their fair value when the contracts are terminated. Liabilities for costs that continue to be incurred under contracts for their remaining term without economic benefit to the Company are recognized and measured at their fair value when the Company ceases using the rights conveyed by the contracts. Liabilities for other costs associated with exit or disposal activities are recognized and measured at their fair value in the periods in which the liabilities are incurred.

F-13

Notes to Consolidated Financial Statements

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

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

Pro forma net income and earnings per share determined as if the Company had used the fair value method of accounting for its stock option based compensation plans for 2002 are as follows. These pro forma amounts reflect the portion of the estimated fair value of awards granted in 2002 based on the vesting or service period over which the awards are earned.



Year ended December 31,	2002

	(as restated)
Net income, as reported		419
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		12
Deduct: Stock-based employee compensation expense determined as if the fair value based method was used for all plans, net of related tax effects		(23	)

Pro forma net income		408

Earnings per share — basic and diluted:
Basic — as reported		6.12
Diluted — as reported		6.11
Basic — pro forma		5.96
Diluted — pro forma		5.95

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 introduced 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 became fully applicable 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. Prior to the implementation of FIN No. 46, the trust was 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 had 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 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 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 2003 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,

F-14

Notes to Consolidated Financial Statements

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

2004 includes fixed assets, net of accumulated depreciation, totaling CHF 53 million that are pledged as collateral on the obligations of the trust.

The Company is not involved with any other significant 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 has not had 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 fully adopted the revised standard in 2003 (see Note 18).

Other

Restatements

The Company’s financial statements and certain notes thereto have been restated to correct certain previously reported deferred income tax and pension related amounts. The need for these corrections was discovered by the Company in 2005 in connection with the preparations for compliance in 2006 with Section 404 of the U.S. Sarbanes Oxley Act and the review of pension plans. The method that has historically been used to calculate deferred income taxes in the U.S. was found to be incorrect. In addition, the method used to account for the effect on pension-related costs of severances of personnel that occurred over the past eight years in the U.K. was found to be incorrect. The effect of the pension-related corrections on the Company’s results of operations are as follows: 2004 — increase operating income by CHF 1 million, 2003 — decrease operating income by CHF 8 million and 2002 — decrease opening retained earnings by CHF 8 million and decrease operating income by CHF 19 million. The effect of both corrections on certain of the Company’s other results of operations is as follows: 2004 — increase income tax expense by CHF 7 million, decrease net income by CHF 5 million and decrease basic and diluted net income per share by CHF 0.07; 2003 — increase income tax expense by CHF 7 million, decrease net income by CHF 15 million and decrease basic and diluted net income per share by CHF 0.21; and 2002 — decrease opening retained earnings by CHF 5 million, decrease income tax expense by CHF 32 million, increase net income by CHF 13 million and increase basic and diluted net income per share by CHF 0.20 and CHF 0.19, respectively. All amounts related to the above corrections have been revised in the related financial statements, business segment data and footnotes.

The fair value of long-term debt figure for 2004 disclosed in Note 9 has been increased by CHF 579 million to CHF 3 256 million as the previously reported figure inadvertently omitted the fair value of a portion of the Company’s debt.

The footnotes to consolidated financial statements have been revised to add Note 24 — Subsequent Events (unaudited), which describes certain events that have occurred since the February 1, 2005 previous issuance date of the Company’s 2004 consolidated financial statements and notes.

Reclassifications

Certain other minor reclassifications to the 2003 and 2002 financial statements and related footnotes amounts have been made to conform to the 2004 presentation.

F-15

Notes to Consolidated Financial Statements

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

6. Property, plant and equipment

Changes in the components of property, plant and equipment and accumulated depreciation for the years ended December 31, 2004 and 2003 were as follows:



	2004															2003
							Machinery
							and			Construction
	Land			Buildings			equipment			in progress			Total			Total
Cost at January 1,		99			1 855			5 447			152			7 553			7 700
Additions		0			5			43			246			294			233
Retirements/disposals		(1	)		(45	)		(86	)		(2	)		(134	)		(157	)
Changes in consolidation scope⁽ⁱ⁾		6			94			160			4			264			90
Currency adjustments		(3	)		(50	)		(149	)		(5	)		(207	)		(213	)
Other		11			22			75			(200	)		(92	)		(100	)
Cost at December 31,		112			1 881			5 490			195			7 678			7 553
Accumulated depreciation at January 1,					(939	)		(3 651	)					(4 590	)		(4 504	)
Depreciation					(59	)		(288	)					(347	)		(333	)
Accumulated depreciation on retirements/disposals					17			75						92			98
Changes in consolidation scope					0			0						0			(21	)
Currency adjustments					21			100						121			91
Other					14			47						61			79
Accumulated depreciation at December 31,					(946	)		(3 717	)					(4 663	)		(4 590	)
Net book value at December 31,		112			935			1 773			195			3 015			2 963

⁽ⁱ⁾ In 2004, changes in consolidation scope result primarily from the acquisition of Raisio Chemicals. In 2003, with the adoption of FIN No. 46, the Company began consolidating an entity from which it has leased a facility.

