<PAGE>   1
                                                                      EXHIBIT 13

                                Financial Review


                   -----------------------------------------
                   Pharmacia & Upjohn, Inc. and subsidiaries


OVERVIEW

1998 marked a turnaround year for Pharmacia & Upjohn (the company) with
significant improvement in operating performance compared to the previous year.
Sales growth in the U.S., restructuring of the company, and divestitures of
noncore businesses were key factors driving the 1998 turnaround.

<TABLE>
<CAPTION>

=================================================================================================
                                                                %                   %
     CONSOLIDATED RESULTS, AS REPORTED           1998      CHANGE     1997     CHANGE       1996
-------------------------------------------------------------------------------------------------
<S>                                             <C>        <C>       <C>        <C>       <C>       
Dollars in millions, except per-share data
Sales                                           $6,758        3      $6,586       (8)      $7,176
                                                                                           
Operating income                                   938      141         390      (42)         677
Earnings before income taxes                     1,016      117         468      (44)         838
Net earnings                                       691      114         323      (43)         562
Net earnings per common share (EPS):
 --Basic                                        $ 1.33      118      $  .61      (44)      $ 1.08
 --Diluted                                      $ 1.31      115      $  .61      (43)      $ 1.07
=================================================================================================
</TABLE>

The financial impact of the restructuring, divestments, and other strategic
measures described in more detail below are unusual in nature and therefore need
to be considered in the year-to-year comparison of results. In the following
discussion of consolidated results, per-share amounts are presented on a
diluted, after-tax basis.

<TABLE>
<CAPTION>

======================================================================================================
                                                                  %                       %
     CONSOLIDATED RESULTS, AS ADJUSTED               1998    CHANGE        1997      CHANGE       1996
------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>     <C>          <C>       <C>
     Dollars in millions, except per-share data
     Net earnings before unusual items             $   830      12      $   739      (26)      $   997
     EPS before unusual items:
        Basic                                      $   1.61     13      $  1.43      (26)      $  1.93
        Diluted                                    $   1.58     12      $  1.41      (26)      $  1.90
======================================================================================================
</TABLE>

Restructuring activity since the 1995 merger of The Upjohn Company and Pharmacia
AB reflects the ongoing transformation of the company from two unique operations
into one integrated global enterprise. Restructuring charges were $92 million
($.12 per share) in 1998; $316 million ($.39 per share) in 1997; and $518
million ($.62 per share) in 1996. Restructuring efforts in 1998 and 1997 were
associated with the global turnaround program. This program was undertaken to
achieve simplified infrastructure, improved efficiency, and a global focus on
the core pharmaceutical business. The 1996 restructuring was related primarily
to the merger and included the reduction of 4,350 positions, the elimination of
duplicate facilities, and other activities connected with the merger. In
addition, merger costs of $67 million ($.09 per share) were reported in 1996.
These costs consisted of certain nonrecurring organizational activities,
establishing the corporate identity for the new company, and other costs of
combining the two predecessor companies.
         To concentrate resources on the faster-growing, higher-margin
pharmaceutical business, management has divested three noncore businesses since
1996. In 1998, the company sold substantially all of its nutrition business for
a loss of $52 million ($.07 per share). In 1997, the company merged Pharmacia
Biotech, its biotechnology supply business, with Amersham Life Science creating
a new company, Amersham Pharmacia Biotech Ltd., of which Pharmacia & Upjohn owns
45 percent. In connection with the merger and subsequent restructuring of
Biotech, the company recorded charges of $79 million ($.12 per share) in 1997.
In 1996, management sold 59 percent of the company's holding in Biacore
International AB through an initial public offering and recorded a gain on the
sale of Biacore stock of $55 million ($.08 per share) which was included in
nonoperating income. The ownership structure of Biotech and Biacore changed from
wholly-owned subsidiaries to equity affiliates, further affecting comparability
among years.
         The company took additional strategic steps during the last three years
which affected earnings comparability. In 1998, management reached a settlement
of $103 million in a federal class-action lawsuit originally filed in 1993 on
behalf

