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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
                               ----------------
 
(Mark One)
 
  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1998
 
                                      OR
 
  [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 
                  For the Transition period from      to
 
                         Commission File No. 333-13523
 
                               DADE BEHRING INC.
                      (Formerly Dade International Inc.)
            (Exact name of registrant as specified in its charter)
 
               Delaware                              36-3949533
    (State or other jurisdiction of      (I.R.S. EmployerIdentification No.)
    incorporation or organization)
 
    1717 Deerfield Road, Deerfield,                  60015-0778
               Illinois                              (Zip Code)
    (Address of principal executive
               offices)
 
      Registrant's telephone number, including area code: (847) 267-5300
 
       Securities registered pursuant to Section 12(b) of the Act: None.
 
       Securities registered pursuant to Section 12(g) of the Act: None.
 
   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]  No [_]
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
   The aggregate market value of the Common Stock held by non-affiliates of
the registrant as of March 19, 1999 was approximately zero. At March 19, 1999,
there were 1,000 shares of Common Stock outstanding, all held by the
registrant's parent, Dade Behring Holdings, Inc.
 
                      Documents Incorporated by Reference
 
                                     NONE
 
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                                    PART I
 
   This information should be read in conjunction with the Consolidated
Financial Statements included herein. Certain statements included in this
discussion are forward-looking, such as statements relating to estimates of
operating and capital expenditure requirements, future revenue and operating
income levels, cash flow, Year 2000 remediation plans, and liquidity. Such
forward-looking statements are based on Management's current expectations and
are subject to a number of risks and uncertainties that could cause actual
results in the future to differ significantly from the results expressed or
implied in any forward-looking statements made by, or on behalf of, the
Company. These risks and uncertainties include, but are not limited to,
uncertainties relating to global economic and business conditions,
governmental and regulatory policies, Year 2000 remediation actions of
suppliers and others, and the competitive environment in which the Company
operates.
 
Item 1. Business.
 
History
 
   The original predecessor company to Dade Behring Inc. ("Dade Behring" or
the "Company", formerly Dade International Inc.), the Baxter Diagnostics
division (the "Predecessor") of Baxter International Inc. ("Baxter"), was
established in 1949 as part of the Dade County Blood Bank in Florida. The
Predecessor initially distributed its blood products through American Hospital
Supply Corporation ("AHS") and was subsequently acquired by AHS in 1956.
Building upon its initial blood testing base, AHS initiated extensive research
and development efforts in the routine chemistry/immunoassay markets of the
emerging in vitro diagnostic testing industry. From 1983 to 1985, those R&D
efforts culminated in the product introductions of the Stratus and Paramax
instrument platform lines. AHS also expanded into the microbiology market and
established the MicroScan product line through a series of acquisitions in the
early 1980s. In 1985, Baxter acquired AHS.
 
   In December 1994, Bain Capital, Inc. ("Bain Capital") and GS Capital
Partners, L.P. ("GS Capital") formed Dade Behring Holdings, Inc. ("Holdings",
formerly Diagnostics Holding, Inc.) and acquired the Predecessor from Baxter
(the "Dade Acquisition"), with the Company becoming a wholly-owned subsidiary
of Holdings. The Company held established leadership positions in hemostasis
and microbiology, strong routine chemistry/immunoassay market positions, and
an extensive sales and service organization.
 
   In May 1996, the Company purchased (the "Chemistry Acquisition") the in
vitro diagnostics business from DuPont, which had entered into the automated
clinical chemistry market in 1968 with the introduction of the first random
access automated chemistry analyzer in the world and whose installed base of
routine chemistry instruments was and still is one of the largest in the
world. The Chemistry Acquisition also provided the Company with world-class
manufacturing capabilities, automation technology, and strong management
processes for operations planning and product development.
 
   In October 1997, the Company acquired (the "Behring Combination") the in
vitro diagnostics business ("Behring") of Hoechst A.G and was renamed Dade
Behring. Behring was established in 1904 by Emil von Behring, the recipient of
the first Nobel Prize in medicine. The Behring Combination provided
complementary product lines for hemostasis and routine immunochemistry and
significantly broadened the overall product line portfolio by adding
leadership positions in plasma protein and drugs of abuse testing/therapeutic
drug monitoring. Behring also provided expanded technology capabilities in
platform development, assay development and the development of emerging
technologies. The acquisition of Behring also extended the geographic scope of
the Company's business.
 
   Dade Behring, a corporation organized under the laws of Delaware, has its
principal executive offices located at 1717 Deerfield Road, Deerfield,
Illinois 60015-0778; its telephone number is (847) 267-5300.
 
 
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Industry--Overview
 
   In vitro (literally, "in glass") diagnostic ("IVD") tests are conducted
outside the body and are used to identify and measure substances in patients'
bodily fluids such as whole blood, blood plasma, serum, or urine, which enable
physicians to diagnose, treat and monitor patients. The most common IVD tests
are traditional routine clinical chemistry tests which measure glucose,
cholesterol or sodium as part of routine blood checks. Other IVD tests measure
bodily functions such as blood clotting ability and cardiac function, or
measure the presence of infections or drugs. The wide range and important
nature of these tests have established IVD testing as an integral part of the
managed care environment, providing for accurate and timely patient diagnosis
and treatment. Increasingly, IVD testing is being recognized as making a
significant contribution to improving patient care and lowering total patient
costs. IVD tests are performed in a number of different clinical settings
including hospitals, reference laboratories, physicians' offices/ambulatory
care centers and consumers' homes.
 
   The global IVD market is estimated at $18.4 billion, with the United States,
Western Europe and Japan comprising approximately 41%, 33% and 13%,
respectively. Management believes that the global IVD market will continue to
grow due to a number of key favorable industry trends: 1) Demographic shifts
resulting from the aging of the population and socio-economic improvements are
expected to increase the overall level of demand for diagnostic testing. 2)
Increased focus on lowering total healthcare expenditures will likely increase
demand for diagnostic testing as an effective tool to improve patient outcomes
and reduce the costs of misdiagnosis through earlier and more accurate
diagnosis and patient monitoring. 3) Emerging markets will provide additional
demand as economic improvements in these countries lead to increases in
healthcare expenditures. 4) Technology improvements in new tests, pathogens and
markers will result in the increased use of diagnostics to aid in the diagnosis
of diseases. 5) Improvements in lower cost point-of-care/near-patient testing
capabilities are expected to expand the application of diagnostic testing
capabilities into non-laboratory settings (e.g. operating room, emergency room,
acute care centers). 6) Increased automation of diagnostic instruments is
expected to lower the overall cost of diagnostic testing and thereby increase
accessibility and demand.
 
   IVD systems are composed of instruments, reagents, consumables, service and
data management systems. Instruments typically have a five-year life and serve
to automate repetitive manual tasks, improve test accuracy and speed results
reporting. Reagents are liquid or powder chemical substances that react with
the patient sample to produce measurable, objective results. The consumable
accessories vary across application segments but are generally items such as
tubes and stoppers used during test procedures. Both reagents and consumables
are typically exclusive to their related instruments (thus, a "closed" system)
and, therefore, generate significant ongoing revenues for suppliers. Sample
handling and preparation devices, as well as data management systems are
becoming increasingly important components of the IVD system. These system
additions further reduce labor, improve safety and reduce cost through their
automation benefits. Providing a total integrated system solution that is
reliable and easy to use creates high switching costs and loyalty among
customers who value consistency and accuracy in test results.
 
   Management believes that certain trends affecting the purchasers of IVD
instruments, as well as the maturation of many IVD testing applications will
drive further consolidation and globalization in the IVD industry. Over the
past several years, an increasing number of domestic hospitals have formed into
groups known as Integrated Health Systems in order to compete for patients,
develop strategic alliances with suppliers and leverage specialized
departments. The formation of these Integrated Health Systems, as well as the
consolidation occurring among competitors in the independent reference lab
market presents larger IVD suppliers with broad product and service offerings
and multiple leadership positions with the opportunity to drive standardization
of their products across all labs in a group. As testing applications mature in
these and other laboratories, IVD suppliers will need to increase the scale of
their operations and broaden the scope of their product lines in order to
leverage worldwide sales, service and research and development infrastructures.
Management believes that the Company, with its global reach and broad product
portfolio, is well positioned to take advantage of these trends.
 
 
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Industry--Served Markets
 
   The Company is the largest supplier of IVD products and services to
clinical laboratories in the United States and the third largest IVD supplier
to clinical laboratories in the world. Of the total estimated $18.4 billion
global IVD market, the Company serves a $15.1 billion segment that consists of
IVD instruments, reagents, consumables, service and data management systems
targeted primarily at clinical laboratories and near-patient testing. Within
the Company's served markets, the Company has global market leadership
positions in six of the seven core product markets, which include routine
chemistry/immunoassay, cardiac, hemostasis, plasma protein, microbiology,
infectious disease diagnostics, and drugs of abuse testing /therapeutic drug
monitoring ("DAT/TDM").
 
   IVD tests are conducted primarily in clinical laboratories, which include
primarily hospital-based laboratories and reference laboratories (independent
from hospitals). The Company's customer base consists of approximately 24,000
customers worldwide. The Company provides products and services to over 90% of
U.S. hospital-based clinical laboratories and to the majority of reference
laboratories worldwide.
 
   The Company manufactures and markets a broad offering of IVD products and
services which includes: (i) instruments (approximately 11% of sales); (ii)
reagents and consumables (approximately 86% of sales); and (iii) services
(approximately 3% of sales). In total, the Company has a worldwide installed
base of approximately 38,400 instruments. With a typical instrument life of
five years, the Company's installed base of instruments generates annual
revenue of approximately $30,000 per instrument from ongoing sales of
reagents, consumables and service. More importantly, over 73% of the Company's
instrument systems are "closed" systems, which require the exclusive use of
Company reagents and consumables in order to run tests. As a result, the
Company generates an attractive, stable and recurring stream of revenue from
reagents, consumables and service contracts.
 
   A description of the Company's served markets is as follows:
 
 Routine Chemistry/Immunoassay
 
   Routine chemistry tests measure substances found in large concentrations in
patients' blood, tissue, urine or other bodily fluids. These substances
include cholesterol, glucose, iron and sodium and their concentration levels
provide information on a patient's basic bodily functions. Routine immunoassay
testing relies upon the properties of antibodies and antigens in the immune
system as its key detection mechanism. Immunoassays (immunochemistry tests)
measure relatively low concentrations of these substances found in blood.
These tests are performed for pre- and post-surgical procedures and to monitor
a patient's response to treatment and therapy. Historically, analyzers had
been developed separately for routine chemistry and immunoassay testing.
Today, high-volume tests are rapidly being consolidated to a single,
heterogeneous platform which significantly improves overall laboratory
productivity and costs.
 
   On average, hospitals operate two to three routine chemistry/immunoassay
analyzers, which serve such roles as routine, STAT and specialty testing.
These instruments are considered the workhorse of the clinical laboratory,
accounting for up to 40% of all IVD tests performed in such laboratories and
are characterized by their high throughput capabilities.
 
   Dade Behring has a broad range of routine chemistry/immunoassay instrument
platforms, including the Dimension(R), Opus(TM), aca(R) and Paramax(R)
instruments. Dade Behring has been a leader in workstation consolidation with
the introduction of the heterogeneous module for the Dimension(R) RxL
instrument, which allows the integration of highly sensitive immunoassay
testing with routine chemistry onto one platform. With the Company's
leadership position in workstation consolidation, the continued consolidation
of routine chemistry/immunoassay testing onto a single platform represents a
significant growth opportunity for the Company. The Company has a
comprehensive test menu of approximately 100 tests and is currently developing
over 40 additional chemistry and immunoassay tests.
 
 
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 Cardiac
 
   The Company's cardiac business is focused on immunoassay platforms targeted
at cardiac diagnostics. The cardiac market is one of the highest growth
segments of the broader immunoassay market, growing at 22% annually. Dade
Behring is the global market share leader in the high growth cardiac segment
and was one of the first to introduce a widely adopted testing system for the
cardiac enzymes Troponin I, CKMB and Myoglobin. The combination of rapid and
accurate tests for Troponin I, CKMB and Myoglobin has allowed for rapid
diagnosis of cardiac disease and has enhanced the physician's ability for
triage and diagnosis of chest pain in patients. Through its 12-year research
collaboration with one of the leading U.S. cardiac marker institutions, George
Washington University, the Company continues to innovate and introduce new
products in the cardiac segment.
 
   The Company's Stratus(R) CS Cardiac system, launched in late 1998,
represents the industry's first quantitative near-patient cardiac instrument.
The Stratus(R) CS system rapid result time (13 minutes), accuracy, test menu
breadth and its direct correlation to central laboratory test results on the
Dimension(R) and Opus(TM) instrument platforms creates a strong competitive
advantage for the Company. The Stratus(R) CS system also offers significant
cost savings for healthcare providers. Currently, the average cost to rule out
myocardial infarction in a patient with chest pain ranges from $1,300 to
$5,600. Stratus(R) CS can achieve a result in 13 minutes which saves
significant time over conventional diagnostic measures, which reduces hospital
lengths of stay, avoids unnecessary testing and thereby reduces healthcare
costs significantly. Additionally, the Stratus(R) CS system also reduces
expenses related to unstable angina, a very common form of cardiac disease, by
offering testing for a new, second-generation Troponin I marker which is a
highly sensitive marker of unstable angina. The new, second-generation Troponin
I marker can serve as a rule-in diagnostic procedure which would expedite
follow-up treatment. The Stratus(R) CS system positions the Company well in
both the near-patient and central laboratory cardiac market.
 
 Plasma Protein
 
   Plasma protein instrument systems test serum, plasma, urine or cerebral
spinal fluid to help both diagnose diseases such as coronary heart diseases and
rheumatic diseases as well as to detect disorders such as tumors, renal failure
and malnutrition. Plasma protein tests are conducted on two types of instrument
platforms. The majority of plasma protein tests are run on dedicated
nephelometers such as the Company's BN(TM)II instrument; some laboratories,
however, also run tests on routine chemistry/immunoassay analyzers such as the
Company's Dimension(R) instrument.
 
   The Company is the market leader in the worldwide plasma protein market. The
Company offers four dedicated plasma protein instruments: the BN(TM)II and
BN(TM)A instruments, targeted at large, high volume hospital and commercial
laboratories; the BN100 instrument, sold to small to medium sized labs; and the
TurbiTime(TM)System, a manual instrument sold to small hospitals and private
labs. The BN(TM)II, a large, highly automated instrument, was released in late
1996 and has proven to be a successful upgrade path for former customers of the
BN(TM)A and BN(TM)100 instruments who are striving to reduce lab costs and
increase actual testing throughput. The Company's instruments offer up to 60
assays which cover the complete spectrum of plasma protein tests. The Company
is launching a new instrument in the fourth quarter of 1999, the BN
ProSpec(TM), which will be targeted at the small to medium size customer group.
 
   The Company's focus on expanding its plasma protein business has led to the
development of the broadest portfolio of plasma protein products in the market,
allowing it to target customers of all sizes and usage profiles. In addition,
the Company has been able to further leverage its expertise in assay
development on dedicated nephelometers by offering plasma protein assays for
the routine chemistry/immunoassay analyzer market. The Company is also working
to grow the plasma protein market by developing new markers for disorders such
as malnutrition.
 
 
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 Microbiology
 
   Dade Behring's MicroScan business serves a market that consists of
identification/antimicrobial susceptibility testing ("ID/AST") instruments,
reagent panels, data management systems, disposable accessories and service.
Microbiology laboratories use ID/AST products to identify infection-causing
bacteria (e.g., strep and staph) and to determine the minimum concentration of
antibiotic (e.g., erythromycin and ampicillin) necessary to inhibit or kill the
bacteria. This information is critical to the optimum management of patient
therapy. Microbiology systems are "closed," meaning that reagents and
consumables can only be used on the instruments for which they were produced.
Continued evolutions in the microbiology testing market have been driven
primarily by advances in automation, new antibiotics, the complexity of various
microbes, and the increasing resistance of microbes to antibiotics.
 
   The Company manufactures and markets both manual and automated ID/AST
products. MicroScan's premier instruments are the WalkAway(R)-40 and the
WalkAway(R)-96, fully automated instruments that use patented dry reagent
panels to conduct bacterial identification and susceptibility testing at the
same time.
 
   The Company is the global leader in automated ID/AST microbiology systems
and has been able to maintain its leadership position in the microbiology
market by focusing on continuous instrument and panel product enhancement and
high growth international markets, as well as by upgrading its instruments to
help laboratories reduce their overall costs. In the United States, the Company
continues to secure business through the promotion of its conventional panels,
testing devices which produce more accurate results than competitive systems,
and through the placement of its pharmLINK(TM) systems, which provide
pharmacists, microbiologists and physicians with better information for the
management of antibiotic therapy. Because antibiotics represent approximately
30% of a typical hospital's drug budget, the potential for significant cost
savings will continue to drive the use of the pharmLINK(TM) system as an
important data management tool. In the future, the Company expects to continue
to aggressively develop international markets. Many international markets rely
predominately upon manual systems--creating a significant opportunity for
MicroScan as customers move to more efficient automated systems. In addition,
as hospitals outside the United States continue to build the necessary
information systems infrastructure, the Company expects to develop new versions
of the pharmLINK(TM) system that are specific to a country's needs.
 
 Infectious Disease Diagnostics
 
   Infectious disease instrument systems test serum, plasma or cerebral spinal
fluid for the presence of infectious microorganisms. This segment of Dade
Behring's business consists primarily of virology testing, including HIV and
hepatitis testing. The Company is devoting significant R&D investments in
infectious disease diagnostics in order to develop a next-generation infectious
disease diagnostics platform which will have the capability of leveraging both
immunoassay and nucleic acid diagnostic technology.
 
   Dade Behring has a strong niche position in infectious disease diagnostics
as well as an aggressive ongoing development program in advanced diagnostics.
Dade Behring has also built strong market share positions in key European
markets. In addition, the Company possesses a strong intellectual property
position for HIV-O, a new variant of HIV recently discovered. Due to the
increased prevalence of HIV-O, any future HIV test platform will have to
include HIV-O to offer full HIV testing capability. The Company continues to
invest in expanded test menu capabilities on its existing instrument line and
has launched the new Quadriga(TM) platform, that allows the Company to better
serve the high volume customer segment. Finally, the Company has made
significant investments in nucleic acid diagnostic technologies, including
branch migration inhibition (BMI).
 
 Hemostasis
 
   Hemostasis testing measures a patient's ability to form and dissolve blood
clots, a critical factor in the stabilization of the cardiovascular system.
Hemostasis testing can be segmented into routine screening and specialty tests.
Routine hemostasis tests are typically performed before and during surgical
procedures.
 
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Hemostasis testing is also essential in post-surgical treatments for patients
with cardiovascular disorders (e.g., monitoring treatments to "thin" the blood)
and for patients with coagulation disorders (e.g., hemophilia). Specialty tests
are performed to further characterize congenital disease states. Market growth
is expected to come from a continued growth in the number of surgeries
performed as well as from new hemostasis tests which more accurately measure
blood clotting and provide for improved patient treatment.
 
   The Company pioneered the field of hemostasis and continues to maintain a
global leadership position through its commitment to innovation and its
development of new and improved products and services. The Company offers the
industry's broadest range of instrument platforms and tests, both routine and
specialty, to meet the needs of customers from small hospitals to large
reference labs. The Company has a strong history of instrument product
development, and has introduced two new systems (the BCS and BCT) over the past
three years. The Company is capitalizing on an emerging near-patient technology
opportunity with the introduction of a novel system for monitoring platelet
function, which is an essential component of primary hemostasis. Platelet
testing today is performed manually, with Dade Behring offering the only
automated system in the market. The Company believes this will be a high-growth
market as new anti-platelet therapies are developed and introduced.
 
 Drugs of Abuse Testing/Therapeutic Drug Monitoring ("DAT/TDM")
 
   Drugs tests are used to measure the level of therapeutic drugs ("TDM") or
drugs of abuse ("DAT") in either blood or urine. TDM tests assist physicians in
ensuring that the level of therapeutic drugs patients receive do not exceed
safe ranges in the bloodstream. An example of a TDM application is testing
performed on transplant patients to monitor the level of immunosuppressive
drugs that they are given. Drugs of abuse tests screen for the use of illicit
substances such as cocaine and marijuana. Because of their range of
application, drugs tests are used at a variety of sites, from clinical
laboratories to employers' offices. Drugs tests are also conducted on multiple
platform types, including the Company's ETS(R) dedicated immunoassay instrument
platform, as well as its Dimension(R) clinical chemistry/immunoassay analyzers.
 
   The Company manufactures a wide range of products under the Syva(R) brand
name in the drugs market, including both dedicated instruments, as well as a
line of over 40 reagents, which it markets to both clinical and non-clinical
laboratories. Syva(R) is the world leader in DAT testing and is also a leader
in DAT innovation, with the broadest menu of assays available and a large
pipeline of new tests. The Company's test for LSD was chosen over the
competition for use by the United States military. In order to increase the
convenience of testing for its customers, the Company is developing new DAT
sample collection technologies, such as a patch that detects drugs from sweat
rather than urine. In addition, the Company is taking advantage of the trend in
diagnostics toward testing at the point-of-care by launching the Syva(R) Rapid
Test(TM) product line, a self-contained, unitized test device. The Company also
has a strong position in the TDM market with an especially strong position in
the high growth immunosuppressives market. The Company has been successful at
developing tests for immunosuppressive drugs; it was the first to market a
research-use only test for MPA and acquired a license to test for FK506.
 
   The Company's plans for growth in the drugs market center on expanding the
scope of its testing platforms and assays, as well as international expansion.
In order to take advantage of the growing need for drug tests, the Company has
been rapidly developing new sample collection methodologies and point-of-care
devices. The Company is also taking advantage of the market potential for tests
on non-dedicated platforms by extending its OEM relationships with
manufacturers of routine chemistry/immunoassay analyzers. In addition, growth
opportunities exist for the Company outside of the United States, where drug
testing is currently less well penetrated. For example, the Company has had
discussions with the governments of Germany and France to use its testing
devices on people involved in car accidents.
 
 Other Served Markets
 
   Immunohematology. Dade Behring immunohematology and related products are
typically used by hospital laboratories and blood donor centers to classify
blood products for use in transfusion procedures. The
 
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immunohematology line consists of immunohematology reagents and base laboratory
equipment such as cell washers and automated centrifuges.
 
   Integrated Services(TM) Division. The Company believes its Integrated
Services(TM) Division ("ISD") organization is one of the largest service
organizations in the industry with over 1,200 product and service specialists
worldwide. This organization provides in-warranty and out-of-warranty service
on the Company's approximately 38,400 instruments and provides service on a
third-party basis to other medical instrument companies. All of the Company's
field service personnel are trained in the technical aspects of one or more of
the Company's major instrument systems. In the United States, this field
service organization provides rapid (usually within six hours), on-site service
to the Company's entire customer base. In the United States, the Company also
maintains a telephone-based, in-house technical support and customer service
group of over 160 people to provide troubleshooting and other user help, which
leverages the higher cost of on-site service.
 
   Third Party Product Distribution. The Company distributes various products
for third party manufacturers in select markets where it can leverage its
existing distribution network.
 
Research and Development
 
 Overview
 
   Within the IVD industry, the Company has established a track record of
innovation and timely product introduction. The Company maintains an active
research and development program focused on the development and
commercialization of products which both complement and update its existing
product offerings. In each of its core product lines, research and development
was instrumental in the development of key technologies which have helped to
create strategic product advantages. At December 31, 1998, there were
approximately 675 employees involved in the Company's product development
efforts.
 