The insurance value of the property, plant and equipment was approximately CHF 10 452 million at December 31, 2004 and CHF 10 485 million at December 31, 2003.

F-20

Notes to Consolidated Financial Statements

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

8. Other intangible assets (as restated ^(a))

Other intangible assets by major class consist of the following:



	Gross					Net
	carrying		Accumulated			carrying
December 31, 2004	amount		amortization			value
Developed technology and know-how		782		(179	)		603
Patents		84		(15	)		69
Trademarks and tradenames		11		(1	)		10
Minimum pension liability — intangible asset		8		0			8
Other		145		(12	)		133
Total		1 030		(207	)		823



						Net
	Gross carrying		Accumulated			carrying
December 31, 2003	amount		amortization			value
	As restated ^(a)
Developed technology and know-how		752		(150	)		602
Patents		35		(9	)		26
Trademarks and tradenames		4		0			4
Minimum pension liability — intangible asset		10		0			10
Other		8		(3	)		5
Total		809		(162	)		647


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

The intangible asset related to the minimum pension liability is not subject to amortization. For the remaining other intangible assets, 2004 amortization amounted to CHF 47 million (2003: CHF 33 million and 2002: CHF 33 million). Based on the other intangible assets values at December 31, 2004, the estimated future annual other intangible assets amortization expense is expected to be as follows: 2005: CHF 55 million, 2006: CHF 53 million, 2007: CHF 51 million, 2008: CHF 49 million, 2009: CHF 47 million, 2010 and thereafter CHF 560 million.

Included in 2004 are other intangible assets recognized in connection with the acquisition of Raisio Chemicals, totaling CHF 233 million. These consist mainly of customer relationships of CHF 138 million (included in Other), patents of CHF 47 million and developed technology of CHF 30 million. These assets are being amortized over a weighted average useful life of 22 years.

F-22

Notes to Consolidated Financial Statements

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

9. Financial investments and instruments (as restated ^(a))

Fair value of financial investments and instruments

The Company determines that, due to their short-term nature, financial assets and liabilities such as cash and cash equivalents, accounts receivable, accounts payable and short-term debt, have book values approximating their fair values.

The book value and fair value of the Company’s long-term debt is as follows:

2004

2003

Book

Fair

Book

Fair

value

value

As restated ^(a)

Long-term debt, including current portion

3 175

3 256

3 188

3 202


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

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 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. Quoted market prices are not available for investments in equity affiliates.

Financial investments



	2004		2003
Investments in equity affiliates		147		137
Investments in unconsolidated companies		33		10
Total financial investments		180		147

Investments in equity affiliates in 2004 include an amount of CHF 14 million resulting from the acquisition of Raisio Chemicals and its related equity affiliates.

At December 31, 2004, 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, 2003: CHF 1 million loss and December 31, 2002: no gain or loss). 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 investments in equity affiliates are Compagnie Industrielle de Monthey SA (investment interest maintained at 50 percent for 2004, 2003 and 2002), and Daihan Swiss Chemical Corp (investment interest maintained at 50 percent for all of 2002 and 2003, and until December 27, 2004). On December 27, 2004, Daihan Swiss Chemical Corp (Daihan Swiss) acquired the 50 percent of its shares that were not held by the Company and immediately cancelled such shares, which resulted in the Company obtaining ownership of 100 percent of Daihan Swiss. Daihan Swiss obtained the financing for this share repurchase with funds borrowed from the Company. The results of Daihan Swiss will be consolidated within the Company’s financial statements effective January 1, 2005.

The following table presents as of December 31, 2004, 2003 and 2002, summarized financial information on a 100 percent basis for investments in companies accounted for using the equity method.



	2004			2003		2002
Sales		149			127		152
Income before taxes		1			4		21
Net income		(1	)		2		16
Total assets		178			110		136
Shareholders’ equity		273			259		280

F-23

Notes to Consolidated Financial Statements

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

The income from earnings of equity affiliates of CHF 1 million (CHF 3 million in 2003 and CHF 6 million in 2002) 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 1 million in 2003 and CHF 2 million in 2002) 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. dollars, euro, British pounds 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

There was no hedge ineffectiveness for the Company’s fair value hedges in both 2004 and in 2003. Gains resulting from hedge ineffectiveness of fair value hedges of CHF 1 million for 2002 were recorded in ‘other financial expenses, net’, in the consolidated statements of income.

F-24

Notes to Consolidated Financial Statements

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

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 2004, 2003 and 2002. At December 31, 2004, the Company had open forward contracts with maturity dates ranging from January 2005 to March 2005. At December 31, 2004, the fair value of open natural gas forward contracts was an unrealized gain of CHF 0.7 million, before taxes (2003: CHF 1.2 million; 2002: CHF 1.7 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 2004 and 2003, realized gains and losses recorded in cost of goods sold and hedge ineffectiveness were not significant.

Information with respect to other derivative financial instruments

At December 31, 2004, the fair value of other derivative instruments not designated as accounting hedges was CHF 15 million (2003: CHF 41 million), consisting of CHF 19 million included in Prepaid and other current assets (2003: CHF 46 million) and CHF 4 million included in Accruals and other current liabilities (2003: CHF 5 million).