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<PAGE>   2
of retail pharmacies. As a consequence of the settlement, the company increased
its litigation reserves by $61 million ($0.08 per share), a charge reported in
marketing, administrative, and other (MA&O) expense in the second quarter of
1998. In 1997, the company reacquired sales and marketing rights in Japan to one
of its leading products, GENOTROPIN. The reacquisition and related inventory
repurchase resulted in a charge of $115 million ($.11 per share) recorded in
sales, cost of goods sold, and MA&O expense. Also in that year, the company
purchased exclusive worldwide commercialization rights to a research compound
for $35 million ($.04 per share) and terminated certain future product plans
resulting in a charge of $36 million ($.05 per share). Both charges were
reported in research and development (R&D) expense. Management additionally
recognized $70 million ($.09 per share) in litigation-related charges in 1997
which were recorded in MA&O expense. Significant events in 1996 included the
termination of a product development agreement with the Biopure Corporation
resulting in a charge of $106 million ($.13 per share); the sale of an equity
interest and related dissolution of a joint venture resulting in a gain of $46
million ($.06 per share); and the increase in certain environmental and legal
reserves of $73 million ($.10 per share), all reported in MA&O expense. The
company additionally recorded $26 million ($.03 per share) for a contractual
obligation relating to a co-development agreement included in R&D expense.

NET SALES
Excluding the divested Biotech business, sales rose 6 percent in 1998 to $6.7
billion. This increase represented a 7 percent volume growth, a 2 percent net
price increase, and a 3 percent unfavorable currency exchange rate effect. On
the same basis, 1997 sales of $6.3 billion were 6 percent lower than the
previous year. The change represented a 1 percent volume growth, a 1 percent net
price decrease, and a 6 percent negative exchange effect.
         As a direct outcome of the company's aggressive U.S. growth strategy,
total sales in the U.S. represented an increasingly larger percentage of
worldwide sales at 37 percent in 1998, up from 33 percent in 1997 and 1996,
excluding Biotech. Despite increasing growth in the U.S. relative to non-U.S.
markets, the company's geographic composition of sales will continue to result
in significant exposure to the fluctuations of exchange rates in both
translation of financial results and the underlying transactions that comprise
the results. The estimated effect of exchange on sales by country in the
following table is based on location of customer.

<TABLE>
<CAPTION>

===================================================================================
                                                            %     % CHANGE
EXCHANGE EFFECT ON CONSOLIDATED SALES     1998         CHANGE     EXCL. FX*    1997
-----------------------------------------------------------------------------------
<S>                                      <C>            <C>         <C>      <C>   
Dollars in millions
Non-U.S.:
 Japan                                   $  565         (9.6)       (2.4)    $  624
 Italy                                      461          0.3         2.6        460
 Germany                                    412          1.6         3.4        405
 United Kingdom                             352         17.0        16.1        300
 Sweden                                     284        (10.1)       (6.3)       317
 France                                     275          8.3         9.8        254
 Spain                                      168         (9.0)       (6.9)       185
 Rest of world                            1,732          0.5         6.5      1,724
United States                             2,498         20.0        20.0      2,081
-----------------------------------------------------------------------------------
Subtotal                                  6,747          6.3         9.1      6,350
Biotech                                      11        (95.0)      (95.1)       236
-----------------------------------------------------------------------------------
Total consolidated sales                 $6,758          2.6         5.4     $6,586
===================================================================================
</TABLE>

* Represents percent change from the prior year excluding the approximate
  effects of currency exchange rate fluctuations.

Management reports its operations within two segments: pharmaceutical and
nonpharmaceutical. The pharmaceutical segment represents the company's core
business: the development, manufacture, and sale of pharmaceutical products.
Pharmaceutical products include prescription and nonprescription products for
humans and animals. The nonpharmaceutical segment includes diagnostics,
nutrition, plasma and biotechnology. Additional information regarding segments
is provided in Note 21 to the consolidated financial statements. Prior to 1998,
the company reported its operations as a single industry segment. In the fourth
quarter of 1998, 


                                       34
<PAGE>   3
the company adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 131 which established new standards
for defining operating segments.