   Dade Behring spent an average of 10% of revenues over the last three years
on R&D for its core product lines, with some product lines reaching 20% of
sales. Furthermore, the Company's hemostasis instrument manufacturing partners
have made considerable investments in instrument and technology upgrades in
collaboration with the Company.
 
   The Company's project portfolio development process ensures that priority
spending is matched with strategies and core competencies. The project
development process employs a market-driven, milestone-based, phase gate
process to support projects from concept to post-commercialization. In
addition, the Company has a strong quality management system that is the
foundation of its technical product development capabilities.
 
   To provide focus for growth and profit enhancement, research and development
activities are grouped into two primary categories: platform development and
test menu development across all product segments. In addition, Dade Behring
has identified specific growth opportunities in near-patient/point-of-care
testing and advanced diagnostics development.
 
   In addition to the product development areas described below, Dade Behring
has an active program in place to seek and establish alliances. The Company has
an alliance with Sysmex Corporation (formerly TOA Medical Electromics Co.,
Ltd.), a leading Japanese manufacturer of medical instruments, to produce a
variety of hemostasis instruments.
 
 Central Lab Platform Development
 
   The Company is committed to continue investing in new platforms to maintain
and enhance its competitive advantage. Management believes that clinical
laboratories are increasingly looking to IVD suppliers to help them reduce
labor costs, the largest cost component in the laboratory. Among the activities
that drive labor costs are sample preparation, instrument setup, throughput and
maintenance, manual data entry and manipulation, and the verification and
reporting of results. The Company has been a leader in laboratory productivity
and workstation
 
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automation and is engaged in a broad range of platform development programs
that will further automate the laboratory and reduce total laboratory costs.
 
   In the routine chemistry/immunoassay segment, the Company created the
industry's first platform capable of performing highly sensitive heterogeneous
immunoassays along with routine clinical chemistry, specialty tests,
electrolytes and metabolites with the Dimension(R) RxL instrument platform. The
Company is investing to maintain its leadership in laboratory productivity with
additional platform enhancements including an integrated centrifugation
technology to reduce excess sample handling and transportation time, sensor-
based technology to enhance instrument efficiency and a number of additional
features that will enhance the product offering.
 
   The Company also markets two new high-end automated platforms, one for the
Plasma Protein product line, the second for the Hemostasis segment. Current new
product initiatives include platform systems that are designed to meet the
needs of the small to mid-size volume customer for the Plasma Protein and
Hemostasis product lines.
 
   In addition to improvements in the existing portfolio of instruments, the
Company continues to seek out new opportunities through the focused development
of certain niche instruments. Such products include the recently introduced
Platelet Function Analyzer (PFA-100) instrument, which automates the testing
and quantifiable measurement of platelet function. Like most IVD instruments,
the PFA-100(R) instrument uses proprietary reagents and consumables designed
exclusively for this instrument. The Company has also developed and launched
the Stratus CS(R) instrument, which is designed to address the need for rapid
measurement of cardiac-specific markers in the emergency room and other near-
patient care environments, as well as in the central laboratory.
 
 Test Menu Development
 
   Once the Company places an instrument, the development of new reagents to
conduct additional tests represents a highly leveraged growth opportunity. The
Company's large installed base of approximately 38,400 instruments thus
represents significant potential for the Company's new reagent development
efforts. The Company is currently developing a series of highly sensitive
immunoassays for the Dimension(R) RxL instrument platform. It is also
increasing the specialty tests on this system with incremental plasma protein
methods as well as new drugs of abuse assays.
 
   For the specialty and niche platforms a number of new tests are under
development. For example, additional acute care markers for the Stratus(R) CS
instrument, new protein markers such as soluble transferrin receptor, an
important new anemia test, for the plasma protein systems and new and updated
identification and antibiotic susceptibility panels for the microbiology
platforms are being developed. The Company also has a significant investment in
assays for the new infectious disease diagnostics platform. The Syva group is
developing a series of TDM assays for immunosuppressive drugs important for the
ongoing treatment and maintenance of organ transplant patients.
 
 Near-Patient/Point-of-Care Development
 
   Dade Behring has identified near-patient testing and point-of-care testing
as emerging growth opportunities in diagnostics. The Company invests
significantly across various segments of the near-patient market and has the
leadership position in the point-of-care cardiac segment today. Recent product
introductions include the successful 1997 launches of the Syva(R) Rapid Test,
the PFA-100(R) instrument and the recently launched next-generation Stratus(R)
CS cardiac instrument. Furthermore, Dade Behring is evaluating alternatives to
leverage its global hemostasis position in the point-of-care market.
 
Customers
 
   The Company has a broad customer base that includes primarily hospital and
reference laboratories. The Company sells its products worldwide and derives
47% of its revenue from outside the United States. No end-consumer represents
more than 4% of the Company's sales. Sales to Allegiance Healthcare
Corporation, the Company's U.S. distributor for certain product lines,
represented 17% of the Company's sales.
 
                                       8
<PAGE>
 
Sales, Distribution and Marketing
 
   The Company maintains twelve sales offices in the U.S. and thirty-eight
sales offices outside the U.S. and employs over 2,300 people in its worldwide
sales group, comprised of field sales representatives, managers, clinical
application specialists ("CASs") and field service representatives. Field sales
representatives are the traditional salesforce and are organized by product
line. The CASs provide troubleshooting in the field, customer training, and
conduct workshops and seminars. The CASs are also organized by major product
lines. Field service representatives install instruments at customer locations
and provide maintenance and service work on the instruments. In addition, the
Company utilizes twelve distributors outside of the U.S.
 
   The Company maintains a dedicated Health Systems sales team in the U.S. that
is exclusively focused on leveraging the Company's broad product line
capabilities with Integrated Health Systems. Integrated Health Systems are
large hospital networks in integrated delivery systems and represent an
increasingly important portion of the customer base. The Health Systems sales
team is focused on the top Integrated Health System accounts and provide
overlay support for the sales representatives.
 
   In the United States, this sales organization works closely with the
Company's chief domestic distributor, Allegiance Healthcare Corporation
("Allegiance"). Allegiance provides routine distribution and delivery functions
such as order entry, invoicing, customer service, database management and
physical warehousing and delivery. Chemistry and Syva products are sold
directly to customers in the U.S. without a distributor.
 
   In addition to its worldwide sales group, the Company employs approximately
350 marketing personnel worldwide with extensive knowledge and understanding of
industry issues, market trends, customer needs and competitive dynamics.
 
Instrument Placements
 
   The Company's instruments range in retail price from $20,000 to $175,000.
Globally, approximately one-third of the Company's instrument placements in
1998 were sold to customers, approximately one-third were sold through third-
party lessors and the remainder were financed directly by the Company.
 
   The Company offers customers a variety of financing options designed to
offset the large up-front capital outlay necessary to purchase an IVD
instrument. The two most common financing methods are (i) third-party leasing,
and (ii) reagent rental agreements in which Dade Behring retains title to the
instrument and recoups the cost via premiums on its reagents.
 
Intellectual Property
 
   The Company owns over 3,750 United States and non-U.S. patents, and has
hundreds of patent applications currently pending in the United States and
abroad. These patents and patent applications cover a broad base of technology
relating to the Company's MicroScan(R), Stratus(R), Syva(R), Dimension(R),
Opus(TM), aca(R), Hemostasis and Plasma Protein product lines as well as
technology which has yet to be commercialized. The Company also licenses
certain patents and other intellectual property from third parties. In addition
to its extensive patent portfolio, the Company possesses a wide array of
unpatented proprietary technology and know-how.
 
   The Company owns over 2,000 United States and non-U.S. registered trademarks
and service marks, including the Company's well known and respected Syva(R),
MicroScan(R), Stratus(R), and Dimension(R) brand names. In addition, the
Company has hundreds of applications for registration of trademarks and service
marks pending in the United States and abroad. The Company also owns several
United States copyright registrations.
 
   In the aggregate, these patents, patent applications, trademarks, copyrights
and licenses are of material importance to the Company's business. However, the
Company believes that no single patent, trademark or copyright (or related
group of patents, trademarks or copyrights) is material in relation to the
Company's business as a whole.
 
                                       9
<PAGE>
 
Employees
 
   As of December 31, 1998 the Company had approximately 6,600 full-time and
part-time employees, 3,850 in the United States (including Puerto Rico), 2,200
in Europe, 250 in Japan and 300 in other locations around the world. The
Company also contracted with approximately 600 temporary employees as of
December 31, 1998.
 
Environmental, Health and Safety Matters
 
   The Company is subject to Federal, state, local and foreign environmental
laws and regulations and is subject to liabilities and compliance costs
associated with the handling, processing, storing and disposing of hazardous
substances and wastes. The Company's operations are also subject to federal,
state, local and foreign occupational health and safety laws and regulations.
The Company devotes resources to maintaining environmental compliance and
managing environmental risk and believes that it conducts its operations in
substantial compliance with applicable environmental and occupational health
and safety laws and regulations. Nonetheless, from time to time, the operations
of the Company may result in noncompliance with environmental or occupational
health and safety laws or liability pursuant to such laws. The Company expects
to incur approximately $0.2 million in capital expenditures for environmental
controls in the current fiscal year to upgrade the heating plant at its
Dudingen facility in Switzerland to conform to local air emission limits. The
Company does not expect to incur material capital expenditures for
environmental controls in the succeeding fiscal year.
 
Item 2. Properties.
 
   The Company provides its customers with high quality products by controlling
each stage of production. Below is an overview of the Company's manufacturing
facilities including key products manufactured:
 
<TABLE>
<CAPTION>
                                   Floor
                          No. of Area (Sq.
        Location          Sites    Ft.)    Owned/Leased            Products
        --------          ------ --------- ------------ ------------------------------
<S>                       <C>    <C>       <C>          <C>
Duedingen, Switzerland..     2     184,700    1 Owned          Immunohematology
                                             1 Leased
 
Miami, Florida..........     1     203,000      Owned            Hemostasis,
                                                        Routine Chemistry/Immunoassay
 
Sacramento, California..     2     236,900    1 Owned            Microbiology
                                             1 Leased
 
Glasgow, Delaware.......     1     447,000      Owned              Cardiac,
                                                        Routine Chemistry/Immunoassay
 
Brookfield, Connecticut.     1     100,000     Leased              Cardiac,
                                                        Routine Chemistry/Immunoassay
 
Cupertino, California...     1     110,000     Leased      Drugs of Abuse Testing,
                                                         Therapeutic Drug Monitoring
 
Marburg, Germany........     3     320,000    1 Owned    Hemostasis, Plasma Protein,
                                             2 Leased   Infectious Disease Diagnostics
 
Kawagoe, Japan..........     1      29,000     Leased           Plasma Protein
                           ---   ---------
                            12   1,630,600
                           ===   =========
</TABLE>
 
Item 3. Legal Proceedings.
 
   The Company is involved in a number of legal proceedings arising in the
ordinary course of its business, none of which is expected to have a material
adverse effect on the Company's business or financial condition.
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
   None.
 
                                       10
<PAGE>
 
                                    PART II
 
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
 
   None.
 
Item 6. Selected Financial Data.
 
   Set forth below are selected historical financial data of the Predecessor
and the Company as of the dates and for the periods shown. The selected
historical financial data, except for the Predecessor's data, were derived
from the Company's financial statements, which, except for data as of December
31, 1994, 1995 and 1996 and for the period from December 17, 1994 through
December 31, 1994 and the year ended December 31, 1995, are included elsewhere
in this Form 10-K. The selected historical financial data for the period from
January 1, 1994 through December 16, 1994 were derived from the Predecessor's
financial statements, which were audited and do not appear in this Form 10-K.
The selected historical financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying notes
thereto included elsewhere in this Form 10-K.
 
<TABLE>
<CAPTION>
                               The
                          Predecessor(1)                             Company(1)
                          -------------- ---------------------------------------------------------------------
                                          Period from
                          --------------------------------------------
                            1/1/94 to     12/17/94 to     1/1/94 to
                             12/16/94    12/31/94(2)(3) 12/31/94(2)(3) 1995(2)(3) 1996(6)   1997(7)   1998(8)
                          -------------- -------------- -------------- ---------- --------  --------  --------
                                                        (dollars in millions)
<S>                       <C>            <C>            <C>            <C>        <C>       <C>       <C>
Net sales...............      $650.6         $19.0          $669.6       $614.3   $  795.8  $  980.5  $1,285.2
Cost of goods sold......      $391.4         $18.6          $410.0       $368.6   $  444.1  $  654.1  $  529.4
Gross profit............      $259.2         $ 0.4          $259.6       $245.7   $  351.7  $  326.4  $  755.8
Marketing and
 administration
 expenses...............      $173.2         $ 2.4          $175.6       $171.1   $  255.5  $  366.8  $  513.9
Research and development
 expenses...............      $ 33.4         $ 1.1          $ 34.5       $ 26.5   $  138.0  $   61.7  $   88.2
Goodwill amortization
 expense (credit).......      $  2.6         $(0.1)         $  2.5       $ (0.4)  $    3.3  $    5.4  $    5.4
Restructuring and
 downsizing costs (4)...      $  --          $ --           $  --        $  --    $   15.0  $   40.1  $   (4.5)
Income (loss) from
 operations.............      $ 50.0         $(3.0)         $ 47.0       $ 48.5   $  (60.1) $ (147.6) $  152.8
Extraordinary items (5).      $  --          $ --           $  --        $  --    $  (25.0) $    --   $    --
Net income (loss).......      $ 35.8         $(1.9)         $ 33.9       $ 12.7   $ (105.3) $ (142.6) $   43.5
<CAPTION>
                                                                            December 31,
                                                        ------------------------------------------------------
                                                             1994         1995      1996      1997      1998
                                                        -------------- ---------- --------  --------  --------
<S>                       <C>            <C>            <C>            <C>        <C>       <C>       <C>
Total assets..........................................      $696.2       $550.9   $1,005.1  $1,510.4  $1,533.4
Long-term liabilities.................................      $300.3       $297.9   $  807.9  $  875.1  $  815.6
</TABLE>
--------
(1) The financial data of the Predecessor and the Company were prepared on
    different bases of accounting.
(2) Financial data for the period from December 17, 1994 to December 31, 1994
    and for the year ended December 31, 1995 exclude the results of the
    Burdick & Jackson and Bartels product lines, which were reflected as "Net
    assets held for sale."
 
                                      11
<PAGE>
 
(3) The Company's stockholder's equity and net loss for the period December 17,
    1994 through December 31, 1994 includes a non-recurring pre-tax charge
    relating to the application of purchase accounting for a partial write-off
    of $5.6 million to cost of goods sold related to the write-off of the $46.0
    million of allocated purchase price made to record acquired finished goods
    and work-in-process inventory at fair market value. The Company's
    stockholder's equity and net income for the year ended December 31, 1995
    include the non-recurring pre-tax write-off of the remaining $40.4 million
    of the inventory write-up discussed above.
(4) In 1996, a $15.0 million restructuring charge was recorded related to a
    plan to eliminate redundancies and rationalize production capacity in
    connection with the Chemistry Acquisition. In 1997, the Company recorded a
    $40.1 million restructuring charge to consolidate manufacturing and
    distribution operations and eliminate redundant sales, service and
    administrative functions. In 1998, $4.5 million of the 1997 reserve was
    determined to be excess and was reversed.
(5) Two extraordinary charges totaling $25.0 million after tax were made to
    record the costs associated with the repurchase of the original 13% senior
    subordinated notes due 2005 and the write-off of previously deferred
    financing fees.
(6) The pre-tax loss for the year ended December 31, 1996 reflects the
    following pre-tax charges resulting from purchase accounting for the
    Chemistry Acquisition and other items: (i) a charge to cost of goods sold
    for $24.8 million of allocated purchase price to record work-in-process and
    finished goods inventories to fair market values, (ii) a $15.0 million
    restructuring charge designed to lower operating costs, increase
    efficiency, and eliminate redundant operations, (iii) a $98.1 million
    charge to research and development expense for acquired research and
    development projects which do not have alternative applications or
    separable economic value, and (iv) a $9.5 million charge to cost of goods
    sold to establish a reserve for excess spare parts inventories related to
    the Paramax(R) product line.
(7) The net loss for the year ended December 31, 1997 reflects the following
    pre-tax charges resulting from application of purchase accounting for the
    Behring Combination related to the following: (i) a charge to cost of goods
    sold for $171.4 million of allocated purchase price to record acquired
    finished goods and work-in process inventories to fair market values, (ii)
    a $40.1 million restructuring charge to consolidate manufacturing and
    distribution operations and eliminate redundant sales, service and
    administrative functions, (iii) a $1.1 million charge to research and
    development expense for acquired research and development projects which do
    not have alternative applications or separable economic value, (iv) $33.5
    million of charges related to distribution costs, increased inventory
    reserves resulting from plant closures and non-core product transition
    costs, (v) $11.4 million of stock-based compensation charges related to
    grants of stock options and purchase rights, and (vi) $2.0 million of
    integration costs associated with the Behring Combination.
(8) Net income for the year ended December 31, 1998 reflects the following pre-
    tax charges: (i) $13.1 million of stock-based compensation charges related
    to grants of stock options and purchase rights, (ii) $24.6 million of
    integration costs associated with the Behring Combination, and (iii) $5.4
    million in non-recurring Year 2000 ("Y2K") costs.
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
 
Comparability
 
   Comparisons drawn from the Company's Consolidated Financial Statements for
1996 through 1998 are impacted by the Chemistry Acquisition effective May 1,
1996 and the Behring Combination effective October 1, 1997. These transactions
were accounted for under the purchase method of accounting and accordingly,
their respective results have been included in the Consolidated Financial
Statements from the date of acquisition. Certain significant purchase
accounting-related and other items impacting comparability include, but may not
be limited to:
 
 1998
 
  . $13.1 million of stock-based compensation charges were recorded related
    to grants of stock options and purchase rights.
 
  . $24.6 million of integration costs associated with the Behring
    Combination.
 
  . $5.4 million of non-recurring Year 2000 ("Y2K") costs.
 
                                       12
<PAGE>
 
 1997
 
  . A $171.4 million charge was recorded to cost of goods sold related to the
    step-up to fair value of work-in-process and finished goods inventory in
    connection with the purchase price allocation for the Behring
    Combination.
 
  . A $40.1 million restructuring charge was recorded to consolidate
    manufacturing and distribution operations and eliminate redundant sales,
    service and administrative functions.
 
  . $1.1 million was charged to research and development expense upon
    consummation of the Behring Combination pertaining to purchase price
    allocated to acquired research and development projects that have no
    alternative future use.
 
  . $33.5 million of charges were recorded including $12.2 million charged to
    cost of goods sold primarily for distribution costs and increased
    inventory reserves resulting from the Miami plant closure actions and
    $21.3 million charged to marketing and administrative expense related
    primarily to the transition of the Stratus(R) non-cardiac and Paramax(R)
    product lines.
 
  . $11.4 million of stock-based compensation charges were recorded related
    to grants of stock options and purchase rights.
 
  . $2.0 million of integration costs associated with the Behring
    Combination.
 
 1996
 
  . A $24.8 million charge was recorded to cost of goods sold related to the
    step-up to fair value of work-in-process and finished goods inventory in
    connection with the purchase price allocation for the Chemistry
    Acquisition.
 
  . A $15.0 million restructuring charge was recorded to operating expense in
    connection with a restructuring plan designed to lower operating costs,
    increase efficiency and eliminate redundant operations.
 
  . The Company recorded a $98.1 million charge to research and development
    expense upon consummation of the Chemistry Acquisition pertaining to
    purchase price allocated to in-process research and development projects
    that have no alternative future use.
 
  . Two extraordinary charges totaling $25.0 million after-tax were made to
    record the costs associated with the repurchase of the original 13%
    senior subordinated notes due 2005 and the write-off of previously
    deferred financing fees.
 
  . A $9.5 million charge to cost of goods sold was recorded to establish a
    reserve for excess spare parts inventories related to the Paramax(R)
    product line. This non-cash charge was a direct result of the Chemistry
    Acquisition and the decision to designate the Paramax(R) product line as
    non-core.
 
  . The elimination of the reporting period lag for the Company's
    international operations added $12.3 million to the sales for the year
    ended December 31, 1996. The change in reporting period did not
    significantly impact earnings.
 
Results of Operations
 
 1998 Compared to 1997
 
   Net sales for 1998 totaled $1,285.2 million as compared to $980.5 million in
1997. The $304.7 million or 31.1% increase over 1997 was attributable primarily
to the inclusion of a full year of sales from the Behring
 
                                       13
<PAGE>
 
Combination versus three months of sales in 1997. The strong U.S. dollar
reduced sales outside of the U.S. by $5.2 million in 1998 versus 1997.
 
   Gross profit for 1998 totaled $755.8 million compared to $326.4 million in
1997. Excluding the $14.6 million of non-recurring costs related to the
Behring integration, 1998 gross profit was $770.4 million. Gross profit for
1997 totaled $510.0 million, exclusive of the $171.4 million purchase
accounting inventory step-up and the $12.2 million charge related primarily to
distribution costs and to increased inventory reserves resulting from the
Miami plant closure actions. Exclusive of the above impacts, gross profit
increased $260.4 million or 51.1% over 1997, with gross margins improving to
59.9% as compared to 52.0% in 1997. This increase was attributable primarily
to the inclusion of a full year of operations from the Behring Combination
versus three months of operations in 1997, the ongoing realization of
manufacturing cost reductions initiated as a result of the combination and a
favorable shift toward higher margin products.
 
   Marketing and administrative expense for 1998 totaled $513.9 million as
compared to $366.8 million in 1997. During 1998 $8.6 million of non-recurring
costs related to the Behring integration were included in marketing and
administrative expenses. Marketing and administrative expense for 1997
included $21.3 million of non-recurring charges primarily related to the
transition of non-core product lines. Exclusive of the above impacts, the
$159.8 million or 46.3% increase over 1997 was attributable primarily to the
inclusion of a full year of operations from the Behring Combination versus
three months of operations in 1997, offset by cost reduction programs
initiated as a result of the combination.
 
   Research and development expense for 1998 totaled $88.2 million, or $86.9
million exclusive of $1.3 million of non-recurring costs related to the
Behring integration. Research and development expense for 1997 totaled $60.6
million, exclusive of the $1.1 million purchase accounting write-off of in-
process research and development projects related to the Behring Combination.
Exclusive of the above impacts, the $26.3 million or 43.4% increase over 1997
was attributable primarily to the inclusion of a full year of operations from
the Behring Combination versus three months of operations in 1997, and
increased investment in new products offset by cost synergies related to
eliminating overlapping or redundant R&D projects. Research and development
expenditures are primarily focused on the development of new instrument
platforms, expansion of test menus and investment in advanced diagnostics and
point-of-care technologies.
 
   The restructuring credit of $4.5 million in 1998 related to the reversal of
excess severance charges initially established in 1997, as a result of higher
than projected levels of employee turnover at the Company's Miami facility
(see also Note 10 to the Consolidated Financial Statements).
 
   Net interest expense for 1998 totaled $80.5 million as compared to $87.8
million in 1997. The $7.3 million or 8.3% decrease was attributable primarily
to lower borrowing rates.
 
   Other income of $5.6 million in 1998 includes gains of $2.4 million for the
sale of two non-strategic businesses and $2.9 million for the sale of a former
manufacturing facility in Miami.
 
   Pre-tax net income for 1998 totaled $77.9 million as compared to a pre-tax
net loss of $226.4 million in 1997. The pre-tax net loss in 1997 was
attributable primarily to the effects of purchase accounting, restructuring
charges, non-recurring operating charges, incremental and duplicative
operating costs and integration costs.
 