F-25

Notes to Consolidated Financial Statements

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

12. Short-term debt



	2004		2003
Bank overdrafts		8		23
Loans		139		81
Other ⁽ⁱ⁾		154		154
Current portion of long-term debt		258		1
Total		559		259

⁽ⁱ⁾ Other includes employee and retiree deposits totaling CHF 141 million at December 31, 2004 and CHF 146 million at December 31, 2003.

The Company maintains certain commercial paper programs. The principle programs are in the United States and provide for short-term borrowings up to USD 1 000 million. At December 31, 2004 and 2003, no amounts were outstanding under these programs in the United States.

The Company maintains a multicurrency revolving loan facility expiring 2006 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 a 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. As of December 31, 2004 and 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, 2004 was 3.7 percent and at December 31, 2003 was 3.7 percent. Unused short-term credit lines totaled CHF 655 million at December 31, 2004 and CHF 601 million at December 31, 2003.

F-28

Notes to Consolidated Financial Statements

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

14. Income taxes (as restated ^(a))

Income from continuing operations before income taxes and minority interest consists of the following:



	2004		2003		2002
	As restated ^(a)		As restated ^(a)		As restated ^(a)
Domestic		194		222		258
Foreign		180		209		296
Total income from continuing operations before income taxes and minority interest		374		431		554

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

The provision for income taxes in 2004, 2003 and 2002 from continuing operations consists of the following:



	2004		2003			2002
	As restated ^(a)		As restated ^(a)			As restated ^(a)
Domestic		24		47			63
Foreign		42		48			41
Total current provision		66		95			104
Domestic		1		(3	)		2
Foreign		24		(12	)		14
Total deferred provision		25		(15	)		16
Share of taxes from earnings of equity affiliates		1		1			2
Total provision for income taxes		92		81			122

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

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:



In percent	2004			2003			2002
	As restated ^(a)			As restated ^(a)			As restated ^(a)
Expected tax rate		30			30			30
Non-deductible items		6			5			3
Tax free income		(2	)		(1	)		(2	)
Income taxed at reduced rates		(4	)		(8	)		(3	)
Changes in valuation allowance		0	)		1			0
Other		(6	)		(8	)		(6	)
Effective tax rate		24			19			22

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

“Non-deductible items” include the tax effect of amortization of other intangible assets in 2004, 2003 and 2002.

“Income taxed at reduced rates” includes the tax effect of certain subsidiaries of the Company that operate in countries having lower tax rates.

“Changes in valuation allowance” reflect increases in valuation allowances for deferred tax assets, primarily loss carryforwards in certain tax jurisdictions, the future realization of which is uncertain and decreases resulting from the release of previously established valuation allowances when realization of the related deferred tax asset occurs or becomes likely to occur in the future.

In 2004, “Other” includes (4) percent for the release of previously established reserves following the settlement of certain outstanding tax matters. In addition, 2004 “Other” also includes the following usual items: (4) percent for the effect of tax deductions in certain of the Company’s subsidiaries that were not recognized for financial reporting purposes, 5 percent for taxes not based on profit such as franchise taxes and tax risk accruals and (3) percent for a variety of other adjustments, none of which is individually significant.

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. In addition, 2003 “Other” also includes the following usual items: (4) percent for the effect of tax deductions in certain of the Company’s subsidiaries that were not recognized for financial reporting purposes, 6 percent for taxes not based on profit

F-30

Notes to Consolidated Financial Statements

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

such as franchise taxes and tax risk accruals, 2 percent for taxes related to the sale of financial investment and (2) percent for a variety of other adjustments, none of which is individually significant.

In 2002, “Other” includes approximately (2) percent for tax adjustments and (4) percent reflecting the effect of certain taxable expenses in certain of the Company’s subsidiaries that were 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, 2004 and 2003, were as follows:



	2004			2003
Deferred tax assets	As restated ^(a)			As restated ^(a)
Pensions and other employee compensation		105			117
Inventory		29			15
Restructuring and special charges		10			10
Environmental reserves		135			158
Tax loss carryforwards		133			151
Other		176			89
Gross deferred tax assets		588			540
Valuation allowance		(110	)		(121	)
Net deferred tax assets		478			419
Deferred tax liabilities
Property, plant and equipment		(311	)		(340	)
Other		(324	)		(204	)
Gross deferred tax liabilities		(635	)		(544	)
Net deferred tax liabilities		(157	)		(125	)
Included in
Prepaid and other current assets		123			130
Other assets		203			209
Accruals and other current liabilities		(70	)		(68	)
Deferred income taxes		(413	)		(396	)
Net deferred tax liabilities		(157	)		(125	)

(a) See note 1 to consolidated financial statements in Item 18 — Financial Statements

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 375 million, of which CHF 16 million will expire in the next five years and CHF 270 million will expire between five and twenty years. The remaining carryforwards do not expire.

At December 31, 2004, unremitted earnings of subsidiaries outside of Switzerland of approximately CHF 450 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.