<TABLE>
<CAPTION>
===================================================================================
                                                %                       %
     SALES BY SEGMENT            1998      CHANGE       1997       CHANGE      1996
----------------------------------------------------------------------------------- 
<S>                            <C>          <C>      <C>           <C>      <C>   
     Dollars in millions
     Pharmaceutical segment    $6,127         7.6     $5,690        (5.5)    $6,025
     Nonpharmaceutical segment    631       (29.4)       896       (22.2)     1,151
-----------------------------------------------------------------------------------
     Total consolidated sales  $6,758         2.6     $6,586        (8.2)    $7,176
===================================================================================
</TABLE>


The increase in pharmaceutical segment sales in 1998 was due largely to new
prescription product growth in the U.S. and Europe. Although new product growth
was strong in 1997, sales that year were adversely affected by intense generic
competition and year-end 1996 trade inventory accumulations in the U.S. and
across major markets in Europe. In Japan, mandatory price decreases in each of
the last three years, negative exchange effects, and government restrictions in
health care reimbursements have adversely affected pharmaceutical segment sales.
         The nonpharmaceutical segment accounted for approximately 9 percent of
consolidated sales in 1998, down from 14 percent in 1997 and 16 percent in 1996.
Excluding Biotech, sales of the remaining noncore businesses fell 3 percent in
1998 in local currency. As previously mentioned, sales of Biotech effective
August 1997 and Biacore effective December 1996 are no longer reported in
consolidated sales. Biotech and Biacore transactions are further discussed in
Notes 5 and 6 to the consolidated financial statements. Nutrition sales will be
significantly lower beginning in 1999 with the sale of the majority of the
nutrition business to Fresenius AG in December 1998. To comply with antitrust
regulations in Germany, operations there were not sold. As of December 31, 1998,
the sale of the operation in China was still pending.

SALES BY PRODUCT
A year-to-year consolidated net sales comparison of the company's top 20
products (including generic equivalents where applicable) is provided in the
table below.

<TABLE>
<CAPTION>
=============================================================================
                                          %                       %
SALES OF TOP PRODUCTS    1998        CHANGE      1997        CHANGE      1996
-----------------------------------------------------------------------------
<S>                    <C>           <C>      <C>           <C>       <C>   
Dollars in millions
GENOTROPIN             $  395         13.1     $  349        (12.0)    $  397
XALATAN                   332        101.6        165        452.7         30
XANAX                     321         14.8        279        (20.8)       353
CLEOCIN/DALACIN           314          5.1        299          7.1        279
MEDROL                    264          9.4        241        (10.3)       269
DEPO-PROVERA              227         15.8        196         (5.1)       206
NICORETTE                 213         26.8        168        (18.7)       207
CAMPTOSAR                 193         26.0        154        162.0         59
FRAGMIN                   181          9.5        165         10.4        150
PHARMORUBICIN             177         (9.3)       196         (5.8)       208
HEALON                    140         (9.3)       155        (17.7)       188
ROGAINE/REGAINE           133          3.2        129        (31.8)       189
DETROL/DETRUSITOL         125          N/A          1          N/A        N/A
PROVERA                   100          4.9         96        (38.9)       157
AZULFIDINE/SALAZOPYRIN     97          3.2         94        (12.2)       107
NAXCEL/EXCENEL             96         13.2         85         12.9         75
MICRONASE/GLYNASE          91          8.5         84        (50.0)       168
HALCION                    88         (5.8)        93        (10.5)       104
CAVERJECT                  73        (17.0)        88         26.5         70
SERMION                    72        (11.1)        81        (19.1)       101
-----------------------------------------------------------------------------
Total                  $3,632         16.5     $3,118         (6.0)    $3,317
=============================================================================
</TABLE>