   Income tax expense of $34.4 million (an effective rate of 44.2%) was
recorded in 1998. At December 31, 1998, the Company had net deferred tax
assets of $375.3 million. In assessing the realizability of the deferred tax
asset, management has analyzed the Company's forecast of future taxable income
by jurisdiction and other relevant factors and has concluded that
recoverability of the net deferred tax asset is more likely to occur than not.
 
                                      14
<PAGE>
 
   For the year ended December 31, 1998, the Company had net income of $43.5
million, as compared to a net loss of $142.6 million in 1997. The net loss in
1997 reflects the impacts of purchase accounting, restructuring charges, non-
recurring operating charges, incremental and duplicative operating and
integration costs.
 
   Earnings before interest, taxes, depreciation, amortization, non-cash
stock-based compensation expense, non-recurring integration expenses, other
non-recurring operating charges and other non-cash charges (EBITDA) for 1998
totaled $258.6 as compared to $176.0 million in 1997. The $82.6 million or
46.9% increase over 1997 was attributable primarily to the inclusion of a full
year of operations from the Behring Combination versus three months of
operations in 1997 and realization of cost synergies from the integration of
Behring operations. EBITDA, which is a widely accepted financial indicator of
a company's ability to service and/or incur indebtedness, represents the sum
of net income, depreciation and amortization, non-cash stock-based
compensation expense, non-recurring integration expenses, and other non-
recurring operating charges and other non-cash charges. EBITDA should not be
considered as a substitute for net income as a measure of a Company's
operating results or to cash flows as a measure of liquidity.
 
 1997 Compared to 1996
 
   Net sales for 1997 were $980.5 million, an increase of $184.7 million or
23.2% over 1996. The increase was attributable primarily to the inclusion of
sales from the Behring Combination during the three months of ownership in
1997 and the inclusion of twelve months of sales from the Chemistry
Acquisition (versus eight months of sales in 1996). The strong U.S. dollar
reduced international sales by $45.3 million in 1997 versus 1996.
 
   Gross profit for 1997 totaled $510.0 million as compared to $386.0 million
in 1996, after adjusting for the following items impacting comparability; in
1996, the $24.8 million purchase accounting inventory step-up impact, and the
$9.5 million charge to establish a reserve for excess Paramax(R) spare parts
inventories recorded and in 1997, the $171.4 million purchase accounting
inventory step-up and the $12.2 million charge related primarily to
distribution costs and to increased inventory reserves resulting from the
Miami plant closure actions recorded in 1997. The $124.0 million increase in
gross profit over 1996 exclusive of the above impact was due to the inclusion
of twelve months of results of the Chemistry Acquisition, as compared to only
eight months of activity in 1996, three months of results of the Behring
Combination, as well as the ongoing realization of manufacturing cost
reduction initiatives and a shift toward higher margin products. The strong
U.S. dollar reduced gross profit by $24.9 million in 1997 versus 1996. Gross
margins for 1997 improved to 52.0% as compared to 48.5% in 1996 exclusive of
the above adjustments.
 
   Marketing and administrative expense for 1997 totaled $345.5 million,
excluding $21.3 million of non-recurring charges primarily related to the
transition of non-core product lines, as compared to $255.5 million in 1996.
The increase is due to the inclusion of twelve months of activity from the
Chemistry Acquisition as compared to only eight months of activity in 1996 and
the inclusion for 1997 of three months of operations from the Behring
Combination and non-recurring costs related to the integration of Behring,
offset by cost reduction programs and lower international expenses resulting
from the strength of the U.S. dollar.
 
   Research and development increased by $20.7 million or 51.9% in 1997 as
compared to 1996 exclusive of $98.1 million purchase accounting write-off of
in-process research and development projects related to the Chemistry
Acquisition in 1996 and the $1.1 million purchase accounting write-off of in-
process research and development projects related to the Behring Combination
in 1997. The increase is attributable to twelve months of operations from the
Chemistry Acquisition as compared to only eight months of activity in 1996,
three months of operations from the Behring Combination, offset partially by
realized cost synergies. Research and development expenditures are primarily
focused on supporting projects that are expanding test menus, developing the
next generation Dimension(R) RxL clinical chemistry instrument platform and
developing a new point-of-care cardiac instrument platform.
 
   During 1997, the Company recorded a $40.1 million restructuring charge and
allocated $77.7 million of the Behring Combination purchase price related to a
restructuring plan to consolidate manufacturing and distribution
 
                                      15
<PAGE>
 
operations and eliminate redundant sales, service and administrative
functions. The restructuring plans include actions to close the Miami and
Westwood manufacturing facilities, consolidate and reorganize the global
sales, marketing and R&D organizations and eliminate administrative
redundancies.
 
   Net interest expense for the year ended December 31, 1997 was $87.8 million
as compared to $65.6 million for 1996. The increase is attributable to a full
year of Chemistry Acquisition debt service recorded (versus eight months in
1996), offset partially by lower borrowing rates.
 
   Other income of $9.0 million in 1997 includes a gain of $9.5 million for a
settlement with a supplier for non-performance under a contractual agreement
partially offset by foreign currency transaction losses.
 
   An income tax benefit of $83.8 million (an effective rate of 37%) was
recorded in 1997. The Company's pre-tax loss of $226.4 million was caused by
purchase accounting related adjustments of $171.4 million for inventory step-
up and $1.1 million for the write-off of in-process research and development
projects with no alternative future use, the restructuring charge of $40.1
million and the other non-recurring charges of $33.5 million. At December 31,
1997, the Company had a net deferred tax asset of $380.2 million. In assessing
the realizability of the deferred tax asset, management has analyzed the
Company's forecast of future taxable income by jurisdiction and other relevant
factors and has concluded that recoverability of the net deferred tax asset is
more likely to occur than not. The realization of the deferred tax asset is
not dependent upon material improvement over the Company's forecast level of
pre-tax income, significant changes in the current relationship between income
reported for financial and tax purposes, or material asset sales or other
transactions not in the normal course of business.
 
   For the year ended December 31, 1997, the Company had a net loss of $142.6
million as compared to a net loss of $105.3 million in 1996. The net loss in
1997 was due to the effects of purchase accounting, restructuring charges,
increased interest expense related to a full year of Chemistry Acquisition
debt service, non-recurring operating charges, incremental and duplicative
operating costs and integration costs.
 
   For the year ended December 31, 1997, the Company's EBITDA was $176.0
million, as compared to $126.5 million for 1996. The increase over 1996 is
attributable to the full year of operations from the Chemistry Acquisition and
three months of operations from the Behring Combination and realization of
cost synergies from the integration of the Chemistry and Behring operations.
Foreign currency exchange rate fluctuations had an adverse impact of $9.2
million on EBITDA during 1997 versus 1996. EBITDA, which is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness, represents the sum of net loss, depreciation and amortization,
the purchase accounting write-offs related to inventory step-up and in-process
research and development with no alternative future use, non-cash stock-based
compensation expense, integration expenses, restructuring and other non-
recurring operating charges and other non-cash charges. EBITDA should not be
considered as a substitute for net income as a measure of a Company's
operating results or to cash flows as a measure of liquidity.
 
Financial Condition and Liquidity
 
   The Company's primary liquidity requirements are for working capital,
capital expenditures, restructuring expenditures and debt service. Working
capital at December 31, 1998 totaled $260.8 million. At December 31, 1998, the
Company had utilized $19.0 million of its $105.0 million revolving credit
facility and had $151.6 million available under various non-U.S. credit lines.
 
   Capital expenditures, including instrument placements in customer
locations, totaled $139.0 million in 1998 compared to $68.4 million in 1997.
The increase reflects the impact of a full year of Behring operations,
integration-related investments for stand-alone infrastructure of $8.8
million, and integration-related expenditures for information systems of $15.6
million. Capital expenditures in 1999 are expected to approximate 1998 levels.
 
   Management believes cash from operating activities and the Company's
available credit facilities will be sufficient to permit the Company to meet
its financial obligations and fund its operations and planned investments.
 
                                      16
<PAGE>
 
   Inflation affects the cost of goods and services used by the Company.
Inflation has been modest in recent years. Overall product prices have been
relatively stable during the past three years and the Company continues to
mitigate the adverse effects of inflation primarily through new product
offerings, improved productivity and cost containment and improvement
programs.
 
Outlook
 
   Management expects sales and operating income growth in 1999, reflecting
the impact of new product introductions and the continued realization of
synergies from the integration of Behring operations into the Company, offset
partially by managed declines in certain mature product lines. Management
believes the Company's broad product line offering and extensive sales and
service infrastructure position it well to compete globally. Sales results
outside the United States are subject to significant influence by foreign
currency exchange rates.
 
   Continued growth from new products is anticipated as the Company continues
to benefit from new platform launches and continued expansion of test menus
and investments in near-patient products. Key products include the
Dimension(R), Stratus(R) CS, Hemostasis, Sysmex(R) CA-500, Sysmex(R) CA-1500,
and BN ProSpec(TM) instruments, Infectious Disease Diagnostics Quadriga
platform as well as a wide range of new assays. Management expects to continue
to aggressively manage the decline across mature product lines (such as
Paramax(R) and Stratus(R) non-cardiac) as the Company continues its successful
strategy of migrating customers from these non-core product lines to newer
platforms (e.g. Dimension(R)).
 
   The Company expects to achieve additional productivity gains in 1999 from
the integration of the Behring Combination. Synergies will be achieved from
the final closure of the Miami, Florida facility; closure of the Kawagoe,
Japan manufacturing facility; elimination of certain transition services from
Hoechst A.G. and Baxter as stand-alone systems and infrastructure projects are
completed; achieving a full-year benefit from 1998 actions including the
closure of the Westwood, Massachusetts facility; consolidation of country
sales and service organizations; and elimination of duplicative administrative
functions.
 
Other Matters
 
 Year 2000 Readiness
 
   Certain information systems in use today may not be able to interpret dates
after December 31, 1999 because such systems allow only two digits to indicate
the year in a date. As a result, such systems are unable, for example, to
distinguish January 1, 2000 from January 1, 1900. Such inability to properly
distinguish between dates could have adverse consequences on the operations of
a business and the integrity of information processing. This potential problem
is commonly referred to as the "Year 2000" or "Y2K" issue.
 
   The Company has completed a review of substantially all of its information
systems and product offerings for Year 2000 issues. The scope of this review
included information technology infrastructure components (such as hardware,
operating systems and communication equipment), business application software,
production and research equipment, laboratory products and associated
applications, buildings' and facilities' systems, personal computers, and the
status of all key suppliers' Year 2000 remediation efforts.
 
   Based on the results of the review, a formal plan has been established by
the Company to address Year 2000 issues. The Plan is monitored by the
Company's Year 2000 Program Office, comprised of senior management in key
functional areas, which reports on a regular basis to executive management on
the plan's status. Although the identification and successful remediation of
all Year 2000 issues cannot be assured with absolute certainty, the Company
expects a successful execution of its Year 2000 plan. The inability of the
Company or third parties on which it relies to resolve Year 2000 issues could
have a material adverse effect on the Company's results of operations and
financial condition.
 
                                      17
<PAGE>
 
   The plan, which provides a process for periodic progress reporting on a
site and region basis, prioritizes mission critical and urgent Year 2000
issues. Progress against the plan is meeting interim mileposts. As of December
31, 1998, remediation plans for 98% of our products have been developed, with
the remaining 2% completed in the first quarter of 1999. Approximately 46% of
all identified internal applications requiring remediation have been made
ready as of December 31, 1998. The majority of mission critical and urgent
Year 2000 product and internal systems issues are planned to be remedied by
the end of the second quarter of 1999, and all are expected to be resolved no
later than the end of the third quarter of 1999. Contingency plans, as
necessary, will be fully established beginning in the first quarter of 1999.
 
   In connection with the resolution of Year 2000 issues, the Company incurred
expenses of approximately $5.4 million in 1998 and expects to incur expenses
of approximately $30.0 million in 1999; expenses in 2000 are expected to be
immaterial. However, there can be no assurance that these costs will not be
greater than anticipated.
 
 New Accounting Pronouncements
 
   On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction.
Management of the Company anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
 
   The information below about the Company's market sensitive financial
instruments constitutes a "forward-looking statement." Actual results in the
future may differ materially from projected results due to actual developments
in the global financial markets. The methods used by the Company to assess and
mitigate risk should not be considered projections of future events or losses.
The Company enters into contracts with major financial institutions, thereby
minimizing the risk of credit loss. Although the Company does not anticipate
nonperformance by counterparties, nonperformance would expose the Company to
credit loss.
 
   In the ordinary course of business, the Company utilizes various financial
instruments that inherently have some degree of market risk. The principle
market risks to which the Company is exposed are changes in interest rates and
foreign currency exchange rates. The Company does not enter into contracts for
speculative or trading purposes. Contract periods are consistent with related
underlying exposures and do not constitute positions independent of those
exposures. The qualitative and quantitative information presented below
summarizes the Company's market risks associated with debt obligations and
other significant financial instruments outstanding at December 31, 1998. Fair
values included herein have been determined based on quoted market prices. The
information presented below should be read in conjunction with Note 3 to the
Consolidated Financial Statements.
 
 Interest Rate Risk
 
   The Company is subject to interest rate risk on its long-term variable
interest rate debt. The Company enters into debt obligations primarily to
support general corporate purposes, including capital expenditures and working
capital needs. To manage a portion of its exposure to interest rate increases
on its outstanding debt, the Company uses purchased interest rate caps, for
which the Company will receive cash payments from the counterparty if an
indexed rate of interest is exceeded. These agreements effectively change the
Company's exposure on its debt obligations with variable interest rates to a
fixed interest rate ("strike price") of 8.5% to 9%, based on three-month LIBOR
rates. Interest rates at December 31, 1998 were below the strike prices of
these contracts.
 
                                      18
<PAGE>
 
   At December 31, 1998, the Company had outstanding three interest rate cap
agreements having notional principal amounts of $50 million each and one
interest rate cap agreement having a notional principal amount of $80 million.
The interest rate cap agreements mature on June 14, 1999, July 23, 1999, July
30, 1999, and August 6, 1999, respectively. The following table sets forth, as
of December 31, 1998, the Company's principal cash flows for its long-term
debt obligations under its bank credit agreement, related weighted average
interest rates, and the notional amounts and weighted average interest rates
of the Company's interest rate caps, by expected maturity dates (U.S. dollars
in millions):
 
<TABLE>
<CAPTION>
                                   Expected Maturity Dates                          Estimated
                          ----------------------------------------------          Fair Value at
                           1999   2000   2001   2002   2003   Thereafter Total  December 31, 1998
                          ------  -----  -----  -----  -----  ---------- ------ -----------------
<S>                       <C>     <C>    <C>    <C>    <C>    <C>        <C>    <C>
Long-term variable rate
 debt                     $ 13.0  $40.7  $84.8  $89.8  $87.4    $70.3    $386.0      $386.0
Weighted average
 interest rate               7.4%   7.4%   7.7%   7.5%   7.9%     8.2%
Variable to fixed caps    $230.0  $ --   $ --   $ --   $ --     $ --     $230.0      $  --
Weighted average receive
 rate                        8.7%   --     --     --     --       --
</TABLE>
 
 Foreign Currency Risk
 
   The Company is subject to foreign currency risk on certain short-term
intercompany borrowing arrangements denominated in foreign currencies. The
Company enters into these arrangements primarily to support the underlying
working capital needs of non-U.S. subsidiaries. At December 31, 1998, the
Company's non-U.S. short-term borrowings totaled $96.4 million. In addition,
the Company is subject to foreign currency risk on trade accounts payable and
receivable, primarily intercompany, where the receivable or payable is
denominated in a currency other than the functional currency of the entity. To
manage a portion of these exposures to foreign currency fluctuations, the
Company uses forward currency exchange contracts.
 
   At December 31, 1998, the Company had outstanding 26 short-term forward
currency exchange contracts denominated in Australian, Canadian, Dutch,
Filipino, French, Italian, Japanese, Singapore, Swiss, and U.S. dollar
currencies having a total notional contract amount of $89.7 million. The
contracts mature between January and July, 1999. The cost to settle the
contracts, which is not material to any individual contract, was $5.0 million
at December 31, 1998. The following table sets forth, as of December 31, 1998,
the contract amounts at the contract exchange rates as of the contract
maturity dates for significant forward currency exchange contracts outstanding
(U.S. dollars in millions). Due to the short-term nature of these contracts,
contract amounts approximated fair values, and contract exchange rates
approximated weighted average contract foreign currency exchange rates at
December 31, 1998.
 
<TABLE>
<CAPTION>
                                    Contract    Contract    Estimated Fair Value
                                     Amount       Rate      at December 31, 1998
                                    -------- -------------- --------------------
      <S>                           <C>      <C>            <C>
      Receive U.S. Dollar/Pay:
        Australian Dollar..........  $ (2.6) 0.6415-0.64175        $ (2.5)
        Canadian Dollar............  $ (4.9) 1.54177-1.549         $ (4.9)
        Swiss Franc................  $(18.3)  1.3317-1.376         $(18.0)
        French Franc...............  $(25.7)  5.526-5.687          $(25.5)
        Italian Lira...............  $ (5.1)     1678.9            $ (5.1)
        Japanese Yen...............  $(26.7) 125.53-134.15         $(30.3)
        Dutch Guilder..............  $ (1.4)    1.99009            $ (1.4)
        Philipine Peso.............      *       49.85                 *
        Singapore Dollar...........  $ (2.2)  1.6433-1.608         $ (2.2)
      Pay U.S. Dollar/Receive:
        Swiss Franc................  $  0.7       1.36             $  0.7
        French Franc...............  $  1.8      5.4968            $  1.8
        Singapore Dollar...........  $  0.3      1.594             $  0.3
</TABLE>
     --------
*Less than $0.1 million
 
                                      19
<PAGE>
 
Item 8. Financial Statements.
 
   See the attached Consolidated Financial Statements (pages F-1 through F-29).
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
 
   None.
 
                                    PART III
 
Item 10. Directors and Executive Officers of the Registrant.
 
Executive officers and directors of Dade Behring are as follows:
 
<TABLE>
<CAPTION>
 Name                       Age                     Position
 ----                       ---                     --------
 <C>                        <C> <S>
 Steven W. Barnes..........  38 President, Chief Executive Officer and Director
 
 James W. P. Reid-Anderson.  39 Chief Administrative Officer, Chief Financial
                                Officer and Director
 
 Robert W. Brightfelt......  56 Group President, Chemistry and Director
 
 Friedhelm Blobel..........  50 Group President, Microbiology, Syva, and
                                Advanced Diagnostics
 
 Donal Quinn...............  43 Group President, Biology
 
 Robert W. Kleinert........  47 Executive Vice President, U.S. Region
 
 Marc N. Casper............  31 Executive Vice President, Europe, Asia, and
                                Intercontinental Region
 
 Thomas E. Hill............  49 Senior Vice President, Human Resources
 
 Scott T. Garrett..........  49 Director
 
 Mark E. Nunnelly..........  40 Director
 
 Stephen G. Pagliuca.......  44 Director
 
 Adam Kirsch...............  37 Director
 
 John P. Connaughton.......  33 Director
 
 Joseph H. Gleberman.......  40 Director
</TABLE>
 
   Mr. Barnes was appointed President and Chief Executive Officer and Director
in 1997. Prior to this assignment, he served as the Company's President of
Global Products and Chief Operating Officer since 1996. In 1996 and 1997, Mr.
Barnes was Executive Vice President of Bain Venture Capital, where he was
responsible for several portfolio companies, including Dade Behring Inc.,
Miltex Inc. and Claricom Inc., where he served as President and Director. From
1988 to 1996, Mr. Barnes served in various positions, including President and
Director of Holson Burnes Group Inc., a publicly traded consumer products
company. From 1982 to 1988, Mr. Barnes served in various positions with Price
Waterhouse. Mr. Barnes is also currently a Director of Miltex, Inc.
 
   Mr. Reid-Anderson was appointed Chief Administrative Officer and Chief
Financial Officer in 1997 and is also a Director of the Company. In this role,
he has global responsibility for all administrative functions, including
Finance, Human Resources (HR), Legal, Business Development, Information
Technology, Staff Operations, Bank/Investor/Analyst Relations, Staff Research
and Development (R&D) and Regulatory Affairs/Quality Assurance (RA/QA). Prior
to this assignment, Mr. Reid-Anderson was Executive Vice President and Chief
Financial Officer for Dade International since 1996. Prior to joining the
Company, he was Chief Operating Officer and Chief Administrative Officer of
Wilson Sporting Goods in addition to running Wilson's international unit. Mr.
Reid-Anderson also served in various financial positions of increasing
responsibility for Pepsico Inc., Diageo PLC (formerly Grand Metropolitan PLC)
and Mobil Oil Corporation in Europe, Asia and North America. Mr. Reid-Anderson
is also currently a Director of Epoch Senior Living.
 
                                       20
<PAGE>
 
   Mr. Brightfelt was appointed Group President, Chemistry in 1997 and is also
a Director of the Company. In this role, he is responsible for the worldwide
operations of Dade Behring's Chemistry business. Prior to this assignment, Mr.
Brightfelt was Executive Vice President of Dade Behring Chemistry Systems
since 1996. From 1967 to 1995, he served in a number of executive positions
for the DuPont Company in a variety of areas, including Business Director of
the Diagnostics Business; Worldwide Marketing Manager, IVD; IVD New Products
Manager; Manager of Product Management and Strategic Planning; and Production
Control and Planning. Mr. Brightfelt is also a Director of Molecular
BioSystems and the Health Industry Manufacturing Association (HIMA).
 
   Dr. Blobel was appointed Group President, Microbiology, Syva, and Advanced
Diagnostics in 1998. In this role, he is responsible for the Microbiology,
Syva (DAT/TDM) and Infectious Disease Diagnostics businesses. In addition, he
manages the Corporate Advanced Development R&D center. Prior to this
assignment, Dr. Blobel was Group President, Biology since 1997. Previously, he
was Chief Technology Officer and Head of Worldwide Product Supply for Dade
Behring Diagnostics since 1995. From 1977 to 1995, he served in several
executive capacities for Boehringer Mannheim GmbH Germany.
 
   Mr. Quinn was appointed Group President, Biology in 1998. In this role, he
is responsible for the worldwide management of the Hemostasis and Plasma
Protein product lines as well as for the Marburg site. Prior to joining the
Company, Mr. Quinn was employed by Mallinckrodt Medical in a number of
executive positions since 1982, including Vice President and General Manager
for Anesthesiology, Europe; Vice President and Managing Director Europe and
Hemocue; and Vice President and Managing Director, Critical Care Division.
 
   Mr. Kleinert was appointed Executive Vice President, U.S. Region in 1997.
In this role, he is responsible for all commercial activities in the U.S.,
including sales, commercial marketing, service, national accounts and customer
support. Prior to this assignment, he was Executive Vice President, Worldwide
Field Operations for the Dade organization since 1994. Prior to joining the
Company, Mr. Kleinert worked for Baxter Healthcare Corporation in a series of
executive roles, including President, Clintec Nutrition; President, Baxter
Diagnostics, Europe; and President, MicroScan Division.
 
   Mr. Casper was appointed Executive Vice President, Europe, Asia and
Intercontinental Region in 1997. In this role, he is responsible for sales and
operations outside the U.S. Prior to joining the Company, Mr. Casper was an
associate of Bain Venture Capital and worked with the Company since 1995 as a
member of Bain Venture Capital's Portfolio Management Group. Mr. Casper also
worked as a strategic consultant for Bain and Company, where he held several
positions of increasing responsibility.
 