F-31

Notes to Consolidated Financial Statements

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

16. Shareholders’ equity (as restated ^(a))

The Company’s shareholders have approved the creation of authorized and conditional capital of the Company. The approval allows for the issuance of an additional 10 million registered shares with a par value of CHF 3 per share (2003: CHF 6 per share; 2002: CHF 9 per share). Of these 10 million shares, 6 million may be issued only through the exercise of option or conversion rights and the remaining 4 million may be issued until February 2006, but would be subject to certain transfer restrictions.

At the Company’s Annual General Meeting on February 26, 2004, the shareholders voted in favor of a proposal made by the Board of Directors not to pay a dividend in 2004 (2003: no dividend payment; 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 6 per share to CHF 3 per share. The capital reduction payment was made on May 14, 2004, totaling CHF 197 million (2003: CHF 206 million paid on May 23, 2003; 2002: CHF 69 million paid on June 28, 2002).

The shareholders also approved the cancellation of 1 303 500 shares of treasury stock purchased in 2003 under the Company’s share buyback program. These treasury shares were cancelled on May 7, 2004.

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 1 963 591 shares in 2004 (1 202 797 shares in 2003 and 4 970 437 shares in 2002) of previously acquired treasury stock at market prices. In addition, in 2004, the Company purchased 3 589 462 shares of treasury stock (2003: 2 374 611 shares of treasury stock and 2 174 577 in 2002) at market prices. At December 31, 2004, the Company held 4 686 272 treasury shares (2003: 4 363 901 treasury shares).

The Company designated a total of 3 751 972 shares in 2004 (3 496 234 shares in 2003) of its treasury stock as reserved shares primarily for satisfaction of future share requirements under its various outstanding employee stock option plans and also for possible future cancellation under the Company’s share repurchase program. The remaining 934 300 shares in 2004 (867 667 shares in 2003) of treasury stock have been designated as unreserved shares.

The after-tax components of accumulated other comprehensive loss are as follows:



	2004			2003
	As restated ^(a)			As restated ^(a)
Currency translation adjustment		(497	)		(421	)
Minimum pension liability, net of tax		(78	)		(79	)
Other, net of tax		0			1
Accumulated other comprehensive loss		(575	)		(499	)


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

There was no deferred tax effect on the unrealized gains/(losses) on available-for-sale securities in either 2004 or in 2003. There was no deferred tax effect on cash flow hedges in either 2004 or 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 49 million in 2004 (2003: CHF 50 million; 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.

F-33

Notes to Consolidated Financial Statements

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

17. Stock based compensation plans

In connection with the capital reduction of CHF 3 per share in 2003 (CHF 1 per share in 2002) (see note 16), the Company reduced the exercise price of its then outstanding stock options (“the capital reduction repricing”). No compensation expense was recorded as a result of those capital reduction repricings. For the Leveraged Executive Asset Plan, which is described below, the capital reduction repricing in 2003 was set by the investment bank . All exercise prices disclosed herein have been adjusted to reflect the capital reduction repricings. In connection with the capital reduction of CHF 3 per share in 2004, the exercise price of outstanding stock options was not changed.

LEAP – As of December 31, 2004, a total of 1 042 782 share options that were granted in connection with one-time Leveraged Executive Asset Plan (LEAP) were outstanding. The options were granted in 1997 to the Company’s then key executives and non-executive Board members (participants), have an expiration date of March 15, 2005, and permit the holder thereof to purchase shares of the Company’s common stock at a price per share of CHF 107.16. 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.

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, other key employees and, in 2002, 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, 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. As a result of the adoption by the Company in 2003 of SFAS No. 123 as amended, compensation expense of approximately CHF 3 million in 2004 (CHF 5 million in 2003) 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 2004, 2003 and 2002:


	Weighted average		Stock options
	exercise price		outstanding

Balance at December 31, 2001		119.63		1 778 449
Options granted		108.80		481 401
Options exercised		108.99		(32 098	)
Options canceled/forfeited		111.07		(32 413	)

Balance at December 31, 2002		117.53		2 195 339

Options granted		82.60		176 627
Options exercised		0		0
Options canceled/forfeited		105.02		(26 989	)
Options expired		160.00		(264 355	)

Balance at December 31, 2003		109.34		2 080 622

Options granted		95.30		81 024
Options exercised		82.60		(2 762	)
Options canceled/forfeited		114.48		(72 239	)
Options expired		109.60		(314 888	)

Balance at December 31, 2004		108.32		1 771 757

The following table summarizes the status of stock options outstanding and exercisable at December 31, 2004:

Stock options outstanding

Stock options exercisable

Weighted average

exercise price

Number of

remaining

Number of

remaining

- outstanding/

outstanding

contractual life

outstanding

contractual life

Exercise price range

exercisable

options

(in years)

options

(in years)

82.60 – 111.88

104.77/106.11

1 658 025

3.6

1 066 079

3.2

160.00

160.00/160.00

113 732

3.0

113 732

3.0

1 771 757

1 179 811

F-34

Notes to Consolidated Financial Statements

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



	Exercise		Rights
	price		outstanding

Balance at December 31, 2001		15		302 740
Rights granted		15		86 040
Rights exercised		15		(18 500	)

Balance at December 31, 2002		15		370 280

Rights granted		15		105 275
Rights exercised		15		(20 005	)

Balance at December 31, 2003		15		455 550

Rights granted		15		104 200
Rights exercised		15		(22 955	)

Balance at December 31, 2004		15		536 795

Compensation expense is recorded in the year the rights are granted and, in 2004, CHF 9 million (2003: CHF 9 million; 2002: CHF 8 million) of compensation expense was recorded under this plan.