                                       35
<PAGE>   4

Sales of new products have represented an increasing percentage of total sales
every year since the merger. In 1996 and 1997, the company's portfolio of
largely older products left it vulnerable to generic competition and consequent
price erosion. With a growing percentage of new products making up the sales
base, the impact of patent expirations on sales over the next five years will be
very limited.
         New product sales growth was led by XALATAN in the U.S. and Europe
during both 1998 and 1997. Introduced in 1996, XALATAN is now the leading
glaucoma treatment worldwide and is sold in 45 countries. Management expects to
launch XALATAN in Japan, the second-largest glaucoma market in the world, late
in 1999. Another successful new product for the company is DETROL (DETRUSITOL
outside the U.S.), a therapy for overactive bladder and its symptoms of urinary
urgency, frequency and urge incontinence. The product targets an underdeveloped
market which is expanding due to direct-to-consumer advertising undertaken by
Pharmacia & Upjohn. DETROL was launched in the U.S. in April 1998 and is
currently available in 22 countries in Europe, North America, and Latin America.
Sales of another promising new product, MIRAPEX, increased $29 million to $49
million in 1998. Since its U.S. launch in mid-1997, MIRAPEX has become the
leading dopamine agonist in the U.S. for the treatment of Parkinson's disease.
         The strong 1998 sales performances of NICORETTE and CAMPTOSAR have
established these products as important to the company's future growth. Current
year sales of the NICORETTE line of products to treat tobacco dependency were
led by NICORETTE Gum and the NICORETTE Inhaler in the U.K. and U.S. markets. In
addition, NICORETTE Microtab was launched in Sweden. Sales levels were lower in
1997 compared to 1996 due to the initial establishment of retail inventories for
the 1996 launches of NICORETTE Gum, NICORETTE Nasal Spray, and the NICOTROL
Patch in the United States. CAMPTOSAR was granted full second-line approval by
the U.S. FDA for colorectal cancer in October 1998, two years after the product
was introduced with an accelerated approval. Sales growth of CAMPTOSAR in 1998
was positively impacted by new survival data released earlier in the year. 1997
sales levels reflected the product's initial strong market penetration in the
U.S.
         FRAGMIN and GENOTROPIN also are products essential to the company's
top-line growth. New indications and improved delivery systems introduced in
selected countries over the past two years have bolstered demand for FRAGMIN, a
low molecular weight heparin for treating blood clots, deep-vein thrombosis, and
acute unstable coronary artery disease. While sales in both 1998 and 1997 fell
in Japan and France, the largest markets for FRAGMIN, the product experienced
strong growth in the U.S., Germany, and the U.K.
         Pharmacia & Upjohn reacquired sales and marketing rights to GENOTROPIN
in Japan, this product's largest market, and assumed control of the product
there during 1998. The company is now able to sell the product directly to its
customers. In the last two years, sales have been adversely affected by the poor
economic climate in Japan, the weak yen, and government-imposed prescribing
restrictions and price decreases. However, continuing expansion into the U.S.
market, the introduction of the new adult indication, and the launch of
GENOTROPIN MiniQuick, a new delivery system, have resulted in strong growth in
the U.S. and Europe since 1996.
         Mandatory price decreases in Japan in each of the last three years and
recent government restrictions in health care reimbursements have severely
depressed the pharmaceutical market in that country. These factors in
combination with the weak yen negatively impacted sales of several products for
which Japan is a major market. In addition to the aforementioned GENOTROPIN and
FRAGMIN, products particularly affected in both 1998 and 1997 included HEALON,
PHARMORUBICIN, SERMION, AZULFIDINE/ SALAZOPYRIN, and HALCION. HEALON is a
viscoelastic used in ophthalmic surgery. PHARMORUBICIN is an oncology product.
AZULFIDINE is a treatment for inflammatory bowel disease and rheumatoid
arthritis. SERMION is a treatment for senile dementia and HALCION is a
sleep-inducing agent.
         The expansion and revitalization of the U.S. sales force benefited
certain products in 1998 for which loss of patent protection and ensuing generic
competition had led to sales declines over the past several years. These
products included XANAX, a treatment for anxiety; oral anti-diabetes agents
GLYNASE and MICRONASE; PROVERA, a progestational agent; and MEDROL steroid
products. In addition, 1997 sales levels for these products were relatively low
due to the termination of special promotions offered in the previous year and
the resulting effects of year-end 1996 trade inventory accumulations. Generic
price erosion also has affected sales of HALCION, HEALON, and PHARMORUBICIN in
Europe. Competition from generics is expected to continue to adversely affect
future sales of these products.
         The U.S. market is very important to several other products including
CAVERJECT, ROGAINE, CLEOCIN, DEPO-PROVERA, and NAXCEL/EXCENEL. Since its launch
in late 1995, CAVERJECT, a treatment for erectile dysfunction, reported strong
sales growth every year until 1998 when intense U.S. competition diminished
sales there. Sales of ROGAINE, a treatment for hereditary hair loss, increased
slightly in 1998; sales levels were lower in 1997 due to the initial
establishment of retail inventories for the U.S. launch in 1996. In 1999,
ROGAINE Professional will be introduced through hair salons to improve
distribution and female use of the product. The antibiotic CLEOCIN achieved
sales growth each year since 1996 led by the U.S. market. Sales growth in 1998
of DEPO-PROVERA, the long-acting injectable contraceptive, also was led by the
U.S. market. In 1997, sales of DEPO-PROVERA fell in the U.S. due to the
termination of special promotions that were offered in the previous year and to
a temporary cutback in promotional spending. NAXCEL/ EXCENEL, an antibiotic for
animals, achieved growth across all major markets during the last three years
led by the United States.