   Dr. Hill was appointed Senior Vice President, Human Resources in 1994. In
this role, he is responsible for all human resource activities, including
corporate employee benefits, compensation, HR development and planning, and
employee relations. Prior to joining the Company, Dr. Hill worked for Baxter
Healthcare Corporation in several executive HR positions of increasing
responsibility. These positions included Director of Corporate Compensation;
Director of Compensation and Benefits for Global Businesses; Vice President,
Human Resource Planning; Corporate Human Resource Planning and Staffing; and
Vice President, Human Resources, Baxter Diagnostics, Inc.
 
   Mr. Garrett joined Baxter in 1975 as a product development engineer and
served in a number of research, strategic planning and management positions.
Mr. Garrett was named Vice President and General Manager of Baxter
Diagnostics, Inc.'s European operations in 1987 and was named President of the
Paramax(R) Systems Division in 1989. Mr. Garrett became Executive Vice
President of Baxter Diagnostics, Inc. in 1990, with responsibility for all
divisions and operations associated with manufactured product lines. Mr.
Garrett served as Chief Executive Officer from 1994-1997. Mr. Garrett is a
member of the American Association for Clinical Chemistry and also currently
serves on the Health Industry Manufacturers Association Board of Directors. He
is also a Director of Sunol Molecular Corporation. Mr. Garrett resigned from
the Company effective October 31, 1997.
 
                                      21
<PAGE>
 
   Mr. Nunnelly has been a Managing Director of Bain Venture Capital since May
1993 and a general partner of Bain Venture Capital since 1990. Prior to
joining Bain Venture Capital, Mr. Nunnelly was a partner at Bain & Company,
where he managed several relationships in the manufacturing sector and served
with Procter and Gamble in product management. He is also a Director of
Corporate Software and Technology, The Learning Company, SR Research and
DoubleClick.
 
   Mr. Pagliuca has been a Managing Director of Bain Venture Capital since May
1993 and a general partner of Bain Venture Capital since 1989. Prior to
joining Bain Venture Capital, Mr. Pagliuca was a partner at Bain & Company,
where he worked extensively in the healthcare arena. Mr. Pagliuca also worked
as a senior accountant and international tax specialist for Peat Marwick
Mitchell & Company in the Netherlands. He is also a Director of Gartner Group,
Coram Healthcare, Epoch Senior Living, Wesley Jessen and Vivra Specialty
Partners.
 
   Mr. Kirsch has been a Managing Director of Bain Venture Capital since May
1993 and a general partner of Bain Venture Capital since 1990. Mr. Kirsch
joined Bain Venture Capital in 1985 as an associate. Prior to joining Bain
Venture Capital, Mr. Kirsch was a consultant at Bain & Company, where he
worked in mergers and acquisitions. He is also a Director of Therma Wave,
Wessley Jessen, Stage Stores and Brookstone.
 
   Mr. Connaughton has been a Managing Director of Bain Venture Capital since
1997 and a member of the firm since 1989. Prior to joining Bain Venture
Capital, Mr. Connaughton was a consultant at Bain & Company, where he worked
in consumer products and healthcare strategy consulting. Following the
Chemistry Acquisition, Mr. Connaughton became a Director of the Company. Mr.
Connaughton is also currently a Director of Epoch Senior Living.
 
   Mr. Gleberman is a Managing Director in the Principal Investment Area of
Goldman, Sachs & Co. He joined Goldman Sachs in 1982 in the Mergers and
Acquisitions Department. In 1990 he became head of Mergers and Acquisitions
for Asia and moved to Tokyo. Mr. Gleberman joined the Principal Investment
Area in 1993 and returned to New York. He is also a Director of Applied
Analytical Industries Inc., Biofield Corporation and several privately held
companies.
 
                                      22
<PAGE>
 
Item 11. Executive Compensation.
 
                          Summary Compensation Table
 
<TABLE>
<CAPTION>
                           Annual Compensation            Long-Term Compensation
                         ----------------------- ----------------------------------------
   Name and Principal                            Options/SAR LTIP Payment    All Other
        Position         Year Salary($) Bonus($)   (#)(1)       ($)(8)    Compensation($)
   ------------------    ---- --------- -------- ----------- ------------ ---------------
<S>                      <C>  <C>       <C>      <C>         <C>          <C>
Steven W. Barnes........ 1998  365,038  525,000        --          --       100,000(10)
 President, Chief                                  180,000                      652(3)
 Executive Officer       1997      --       --                     --           --
 and Director (6)
 
Friedhelm Blobel........ 1998  270,000  180,000        --      108,000        3,200(2)
 Group President,                                                             4,990(3)
 Microbiology,                                                                3,575(9)
 Syva, and Advanced                                                          13,542(11)
 Diagnostics (7)                                                   --       125,000(12)
                                                                              7,500(13)
                         1997      --       --      64,000
 
James W.P. Reid-         1998  352,132  450,000        --          --         3,200(2)
 Anderson...............                                                     13,001(3)
 Chief Administrative                                                         1,385(4)
 Officer,                                                                    28,388(5)
 Chief Financial Officer                                                      7,500(9)
 and Director            1997  330,000  178,500     49,850         --         3,200(2)
                                                                              5,506(3)
                                                                             29,230(5)
                         1996  116,769  148,500     69,000         --           --
 
Robert W. Kleinert...... 1998  270,609  170,000        --          --         3,200(2)
 Executive Vice                                                              12,221(3)
 President, U.S.                                                              8,080(4)
 Region                                                                       7,500(9)
                         1997  240,824   85,000     17,910         --         3,200(2)
                                                                              8,798(3)
                                                                              7,756(4)
                         1996  202,862   32,680        --          --         4,500(2)
                                                                             11,836(3)
                                                                              6,300(4)
 
Marc N. Casper.......... 1998  262,239  240,000        --          --         3,027(2)
 Executive Vice                                                               5,777(3)
 President, Europe,                                                          10,800(4)
 Asia, and                                                                    7,500(9)
 Intercontinental Region 1997  190,903  107,500     55,000         --         9,969(4)
</TABLE>
--------
 (1) The options were granted under Holdings' Executive Management Equity
     Plan.
 (2) Reflects amounts contributed by Dade Behring for the benefit of the named
     executive officers under the Savings Investment Plan.
 (3) Reflects amounts contributed by Dade Behring for the benefit of the named
     executive officers under the Deferred Compensation Plan and related
     interest.
 (4) Reflects amounts contributed by the company for an automobile allowance.
 (5) Reflects amounts provided by the company for a home leave allowance.
 (6) Mr. Barnes became CEO on November 1, 1997. Mr. Barnes did not receive any
     cash remuneration from the company during 1997.
 
                                      23
<PAGE>
 
 (7) Mr. Blobel became an employee of the company on October 1, 1997. He
     continued to be paid by Hoechst for the balance of 1997.
 (8) Reflects amounts received by Mr. Blobel under the Hoechst BDI LTI plan.
 (9) Reflects amounts provided by the company for a personal financial
     planning allowance.
(10) Reflects amounts received by Mr. Barnes as a sign on bonus when he became
     an employee of the company.
(11) Reflects amounts received as cost of living allowance under the Hoechst
     relocation policy.
(12) Reflects amounts received by Mr. Blobel under the Hoechst BDI Stay Bonus
     program.
(13) Reflects amounts received by Mr. Blobel under the Hoechst BDI Executive
     Allowance program.
<TABLE>
<CAPTION>
                       Individual Grants
      --------------------------------------------------- Potential Realizable Value
      Number of   % of Total                                at Assumed Annual Rates
      Securities   Options                                of Stock Price Appreciation
      Underlying  Granted to  Exercise or                       of Option Terms
       Options   Employees in Base Price                  ----------------------------
Name   Granted   Fiscal Year    ($/Sh)    Expiration Date      5%            10%
----  ---------- ------------ ----------- ---------------      --       --------------
<S>   <C>        <C>          <C>         <C>             <C>           <C>
None
</TABLE>
 
   The following table sets forth information concerning the option grants by
Holdings in 1998 to each of the named executive officers:
 
 
    Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
                               Option/SAR Values
 
<TABLE>
<CAPTION>
                                                    Number of Securities
                                                   Underlying Unexercised   Value of Unexercised In-
                                 Company                Options/SARs         the-Money Options/SARs
                         ------------------------ ------------------------- -------------------------
                         Shares Acquired  Value
Name                       on Exercise   Realized Exercisable Unexercisable Exercisable Unexercisable
----                     --------------- -------- ----------- ------------- ----------- -------------
<S>                      <C>             <C>      <C>         <C>           <C>         <C>
Steven W. Barnes........       --          $--
 Time options...........                            135,000      45,000     $5,602,500   $1,867,500
Friedhelm Blobel........       --           --
 Time options...........                             12,800      51,200        294,400    1,177,600
James W.P. Reid-
 Anderson...............       --           --
 Time options...........                             57,800       9,200      2,912,300      432,200
 Performance options....                                --       51,850            --     2,385,100
Robert W. Kleinert......       --           --
 Time options...........                              3,900       1,300        222,300       74,100
 Performance options....                                --       40,910            --     1,881,860
Marc N. Casper..........       --          $--
 Time options...........                              5,000      20,000        237,000      948,000
 Performance options....                                --       30,000            --     1,380,000
</TABLE>
 
Pension Plan Benefits
 
   Dade Behring maintains a defined benefit pension plan (the "Plan") for the
benefit of its U.S. employees. Under the Dade Behring cash balance formula
design, credits to an eligible participant's account are posted to a notional
account based on eligible compensation and service. Moreover, interest credits
are posted to each notional account as of the end of each quarter at the
prevailing rate of return for 10-year U.S. Treasury bills at the end of the
previous quarter.
 
Cash Balance Formula Design
 
   The cash balance formula design became effective January 1, 1997 when Dade
Behring transitioned its pension plan from a final average pay formula design
to a cash balance formula design. Employees with an accrued benefit under the
final average pay formula design as of December 31, 1996 were credited with an
opening cash balance based on the lump-sum present value of the final average
pay formula accrued benefit. In addition, the present value of the
aforementioned accrued benefit was increased by a transitional benefit
supplement expressed as a percentage multiplier. This transitional benefit
supplement recognized the sum of age and service as of December 31, 1996, as
follows:
 
<TABLE>
<CAPTION>
                                                            Transitional Benefit
      Points for Age Plus Service                                Supplement
      ---------------------------                           --------------------
      <S>                                                   <C>
      less than 35.........................................         110%
      35 to 44.............................................         115%
      45 to 54.............................................         120%
      55 or more...........................................         125%
</TABLE>
 
                                      24
<PAGE>
 
   As of January 1, 1997, the named executive officers had transitional benefit
supplements as follows: Mr. Kleinert, $54,197. These transitional benefits
include supplements to the qualified and non-qualified pension plans. Mr.
Barnes, Mr. Blobel, Mr. Reid-Anderson, and Mr. Casper did not participate in
the Plan as of December 31, 1996.
 
   The following table sets forth the annual credits posted to cash balance
accounts:
 
<TABLE>
<CAPTION>
                                                                 Company Credits
      Points for Age plus Service as of                          as a Percent of
      December 31 of the Previous Plan Year                            Pay
      -------------------------------------                      ---------------
      <S>                                                        <C>
      Less than 35..............................................        4%
      35 to 44..................................................        5%
      45 to 54..................................................        6%
      55 to 64..................................................        7%
      65 to 74..................................................        8%
      75 to 84..................................................        9%
      85 or more................................................       10%
</TABLE>
 
   The named executive officers had 1998 company and interest credits as
follows: Mr. Reid-Anderson, $27,537, Mr. Kleinert, $46,613, and Mr. Casper,
$12,941. These credits were posted to the qualified and non-qualified pension
plans. Mr. Barnes and Mr. Blobel did not participate in the Plan as of December
31, 1998.
 
Final Average Pay Formula Design
 
   Individuals participating in the Plan under the final average pay formula
design as of December 31, 1996 continue to accrue service and have their
benefits calculated under both the final average pay formula and the cash
balance formula through June 30, 1999.
 
   Of the named executive officers, one participated in the Plan as of December
31, 1996. The following table sets forth anticipated annual pension plan
benefits under the final average pay formula of the Plan.
 
                               PENSION PLAN TABLE
 
<TABLE>
<CAPTION>
                                            Years of Plan Participation
                                    --------------------------------------------
Remuneration                           15       20       25       30       35
------------                        -------- -------- -------- -------- --------
<S>                                 <C>      <C>      <C>      <C>      <C>
125,000............................ $ 32,810 $ 43,750 $ 54,680 $ 65,620 $ 76,560
150,000............................   39,370   52,500   65,620   78,750   91,870
175,000............................   45,930   61,250   76,560   91,870  107,180
200,000............................   52,500   70,000   87,500  105,000  122,500
225,000............................   59,060   78,750   98,430  118,120  137,810
250,000............................   65,620   87,500  109,370  131,250  153,120
300,000............................   78,750  105,000  131,250  157,500  183,750
400,000............................  105,000  140,000  175,000  210,000  245,000
450,000............................  118,120  157,500  196,870  236,250  275,620
500,000............................  131,250  175,000  218,750  262,500  306,250
</TABLE>
 
   The above estimated pension benefit amounts assume that benefit payments
begin at age 65 under a single life annuity form. Such amounts do not reflect
the social security offset incorporated by the pension benefit formula. The
social security offset amount is determined by a participant's social security
earnings history and normal retirement date of age 65. The estimated pension
amounts include benefits payable from the qualified and non-qualified pension
plans. The non-qualified pension plan provides benefits derived by the
qualified plan's formula that exceed legal maximum benefit limitations. The
pension benefit formula is:
 
                                       25
<PAGE>
 
  1.75% of "final average pay" multiplied by the number of years of plan
  participation, minus
 
  1.75% of "social security primary insurance amount ("PIA")" multiplied by
  the number of years of plan participation (social security offset not to
  exceed 60% of PIA)
 
where "final average pay" is defined as a participant's five highest
consecutive calendar year earnings (base salary and bonus) out of the last ten
calendar years before retirement.
 
   As of January 1, 1999, the eligible named executive officers' years of plan
participation and final average pay for purposes of calculating pension
benefits payable under the Plan under the final average pay formula design are
as follows: Mr. Kleinert, 24 years and $300,066. Mr. Barnes, Mr. Blobel, Mr.
Reid-Anderson, and Mr. Casper did not participate in the former Plan as of
December 31, 1996.
 
Compensation of Directors
 
   Directors are not entitled to receive any compensation for serving on Dade
Behring's Board of Directors. Directors are reimbursed for their out-of-pocket
expenses incurred in connection with such services.
 
Item 12. Security Ownership of Management and Directors.
 
   Dade Behring is a wholly owned subsidiary of Holdings. The common stock of
Holdings consists of Common Stock, par value $.01 per share (the "Common
Stock"), and Class L Common Stock, par value $.01 per share (the "Class L
Common"). The holders of Class L Common have no voting rights except as
required by law. The holders of the Common Stock are entitled to one vote per
share on all matters to be voted upon by the stockholders of Holdings,
including the election of directors. Bain Capital and its related investors, GS
Capital and its related investors, and Hoechst A.G. own 35.9%, 17.9%, and
31.2%, respectively, of the Common Stock and are parties to a stockholder
agreement regarding the ownership (including the voting) of such stock. By
virtue of such stock ownership and stockholder agreement, Bain Capital, GS
Capital, and Hoechst A.G. have the power to control all matters submitted to a
vote of stockholders of, and to elect all directors of, Holdings and,
indirectly, to elect all directors of Dade Behring. In 1996, 1997 and 1998,
certain members of Dade Behring's management acquired voting common stock of
Holdings, and members of Dade Behring's management are eligible to receive
additional common stock of Holdings in part based upon the operating
performance of Dade Behring.
 
   The following tables set forth certain information as of December 31, 1998
regarding the beneficial ownership of (i) voting common stock by each person
(other than directors and executive officers of Dade Behring) known to Dade
Behring to own more than 5% of the outstanding voting common stock of Holdings
and (ii) voting and non-voting common stock by each director of Dade Behring,
each named executive officer and all of Dade Behring's directors and executive
officers as a group. To the knowledge of Dade Behring, each of such
stockholders has sole voting and investment power as to the shares shown unless
otherwise noted.
 
                Security Ownership of Certain Beneficial Owners
 
<TABLE>
<CAPTION>
                                                  Common Stock (Voting)
                                             ---------------------------------
                                                                   Percentage
                                             Number of Percentage   of Class--
Name and Address of Beneficial Owner          Shares   of Class(1) Undiluted(2)
------------------------------------         --------- ----------  -----------
<S>                                          <C>       <C>         <C>
Bain Capital Entities (3)................... 5,960,000    35.9%       40.4%
 c/o Bain Capital
 Two Copley Place
 Boston, Massachusetts 02116
Hoechst A.G................................. 5,188,609    31.2%       35.2%
 Bruningstrasse 50
 D-65929 Frankfurt a. M.
 Germany
The Goldman Sachs Group, L.P. and related    2,980,000    17.9%       20.2%
 investors (4)..............................
 85 Broad Street
 New York, New York 10004
</TABLE>
 
                                       26
<PAGE>
 
--------
(1) The percentages assume that all options held by Dade Behring's management
    have been exercised. Certain of the options held by Dade Behring's
    management are exercisable in accordance with certain time and performance
    criteria. Excludes warrant held by Hoechst A.G. to purchase 1,275,816
    shares of voting Common Stock.
(2) The percentages are based on ownership of outstanding shares as of
    December 31, 1998.
(3) Amounts shown represent the aggregate number of shares held by Bain
    Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates and
    BCIP Trust Associates, L.P. (the "Bain Capital Entities").
(4) Includes shares beneficially owned by certain investment limited
    partnerships of which affiliates of the Goldman Sachs Group, L.P. ("GS
    Group") are the general partners or the managing general partners. GS
    Group disclaims beneficial ownership of shares held by such investment
    partnerships to the extent partnership interests in such partnerships are
    held by persons other than GS Group and its affiliates.
 
                Security Ownership of Management and Directors
 
<TABLE>
<CAPTION>
                                                         Class L Common Stock
                                   Common Stock (Voting)     (Non-voting)
                                   -------------------- -----------------------
                                   Number of Percentage  Number of   Percentage
     Name of Beneficial Owner       Shares    of Class     Shares     of Class
     ------------------------      --------- ---------- ------------ ----------
<S>                                <C>       <C>        <C>          <C>
Steven W. Barnes (1)..............   180,000    1.1%             --      --
Robert W. Kleinert (1)............    92,410    0.6%           5,000     0.3%
James W.P. Reid-Anderson (1)......   122,450    0.7%             400     --
Marc N. Casper (1)................    66,250    0.4%           1,250     0.1%
Friedhelm Blobel (1)..............    64,000    0.4%             --      --
Scott T. Garrett (2)..............   253,876    1.5%           8,900     0.6%
Mark E. Nunnelly (3).............. 5,960,000   35.9%      662,222.22    42.7%
Stephen G. Pagliuca (3)........... 5,960,000   35.9%      662,222.22    42.7%
Adam Kirsch (3)................... 5,960,000   35.9%      662,222.22    42.7%
John P. Connaughton (3)........... 5,960,000   35.9%      662,222.22    42.7%
Joseph H. Gleberman (4)........... 2,980,000   17.9%      331,111.11    21.3%
All executive officers and
 directors of Dade Behring as a
 group (10 people)................ 9,718,986   58.5%    1,008,833.33    65.0%
</TABLE>
--------
(1) The number of shares held by management and the percentages assume that
    all options held by management have been exercised. Certain options held
    by management are exercisable in accordance with certain time and
    performance criteria.
(2) The number of shares held by Scott T. Garrett and the percentages assume
    that all his options have been exercised.
(3) All shares shown are held by the Bain Capital Entities. Messrs. Kirsch,
    Nunnelly, Connaughton and Pagliuca, who serve as directors of Dade
    Behring, and are managing directors of Bain Capital, which is the general
    partner of certain of the Bain Capital Entities, and are limited partners
    of Bain Capital Partners IV, L.P., the general partner of certain of the
    Bain Capital Entities. Accordingly, Messrs. Kirsch, Nunnelly, Connaughton
    and Pagliuca may be deemed to share voting and dispositive power as to the
    shares held by the Bain Capital Entities. Messrs. Kirsch, Nunnelly,
    Connaughton and Pagliuca disclaim beneficial ownership of such shares.
(4) Mr. Gleberman is a general partner of Goldman, Sachs, & Co. The shares
    reported herein include shares beneficially owned by certain investment
    limited partnerships of which affiliates of GS Group are the general
    partners or the managing general partners. Mr. Gleberman disclaims
    beneficial ownership of such shares.
 
                                      27
<PAGE>
 
Item 13. Certain Relationships and Related Transactions.
 
Management Services Agreements
 
   The Company and Holdings entered into five-year Management Services
Agreements with Bain Capital and Goldman, Sachs & Co. (an affiliate of GS
Capital). Pursuant to these agreements, they will pay Bain Capital and
Goldman, Sachs & Co., subject to compliance with the terms of the indenture
governing the 11 1/8% senior subordinated notes, an aggregate annual fee of up
to $3.0 million plus their respective out-of-pocket expenses in return for
management consulting in the areas of corporate finance; corporate strategy;
investment analysis; market research and business development; advisory
services and support, negotiation; analysis of financial alternatives,
acquisitions and dispositions; and other services. The Company believes that
the fees paid for the professional services rendered are at least as favorable
to the Company as those that could be negotiated with an unaffiliated third
party. For the year ended December 31, 1998, the Consolidated Statement of
Operations and Comprehensive Income includes advisory fees and related
expenses of $3.3 million incurred under these agreements.
 
Stockholders Agreement
 
   On December 20, 1994, Holdings, Bain Capital Fund IV, L.P., Bain Capital
Fund IV-B, L.P., GS Capital Partners, L.P. and certain other parties signatory
thereto entered into a Stockholders Agreement (the "Stockholders Agreement")
whereby prior to the fifth anniversary of the date of the Stockholders
Agreement, if Holdings requires certain services of an investment banking
firm, Holdings agrees to retain Goldman, Sachs & Co. to provide such services
unless Holdings' Board of Directors determines that the retention of another
investment banking firm would provide a material additional benefit to
Holdings.
 
   On October 31, 1997, Holdings, Hoechst, Bain Capital Fund IV, L.P., Bain
Capital Fund IV-B, L.P., GS Capital Partners, L.P. and certain other parties
signatory thereto entered into an Amended and Restated Stockholders Agreement
(the "Amended and Restated Stockholders Agreement"). The Amended and Restated
Stockholders Agreement provides certain conditions in connection with the
election of directors, transfer of stock, sale of the Company and certain
restrictions on Dade Behring's activities.
 
Transition Service Agreements
 
   Pursuant to Transition Services Agreements dated September 30, 1997,
Hoechst provides the Company with certain support services including
administrative support, warehousing and distribution services, human resource
support, information systems support, accounting support and office space. The
Transition Services Agreements have various terms from October 1, 1997 through
December 31, 1999. The Company paid $12.1 million to Hoechst related to these
agreements for the year ended December 31, 1998.
 
Other Agreements
 
   Hoescht subleases office space to the Company pursuant to a sublease dated
October 1, 1997. Rent expense related to this sublease totaled $3.5 million
for the year ended December 31, 1998.
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
 
   (a) The following documents are filed as a part of this report.
 
     (i) See "Index to Financial Statements and Schedule" on page F-1 hereof.
 
     (ii) See "Index to Exhibits" on page X-1 hereof.
 
   (b) Reports on Form 8-K.
 