Change in control and reserve of shares

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 are as follows:

F-35

Notes to Consolidated Financial Statements

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

18. Retirement benefits (as restated ^(a))

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 11 million in 2004, CHF 14 million in 2003 and CHF 16 million in 2002.

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 31^st for each year presented.

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.



	2004									2003

	Funded			Unfunded			All			Funded			Unfunded			All
	plans			plans			plans			plans			plans			plans

	As restated ^(a)						As restated ^(a)			As restated ^(a)						As restated ^(a)

Change in benefit obligation (PBO)
PBO, beginning of year		3 110			525			3 635			2 984			473			3 457
Service cost		79			9			88			76			8			84
Interest cost		149			27			176			143			28			171
Participant contributions		24			—			24			22			—			22
Actuarial (gain) loss		190			(8	)		182			52			11			63
Plan amendments		(6	)		—			(6	)		(1	)		—			(1	)
Benefits paid		(133	)		(26	)		(159	)		(149	)		(25	)		(174	)
Foreign currency translation		(41	)		(4	)		(45	)		(76	)		29			(47	)
Other		47			(1	)		46			59			1			60

PBO, end of year		3 419			522			3 941			3 110			525			3 635

Change in plan assets Fair value of plan assets, beginning of year		2 936			—			2 936			2 789			—			2 789
Actual return on plan assets		221			—			221			240			—			240
Employer contributions		97			26			123			46			25			71
Participant contributions		24			—			24			22			—			22
Benefits paid		(133	)		(26	)		(159	)		(149	)		(25	)		(174	)
Foreign currency translation		(30	)		—			(30	)		(58	)		—			(58	)
Other		(6	)		—			(6	)		46			—			46

Fair value of plan assets, end of year		3 109			—			3 109			2 936			—			2 936

PBO funded status		(310	)		(522	)		(832	)		(174	)		(525	)		(699	)


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

For both years presented, substantially all of the Company’s funded pension plans had PBO in excess of plan assets.

F-37

Notes to Consolidated Financial Statements

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

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, 2004 and 2003 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):

2004

2003

Fully-

Under-

Total funded

Fully-

Under-

Total funded

Funded plans

funded

plans

funded

plans

Accumulated benefit obligation (ABO)

2 580

458

3 038

2 392

428

2 820

Fair value of plan assets

2 743

366

3 109

2 628

308

2 936

ABO status — fully (under) funded

163

(92

)

236

(120

)

116

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 shareholders’ equity. The recording of this additional minimum pension liability has no impact on the Company’s income from operations.

The following table shows the components of the additional minimum pension liability as of December 31, 2004 and 2003 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:



	2004			2003

Unrecognized prior service cost recorded as intangible asset		8			10
Recorded as other comprehensive income		127			129
Currency adjustments		(30	)		(22	)

Additional minimum pension liability		(105	)		(117	)
Prepaid pension asset already recorded		19			7

ABO status, plans where additional minimum liability required		(86	)		(110	)
Other under-funded plans, no additional minimum liability required		(6	)		(10	)

ABO status — All under-funded plans		(92	)		(120	)

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, 2004 and 2003 for the Company’s unfunded defined benefit pension plans:



	2004		2003

Unfunded plans
Accumulated benefit obligation		489		490
Accrued pension liability		505		500

Liability recognized in excess of ABO		16		10

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,

F-38

Notes to Consolidated Financial Statements

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

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, 2004 and 2003:



	2004									2003

	Funded			Unfunded						Funded			Unfunded
	plans			plans			All plans			plans			Plans			All plans

	As restated ^(a)						As restated ^(a)			As restated ^(a)						As restated ^(a)

Prepaid benefit cost⁽¹⁾		764			—			764			704			—			704
Accrued benefit liability⁽¹⁾		(108	)		(505	)		(613	)		(132	)		(500	)		(632	)
Minimum pension liability — intangible asset		8			—			8			10			—			10
Accumulated other comprehensive income, pre tax		127			—			127			129			—			129
Currency adjustments⁽²⁾		(30	)		—			(30	)		(22	)		—			(22	)

Net pension asset (liability) on consolidated balance sheets		761			(505	)		256			689			(500	)		189
Unrecognized net gain (loss)		(1 068	)		(19	)		(1 087	)		(853	)		(27	)		(880	)
Unrecognized prior service cost		(3	)		2			(1	)		(10	)		2			(8	)

PBO funded status		(310	)		(522	)		(832	)		(174	)		(525	)		(699	)


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

(1) Current and long-term portion
(2) Currency effect on the prior year additional minimum pension liability

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, 2004, 2003 and 2002 were:



	Funded plans									Unfunded plans						All plans

	2004			2003			2002			2004		2003		2002		2004			2003			2002

	As restated ^(a)			As restated ^(a)			As restated ^(a)									As restated ^(a)			As restated ^(a)			As restated ^(a)

Service cost		79			76			88			9		8		7		88			84			95
Interest cost		149			143			155			27		28		27		176			171			182
Expected return on plan assets		(208	)		(211	)		(230	)		—		—		—		(208	)		(211	)		(230	)
Amortization of prior service cost		2			2			1			—		—		—		2			2			1
Other (gains), losses and amortization, net		1			(0	)		(7	)		—		1		1		1			(1	)		(6	)

Total net pension expense		23			10			7			36		37		35		59			47			42


(a)		See note 1 to consolidated financial statements in Item 18 — Financial Statements

Key assumptions

The weighted average key actuarial assumptions used to determine the Company’s pension benefit obligations were as follows:



	2004			2003

Discount (interest) rate		4.6	%		4.9	%
Rate of increase in compensation levels		2.3	%		2.3	%

The weighted average key actuarial assumptions used to determine the Company’s net periodic benefit cost were as follows:


	2004			2003			2002

Discount (interest) rate		4.9	%		5.1	%		5.3	%
Rate of increase in compensation levels		2.3	%		2.4	%		2.9	%
Expected long-term rate of return on plan assets		6.2	%		6.2	%		6.5	%

F-39

Notes to Consolidated Financial Statements

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

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 investment policies and strategies for plan assets held by 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 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 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, 2004 and 2003, and the range of weighted average target plan asset allocation percentages in effect as of December 31, 2004, are as follows:


	Actual plan asset						Target plan asset
	allocation percentages at						allocation percentages at
	December 31						December 31,
	2004			2003			2004

Asset category
Equity securities		36	%		34	%		35% - 45	%
Debt securities		48	%		42	%		40% - 50	%
Real estate		12	%		10	%		5% - 15	%
Other		4	%		14	%		0% - 10	%

Total		100	%		100	%

At December 31, 2004 and 2003, the Company’s pension plans did not own any Company common stock.

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:



	Funded		Unfunded
Undiscounted expected benefit payments	plans		plans		All plans

2005		103		26		129
2006		109		27		136
2007		116		27		143
2008		126		28		154
2009		133		29		162
Aggregate for 2010 through 2014		805		158		963

The amount expected to be contributed by the Company to it’s defined benefit pension plans during 2005 is CHF 129 million.

Other postretirement benefits

The Company’s net liability for other postretirement benefits at December 31, 2004 was CHF 63 million (December 31, 2003: CHF 69 million) resulting principally from the postretirement healthcare plan in the United States. The Company’s other postretirement plans are not funded by the Company, did not require significant amounts to be recognized in the consolidated statements of income for 2004, 2003 or 2002, and are not expected to require significant future annual benefit payments.

F-40

Notes to Consolidated Financial Statements

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

19. Earnings per share (as restated ^(a))

In 2004 and 2003 there was no difference between basic and diluted earnings per share for income from continuing operations. In 2002 the difference between basic and diluted earnings per share for income from continuing operations was CHF 0.01. In 2004 the basic weighted average number of shares outstanding were 66 059 479 (2003: 68 361 123 and 2002: 68 549 964) and the diluted weighted average number of shares outstanding were 66 059 479 (2003: 68 361 123 and 2002: 72 036 457).

In 2002, the difference of 3 486 493 in the weighted average number of shares outstanding was due to the inclusion of 3 461 399 shares from the dilutive effect of the convertible bonds, issued in July 1998 and repaid in July 2003, and due to the inclusion of 25 094 shares from 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 2004 and 2003, the calculation of diluted earnings per share did not include any stock options as their inclusion would have been antidilutive, that is, diluted earnings per share would be higher than basic earnings per share. For purposes of calculating basic and diluted earnings per share in 2004 and 2003 there was no required adjustment to the reported income from continuing operations or net income. For purposes of calculating basic and diluted earnings per share in 2002, income from continuing operations was increased by CHF 21 million to account for the effect of the interest expense that would not have been incurred if the bonds were converted.

The calculation of diluted earnings per share in 2004 excluded 1 783 225 stock options outstanding with exercise prices between CHF 82.60 and CHF 179.30, in 2003 excluded 2 092 090 stock options outstanding with exercise prices between CHF 82.60 and CHF 179.30, and in 2002 excluded 878 036 stock options outstanding with exercise prices between CHF 112.09 and CHF 181.70, as their inclusion would have been antidilutive. For the year ended December 31, 2003 the calculation of diluted earnings per share excluded the convertible bonds, as their inclusion would have been antidilutive.

(a) See Note 1 to Consolidated Financial Statements in Item 18 — Financial Statements

F-41

Notes to Consolidated Financial Statements

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

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: 2005 CHF 41 million; 2006 CHF 25 million; 2007 CHF 16 million; 2008 CHF 12 million; 2009 CHF 9 million; 2010 and thereafter CHF 25 million. Rental expense amounted to CHF 57 million in 2004, CHF 64 million in 2003 and CHF 67 million in 2002.