                                       36
<PAGE>   5

OPERATING COSTS AND EXPENSES
Consolidated operating expenses, stated as a percentage of net sales, are
provided in the table below.

<TABLE>
<CAPTION>

===================================================================
                                  1998         1997        1996
-------------------------------------------------------------------
<S>                                 <C>          <C>         <C>   
     Cost of products sold          30.1%        31.1%       29.5%
     Research and development       17.7         18.5        17.6
     Marketing, administrative
      and other                     39.0         40.5        36.8
     Restructuring                   1.4          4.8         7.2
     Biotech                        (0.8)         1.1        -- 
     Loss on sale of nutrition       0.8         --          -- 
     P&U merger costs               --           --           0.9
     Operating income               13.9          5.9         9.4
===================================================================
</TABLE>


A favorable comparison in product mix and production costs drove cost of
products sold lower as a percentage of sales in 1998 as compared to 1997. New
products, representing an increasing percentage of sales, contributed a higher
gross profit than older products in price competition with generics.
Improvements in production efficiencies, increased production volumes, and the
favorable effect of currency exchange on costs more than offset the negative
currency impact on sales, further reducing the percentage. From 1996 to 1997,
cost of products sold increased as a percentage of sales due to declining sales
levels and rising manufacturing expenses. The unfavorable effects of selling
price erosion, product mix, and currency exchange caused sales levels to
decline. Manufacturing expense increased due to higher production start-up
expenses for new products and project expenses incurred in 1997 to achieve
long-term production efficiencies. The increase in manufacturing expenses was
partially offset by the favorable effects of exchange.
         Research and development (R&D) expense decreased as a percentage of
sales from 1997 to 1998. Excluding Biotech and the previously mentioned unusual
items recorded in 1997 (the purchase of rights to a research compound and the
cancellation of future product rights under a research agreement for a total of
$71 million), R&D spending levels increased by 7 percent in 1998. The savings
from lower infrastructure costs in 1998 due to efficiencies generated by the
1997 restructuring were reinvested into strategic licensing agreements, other
R&D collaborations to supplement the company's internal research base, and
increased clinical spending on products in development. Key activities in 1998
included the acquisition of the rights to almotriptan, an anti-migraine
compound; the in-licensing of two new compounds for the treatment of diabetes
and anxiety; and the Hepatitis C virus and pharmacogenomics collaborations.
Spending during 1998 also supported the product filings of anticancer therapies
AROMASIN (exemestane) and epirubicin as well as the development activities
related to filing a New Drug Application for EDRONAX with the U.S. FDA for
depression.
         From 1996 to 1997, R&D spending grew as a percentage of sales largely
due to lower 1997 sales levels. Excluding Biotech and unusual items in both
years, R&D expense declined 6 percent in 1997. The ongoing efforts to focus R&D
resources on selected projects contributed to the decline as did the favorable
effects of exchange. In addition, 1996 spending levels were higher due to
spending for 11 significant product filings.
         Marketing, administrative, and other (MA&O) expense as reported
declined as a percentage of sales from 1997 to 1998. Unusual items recorded in
1998 included the previously mentioned $61 million increase in litigation
reserves. In 1997, unusual items included $95 million for the retrieval of
marketing rights to GENOTROPIN in Japan and $70 million for litigation-related
charges. Excluding Biotech and unusual items, 1998 spending increased 8 percent.
The increase was due primarily to sales force expansions and increased product
promotion in the U.S., Europe, and Japan, particularly for the following brands:
DETROL, EDRONAX, MIRAPEX, GENOTROPIN, and XALATAN. The comparative spending
increase was somewhat mitigated by the favorable effects of exchange and a
decrease in general and administrative expense, a consequence of the 1997
restructuring.
         From 1996 to 1997, MA&O expense increased as a percentage of sales on
both an as reported basis and excluding unusual items. In 1996, unusual items
included the impairment of an investment of $106 million resulting from the
termination of a product development agreement, increases in certain
environmental and legal reserves of $73 million, and a gain of $46 million on
the sale of an equity interest and related dissolution of a joint venture.
Spending levels in 1997 were higher than 1996 due to increased advertising and
promotion expense for new products; prelaunch and launch activities throughout
the world; sales force expansions in the U.S. and certain Latin American
countries; additional marketing investments in emerging markets; and increased
information technology expenses. The greater 1997 spending was largely offset by
the favorable effects of exchange resulting in a net increase of 3 percent,
excluding unusual items and Biotech.
         The company recorded $52 million in 1998 primarily for its share of
Amersham Pharmacia Biotech's pretax earnings. In 1997, the company recorded
Biotech merger costs of $36 million as well as its portion of the new company's
merger-related restructuring costs of $43 million. The merger costs included
transaction costs to effect the merger and charges associated with the write-off
of acquired R&D.
         In 1997, the company announced a comprehensive restructuring and
turnaround program that would result in restructuring charges of approximately
$450 million during 1997 and 1998. The company has structured the turnaround
program in two phases reflecting management development and approval of plans.
The turnaround program was initiated in the third quarter of 1997 and has been
scheduled to be materially completed by December 31, 1999. The objectives of the
turnaround program were to significantly rationalize infrastructure, establish a
global headquarters in New Jersey, and eliminate duplicate resources in
manufacturing, administration, and R&D. The turnaround program mainly affects