     None.
 
                                      28
<PAGE>
 
                               DADE BEHRING INC.
 
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
 
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Accountants.........................................   F-2
 
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998.   F-3
 
Consolidated Statements of Operations and Comprehensive Income for the
 three years ended December 31, 1998......................................   F-4
 
Consolidated Statements of Cash Flows for the three years ended December
 31, 1998.................................................................   F-5
 
Consolidated Statements of Changes in Stockholder's Equity (Deficit) for
 the three years ended December 31, 1998..................................   F-6
 
Notes to Consolidated Financial Statements................................   F-7
 
Financial Statements Schedule (Schedule II)...............................  F-29
</TABLE>
 
                                      F-1
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholder
of Dade Behring Inc.
 
   In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income, of
cash flows and of changes in stockholder's equity (deficit) present fairly, in
all material respects, the financial position of Dade Behring Inc. (a wholly-
owned subsidiary of Dade Behring Holdings, Inc.) and its subsidiaries (the
Company) at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 the
opinion expressed above.
 
PricewaterhouseCoopers LLP
 
Chicago, Illinois
March 19, 1999
 
                                      F-2
<PAGE>
 
                               DADE BEHRING INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
                (Dollars in millions, except share-related data)
 
<TABLE>
<CAPTION>
                                                      December 31, December 31,
                       ASSETS                             1997         1998
                       ------                         ------------ ------------
<S>                                                   <C>          <C>
Current assets:
  Cash and cash equivalents..........................   $   20.5     $   25.8
  Restricted cash....................................        3.7          --
  Accounts receivable, net...........................      359.6        353.5
  Inventories........................................      272.5        265.9
  Prepaid expenses and other current assets..........       11.9          7.3
  Deferred income taxes..............................       97.0         76.8
                                                        --------     --------
    Total current assets.............................      765.2        729.3
                                                        --------     --------
Property, plant and equipment, net...................      214.5        304.7
Debt issuance costs, net.............................       37.0         31.2
Goodwill, net........................................      135.6        126.5
Deferred income taxes................................      286.1        269.7
Other assets.........................................       72.0         72.0
                                                        --------     --------
    Total assets.....................................   $1,510.4     $1,533.4
                                                        ========     ========
 
<CAPTION>
        LIABILITIES AND STOCKHOLDER'S EQUITY
        ------------------------------------
<S>                                                   <C>          <C>
Current liabilities:
  Current portion of long-term debt..................   $    3.7     $   13.0
  Short-term debt....................................       54.4         96.4
  Accounts payable...................................       89.2        130.7
  Accrued liabilities................................      283.9        228.4
                                                        --------     --------
    Total current liabilities........................      431.2        468.5
                                                        --------     --------
Long-term debt, less current portion.................      416.9        373.0
Senior subordinated notes............................      350.0        350.0
Other liabilities....................................      108.2         92.6
                                                        --------     --------
    Total liabilities................................    1,306.3      1,284.1
                                                        --------     --------
Commitments and contingencies (Note 18)..............        --           --
Stockholder's equity:
  Common stock, $.01 par value, 1,000 shares
   authorized, issued and outstanding................        --           --
  Additional paid-in capital.........................      490.2        493.0
  Unearned stock-based compensation..................      (21.8)       (11.5)
  Notes receivable on capital contribution...........       (0.7)        (0.2)
  Accumulated deficit................................     (252.9)      (209.4)
  Accumulated other comprehensive income (loss)......      (10.7)       (22.6)
                                                        --------     --------
    Total stockholder's equity.......................      204.1        249.3
                                                        --------     --------
    Total liabilities and stockholder's equity.......   $1,510.4     $1,533.4
                                                        ========     ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                               DADE BEHRING INC.
 
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
                             (Dollars in millions)
 
<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                                    --------------------------
                                                     1996     1997      1998
                                                    -------  -------  --------
<S>                                                 <C>      <C>      <C>
Net sales.......................................... $ 795.8  $ 980.5  $1,285.2
                                                    -------  -------  --------
Operating costs and expenses:
  Cost of goods sold...............................   444.1    654.1     529.4
  Marketing and administrative expenses............   255.5    366.8     513.9
  Research and development expenses................   138.0     61.7      88.2
  Goodwill amortization expense....................     3.3      5.4       5.4
  Restructuring expenses...........................    15.0     40.1      (4.5)
                                                    -------  -------  --------
Income (loss) from operations......................   (60.1)  (147.6)    152.8
Other income (expense):
  Interest expense, net............................   (65.6)   (87.8)    (80.5)
  Other............................................     --       9.0       5.6
                                                    -------  -------  --------
Income (loss) before income taxes..................  (125.7)  (226.4)     77.9
Income tax expense (benefit).......................   (45.4)   (83.8)     34.4
                                                    -------  -------  --------
Income (loss) before extraordinary items...........   (80.3)  (142.6)     43.5
Extraordinary items (net of tax benefit of $14.7):
  Write-off of deferred financing fees.............   (11.4)     --        --
  Premium on purchase of 13% senior subordinated
   notes...........................................   (13.6)     --        --
                                                    -------  -------  --------
Net income (loss).................................. $(105.3) $(142.6) $   43.5
                                                    -------  -------  --------
Other comprehensive income (loss), before tax:
  Foreign currency translation adjustments.........    (2.5)    (8.6)    (11.6)
  Unrealized gain (loss) on marketable securities..     1.2     (0.2)     (0.3)
                                                    -------  -------  --------
Other comprehensive income (loss)..................    (1.3)    (8.8)    (11.9)
Income tax expense (benefit) related to items of
 comprehensive income..............................     --       --        --
                                                    -------  -------  --------
Other comprehensive income (loss), net of tax......    (1.3)    (8.8)    (11.9)
                                                    -------  -------  --------
Comprehensive income (loss)........................ $(106.6) $(151.4) $   31.6
                                                    =======  =======  ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                               DADE BEHRING INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                             (Dollars in millions)
 
<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                                    ----------------------------
                                                      1996      1997     1998
                                                    --------  --------  --------
<S>                                                 <C>       <C>       <C>
Operating Activities:
 Net income (loss)................................  $ (105.3) $ (142.6) $  43.5
 Adjustments to reconcile net income (loss) to net
  cash provided by operating activities:
   Write-off of in-process research and
    development...................................      98.1       1.1      --
   Depreciation and amortization expense..........      44.1      56.6     56.7
   Stock-based compensation expense...............       --       11.4     13.1
   Other non-cash charges.........................       --       37.1      3.8
   Write-off of deferred financing fees...........      18.1       --       --
   Amortization of inventory step-up..............      24.8     171.4      --
   Restructuring expenses.........................      15.0      40.1      --
   Non-cash write-off of excess spare parts.......       9.5       --       --
   Loss on sale of "Net asset held for sale"......       2.8       --       --
   Loss on write-down of marketable equity
    securities....................................       2.7       --       0.3
   Gain on sales of assets........................       --        --      (5.3)
   Premium on purchase of 13% senior subordinated
    notes.........................................      21.6       --       --
   Deferred income taxes..........................     (48.2)    (86.1)    29.6
   Changes in balance sheet items:
     Accounts receivable, net.....................       1.0      (3.3)     1.5
     Inventories..................................      (6.9)     (6.3)   (30.5)
     Accounts payable.............................       1.5     (11.0)    42.1
     Accrued liabilities..........................     (34.2)    (66.0)   (21.3)
     Other liabilities............................      (0.4)     86.9    (63.9)
     Other, net...................................     (11.4)    (33.1)    (2.3)
                                                    --------  --------  -------
      Net cash flow provided by operating
       activities.................................      32.8      56.2     67.3
                                                    --------  --------  -------
Investing Activities:
 Acquisitions and purchase price adjustments, net
  of acquired cash................................    (522.5)     (0.9)    30.5
 Capital expenditures.............................     (57.3)    (68.4)  (139.0)
 Proceeds from sale of assets.....................       --        0.7     36.2
 Proceeds from Baxter for purchase price
  adjustments.....................................       9.7       --       --
                                                    --------  --------  -------
      Net cash flow utilized by investing
       activities.................................    (570.1)    (68.6)   (72.3)
                                                    --------  --------  -------
Financing Activities:
 Proceeds from sale of "Net assets held for sale".      54.8       --       --
 Proceeds from issuance of short-term debt, net of
  repayments......................................      15.7      (0.5)    44.3
 Cash dividend to parent for Behring Combination..       --      (34.8)     --
 Proceeds from revolving credit facility..........     205.0     259.4     94.0
 Repayment of borrowings under revolving credit
  facility........................................    (205.0)   (259.4)   (75.0)
 Proceeds from issuance of 11 1/8% senior
  subordinated notes..............................     350.0       --       --
 Repayment of borrowings and premium paid on 13%
  senior subordinated notes.......................    (141.6)      --       --
 Proceeds from issuance of long-term loans........     460.0      50.0      --
 Repayment of borrowings under long-term loans....    (183.5)    (69.4)   (53.6)
 Contribution from parent.........................       0.4      88.4      --
 Debt issuance costs..............................     (46.2)     (0.4)     --
                                                    --------  --------  -------
      Net cash flow provided by financing
       activities.................................     509.6      33.3      9.7
                                                    --------  --------  -------
Effect of foreign exchange rates on cash..........      (0.2)     (0.4)     0.6
                                                    --------  --------  -------
      Net increase (decrease) in cash and cash
       equivalents................................     (27.9)     20.5      5.3
Cash and Cash Equivalents:
 Beginning of period..............................  $   27.9  $    --   $  20.5
                                                    --------  --------  -------
 End of period....................................  $    --   $   20.5  $  25.8
                                                    ========  ========  =======
Supplemental Disclosure of Cash Flow Information:
 Cash paid during the period for interest.........  $   62.0  $   92.2  $  77.3
                                                    ========  ========  =======
 Cash paid during the period for income taxes.....  $    2.4  $    7.8  $   4.6
                                                    ========  ========  =======
Non Cash Supplemental Disclosure of Cash Flow
 Information:
 Acquired company contributed by parent...........  $    --   $  316.0  $   --
                                                    ========  ========  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
 
                                      F-5
<PAGE>
 
                               DADE BEHRING INC.
 
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
 
                             (Dollars in millions)
 
<TABLE>
<CAPTION>
                                                      Notes                               Accumulated      Total
                          Common Stock  Additional  Receivable    Unearned                   Other     Stockholder's
                          -------------  Paid-in    on Capital  Stock-Based  Accumulated Comprehensive    Equity
                          Shares Amount  Capital   Contribution Compensation   Deficit   Income (Loss)   (Deficit)
                          ------ ------ ---------- ------------ ------------ ----------- ------------- -------------
<S>                       <C>    <C>    <C>        <C>          <C>          <C>         <C>           <C>
Balance at December 31,
 1995...................  1,000   $--     $ 87.0      $(0.2)       $  --       $  (5.0)     $ (0.6)       $  81.2
                          -----   ----    ------      -----        ------      -------      ------        -------
Net loss................                                                        (105.3)                    (105.3)
Forgiveness of
 shareholder debt.......                                0.1                                                   0.1
Payments on notes
 receivable.............                                0.1                                                   0.1
Capital contribution
 from parent............                     0.4                                                              0.4
Recognition of other
 than temporary
 impairment of
 marketable equity
 securities.............                                                                       1.1            1.1
Unrealized gain on
 marketable equity
 securities.............                                                                       0.1            0.1
Cash dividend to parent
 on common stock........                    (0.2)                                                            (0.2)
Cumulative translation
 adjustment.............                                                                      (2.5)          (2.5)
                          -----   ----    ------      -----        ------      -------      ------        -------
Balance at December 31,
 1996...................  1,000    --       87.2        --            --        (110.3)       (1.9)         (25.0)
                          -----   ----    ------      -----        ------      -------      ------        -------
Net loss................                                                        (142.6)                    (142.6)
Capital contribution
 from parent (Note 4)...                   404.6                                                            404.6
Notes receivable on
 capital contribution...                               (0.7)                                                 (0.7)
Cash dividend to parent
 on common stock........                   (34.8)                                                           (34.8)
Issuance of unearned
 stock-based
 compensation...........                    33.2                    (33.2)                                    --
Amortization of unearned
 stock-based
 compensation...........                                             11.4                                    11.4
Unrealized loss on
 marketable equity
 securities.............                                                                      (0.2)          (0.2)
Cumulative translation
 adjustment.............                                                                      (8.6)          (8.6)
                          -----   ----    ------      -----        ------      -------      ------        -------
Balance at December 31,
 1997...................  1,000    --      490.2       (0.7)        (21.8)      (252.9)      (10.7)         204.1
                          -----   ----    ------      -----        ------      -------      ------        -------
Net income..............                                                          43.5                       43.5
Payments on notes
 receivable.............                                0.5                                                   0.5
Issuance of unearned
 stock-based
 compensation...........                     3.6                     (3.6)                                    --
Adjustment of unearned
 stock-based
 compensation...........                    (0.8)                     0.8                                     --
Amortization of unearned
 stock-based
 compensation...........                                             13.1                                    13.1
Unrealized loss on
 marketable equity
 securities.............                                                                      (0.3)          (0.3)
Cumulative translation
 adjustment.............                                                                     (11.6)         (11.6)
                          -----   ----    ------      -----        ------      -------      ------        -------
Balance at December 31,
 1998...................  1,000   $--     $493.0      $(0.2)       $(11.5)     $(209.4)     $(22.6)       $ 249.3
                          =====   ====    ======      =====        ======      =======      ======        =======
</TABLE>
 
 
           See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
                               DADE BEHRING INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Organization and Business
 
   Dade Behring Inc. (the "Company"), formerly Dade International Inc., was
incorporated in Delaware in 1994 and is a wholly-owned subsidiary of Dade
Behring Holdings, Inc. ("Holdings"), formerly Diagnostics Holding Inc. Bain
Capital, Inc., GS Capital Partners, L.P. (an affiliate of Goldman Sachs Group,
L.P.), their respective related investors, Hoechst A.G. and certain of its
affiliates ("Hoechst") and the management of the Company own substantially all
of the capital stock of Holdings. The Company develops, manufactures and
markets in vitro diagnostic equipment, reagents, consumable supplies and
services worldwide.
 
   Effective December 16, 1994, the Company acquired (the "Dade Acquisition")
the worldwide in vitro diagnostics products manufacturing and services
businesses and net assets of Baxter Diagnostics Inc. and certain of its
affiliates, from Baxter International Inc. and its affiliates ("Baxter"). The
Dade Acquisition was accounted for as a purchase.
 
   Effective May 1, 1996, the Company acquired (the "Chemistry Acquisition")
the worldwide in vitro diagnostics business ("Dade Chemistry") of E.I. du Pont
de Nemours and Company. The operating results and acquired assets and assumed
liabilities of the Chemistry Acquisition, which was accounted for as a
purchase, have been reflected in the Company's consolidated financial
statements since May 1, 1996.
 
   Effective October 1, 1997, Holdings acquired (the "Behring Combination")
the stock and beneficial interests of various subsidiaries of Hoechst that
operated its worldwide in vitro diagnostic business ("Behring"). The stock and
beneficial interest was contributed to the Company effective October 1, 1997.
The operating results and acquired assets and assumed liabilities of the
Behring Combination, which was accounted for as a purchase, have been
reflected in the Company's consolidated financial statements since October 1,
1997.
 
2. Change in Non-U.S. Reporting Period
 
   Prior to 1996, the Company's non-U.S. operations reported financial results
on a fiscal year ending November 30. Effective January 1, 1996, the Company's
non-U.S. operations changed to a calendar year-end. As a consequence, the
Company's results of operations for 1996 include 13 months of non-U.S.
operations' results. The Company has designated the month of December 1995 as
the "lag month" for purposes of comparability to future periods. Non-U.S.
operations during the lag month reported net sales of approximately $12.3
million, thus increasing consolidated net sales by this amount for the year
ended December 31, 1996. The impact on net income was not significant.
 
3. Summary of Significant Accounting Policies
 
   This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the accompanying consolidated financial
statements. These policies are in conformity with generally accepted
accounting principles and have been applied consistently unless otherwise
noted.
 
 Management Estimates
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. Actual results could differ from those
estimates.
 
 Principles of Consolidation
 
   The consolidated financial statements include all majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
 
                                      F-7
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Revenue Recognition
 
   Revenues for products sold are recognized upon shipment of products to
customers and are recorded on the basis of the sales price to such customers.
Revenues for products that are subject to a distribution agreement in the
United States are recognized upon shipment of products to the distributor or
direct shipment of the products by the Company to third party customers. Such
revenues are recorded on the basis of the estimated sales price to third party
customers (i.e., generally the end consumer) less a contractual distribution
discount to the distributor. The estimated discount recorded by the Company may
be revised in the future as actual selling price information becomes available.
 
   Revenues under product service contracts, which are generally for one year,
are deferred and recognized ratably over the term of the contract.
 
 Cash and Cash Equivalents
 
   For purposes of reporting cash flows, cash and cash equivalents include
demand deposits and cash equivalents which are highly liquid instruments with
maturities of three months or less at the time of purchase and are held to
maturity. Cash equivalents included $10.1 million invested in short-term money
market investments at December 31, 1997. Cash equivalents were immaterial at
December 31, 1998.
 
 Accounts Receivable
 
   Accounts receivable are net of bad debt reserves of $27.7 million and $18.0
million at December 31, 1997 and 1998, respectively. Accounts receivable are
unsecured.
 
 Research and Development Expenses
 
   Expenditures by the Company for research and development are expensed as
incurred.
 
   In 1997, in connection with the Behring Combination (Note 4), $1.1 million
of the purchase price was allocated to acquired in-process research and
development for projects which have no alternative future use. Such costs were
expensed immediately following consummation of the Behring Combination.
 
   In conjunction with the Chemistry Acquisition in 1996 (Note 5), $98.1
million of the purchase price was allocated to acquired in-process research and
development projects which have no alternative future use. Accordingly, such
costs were expensed immediately following the consummation of the Chemistry
Acquisition.
 
 Inventories
 
   Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes materials, labor and manufacturing overhead costs. Market
for raw materials is based on replacement costs and, for other inventory
classifications, on net realizable value. Appropriate consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable
value.
 
 Property, Plant and Equipment
 
   Property, plant and equipment are stated at cost. Depreciation and
amortization are provided for financial reporting purposes principally on the
straight-line method over the estimated useful lives of the assets as follows:
 
<TABLE>
      <S>                                                          <C>
      Buildings...................................................      40 years
      Machinery and equipment..................................... 3 to 10 years
      Equipment placed with customers.............................       5 years
</TABLE>
 
                                      F-8
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Assets recorded under capital leases are amortized over the life of the
lease. Leasehold improvements are capitalized and amortized over their
estimated useful lives or over the terms of the related leases, if shorter.
 
 Goodwill
 
   Goodwill represents primarily the excess cost over the fair value of net
assets acquired in connection with the Chemistry Acquisition. Goodwill at
December 31, 1997 aggregated $135.6 million, net of $9.4 million of
accumulated amortization, and reflects the finalization of the Chemistry
Acquisition purchase price allocation. Goodwill at December 31, 1998
aggregated $126.5 million, net of $14.8 million of accumulated amortization.
Goodwill is being amortized using the straight-line method over 25 years.
Negative goodwill arising from the Behring Combination, aggregated $17.9
million at December 31, 1998, net of $0.7 of accumulated amortization, and is
amortized on the straight-line basis over 25 years. Negative goodwill is
classified in other long-term liabilities. The carrying value of goodwill and
other long-lived assets are reviewed for impairment when events or changes in
circumstances indicate the carrying value of the asset may not be recoverable.
This review compares projected future undiscounted cash flows before interest
to the carrying value of the asset.
 
 Patents and Trademarks
 
   Patents and trademarks are being amortized over their legal or estimated
useful lives, whichever is shorter (generally not exceeding 17 years). Patents
and trademarks totaled $26.8 million and $23.5 million, net of accumulated
amortization of $5.3 million and $8.6 million, at December 31, 1997 and 1998,
respectively.
 
 Debt Issuance Costs
 
   Debt issuance costs, which are being amortized over the applicable terms of
the Bank Credit Agreement (7 years weighted average) and 11 1/8% senior
subordinated notes (10 years), totaled $37.0 million at December 31, 1997, net
of accumulated amortization of $9.6 million, and $31.2 million at December 31,
1998, net of accumulated amortization of $15.4 million.
 
 Income Taxes
 
   Deferred tax assets and liabilities are recognized at current tax rates for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Deferred tax
assets are recognized, net of any valuation allowance, for the estimated
future tax effects of deductible temporary differences and tax operating loss
and credit carryforwards. Additionally, the Company provides deferred tax
liabilities for the eventual tax effect of repatriating unremitted earnings of
certain non-U.S. subsidiaries. The Company's operations are included in
Holdings' consolidated United States Federal and state income tax returns.
 
 Foreign Currency Translation
 
   The Company has determined that the local currencies of its non-U.S.
operations are their functional currencies. Assets and liabilities of the non-
U.S. subsidiaries are translated at the year-end exchange rates. Revenues and
expenses are translated at average rates of exchange in effect during the
year.
 
 Derivative Financial Instruments
 
   The Company utilizes derivative financial instruments for purposes other
than trading, specifically to manage its exposure to foreign currency and
interest rate fluctuations.
 
 
                                      F-9
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   The Company enters into forward currency exchange contracts with highly
rated counterparties to manage its exposure to foreign currency fluctuations
on short-term intercompany borrowing arrangements denominated in foreign
currencies. The intercompany borrowing arrangements support the underlying
working capital needs of non-U.S. subsidiaries. Premiums and discounts on
forward rate option contracts are deferred and amortized to other income over
the life of the contract. Gains and losses on forward contracts resulting from
revaluations are recorded to other income. At the maturity of the forward
contracts the currencies involved are exchanged based on the contracted
exchange rate. At December 31, 1997 and December 31, 1998, the replacement
value of "in-the-money" contracts was not significant. Total notional contract
value of foreign currency exchange contracts outstanding were as follows (in
millions):
 
<TABLE>
<CAPTION>
                                                                    December 31,
                                                                    ------------
                                                                     1997  1998
                                                                    ------ -----
      <S>                                                           <C>    <C>
      Forward purchases............................................ $ 79.0 $ 2.9
      Forward sales................................................ $139.2 $87.2
</TABLE>
 
   The Company also utilizes purchased interest rate caps, for which the
Company will receive cash payments from the counterparty if an indexed rate of
interest is exceeded, to manage a portion of its exposure to interest rate
increases on its outstanding debt. The notional value of these caps was $230.0
million at December 31, 1997 and 1998. Premiums paid for the purchase of the
caps are recorded to interest expense over the life of the caps. Amounts
received, if any, are recorded as a reduction of interest expense over the
related period. As of December 31, 1997 and 1998, capitalized amounts relating
to the caps are not material to the consolidated financial statements.
 
 Earnings (Loss) Per Share
 
   Earnings (loss) per share is not presented for the Company, as its common
stock is not publicly traded.
 
 Concentration of Credit Risk
 
   Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of trade accounts receivable. A large
percentage of U.S. accounts receivable was generated by the Company's sales to
Allegiance Healthcare Corporation ("Allegiance"). This credit risk is
mitigated due to the large number of entities comprising Allegiance's
worldwide customer base and their dispersion across different regional
economies.
 
   A number of the Company's customers operate in the hospital and reference
laboratory market, which may be subject to legislated healthcare reforms.
Additionally, at December 31, 1997 and 1998, approximately $59.9 million or
17% and $68.0 million or 29%, respectively, of the Company's non-U.S. accounts
receivable were geographically concentrated in Italy. The Company does not
expect these risk factors to have a material adverse impact on its results of
operations, financial position or liquidity.
 