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.

Guarantees

In the normal course of business, the Company has provided certain trade and other 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, 2004, the Company has provided guarantees to third parties for indebtedness of others of approximately CHF 17 million of which CHF 12 million expire in 2005 and CHF 5 million 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. As of December 31, 2004 the Company had issued CHF 31 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, 2004, the Company has recorded a liability related to the environmental indemnifications in the amount of CHF 12 million (2003: CHF 12 million) and for the tax indemnifications a liability has been recorded in the amount of CHF 1 million (2003: 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.

In connection with the Company’s divestment of the Performance Polymers Business in 2000, Vantico (now owned by the Huntsman Group) initiated arbitration proceedings against the Company as a result of a dispute over an agreement with a third party and a pension-related lawsuit. A court ruling has been issued in favor of the Company’s pension fund, which has been appealed to a superior court. This appeal is pending. The dispute and related arbitration proceedings regarding the agreement with the third party were settled during 2004 resulting in the release of previously established reserves totaling CHF 28 million, net of income taxes of CHF 9 million. Although the outcome of the pension-related litigation cannot be predicted with certainty, management is of the opinion that it 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).

Environmental matters

F-43

Notes to Consolidated Financial Statements

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

disposal facilities at all major manufacturing sites that allow the sites to comply with laws and regulations applicable to waste streams. In management’s opinion, the Company substantially complies with all such laws.

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.

F-44

Notes to Consolidated Financial Statements

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

22. Valuation and qualifying accounts and reserves



Allowance for doubtful accounts
For the year ended December 31,	2004			2003			2002
Balance at beginning of year		85			96			120
Additions charged to cost and expenses		24			22			50
Deductions credited to cost and expenses		(15	)		(13	)		(19	)
Other, net ⁽ⁱ⁾		(10	)		(18	)		(43	)
Currency adjustments		(3	)		(2	)		(12	)
Balance at end of year		81			85			96



Allowance for obsolete and slow moving inventory
For the year ended December 31,	2004			2003			2002
Balance at beginning of year		50			58			66
Additions charged to cost and expenses		17			20			23
Deductions credited to cost and expenses		(16	)		(22	)		(18	)
Other, net ⁽ⁱ⁾		(3	)		(4	)		(9	)
Currency adjustments		(2	)		(2	)		(4	)
Balance at end of year		46			50			58



Deferred income tax valuation allowance
For the year ended December 31,	2004			2003			2002
Balance at beginning of year		121			131			146
Additions charged to cost and expenses		11			22			10
Deductions credited to cost and expenses		(20	)		(19	)		(9	)
Other, net ⁽ⁱ⁾		3			0			0
Currency adjustments		(5	)		(13	)		(16	)
Balance at end of year		110			121			131

(i) Other, net is primarily additions applicable to acquisitions, 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.

F-46

Notes to Consolidated Financial Statements

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

23. Restructuring and special charges

In 2004, the Company implemented the “Shape” program, which is primarily designed to adapt and optimize production and the support organization of the Segment Water & Paper Treatment following the acquisition of Raisio Chemicals and to accelerate the shift of focus in Segment Textile Effects to growth regions in Asia by reducing its European presence. The program involves the closure of manufacturing facilities in the UK and Italy and the rightsizing of plants in Europe and the United States. It is expected that this will result in the reduction of approximately 950 positions. The planned program completion date is 2007.

The cost of the program is expected to total approximately CHF 174 million before taxes comprised of employee severance costs of CHF 93 million, asset impairment charges of CHF 55 million and other costs of CHF 26 million. During 2004, costs related to the program totaling CHF 80 million have been recognized in operating income in the consolidated statements of income comprised of employee severance costs of CHF 17 million, asset impairment charges of CHF 50 million and other costs of CHF 13 million. The fair values used to determine the asset impairment charges were established by calculating present values of the estimated future cash flows attributable to the affected assets.

Restructuring and special charges for 2004 also includes CHF 11 million resulting from expensing the fair value of Raisio Chemicals’ in-process research and development activities that were acquired.

24. Subsequent events (unaudited)

Upon full implementation, the “Shape” program described above in note 23 was expected to restore Segment Textile Effects to acceptable profitability levels. However, during 2005 the shift of the textile market and customers to Asia was greatly accelerated by the ending of WTO quotas. While cost reductions in connection with the "Shape" program and other sales price and cost control measures resulted in the Segment's 2005 profitability improving slightly over 2004, it remained at very low levels. It then became evident that significant profitability improvement would not be able to be achieved without additional cost reduction. These developments triggered the testing of certain of the Segment's long-lived assets for impairment of their carrying values. As a result, an impairment charge of CHF 583 million was recorded in December 2005. The impairment amounts to CHF 377 million of property, plant and equipment, CHF 161 million of goodwill and CHF 45 million of other intangible assets.

In connection with the Company’s divestment of the Performance Polymers Business in 2000, Vantico (now owned by Huntsman Corporation) initiated a pension-related lawsuit. The supreme court ruled in the Company’s favor in June 2005 resulting in the release of previously established reserves totaling CHF 30 million, net of income taxes of CHF 10 million.