 Fair Value of Financial Instruments
 
   The carrying values of cash equivalents and other current assets and
liabilities approximate fair value at December 31, 1997 and 1998 because of
the short maturity of these instruments.
 
   The excess of the fair values of derivative financial instruments over
carrying values aggregated $1.7 million at December 31, 1997. The excess of
the carrying values of derivative financial instruments over fair values
aggregated $3.0 million at December 31, 1998. Fair values are based upon year-
end published exchange rates.
 
                                     F-10
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The carrying value of the long-term debt of $416.9 million and $373.0
million at December 31, 1997 and 1998, respectively, approximates fair value as
the interest rate on each instrument adjusts based upon market interest rate
changes. The fair value of the $350.0 million 11 1/8% senior subordinated notes
was $390.3 million and $379.2 million at December 31, 1997 and 1998,
respectively, based on the trading value at that date.
 
 Stock-Based Compensation
 
   Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", encourages, but does not require, the use of a
fair value method for recording compensation expense for stock-based
compensation plans. The Company has elected to continue to account for its
stock-based compensation plans using the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Under the intrinsic value method,
compensation cost for stock options is based on the excess, if any, of the fair
value of the stock at the date of the grant over the amount the employee must
pay to acquire the stock (see Note 14).
 
 Reclassifications
 
   Certain reclassifications have been made to prior period balances to conform
to the current year presentation.
 
4. Behring Combination
 
   Effective October 1, 1997, Holdings completed its acquisition of Behring
from Hoechst. As consideration for the acquisition, Holdings issued equity
securities to Hoechst providing Hoechst with a 32.5% interest in Holdings and
paid $0.1 million to Hoechst at closing. Subsequent to closing, Hoechst paid
Holdings $54.8 million related to certain adjustments and changes in the Net
Assets (as defined in the Agreement and Plan of Contribution related to the
acquisition) of Behring, which were treated as a reduction to the final
purchase price. The equity securities issued to Hoechst comprise 5,702,383
shares of Holdings' Common Stock and a warrant expiring October 1, 1999 to
acquire 1,403,663 additional shares of Holdings' Common Stock for $80.0
million. The issued shares and warrant were valued by independent appraisal at
$352.8 million and $16.1 million, respectively, as of October 1, 1997. Holdings
contributed Behring to the Company effective October 1, 1997 and the Company
recorded in 1997 a capital contribution of $404.6 million, representing the
aforementioned appraised values and direct costs of the acquisition. The
transaction was accounted for as a purchase and, accordingly, the operating
results of Behring have been included in the consolidated operating results
since October 1, 1997. The purchase price has been allocated to assets acquired
and liabilities assumed based on fair market values at the date of acquisition.
Since the estimated fair values of the net assets acquired exceeded total
acquisition cost, the allocation of purchase price resulted in a pro rata
write-off of non-current assets, including in-process research and development
projects and the establishment of $18.6 million of negative goodwill, which is
being amortized using the straight-line method over 25 years.
 
   The summary of assets acquired, liabilities assumed and the purchase price
paid is as follows (in millions):
 
<TABLE>
      <S>                                                               <C>
      Consideration: stock and warrant issued, net of purchase price
       adjustments..................................................... $314.1
      Costs of acquisition.............................................   37.9
                                                                        ------
                                                                         352.0
      Liabilities assumed..............................................  349.0
                                                                        ------
      Costs of assets acquired......................................... $701.0
                                                                        ======
</TABLE>
 
                                      F-11
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The following represents the unaudited pro forma results of operations of
the Company as if the Behring Combination had occurred on January 1, 1996 and
January 1, 1997, respectively, after giving effect to the following
adjustments: write-off of in-process research and development, write-off of
inventory step-up, decreased depreciation of property, plant and equipment,
decreased amortization of intangibles, decreased amortization of goodwill, and
related income tax effects of these adjustments (in millions):
 
<TABLE>
<CAPTION>
                                                               Pro forma
                                                          Year ended December
                                                                  31,
                                                         ----------------------
                                                            1996        1997
                                                         ----------- ----------
                                                         (Unaudited) (Unaudited)
      <S>                                                <C>         <C>
      Net sales.........................................  $1,449.4    $1,412.1
                                                          ========    ========
      Loss from operations..............................  $ (186.5)   $ (109.4)
                                                          ========    ========
      Loss before extraordinary items...................  $ (163.9)   $ (116.9)
                                                          ========    ========
      Net loss..........................................  $ (188.9)   $ (116.9)
                                                          ========    ========
</TABLE>
 
   The unaudited pro forma results of operations presented above are not
necessarily indicative of the results that would have been obtained if the
Behring Combination had actually occurred on January 1, 1996 and January 1,
1997 and are not intended to be a projection of future results or trends.
 
   Loss from operations includes the following significant items:
 
<TABLE>
<CAPTION>
                                                        Year ended December
                                                                31,
                                                       ----------------------
                                                          1996        1997
                                                       ----------- ----------
                                                       (Unaudited) (Unaudited)
      <S>                                              <C>         <C>
      Write-off of in-process research and
       development....................................   $  99.2    $   1.1
      Write-off of inventory step-up..................     196.2      171.4
      Restructuring costs.............................      55.5       51.1
      Stock-based compensation expense................       --        11.4
      Behring transaction related employee expenses...       --        13.9
      International lag month.........................      (2.4)       --
      Non-cash charge for excess spare parts..........       9.5        --
      Other charges...................................       --        33.5
                                                         -------    -------
                                                           358.0      282.4
          Pro forma loss from operations, as above....    (186.5)    (109.4)
                                                         -------    -------
                                                         $ 171.5    $ 173.0
                                                         =======    =======
</TABLE>
 
   The pro forma results of operations excludes the $9.0 million of other
income recorded in 1997 and includes incremental and duplicative expenses
associated with the development of stand-alone infrastructure in the areas of
information systems, finance and human resources as the Company prepares for
the termination of the transition service agreements with Baxter, DuPont and
Hoechst. Additionally, the Company was adversely impacted by foreign currency
exchange rates during 1997. Moreover, the synergistic savings that are
expected to be realized as a result of the Behring Combination are not
reflected in the unaudited pro forma results presented above.
 
                                     F-12
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
5. Dade Chemistry Acquisition
 
   Effective May 1, 1996, the Company completed the acquisition of Dade
Chemistry from DuPont, which was accounted for as a purchase. Accordingly, the
purchase price and the direct costs of the Chemistry Acquisition, which
aggregated $585.9 million, were allocated to the assets acquired and the
liabilities assumed based upon their fair market values at the date of the
acquisition. The Chemistry Acquisition was financed principally by the issuance
of $350.0 million of senior subordinated notes, a refinancing of bank debt and
cash. Since the purchase price exceeded the fair market value of the net assets
acquired, the residual, aggregating $145.0 million, was recorded as goodwill.
During 1998, $5.0 million of remaining unused restructuring reserves were
charged against goodwill and $7.3 million of liabilities established in
purchase accounting were not ultimately funded and were reversed to income. The
estimated fair values, which were finalized during 1997, are based on
independent appraisals, management estimates and arms-length negotiations with
DuPont.
 
   The summary of assets acquired, liabilities assumed and the purchase price
paid is as follows (in millions):
 
<TABLE>
      <S>                                                                <C>
      Cash consideration................................................ $504.1
      Costs of acquisition..............................................   19.3
                                                                         ------
                                                                          523.4
      Liabilities assumed...............................................   62.5
                                                                         ------
      Costs of assets acquired.......................................... $585.9
                                                                         ======
</TABLE>
 
   The Company's allocation of the Dade Chemistry purchase price includes $98.1
million of costs attributed to in-process research and development projects
that have no alternative future use. Accordingly, such costs were expensed upon
the consummation of the Chemistry Acquisition. During the fourth quarter of
1996, the Company recorded a non-cash charge of $9.5 million to cost of goods
sold to provide for excess spare parts for the Paramax(R) product line. This
non-cash charge, which was a direct result of the designation of the Paramax(R)
product line as non-core due to the Chemistry Acquisition, appropriately
relates to the second quarter of 1996.
 
   The following represents the unaudited pro forma results of operations of
the Company as if the Chemistry Acquisition had occurred on January 1, 1995 and
January 1, 1996, respectively, after giving effect to the following
adjustments: write-off of in-process research and development, write-off of
inventory step-up, increased depreciation of property, plant and equipment,
increased amortization of intangibles, increased amortization of goodwill,
increased interest expense on acquisition debt, refinancing charges, and
related income tax effects of these adjustments (in millions):
 
<TABLE>
<CAPTION>
                                                                Pro forma
                                                         Year ended December 31,
                                                         -----------------------
                                                            1995        1996
                                                         ----------- -----------
                                                         (Unaudited) (Unaudited)
      <S>                                                <C>         <C>
      Net sales.........................................   $ 959.0     $ 910.6
                                                           =======     =======
      Loss before extraordinary items...................   $ (89.2)    $ (83.6)
                                                           =======     =======
      Net loss..........................................   $(114.2)    $(108.6)
                                                           =======     =======
</TABLE>
 
   The unaudited pro forma results of operations presented above are not
necessarily indicative of the results that would have been obtained if the
Chemistry Acquisition had actually occurred on January 1, 1995 and January 1,
1996 and are not intended to be a projection of future results or trends. The
decline in net sales for the year ended December 31, 1996 is primarily due to
the rationalization of overlapping product lines and product repositioning
following the integration of Dade Chemistry. The losses for both periods
include a $98.1 million charge related to the write-off of in-process research
and development projects that have no alternative future use and the $24.8
million write-off of inventory step-up. In addition, results for 1996 include
$15.0 million
 
                                      F-13
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
of restructuring costs, a $9.5 million non-cash charge for excess spare parts
as well as incremental and duplicative expenses associated with the
development of stand-alone infrastructure in the areas of information systems,
finance and human resources as the Company prepared for the termination of the
transition service agreements with Baxter and DuPont. Moreover, the
synergistic savings that are expected to be realized as a result of the
Chemistry Acquisition and the adjustment for the differences in reporting
periods for the Company's non-U.S. operations are not reflected in the
unaudited pro forma results presented above.
 
6. Dade Acquisition
 
   Effective December 16, 1994, the Company, in separate transactions,
acquired certain net assets and businesses of the Predecessor, including the
stock of various non-U.S. subsidiaries. The Dade Acquisition was recorded in
accordance with the purchase method of accounting. In January 1996, the
Company received a $9.7 million purchase price adjustment from Baxter, which
was charged against negative goodwill in the finalization of acquisition
accounting.
 
7. Inventories
 
   Inventories consist of the following (in millions):
 
<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   -------------
                                                                    1997   1998
                                                                   ------ ------
      <S>                                                          <C>    <C>
      Raw materials............................................... $ 59.5 $ 48.8
      Work-in-process.............................................   64.0   52.3
      Finished products...........................................  149.0  164.8
                                                                   ------ ------
          Total inventories....................................... $272.5 $265.9
                                                                   ====== ======
</TABLE>
 
8. Net Assets Held for Sale
 
   Baxter operated a business (Burdick & Jackson) which was identified, along
with certain excess land and warehouse facilities at another location, as
operations and assets to be sold. The Company recorded "Net assets held for
sale," which represented the estimated proceeds to be received from the sale
of this business and the excess land and warehouse facilities, plus expected
operating cash flow during the holding period. The excess land facilities were
sold during the first quarter of 1996 for the expected net proceeds of $10.8
million. Burdick & Jackson was sold during the fourth quarter of 1996 for cash
proceeds of $44.0 million, which resulted in a pre-tax loss of $2.8 million.
 
9. Property, Plant and Equipment
 
   Property, plant and equipment consist of the following (in millions):
 
<TABLE>
<CAPTION>
                                                           December 31,
                                                      -------------------------
                                                       1997     1998
                                                      -------  -------
      <S>                                             <C>      <C>      <C> <C>
      Land........................................... $   6.3  $   6.8
      Buildings and leasehold improvements...........    29.5     46.0
      Machinery and equipment........................    45.1    100.3
      Equipment placed with customers................   226.8    281.6
      Construction in progress.......................    26.5     57.1
      Capitalized software...........................    16.9     40.9
                                                      -------  -------
      Total property, plant and equipment, at cost...   351.1    532.7
      Accumulated depreciation and amortization......  (136.6)  (228.0)
                                                      -------  -------
          Net property, plant and equipment.......... $ 214.5  $ 304.7
                                                      =======  =======
</TABLE>
 
 
                                     F-14
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   Equipment placed with customers includes instruments provided at no charge
in exchange for contractual commitments for ongoing reagent revenues. The net
book value of this equipment was $82.9 million and $102.9 million at December
31, 1997 and 1998, respectively. Management believes the carrying value of
this equipment is recoverable from the revenues anticipated from future
reagent sales.
 
10. Restructuring
 
   In connection with the Behring Combination in 1997, the Company recorded a
$40.1 million restructuring charge and allocated $74.3 million ($77.7 million
was allocated in connection with the preliminary allocation of purchase price)
of the Behring Combination purchase price for a restructuring plan to
consolidate manufacturing and distribution operations and eliminate redundant
sales, service and administrative functions. These restructuring actions
include the closure of the Company's Miami, Florida and Behring's Westwood,
Massachusetts manufacturing facilities, the exit from the San Jose
administrative/research facility, the consolidation and reorganization of the
global sales, marketing and research and development organizations and
elimination of administrative redundancies. The actions are expected to be
substantially completed within two years. A total of 1,528 employees were
identified for termination resulting from these initiatives, 824 of which were
employees of the Company prior to the Behring Combination. Of the $40.1
million restructuring charge, $26.4 million relates to employee severance and
$13.0 million relates to lease terminations and facility dispositions with the
remainder relating to other exit costs. The Behring Combination reserve
includes $26.7 million related to employee severance and relocation and $47.6
million related to facility exit costs with the remainder relating to other
exit costs. As of December 31, 1997, 69 of the 824 identified Company
employees described above had been severed, while 58 of the 704 identified
Behring employees had been severed. During 1997, an aggregate of $3.7 million
was paid for severance and $9.0 million was paid for exit costs. The reserve
as of December 31, 1997 for these restructuring actions was $105.1 million. As
of December 31, 1998, 410 of the 824 identified Company employees described
above had been severed, while 525 of the 704 identified Behring employees had
been severed. During 1998, an aggregate of $26.6 million was paid for
severance and relocation and $27.5 million was paid for facility exit and
other exit costs. In 1998, excess severance reserves of $4.5 million,
resulting from higher than projected employee turnover at the Miami facility,
were identified and credited to income. The reserve as of December 31, 1998
for these restructuring actions was $43.2 million, $24.0 million of which is
classified in other long-term liabilities.
 
11. Accrued Liabilities
 
   Accrued liabilities consist of the following (in millions):
 
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 -------------
                                                                  1997   1998
                                                                 ------ ------
      <S>                                                        <C>    <C>
      Salaries, wages, commissions, withholdings and other
       payroll taxes............................................ $ 64.7 $ 77.5
      Restructuring.............................................   55.6   19.2
      Property, sales and use and other taxes...................   12.2   22.0
      Deferred service contract revenue/warranty................   16.7   14.1
      Interest payable..........................................   11.1   10.6
      Vendor lease obligations..................................   42.7    --
      Other.....................................................   80.9   85.0
                                                                 ------ ------
                                                                 $283.9 $228.4
                                                                 ====== ======
</TABLE>
 
                                     F-15
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
12. Debt
 
   Long-term debt consists of the following (in millions):
 
<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 --------------
                                                                  1997    1998
                                                                 ------  ------
      <S>                                                        <C>     <C>
      Revolver.................................................. $  --   $ 19.0
      Bank Credit Agreement:
        A Term Loan.............................................  124.5   109.6
        B Term Loan.............................................  104.8    91.1
        C Term Loan.............................................  104.8    91.1
        D Term Loan.............................................   86.5    75.2
      11 1/8% Senior Subordinated Notes.........................  350.0   350.0
                                                                 ------  ------
                                                                  770.6   736.0
          Less current portion..................................   (3.7)  (13.0)
                                                                 ------  ------
                                                                 $766.9  $723.0
                                                                 ======  ======
</TABLE>
 
   To fund the Chemistry Acquisition, the Company refinanced its then existing
indebtedness by entering into a new credit agreement with a number of banks
("Bank Credit Agreement"), which provided for borrowing up to $585.0 million,
issued $350.0 million of 11 1/8% senior subordinated notes, and repurchased
its $120.0 million 13% senior subordinated notes.
 
   The Company filed a registration statement on Form S-1 in October 1996
under the Securities Act of 1933, to register $350.0 million of its Series B
11 1/8% senior subordinated notes due 2006, which were exchanged for its then
outstanding 11 1/8% senior subordinated notes due 2006.
 
 Bank Credit Agreement
 
   The Bank Credit Agreement initially consisted of $460.0 million in term
loans and $125.0 million in a revolving credit facility ("Revolver"). The
borrowings are guaranteed by Holdings and the Company's domestic subsidiaries,
and substantially all the domestic assets of the Company are pledged as
collateral.
 
   At December 31, 1996, term-loan indebtedness under the Bank Credit
Agreement bore interest at (i) the Base Rate (as defined) plus margins ranging
from 1.75% to 2.75% or (ii) the Eurodollar Rate plus margins ranging from
2.75% to 3.75%. At December 31, 1996, the Company funded its borrowings using
the Eurodollar Rate. The Eurodollar Rate in effect at December 31, 1996 was
5.94% in respect of A Term Loan, 5.56% in respect of B Term Loan, 5.56% in
respect of C Term Loan, and 5.63% in respect of D Term Loan.
 
   In 1997, the Company amended the Bank Credit Agreement to consist of $460.0
million in term loans and $105.0 million in a Revolver. In addition, the term-
loan interest rates were amended to (i) the Base Rate (as defined) plus
margins ranging from 1.25% to 2.00% or (ii) the Eurodollar Rate plus margins
ranging from 2.25% to 3.00%. At December 31, 1997, the Company funded the
borrowings using the Eurodollar Rate. The Eurodollar Rate in effect at
December 31, 1997 was 5.75% in respect of A Term Loan, 5.88% in respect of B
Term Loan, 5.88% in respect of C Term Loan, and 5.88% in respect of D Term
Loan.
 
   During 1998, the Company amended certain terms of the Bank Credit
Agreement. Under the amended terms, term-loan borrowings between January 8 and
October 31, 1998 bore interest at (i) the Base Rate (as defined) plus margins
ranging from 1.00% to 2.00% or (ii) the Eurodollar Rates plus margins ranging
from 2.00% to 3.00%. Effective November 1, 1998, term-loan interest rates
reverted to rates in effect during 1997. At December 31, 1998, the Company
funded the borrowings using the Eurodollar Rate. The Eurodollar Rate in effect
at December 31, 1998 was 5.06% in respect of A Term Loan, 4.99% in respect of
B Term Loan, 5.13% in respect of C Term Loan, and 5.19% in respect of D Term
Loan.
 
                                     F-16
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The Bank Credit Agreement contains various restrictive covenants including
mandatory repayments under certain conditions, minimum levels of earnings
before interest, taxes, depreciation and amortization (as defined therein),
minimum interest coverage, maximum leverage ratios, and other covenants which,
among other things, limit the incurrence of additional indebtedness,
dividends, transactions with affiliates, asset purchases and sales,
acquisitions, mergers and consolidations, prepayments of other indebtedness,
(including the 11 1/8% Senior Subordinated Notes), liens and encumbrances and
other matters customarily restricted in such agreements.
 
   Under the terms of the Bank Credit Agreement, the Company is required to
maintain specified levels of interest rate protection. The Company has
purchased a series of interest rate caps under which the Company will receive
cash payment from the counterparties if certain indexed rates of interest are
exceeded. Premiums paid for the purchase of the caps are capitalized and
amortized to interest expense over the life of the cap.
 
   The Revolver may be repaid and reborrowed at any time and is due December
31, 2001. Borrowings bear interest at the Prime Rate plus a 1.25% margin; at
December 31, 1998 the interest rate on the Revolver was 9.0%. The Company is
required to pay to the lenders under the Bank Credit Agreement (as amended) a
commitment fee equal to 1/2 of 1% per annum, payable on a quarterly basis, on
the daily unused portions of the Revolving Credit Facility during such
quarter.
 
   The A, B, C, and D Term Loans mature on December 31, 2001, 2002, 2003, and
2004, respectively.
 
 Senior Subordinated Notes
 
   Interest on the 11 1/8% senior subordinated notes due 2006 accrues from the
date of issuance and is payable semi-annually on May 1 and November 1. The 11
1/8% senior subordinated notes are redeemable in whole or in part, at the
Company's option commencing May 1, 2001. The 11 1/8% senior subordinated notes
contain restrictive covenants that include, among others, the incurrence of
additional debt, mergers and change of control.
 
   In connection with the 1996 debt refinancing and purchase of the 13% senior
subordinated notes due 2005, $18.1 million ($11.4 million net of tax) and
$21.6 million ($13.6 million net of tax) of premiums were recognized as
extraordinary items.
 
 Other Credit Facilities
 
   At year-end December 31, 1998, the Company's non-U.S. subsidiaries had
credit lines from various financial institutions totaling $248.0 million.
These credit lines do not have significant commitment fees. These credit lines
are principally to provide working capital financing for local operations.
 
   The Company had utilized $96.4 million of these credit lines at December
31, 1998 at the prevailing local market interest rates.
 
 Aggregate Maturities of Long-Term Debt
 
   The aggregate maturities of long-term debt at December 31, 1998 are as
follows (in millions):
 
<TABLE>
             <S>                                <C>
             1999.............................. $ 13.0
             2000..............................   40.7
             2001..............................   84.8
             2002..............................   89.8
             2003..............................   87.4
             Thereafter........................  420.3
                                                ------
                                                $736.0
                                                ======
</TABLE>
 
                                     F-17
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
13. Income Taxes
 
   Income (loss) before income tax expense is as follows (in millions):
 
<TABLE>
<CAPTION>
                                                        Years ended December
                                                                 31,
                                                        -----------------------
                                                         1996     1997    1998
                                                        -------  -------  -----
      <S>                                               <C>      <C>      <C>
      U.S. (including Puerto Rico)..................... $(103.8) $(184.9) $45.3
      Non-U.S..........................................   (21.9)   (41.5)  32.6
                                                        -------  -------  -----
      Income (loss) before income tax expense.......... $(125.7) $(226.4) $77.9
                                                        =======  =======  =====
</TABLE>
 
 Tax Expense (Benefit)
 
   Income tax expense (benefit) consists of the following (in millions):
 
<TABLE>
<CAPTION>
                                                              Years ended
                                                             December 31,
                                                          ---------------------
                                                           1996    1997   1998
                                                          ------  ------  -----
      <S>                                                 <C>     <C>     <C>
      Current
        U.S.
          Federal........................................ $  --   $  0.2  $ --
          State and local (including Puerto Rico)........    2.6     0.9    0.3
        Non-U.S..........................................    0.2     1.2    4.5
                                                          ------  ------  -----
          Current income tax expense.....................    2.8     2.3    4.8
                                                          ------  ------  -----
      Deferred
        U.S.
          Federal........................................  (35.2)  (58.2)  10.2
          State and local (including Puerto Rico)........   (9.8)  (14.7)   3.6
        Non-U.S..........................................   (3.2)  (13.2)  15.8
                                                          ------  ------  -----
          Deferred income tax expense (benefit)..........  (48.2)  (86.1)  29.6
                                                          ------  ------  -----
            Total income tax expense (benefit)........... $(45.4) $(83.8) $34.4
                                                          ======  ======  =====
</TABLE>
 
 Tax Rates
 
   Differences between income taxes computed using the U.S. Federal income tax
statutory rate of 35% and income tax expense recorded by the Company are
attributable to the following (in millions):
 
<TABLE>
<CAPTION>
                                                             Years ended
                                                            December 31,
                                                         ---------------------
                                                          1996    1997   1998
                                                         ------  ------  -----
      <S>                                                <C>     <C>     <C>
      Income tax expense (benefit) at statutory rate.... $(44.0) $(79.3) $27.3
      Tax exempt operations.............................   (2.9)   (3.0)   --
      Nondeductible (non-taxable) goodwill..............    0.5     0.4   (0.2)
      Nondeductible items...............................    1.4     1.1    1.7
      State and local taxes (net of Federal benefit)....   (4.5)   (8.3)   2.7
      Valuation allowances..............................    6.3     2.8    3.3
      Tax on unremitted foreign earnings................   (0.1)    0.7    1.0
      Excess foreign tax charge (benefit)...............   (2.9)   (1.1)   1.4
      Adjustment for prior year items...................    --      --    (3.1)
      Other factors.....................................    0.8     2.9    0.3
                                                         ------  ------  -----
      Income tax expense (benefit)...................... $(45.4) $(83.8) $34.4
                                                         ======  ======  =====
</TABLE>
 
                                     F-18
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Deferred Taxes
 
   Deferred tax assets (liabilities) are comprised of the following (in
millions):
 
<TABLE>
<CAPTION>
                                                                December 31,
                                                                --------------
                                                                 1997    1998
                                                                ------  ------
      <S>                                                       <C>     <C>
      Gross deferred tax liabilities........................... $(17.1) $(33.5)
                                                                ------  ------
      Property, plant and equipment basis differences..........   76.4    53.5
      Trade receivables basis difference.......................   17.1    10.5
      Inventory basis difference...............................   28.5    30.5
      Accrued liabilities not currently deductible.............   85.1    57.1
      Intangible assets basis difference.......................  122.2    69.6
      Net operating loss carryforwards.........................  123.8   202.2
      Other....................................................    9.4     8.1
                                                                ------  ------
      Gross deferred tax assets................................  462.5   431.5
      Valuation allowance......................................  (65.2)  (56.2)
                                                                ------  ------
      Net deferred tax assets..................................  397.3   375.3
                                                                ------  ------
                                                                $380.2  $341.8
                                                                ======  ======
</TABLE>
 
   In assessing the realizability of the gross deferred tax assets at December
31, 1998, management analyzed the Company's forecast for future taxable
earnings (and losses) by jurisdiction and other relevant factors and concluded
that recoverability of the deferred tax asset of $375.3 million, net of a
$56.2 million valuation allowance, was more likely than not. This analysis
also supported the release in 1998 of $6.2 million and $1.0 million of
valuation allowances previously established against deferred tax assets
arising in France and Belgium, respectively.
 
   The Company received a tax exemption grant from Puerto Rico during 1996
which provided that its manufacturing operations be partially exempt from
local Puerto Rico taxes until the year 2014. The tax benefit of this local
grant was approximately $4.1 million for the year ended December 31, 1997.
 
   The Company has also filed an election to be taxed under Section 936 for
its Puerto Rico operations for Federal income tax purposes. The total Federal
income tax benefit of Section 936 treatment was approximately $3.0 million for
the year ended December 31, 1997.
 
   The company ceased its manufacturing operations in Puerto Rico in the first
quarter of 1998. Accordingly, no local or Federal tax benefits were recorded
for these operations in 1998. Appropriate taxes have been provided for the
cost of repatriation of all available earnings generated prior to the closing
of these operations.
 
   At December 31, 1997 and 1998, the Company had net operating loss
carryforwards available in the United States for Federal income tax return
purposes of $254.5 million and $367.8 million, respectively, which expire
during 2004 through 2013. United States tax rules impose limitations on the
use of net operating losses and excess tax bases following certain changes in
ownership. If such a change were to occur, the limitation could reduce the
amount of these benefits that would be available to offset future taxable
income, starting with the year of ownership change. The $367.8 million of net
operating loss carryforward at December 31, 1998 includes $77.9 million of
United States net operating loss carryforward from the pre-combination Behring
entity. Since the use of these loss carryforwards is subject to the change in
ownership limitation, a full deferred tax valuation has been recorded.
Additionally, at December 31, 1998, the Company had net operating loss
carryforwards available in countries outside of the United States of $126.6
million with various dates of expiration. Since a use of a portion of these
benefits is subject to statutory carryforward limitations, valuation
allowances on $57.0 million of net operating loss carryforwards from outside
the U.S. have been recorded at December 31, 1998.
 
   Deferred United States Federal income taxes and non-U.S. withholding taxes
have been provided on the undistributed earnings of certain subsidiaries
deemed available for dividend repatriations, principally Puerto
 
                                     F-19
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Rico, Switzerland and the United Kingdom. In other foreign jurisdictions with
accumulated earnings, it is management's intent to permanently reinvest
earnings locally or use available cash to pay down local debt. No provision
has been made for non-U.S. withholding taxes or U.S. Federal or state taxes on
undistributed earnings of approximately $0.2 million and $1.7 million at
December 31, 1997 and 1998, respectively. Should such earnings be remitted to
the Company, there would be limited use of credits, if any, which could be
used to offset the U.S. taxes due upon repatriation.
 
14. Stockholder's Equity
 
 Common Stock
 
   The Company's Common Stock consists of 1,000 authorized shares of $.01 par
value stock with voting rights, of which 1,000 shares were issued and
outstanding at December 31, 1997 and 1998. All outstanding shares at December
31, 1997 and 1998 were owned by Holdings.
 
 Stock Purchase and Option Plans
 
   Holdings has various stock purchase and option plans ("Plans") principally
for the benefit of the Company's employees. The Plans provide for the sale of
53,594 shares of Holdings' Class L Common Stock and the sale or granting of
options of 2,823,402 shares of Holdings' Common Stock. The stock options are
exercisable either over time (Time Options) or upon the achievement of certain
investment return levels by certain owners of Holdings (Performance Options).
All stock options vest within ten years of the date of grants.
 
   During 1996 and 1997, 6,050 shares of Holdings' Class L Common Stock and
54,450 shares of Holdings' Common Stock were sold at $44.00 and $4.00 per
share, respectively. Management believes the purchase prices for these stock
purchases reasonably approximated the fair market value of the stock at the
respective dates of sale. Additionally, during 1997, 24,000 shares of
Holdings' Common Stock were acquired by certain executives of the Company at a
price $32.50 below the fair market value of Holdings' Common Stock at that
date, as established by an independent valuation. Stock compensation expense
of $0.8 million was recorded by the Company in 1997 related to these stock
purchases. No shares of Holdings' Class L Common Stock or of Holdings' Common
Stock were sold during 1998.
 
   All stock options granted during 1996 have exercise prices that management
believes equaled or exceeded the fair market value of the Holdings' Common
Stock on the dates of the grants. During 1997 and 1998, certain option grants
were made with exercise prices below fair market values of Holdings' Common
Stock, based on independent valuations. Time Options generally vest ratably
over a five-year period and have a ten-year term. Performance Options become
exercisable at $7 or $16 per share either within ten years of grant or earlier
if investment returns (as defined) of three times or five times, respectively,
the total investment (as defined) of the original investors of the Company is
achieved. Stock option activity during 1996, 1997, and 1998 was as follows:
 
 
<TABLE>
<CAPTION>
                                                   1996      1997       1998
                                                  -------  ---------  ---------
      <S>                                         <C>      <C>        <C>
      Outstanding at January 1................... 629,170    684,170  1,782,450
      Time Options
        Granted..................................  84,000    994,400    182,000
        Exercised................................ (54,900)   (40,840)   (15,100)
        Forfeited................................  (9,500)   (59,340)   (49,676)
      Performance Options
        Granted..................................  60,400    262,574        --
        Exercised................................     --         --         --
        Forfeited................................ (25,000)   (58,514)   (18,076)
                                                  -------  ---------  ---------
      Outstanding at December 31................. 684,170  1,782,450  1,881,598
                                                  =======  =========  =========
      Exercisable at December 31.................  62,740    114,080    632,033
      Available for grant at December 31.........  22,500    336,912    222,664
</TABLE>
 
 
                                     F-20
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   Weighted average option exercise price information for 1996, 1997 and 1998
is as follows:
 
<TABLE>
<CAPTION>
                                                            1996   1997   1998
                                                           ------ ------ ------
      <S>                                                  <C>    <C>    <C>
      Time Options
        Outstanding at January 1.......................... $ 0.50 $ 1.40 $15.97
        Granted........................................... $ 4.00 $19.36 $37.72
        Exercised......................................... $ 0.50 $ 1.35 $ 1.68
        Forfeited......................................... $ 0.50 $ 1.25 $21.18
        Outstanding at December 31........................ $ 1.40 $15.97 $18.96
        Exercisable at December 31........................ $ 0.50 $ 1.94 $12.59
      Performance Options
        Outstanding at January 1.......................... $11.50 $11.50 $11.50
        Granted........................................... $11.50 $11.50 $  --
        Exercised......................................... $  --  $  --  $  --
        Forfeited......................................... $11.50 $11.50 $11.50
        Outstanding at December 31........................ $11.50 $11.50 $11.50
        Exercisable at December 31........................ $  --  $  --  $  --
</TABLE>
 
   Effective April 1, 1997, 46,500 Time Options with an exercise price of
$4.00, 99,787 Performance Options with an exercise price of $7.00 and 99,787
Performance Options with an exercise price of $16.00 were granted, which
represented discounts of $14.00, $11.00 and $2.00, respectively, below fair
market value of Holdings' Common Stock at that date, as established by an
independent valuation. Effective October 1, 1997, 860,900 Time Options with
exercise prices of $0.50-$34.50 were granted, which represented a discount of
$23.00-$57.00 from fair market value of Holding's Common Stock at that date,
as established by an independent valuation. Accordingly, stock compensation
expense of $10.6 million was recorded by the Company in 1997 related to these
grants. Between March and October 1998, 182,000 Time Options with exercise
prices of $34.50-$51.75 were granted, which represented a discount of $5.75-
$23.00 from the approximate fair market value of Holdings' Common Stock at
those dates. Accordingly, stock compensation expense of $1.5 million was
recorded by the Company in 1998 related to these grants.
 
   Significant option groups outstanding at December 31, 1998 and related
weighted average price and life information is as follows:
 
<TABLE>
<CAPTION>
                                                                 Exercisable
                                    Options Outstanding            Options
                              -------------------------------- ----------------
                                         Weighted
                                          Average     Weighted         Weighted
                              Number     Remaining    Average  Number  Average
                                of      Contractual   Exercise   of    Exercise
   Grant Date                 Shares  Life (in years)  Price   Shares   Price
   ----------                 ------- --------------- -------- ------- --------
   <S>                        <C>     <C>             <C>      <C>     <C>
   Time Options--7/31/95..... 192,440         7        $ 1.35  145,500  $ 1.53
   Time Options--7/31/96.....  54,000         8        $ 4.00   16,800  $ 4.00
   Time Options--2/5/97-
    8/25/97..................  86,500         9        $ 4.00   17,300  $ 4.00
   Time Options--10/1/97..... 823,304         9        $21.48  416,233  $15.19
   Time Options--3/98-10/98.. 182,000        10        $37.72   36,200  $35.26
   Performance Options--
    7/31/95.................. 130,950         7        $ 7.00      --   $  --
   Performance Options--
    7/31/95.................. 130,950         7        $16.00      --   $  --
   Performance Options--
    7/31/96..................  23,200         8        $ 7.00      --   $  --
   Performance Options--
    7/31/96..................  23,200         8        $16.00      --   $  --
   Performance Options--
    2/5/97-8/25/97........... 117,527         9        $ 7.00      --   $  --
   Performance Options--
    2/5/97-8/25/97........... 117,527         9        $16.00      --   $  --
</TABLE>
 
                                     F-21
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   As Holdings' Common Stock is not publicly traded, the fair value of options
was estimated using the minimum value method as prescribed in SFAS No. 123,
using the following assumptions:
 
<TABLE>
<CAPTION>
                                                                 1996  1997  1998
                                                                 ----  ----  ----
      <S>                                                        <C>   <C>   <C>
      Expected life (years):
        Time Options............................................   5     5     5
        Performance Options.....................................   3     2    --
      Interest rate:
        Time Options............................................ 5.5%  5.7%  5.4%
        Performance Options..................................... 5.4%  5.6%   --
      Dividend yield:
        Time Options............................................ 0.0%  0.0%  0.0%
        Performance Options..................................... 0.0%  0.0%   --
</TABLE>
 
   The fair values at the date of grant of the Time Options and Performance
Options granted during 1996 were $0.1 million and $0.1 million, respectively.
No stock-based compensation expense was recorded in 1996. Pro forma stock-
based compensation would not have been significant in 1996 had the fair value
of options granted in 1996 been recognized as compensation expense on a
straight-line basis over the vesting of the grants. The fair values at the
date of grant of the Time Options and Performance Options granted during 1997
were $36.1 million and $1.6 million, respectively. Pro forma stock-based
compensation for 1997 would not be materially different from the recorded
expense had the fair value of the options granted in 1996 and 1997 been
recognized as compensation expense on a straight-line basis over the vesting
of the grants. The fair values at the dates of grant of the Time Options
granted during 1998 were $5.2 million. Pro forma stock-based compensation for
1998 would have been $2.2 million higher than the recorded expense had the
fair value of the options granted in 1996 through 1998 been recognized as
compensation expense on a straight-line basis over the vesting of the grants.
 
15. Transactions with Baxter and Allegiance
 
   Commencing in December 1994, the Company and Baxter entered into a
distribution agreement within the United States. The U.S. Distribution
Agreement, which became effective at the closing of the Dade Acquisition, gave
Baxter's U.S. Distribution Division the right, generally on an exclusive
basis, to sell the Predecessor's domestic products in the areas in which
Baxter's U.S. Distribution Division previously sold the Predecessor's
products. Effective October 1, 1996, Baxter "spun-off" its distribution
business as Allegiance and Allegiance assumed the Company's Distribution
Agreement. The term of this agreement, as amended, extends to December 31,
2000. Allegiance may terminate the agreement at any time after the four-year
anniversary date by providing the Company with at least six months prior
written notice. The Company may also terminate the agreement at any time after
the eighteen-month anniversary with at least six months prior written notice.
Net sales to Baxter's U.S. Distribution Division aggregated $221.8 million for
the year ended December 31, 1996. Net sales to Allegiance totaled $72.2
million, $257.5 million, and $230.7 million for the years ended December 31,
1996, 1997, and 1998, respectively. At December 31, 1997 and 1998, receivables
from Allegiance totaled $67.8 million and $51.0 million, respectively.
 
16. Related Party Transactions
 
   The Company and Holdings entered into five-year Management Services
Agreements with Bain Capital and Goldman, Sachs & Co. (an affiliate of GS
Capital). Pursuant to these agreements, they will pay Bain Capital and
Goldman, Sachs & Co., subject to compliance with the terms of the indenture
governing the 11 1/8% senior subordinated notes, an aggregate annual fee of up
to $3.0 million plus their respective out-of-pocket expenses in return for
management consulting in the areas of corporate finance; corporate strategy;
investment analysis;
 
                                     F-22
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
market research and business development; advisory services and support,
negotiation; analysis of financial alternatives, acquisitions and
dispositions; and other services. In connection with the Chemistry Acquisition
(Note 5), the Company paid $11.4 million for advisory fees and expenses to
Bain Capital and $3.6 million to Goldman, Sachs & Co. The Company paid, in the
aggregate, $18.8 million to Bain Capital, Goldman, Sachs & Co. and Hoechst in
connection with the Behring Combination (Note 4).
 
   Included in marketing and administrative expense for the years 1996, 1997
and 1998 are advisory fees and expenses paid to Bain Capital and Goldman,
Sachs & Co. totalling $3.0 million, $1.7 million and $3.3 million,
respectively. Also in 1998, strategic consulting fees of $0.9 million were
paid to Bain and Company, an affiliate of Bain Capital.
 
   Pursuant to Transition Services Agreements dated September 30, 1997,
Hoechst provides the Company with certain support services including
administrative support, warehousing and distribution services, human resource
support, information systems support, accounting support and office space. The
Transition Services Agreements have various terms from October 1, 1997 through
December 31, 1999. The Company paid $7.9 million and $12.1 million to Hoechst
related to these agreements for the three months ended December 31, 1997 and
for the year ended December 31, 1998, respectively.
 
   Hoechst subleases office space to one of the Company's former Behring sites
pursuant to a sublease dated October 1, 1997. Rent expense related to this
sublease totaled $0.9 million and $3.5 million for the three months ended
December 31, 1997 and for the year ended December 31, 1998, respectively.
 
   Net sales to Hoechst totaled $14.1 million and $52.7 million for the three
months ended December 31, 1997 and for the year ended December 31, 1998,
respectively. At December 31, 1997 and 1998, receivables from Hoechst totaled
$21.3 million and $11.7 million, respectively. At December 31, 1997 and 1998,
payables to Hoechst totaled $12.4 million and $13.9 million, respectively.
 
17. Retirement Programs
 
 Pension Plans
 
   The Company maintains non-contributory defined benefit pension plans
covering substantially all employees in the United States and Puerto Rico
("U.S. Plans") and a combination of contributory and non-contributory plans in
certain non-U.S. locations ("Non-U.S. Plans"). Through December 31, 1996, the
U.S. Plans' benefits are based on years of service and the employees'
compensation during five of the last ten years of employment as defined by the
plans. Effective January 1, 1997, the Company amended its pension plan
covering U.S. employees to change to a cash balance formula. The Company's
funding policy is to make contributions to the trusts of the plans that meet
or exceed the minimum requirements of the Employee Retirement Income Security
Act of 1974 ("ERISA").
 
   Under the terms of the Behring Combination (Note 4), effective January 1,
1998, the employees' pension assets and liabilities of Behring were
transferred into various Company Plans and the Company assumed responsibility
for the liability for future benefits payable under the terms of the Company's
Plans for those employees as of January 1, 1998. The Company reimbursed
Hoechst for the service costs of those Plans for the period October 1, 1997
through December 31, 1997.
 
                                     F-23
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Under the terms of the Chemistry Acquisition (Note 5), the transferred
DuPont employees' pension assets and liabilities were transferred directly
into the existing Domestic Plans and the Company assumed responsibility for
the liability for future benefits payable under the terms of the Company's
plan for those employees as of the Chemistry Acquisition date.
 
   Under the terms of the Dade Acquisition (Note 6), Baxter retained liability
for future benefits payable to existing retirees and non-transferred employees
of the Predecessor as of the Dade Acquisition date, and the Company
established new plans for retained active employees. During 1995,
substantially all of the assets were transferred to the new plans. At December
31, 1997 and December 31, 1998, plan assets primarily consist of stocks, bonds
and contracts with insurance companies.
 
<TABLE>
<CAPTION>
                                                  1997              1998
                                             ---------------- -----------------
                                              U.S.   Non-U.S.  U.S.    Non-U.S.
                                             ------  -------- -------  --------
<S>                                          <C>     <C>      <C>      <C>
Change in benefit obligation:
  Benefit obligation at beginning of year... $ 73.2   $ 23.9  $  90.9   $ 52.0
  Service cost..............................    7.6      1.8     10.2      2.2
  Interest cost.............................    6.7      1.2      7.6      1.7
  Plan participants' contributions..........    --       --       --       --
  Amendments................................    --       --       --       --
  Actuarial (gain) loss.....................    7.0      1.1      6.8     (0.9)
  Acquisition...............................    --      22.7      --       --
  Curtailments..............................    --        --      0.2     (0.4)
  Benefits paid.............................   (3.6)    (1.1)    (8.7)    (1.4)
  Foreign currency changes..................     --      2.4      --       3.8
                                             ------   ------  -------   ------
Benefit obligation at end of year........... $ 90.9   $ 52.0  $ 107.0   $ 57.0
                                             ------   ------  -------   ------
Change in plan assets:
  Fair value of plan assets at beginning of
   year..................................... $104.1   $ 14.5  $ 112.0   $ 24.2
  Actual return on plan assets..............   11.6      1.1      5.0      0.3
  Acquisition...............................    --      22.7      --       --
  Employer contribution.....................    --       --       --       0.2
  Plan participants' contributions..........    --       --       --       --
  Benefits paid.............................   (3.6)    (0.7)    (8.7)    (0.6)
  Foreign currency changes..................     --    (13.4)     --       1.7
                                             ------   ------  -------   ------
  Fair value of plan assets at end of year.. $112.1   $ 24.2  $ 108.3   $ 25.8
                                             ------   ------  -------   ------
Funded status at end of year:
  Accumulated benefit obligation............ $(87.2)  $ 41.5  $(102.8)  $ 49.0
                                             ------   ------  -------   ------
  Funded status............................. $ 20.9   $(27.1) $   1.2   $(24.7)
  Unrecognized net actuarial (gain) loss....    9.2      1.3     21.4     (0.7)
  Unrecognized prior service cost...........   (8.7)     --      (7.1)     --
  Foreign currency changes..................    --       3.6      --      (5.0)
                                             ------   ------  -------   ------
  Net amount recognized--(accrued) prepaid
   at end of year........................... $ 21.4   $(22.2) $  15.5   $(30.4)
                                             ------   ------  -------   ------
</TABLE>
 
                                     F-24
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
<TABLE>
<CAPTION>
                                                      1997           1998
                                                  -------------  -------------
                                                          Non-           Non-
                                                  U.S.    U.S.   U.S.    U.S.
                                                  -----  ------  -----  ------
<S>                                               <C>    <C>     <C>    <C>
Amounts recognized in the statement of financial
 position consist of:
  Prepaid benefit cost (accrued benefit
   liability)...................................  $21.0  $(23.7) $21.4  $(22.2)
  Net periodic pension cost.....................    3.6    (2.3)  (6.0)   (5.2)
  Intangible asset..............................    0.3     --     --     (0.3)
  Accumulated other comprehensive income........    0.1     --     --      --
  Company contributions.........................    --      --     --      1.1
  SFAS 88 adjustment............................    --      --     --     (0.7)
  Benefits paid.................................   (3.6)    --     0.1     2.3
  Foreign currency charges......................    --      3.8    --     (5.4)
                                                  -----  ------  -----  ------
  Net amount recognized--(accrued) prepaid at
   end of year..................................  $21.4  $(22.2) $15.5  $(30.4)
                                                  -----  ------  -----  ------
</TABLE>
 
<TABLE>
<CAPTION>
                              1996              1997              1998
                         ----------------  ----------------  ----------------
                         U.S.   Non-U.S.   U.S.   Non-U.S.    U.S.   Non-U.S.
                         -----  ---------  -----  ---------  ------  --------
<S>                      <C>    <C>        <C>    <C>        <C>     <C>
Weighted-average
 assumptions as of
 December 31:
  Discount rate.........  7.75%       5.0%  7.75%  3.5%-6.5%   7.00% 3.5%-6.0%
  Expected return on
   plan assets..........  9.50%       5.4%  9.50%  3.5%-5.5%   9.50% 3.0%-5.5%
  Rate of compensation
   increase.............  4.50% 3.25%-4.0%  4.50% 3.25%-4.0%   4.50% 2.5%-4.0%
Components of net
 periodic benefit cost:
  Service cost.......... $ 5.6      $ 1.8  $ 7.6      $ 1.8  $ 10.2     $ 2.9
  Interest cost.........   5.1        0.7    6.8        1.2     7.6       2.2
  Expected return on
   plan assets..........  (8.0)      (0.8)  (9.7)      (0.7)  (10.4)     (0.8)
  Amortization of prior
   service cost.........   1.5        --    (1.1)       --     (1.1)      0.1
  Recognized net
   actuarial loss.......   --         --     --         --      --        --
                         -----  ---------  -----  ---------  ------  --------
  SFAS 87 cost..........   4.2        1.7    3.6        2.3     6.3       4.4
                         -----  ---------  -----  ---------  ------  --------
  SFAS 88 charges:
  Curtailment charge
   (credit).............  (2.3)       0.2    --         --     (0.3)      0.8
                         -----  ---------  -----  ---------  ------  --------
    Total net periodic
     benefit cost....... $ 1.9      $ 1.9  $ 3.6      $ 2.3  $  6.0     $ 5.2
                         =====  =========  =====  =========  ======  ========
</TABLE>
 Savings Plan
 
   Most U.S. employees are eligible to participate in a Company sponsored
qualified 401(k) plan. Participants may contribute up to 12% of their annual
compensation, up to certain limits, to the 401(k) plan and the Company matches
the participants' contributions, up to 2% of compensation. Matching
contributions made by the Company were $3.2 million for the year ended
December 31, 1996, $2.9 million for the year ended December 31, 1997, and $3.6
million for the year ended December 31, 1998.
 