At the Company’s Annual General Meeting on March 3, 2005, the shareholders approved a payment in the form of a capital reduction of CHF 2 per share. The capital reduction was in the form of a reduction in the nominal value of each common share from CHF 3 per share to CHF 1 per share. The capital reduction payment was made on May 18, 2005, totaling CHF 130 million.

F-47

Section 302 Certification

CERTIFICATIONS

I, Armin Meyer, certify that:

1.		I have reviewed this annual report on this Amendment No. 1 to the annual report on Form 20-F of Ciba Specialty Chemicals Holding Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.		The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(c)		Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely

Section 302 Certification

CERTIFICATIONS

I, Michael Jacobi, certify that:

1.		I have reviewed this annual report on this Amendment No. 1 to the annual report on Form 20-F of Ciba Specialty Chemicals Holding Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.		The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(c)		Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely


Introduction

Currency Translation

Cautionary Statement Regarding Forward-Looking Statements

PART I
Item 1. Identity of Directors, Senior Management and Advisors (N/A)
Item 2. Offer Statistics and Expected Timetable (N/A)
Item 3. Key Information
Item 4. Information on the Company
Item 5. Operating and Financial Review and Prospects
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 (N/A)

PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
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 (N/A)
Item 16E Purchases of Equity Securities by the Company

PART III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits

Signature

•	Products for polymer design such as polymerization regulators:

•	Products for lubricants such as antioxidants, metal deactivators, and antiwear additives:

•	Light absorbers for fabric and personal care, rheology modifiers, actives for skin protection, carrier systems, conditioners, specialty colors for home and personal care products, laundry additives for comfort enhancement, and stain removers.

⁽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.


-	a Lead Director (to complement the Chairman of the Board) entitled to convene on his own and chair meetings of the Board; in addition the Lead Director chairs the Compensation Committee; based on interviews with other Board members, he prepares a review of the Chairman. He may act as a liaison between the Board and the Chairman in delicate matters


-	broad supervisory and reviewing powers for the Board, directly supported by Internal Audit


-	independence of Board Members who are all non-executives of the Company, with the exception of the Chairman


-	independence of Board Committee Members who are equally all non-executives, with one exception being the Chairman serving on the Human Resources and Nomination and the Finance Committees


-	having Audit Committee Members who are all non-executives with significant expertise particularly in the area of finance


-	having Compensation Committee Members who are non-executives with broad practical experience in the area of employee and executive compensation


-	receiving and providing continuous and comprehensive information including periodic and yearly reports prepared by management on finances, strategies, research and development, production planning and risk management [DCG 3.7].

(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).

•	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).


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 14, 2004. (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


	Ciba Specialty Chemicals Holding Inc.,

	By:	/s/ Michael Jacobi

		Name: Michael Jacobi

		Title: Chief Financial Officer

Date: January 30, 2006



Index to Consolidated Financial Statements	Page

Report of Independent Auditors — Ernst & Young Ltd		F-2

Consolidated Statements of Income for the Years ended December 31, 2004, 2003 and 2002		F-3

Consolidated Balance Sheets at December 31, 2004 and 2003		F-4

Consolidated Statements of Cash Flows for the Years ended December 31, 2004, 2003 and 2002		F-5

Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2004, 2003 and 2002		F-6

Business Segment Data		F-7

Geographic Data		F-10

Notes to Consolidated Financial Statements		F-11

(i)	Shared operating net 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.

(ii)	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.

(iii)	Invested capital equals 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.



			Statement of income						Balance sheet
			average rates						year-end rates
			2004		2003		2002		2004		2003
1	U.S. dollar	(USD)		1.24		1.35		1.56		1.15		1.25
1	British pound	(GBP)		2.27		2.20		2.34		2.21		2.21
1	Euro	(EUR)		1.54		1.52		1.47		1.54		1.56
100	Japanese yen	(JPY)		1.15		1.16		1.24		1.11		1.17



	2004			2003
Accounts receivable		1 145			1 025
Allowance for doubtful accounts		(81	)		(85	)
Total		1 064			940



					Foreign
					currency
	December 31,				translation			December 31,
	2003		Acquisitions		adjustments			2004
Plastic Additives		62		2		(2	)		62
Coating Effects		189				0			189
Water & Paper Treatment		951		206		(3	)		1 154
Textile Effects		156				0			156
Total		1 358		208		(5	)		1 561



	2004		2003
Payroll and employee benefits		178		201
Taxes other than income taxes		77		63
Interest		85		87
Rebates		44		52
Environmental remediation and compliance		32		28
Retirement and postemployment benefits		35		30
Deferred income taxes		70		68
Other		310		312
Total		831		841



	2004			2003
Bonds and Euro Medium-Term Notes		3 036			3 071
Amounts owed to credit institutions		95			100
Other long-term debt		44			17
Total		3 175			3 188
Less: current portion of long-term debt		(258	)		(1	)
Total long-term debt		2 917			3 187

			affect the company’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.



	/s/ Armin Meyer
	Armin Meyer
	Chairman of the Board and Chief Executive Officer