18. Commitments and Contingencies
 
 Legal Proceedings
 
   The Company is a party in a number of legal proceedings. Based on the
advice of legal counsel, management believes that any potential liability
relative to the various legal proceedings pending against the Company will not
have a material adverse effect on the Company's conduct of its business, its
results of operations, its financial position or its liquidity.
 
 Letters of Credit
 
   As of December 31, 1998, the Company has letters of credit outstanding of
approximately $8.5 million.
 
 
                                     F-25
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Operating Leases
 
   The Company leases certain facilities and equipment under operating leases
expiring at various dates. Many of these operating leases contain renewal
options. Future minimum lease payments under noncancelable operating leases at
December 31, 1998 are as follows (in millions):
 
<TABLE>
             <S>                                <C>
             1999.............................. $ 43.7
             2000..............................   37.6
             2001..............................   34.2
             2002..............................   31.0
             2003..............................   25.9
             Thereafter........................   68.2
                                                ------
                 Total......................... $240.6
                                                ======
</TABLE>
 
   Total expense for all operating leases was $14.1 million for the year ended
December 31, 1996, $22.9 million for the year ended December 31, 1997, and
$43.9 million for the year ended December 31, 1998.
 
19. Business Segment and Geographic Information
 
   The business of the Company is in vitro diagnostic ("IVD") products. The
operating segments derive substantially all their revenues from the
manufacture and marketing of IVD products and services. The Company's
operating structure includes the following operating segments: United States,
Germany, Other Europe, Asia-Pacific, and All Other.
 
   Management evaluates the performance of its operating segments separately
to individually monitor the different factors affecting financial performance.
Management evaluates segment performance based upon EBITDA, which is a widely
accepted measure of a company's ability to incur and/or service indebtedness.
EBITDA represents the sum of net income, depreciation and amortization
expense, non-cash stock-based compensation expense, non-recurring integration
expenses, and other non-recurring operating charges and other non-cash
charges. EBITDA includes substantially all cost of goods sold, marketing and
administrative expenses, and research and development expenses. EBITDA for the
U.S. and Germany includes research and development costs for products that are
sold by all operating segments.
 
                                     F-26
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   Financial information by segment for the years ended December 31, 1996,
1997 and 1998 is summarized as follows (in millions):
 
<TABLE>
<CAPTION>
                                   United States Germany Other Europe Asia-Pacific All Other(2)  Total
                                   ------------- ------- ------------ ------------ ------------ --------
<S>                                <C>           <C>     <C>          <C>          <C>          <C>
December 31, 1996 and the year then ended (1)
  Revenue from external customers.   $  559.5    $ 48.3     $100.8       $ 69.3      $  17.9    $  795.8
  Intersegment revenues...........       61.0       --         1.5          --           --         62.5
  Interest expense................       66.1       0.1        0.5          0.2          --         66.9
  Segment EBITDA..................       84.0       6.4        4.4         12.0         19.7       126.5
  Segment assets..................    1,491.9      27.4      162.1         52.2          0.5     1,734.1
December 31, 1997 and the year then ended
  Revenue from external customers.      649.1      71.7      145.8         82.6         31.3       980.5
  Intersegment revenues...........      111.9      15.1       12.3          --           --        139.3
  Interest expense................       86.6       --         2.1          0.6          0.3        89.6
  Segment EBITDA..................      117.7      27.3       22.0          6.0          3.0       176.0
  Segment assets..................    1,482.3     189.6      243.8         74.5         34.4     2,024.6
  Expenditures for segment assets.       39.9       4.0       19.5          4.3          0.7        68.4
December 31, 1998 and the year then ended
  Revenue from external customers.      687.2     158.6      293.9        111.7         33.8     1,285.2
  Intersegment revenues...........       74.1     182.0      108.6          1.3          --        366.0
  Interest expense................       78.0       3.1        0.9          0.8          0.8        83.6
  Depreciation and amortization...       28.2      13.6       25.0          5.2        (13.2)       58.8
  Segment EBITDA..................      100.0      26.3      108.7         17.9          5.7       258.6
  Segment assets..................    2,048.5     491.7      233.3         90.0       (696.2)    2,167.3
  Expenditures for segment assets.   $   57.6    $ 26.4     $ 42.8       $ 12.0      $   0.2    $  139.0
</TABLE>
--------
(1) Expenditures for segment assets for the year ended December 31, 1996 are
    not presented due to impracticality.
(2) Includes the effects of purchase accounting which have not been reflected
    in segment accounting records. Consequently, asset write-downs resulting
    from bargain purchases are reflected in the All Other column.
 
                                     F-27
<PAGE>
 
                               DADE BEHRING INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
 
<TABLE>
<CAPTION>
                                                          December 31,
                                                   ----------------------------
                                                     1996      1997      1998
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Reconciliation of reportable segments:
Revenues
  Total revenue for reportable segments........... $  840.4  $1,088.5  $1,617.4
  Other revenues..................................     17.9      31.3      33.8
  Elimination of intersegment revenues............    (62.5)   (139.3)   (366.0)
                                                   --------  --------  --------
      Total consolidated revenues................. $  795.8  $  980.5  $1,285.2
                                                   --------  --------  --------
EBITDA
  Total EBITDA from reportable segments........... $  106.8  $  173.0  $  252.9
  Other EBITDA....................................     19.7       3.0       5.7
                                                   --------  --------  --------
      Total EBITDA................................ $  126.5  $  176.0  $  258.6
                                                   --------  --------  --------
EBITDA to Income (Loss) Before Taxes
  Total EBITDA.................................... $  126.5  $  176.0  $  258.6
  Less: Depreciation and amortization.............    (38.4)    (50.7)    (56.7)
     Interest expense, net........................    (65.6)    (87.8)    (80.5)
     Purchase accounting related charges..........   (122.9)   (172.5)      --
     Restructuring (charges) credits..............    (15.0)    (40.1)      4.5
     Non-recurring charges and other..............    (10.3)    (37.9)    (10.3)
     Stock-based compensation.....................      --      (11.4)    (13.1)
     Integration costs............................      --       (2.0)    (24.6)
                                                   --------  --------  --------
  Income (loss) before taxes...................... $ (125.7) $ (226.4) $   77.9
                                                   ========  ========  ========
Assets
  Total assets for reportable segments............ $1,733.6  $1,990.2  $2,863.5
  Other assets....................................      0.5      34.4    (696.2)
  Elimination of intercompany receivables.........   (729.0)   (514.2)   (633.9)
                                                   --------  --------  --------
      Total consolidated assets................... $1,005.1  $1,510.4  $1,533.4
                                                   ========  ========  ========
</TABLE>
 
 
                                      F-28
<PAGE>
 
                               DADE BEHRING INC.
 
                                  SCHEDULE II
 
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
                             (Dollars in millions)
 
<TABLE>
<CAPTION>
                                            Additions
                                        -----------------
                               Balance  Charged                          Balance
                                 at     to costs Charged                   at
                              Beginning   and    to other                End of
                              of Period expenses accounts   Deductions   Period
                              --------- -------- --------   ----------   -------
<S>                           <C>       <C>      <C>        <C>          <C>
Year ended December 31, 1996
  Allowance for bad debts....  $  6.8      8.1                 (5.3)      $ 9.6
  Income tax valuation
   allowance.................  $ 13.6      6.3     (0.8)(1)               $19.1
Year ended December 31, 1997
  Allowance for bad debts....  $  9.6     17.0      6.3 (2)    (5.2)      $27.7
  Income tax valuation
   allowance.................  $ 19.1      9.0     45.2 (2)    (6.2)      $65.2
                                                   (1.9)(1)
Year ended December 31, 1998
  Allowance for bad debts....  $ 27.7      4.0      1.3       (15.0)      $18.0
  Income tax valuation
   allowance.................  $ 65.2      3.3      1.2 (1)   (13.5)(3)   $56.2
</TABLE>
--------
(1) Impact of foreign currency translation.
(2) Acquired in the Behring combination.
 
                                      F-29
<PAGE>
 
                                   SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, in the City of Deerfield, State of Illinois, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 24, 1999.
 
                                                  /s/ Steven W. Barnes
                                          By: _________________________________
                                                     Steven W. Barnes
                                               President and Chief Executive
                                                          Officer
 
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 24, 1999.
 
<TABLE>
<CAPTION>
                 Signature                                     Title
                 ---------                                     -----
 
 
<S>                                         <C>
         /s/ Steven W. Barnes               President, Chief Executive Officer and
___________________________________________   Director
             Steven W. Barnes                 (principal executive officer)
 
     /s/ James W. P. Reid-Anderson          Chief Administrative Officer, Chief
___________________________________________   Financial Officer and Director (principal
         James W. P. Reid-Anderson            financial officer)
 
         /s/ Glenn R. Richter               Senior Vice President/Controller
___________________________________________   (principal accounting officer)
             Glenn R. Richter
 
       /s/ Robert W. Brightfelt             Group President, Chemistry and Director
___________________________________________
           Robert W. Brightfelt
 
         /s/ Mark E. Nunnelly               Director
___________________________________________
             Mark E. Nunnelly
 
        /s/ Stephen G. Pagliuca             Director
___________________________________________
            Stephen G. Pagliuca
 
            /s/ Adam Kirsch                 Director
___________________________________________
                Adam Kirsch
 
        /s/ John P. Connaughton             Director
___________________________________________
            John P. Connaughton
 
        /s/ Joseph H. Gleberman             Director
___________________________________________
            Joseph H. Gleberman
 
         /s/ Scott T. Garrett               Director
___________________________________________
             Scott T. Garrett
</TABLE>
<PAGE>
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
  Exhibit
  Number                        Document Description
  -------                       --------------------
 <C>       <S>                                                              <C>
  3.1      Certificate of Incorporation of the Company. Incorporated by
           reference to Exhibit 3.1 to the Company's Form S-1
           Registration Statement under the Securities Act of 1933, as
           filed on October 4, 1996.
  3.2      Amendment to Certificate of Incorporation of the Company.
  3.3      Amended and Restated By-laws of the Company. Incorporated by
           reference to Exhibit 3.2 to the Company's Form 10-K under the
           Securities Exchange Act of 1934, as filed on March 31, 1998.
  4.1      Indenture dated as of May 7, 1996 between the Company and IBJ
           Schroeder Bank & Trust Company. Incorporated by reference to
           Exhibit 4.1 to the Company's Form S-1 Registration Statement
           under the Securities Act of 1933, as filed on October 4, 1996.
  4.2      Amended and Restated Registration Agreement dated as of
           October 1, 1997 among Dade Behring Holdings, Inc., Hoechst AG
           and other parties signatory thereto.
 10.1      Amended and Restated Credit Agreement dated as of April 29,
           1997 among Diagnostics Holding, Inc., the Company, various
           lending institutions and Bankers Trust Company, as Agent.
           Incorporated by reference to Exhibit 10.5 to the Company's
           Form 10-Q under the Securities Exchange Act of 1934, as filed
           on May 15, 1997.
 10.2      First Amendment to Credit Agreement dated as of September 11,
           1997 among Diagnostics Holding, Inc., the Company, various
           lending institutions and Bankers Trust Company, as Agent.
           Incorporated by reference to Exhibit 10.1 to the Company's
           Form 8-K under the Securities Exchange Act of 1934, as filed
           on October 20, 1977.
 10.3      Second Amendment to Credit Agreement dated as of December 12,
           1997 among Dade Behring Holdings, Inc., the Company, various
           lending institutions and Bankers Trust Company, as Agent.
 10.4      Third Amendment to Credit Agreement dated as of January 8,
           1998 among Dade Behring Holdings, Inc., the Company, various
           lending institutions and Bankers Trust Company, as Agent.
           Incorporated by reference to Exhibit 10.1 to the Company's
           Form 10-Q under the Securities Exchange Act of 1934, as filed
           on May 15, 1998.
 10.5      Fourth Amendment and Waiver to Credit Agreement dated as of
           March 22, 1998 among Dade Behring Holdings, Inc., the Company,
           various lending institutions and Bankers Trust Company, as
           Agent. Incorporated by reference to Exhibit 10.2 to the
           Company's Form 10-Q under the Securities Exchange Act of 1934,
           as filed on May 15, 1998.
 10.6      Fifth Amendment to Credit Agreement dated as of April 30, 1998
           among Dade Behring Holdings, Inc., the Company, various
           lending institutions and Bankers Trust Company, as Agent.
           Incorporated by reference to Exhibit 10.1 to the Company's
           Form 10-Q under the Securities Exchange Act of 1934, as filed
           on August 14, 1998.
 10.7      Sixth Amendment to Credit Agreement dated as of April 30, 1998
           among Dade Behring Holdings, Inc., the Company, various
           lending institutions and Bankers Trust Company, as Agent.
           Incorporated by reference to Exhibit 10.2 to the Company's
           Form 10-Q under the Securities Exchange Act of 1934, as filed
           on August 14, 1998.
 10.8      Seventh Amendment to Credit Agreement dated as of July 8, 1998
           among Dade Behring Holdings, Inc., the Company, various
           lending institutions and Bankers Trust Company, as Agent.
           Incorporated by reference to Exhibit 10.3 to the Company's
           Form 10-Q under the Securities Exchange Act of 1934, as filed
           on August 14, 1998.
</TABLE>
 
                                      X-1
<PAGE>
 
<TABLE>
<CAPTION>
  Exhibit
  Number                        Document Description
  -------                       --------------------
 <C>       <S>                                                              <C>
 10.9      Eighth Amendment to Credit Agreement dated as of October 16,
           1998 among Dade Behring Holdings, Inc., the Company, various
           lending institutions and Bankers Trust Company, as Agent.
           Incorporated by reference to Exhibit 10.1 to the Company's
           Form 10-Q under the Securities Exchange Act of 1934, as filed
           on November 16, 1998.
 10.10     Security Agreement dated as of May 7, 1996 among Diagnostics
           Holding, Inc., the Company, certain subsidiaries of the
           Company and Bankers Trust Company, as Collateral Agent.
           Incorporated by reference to Exhibit 10.2 to the Company's
           Form S-1 Registration Statement under Securities Act of 1933,
           as filed on October 4, 1996.
 10.11     Pledge Agreement dated as of May 7, 1996 among Diagnostics
           Holding, Inc., the Company, various subsidiaries of the
           Company and Bankers Trust Company, as Collateral Agent.
           Incorporated by reference to Exhibit 10.3 to the Company's
           Form S-1 Registration Statement under the Securities Act of
           1933, as filed on October 4, 1996.
 10.12     Asset Purchase and Sale Agreement dated December 11, 1995, as
           amended and restated on May 7, 1996, between E.I. du Pont de
           Nemours and Company and Dade Chemistry Systems Inc.
           Incorporated by reference to Exhibit 2.1 to the Company's Form
           8-K under the Securities Exchange Act of 1934, as filed on May
           22, 1996 (No. 33-90462).
 10.13     Agreement and Plan of Combination by and between Diagnostics
           Holding, Inc. and Hoechst A.G. dated as of June 24, 1997 and
           supplemented on July 2, 1997 and as further supplemented on
           September 29, 1997 and September 30, 1997. Incorporated by
           reference to Exhibit 2.1 to the Company's Form 8-K under the
           Securities Exchange Act of 1934, as filed on October 20, 1997.
 10.14     Cooperation and Collaboration Agreement executed as of October
           1, 1997 between Dade Behring Holdings, Inc. and Hoechst AG.
           Incorporated by reference to Exhibit 10.18 to the Company's
           Form 8-K under the Securities Exchange Act of 1934, as filed
           on October 20, 1997.
 10.15     Transition Services Agreement dated as of September 30, 1997
           between Diagnostics Holding, Inc. and Hoechst AG.
 10.16     Amended and Restated Stockholders Agreement dated as of
           October 1, 1997 between Dade Behring Holdings, Inc. and the
           other parties signatory thereto. Incorporated by reference to
           Exhibit 10.7 to the Company's Form 8-K under the Securities
           Exchange Act of 1934, as filed on October 20, 1997.
 10.17     Management Services Agreement dated as of December 20, 1994 by
           and among the Company and Bain Capital, Inc. Incorporated by
           reference to Exhibit 10.7 to the Company's Form S-4
           Registration Statement under the Securities Act of 1933, as
           filed on March 20, 1995 (No. 33-90462) as amended by Amendment
           No. 1 to Management Services Agreement dated as of May 7,
           1996. Incorporated by reference to Exhibit 10.8 to the
           Company's Form S-1 Registration Statement under the Securities
           Act of 1933, as filed on October 4, 1996.
 10.18     Management Services Agreement dated as of December 20, 1994 by
           and among the Company and Goldman, Sachs & Co. Incorporated by
           reference to Exhibit 10.8 to the Company's Form S-4
           Registration Statement under the Securities Act of 1933, as
           filed on March 20, 1995 (No. 33-90462).
 10.19     Tax Law Change Indemnification dated as of December 16, 1994
           between Baxter International Inc. and Diagnostics Holding,
           Inc. Incorporated by reference to Exhibit 10.9 to the
           Company's Form S-4 Registration Statement under the Securities
           Act of 1933, as filed on March 20, 1995 (No. 33-90462).
</TABLE>
 
 
                                      X-2
<PAGE>
 
<TABLE>
<CAPTION>
  Exhibit
  Number                        Document Description
  -------                       --------------------
 <C>       <S>                                                              <C>
 10.20     Amended and Restated Exclusive Distribution Agreement dated as
           of September 15, 1995, by and between the Company and Baxter
           Healthcare Corporation as amended on September 26, 1996.
           Incorporated by reference to Exhibit 10.11 to the Company's
           Form S-1 Registration Statement under the Securities Act of
           1933, as filed on October 4, 1996.
 10.21     Second Amendment to Amended and Restated Exclusive
           Distribution Agreement made and entered into as of October 1,
           1997 by and between the Company and Allegiance Healthcare
           Corporation. Incorporated by reference to Exhibit 10.11 to the
           Company's Form 8-K under the Securities Exchange Act of 1934,
           as filed on October 20, 1997.
 10.22     Third Amendment to the Amended and Restated Exclusive
           Distribution Agreement dated as of May 27, 1998 between the
           Company and Allegiance Healthcare Corporation.
 10.23     1995 Executive Stock Purchase and Option Plan. Incorporated by
           reference to Exhibit 10.1 to the Company's Form 10-Q
           Registration Statement under the Securities Exchange Act of
           1934, as filed on August 14, 1995 (No. 33-90462).
 10.24     1995 Management Stock Option Plan. Incorporated by reference
           to Exhibit 10.2 to the Company's Form 10-Q under the
           Securities Exchange Act of 1934, as filed on August 14, 1995
           (No. 33-90462).
 10.25     Form of Agreement under 1995 Executive Stock Purchase and
           Option Plan. Incorporated by reference to Exhibit 10.3 to the
           Company's Form 10-Q under the Securities Exchange Act of 1934,
           as filed on August 14, 1995 (No. 33-90462).
 10.26     Form of Agreement under 1995 Management Stock Option Plan.
           Incorporated by reference to Exhibit 10.4 to the Company's
           Form 10-Q under the Securities Exchange Act of 1934, as filed
           on August 14, 1995 (No. 33-90462).
 10.27     1996 Executive Stock Purchase and Option Plan. Incorporated by
           reference to Exhibit 10.16 to the Company's Form S-1
           Registration Statement under the Securities Act of 1933, as
           filed on October 4, 1996.
 10.28     Form of Agreement under 1996 Executive Stock Option Plan.
           Incorporated by reference to Exhibit 10.17 to the Company's
           Form S-1 Registration Statement under the Securities Act of
           1933, as filed on October 4, 1996.
 10.29     1997 Executive Stock Purchase and Option Plan. Incorporated by
           reference to Exhibit 10.1 to Company's Form 10-Q under the
           Securities Exchange Act of 1934, as filed on May 15, 1997.
 10.30     Form of Agreement under 1997 Executive Stock Purchase and
           Option Plan. Incorporated by reference to Exhibit 10.2 to the
           Company's Form 10-Q under the Securities Exchange Act of 1934,
           as filed on May 15, 1997.
 10.31     1997 Management Stock Option Plan. Incorporated by reference
           to Exhibit 10.3 to the Company's Form 10-Q under the
           Securities Exchange Act of 1934, as filed on May 15, 1997.
 10.32     Form of Agreement under 1997 Management Stock Option Plan.
           Incorporated by reference to Exhibit 10.4 to the Company's
           Form 10-Q under the Securities Exchange Act of 1934, as filed
           on May 15, 1997.
 10.33     1997 Executive Stock Purchase and Option Plan. Incorporated by
           reference to Exhibit 10.23 to the Company's Form 10-K under
           the Securities Exchange Act of 1934, as filed on March 31,
           1998.
</TABLE>
 
                                      X-3
<PAGE>
 
<TABLE>
<CAPTION>
  Exhibit
  Number                        Document Description
  -------                       --------------------
 <C>       <S>                                                              <C>
 10.34     Employment Agreement effective as of October 1, 1997 between
           the Company and Steve Barnes. Incorporated by reference to
           Exhibit 10.3 to the Company's Form 10-Q under the Securities
           Exchange Act of 1934, as filed on May 15, 1998.
 10.35     Employment Agreement Addendum effective October 1, 1997
           between the Company and Steve Barnes. Incorporated by
           reference to Exhibit 10.4 to the Company's Form 10-Q under the
           Securities Act of 1934, as filed on May 15, 1998.
 10.36     Employment letter dated August 1, 1996 between the Company and
           James Reid-Anderson.
 10.37     Managing Director-Employment Agreement dated August 19, 1998
           between Dade Behring Holding GmbH and Friedhelm Blobel.
 10.38     Employment letter dated January 8, 1997 between the Company
           and Marc Casper.
 10.39     Separation Agreement dated July 20, 1998 between the Company
           and Marc Casper.
 10.40     Executive Agreement dated as of October 1, 1997 between Dade
           Behring Holdings, Inc. and Steve Barnes.
 10.41     Executive Agreement dated as of October 1, 1997 between Dade
           Behring Holdings, Inc. and James Reid-Anderson.
 21.1      Subsidiaries of the Company.
 23.1      Report of Independent Accountants on Financial Statement
           Schedule.
 27.1      Financial Data Schedule.
</TABLE>
 
                                      X-4