                                       37
<PAGE>   6

the company's core pharmaceutical segment and corporate administration groups,
with minor restructuring of businesses included in the nonpharmaceutical
segment. In the third and fourth quarters of 1997, the company recorded phase
one charges totaling $316 million. The second phase of the turnaround program
was finalized in the fourth quarter of 1998, resulting in an additional
restructuring charge of $92 million. Cost savings achieved from implementation
of this program will allow the company to increase investments in areas that
directly impact top-line growth.
         The charge of $92 million recorded in 1998 was comprised of employee
separation costs of $68 million; write-downs of fixed assets and abandoned
manufacturing projects of $8 million; and other costs of $16 million.
         The 1997 restructuring charge of $316 million for the first phase of
the turnaround program primarily related to employee separation costs of $134
million; write-downs of fixed assets and abandoned manufacturing projects of
$162 million; and other costs of $20 million.
         The total restructuring charges for 1998 and 1997 included involuntary
employee separation costs for 580 and 1,320 employees worldwide, respectively.
The 1998 charge included elimination of positions in marketing and
administration of $55 million, R&D of $9 million, and manufacturing of $4
million. These amounts included an adjustment of $16 million of the phase one
accruals, mainly attributable to lower employee separation costs and, to a
lesser extent, changes in plan estimates. The 1997 charge included elimination
of positions in marketing and administration of $81 million, R&D of $22 million,
and manufacturing of $31 million. As of December 31, 1998, the company had paid
$101 million in severance costs in connection with the 1998 and 1997 charges.
The remaining balance for employee separation costs related to the turnaround
program was $101 million at December 31, 1998, comprised mainly of charges
related to the phase two charge and remaining annuity separation payments for
the phase one charge. The company expects employee reductions for the 1998 and
1997 charges to be substantially completed by December 31, 1999.
         The 1998 and 1997 restructuring charges included asset write-downs for
excess manufacturing, administration, and R&D facilities totaling $8 million and
$162 million, respectively. The 1998 amount included an adjustment of $15
million of the phase one accruals, mainly attributable to changes in plan
estimates, favorable outcomes on sales of facilities, and actual facility
closure costs below the original estimates. At December 31, 1998, facilities
presently being marketed had a net book value of $47 million. Fixed asset
write-downs were based on appraisals less costs to sell.
         Other costs included in the 1998 and 1997 restructuring charges of $16
million and $20 million, respectively, were primarily comprised of cancelled
contractual lease obligations and, to a lesser extent, demolition and other
costs. Offsetting 1998 charges in this grouping was an adjustment of $6 million
related to all restructuring charges prior to 1997. The company expects
substantial completion of the 1997-1998 restructuring by December 31, 1999.
         In 1996, the company recorded restructuring charges of $518 million
primarily associated with the merger. The charges reflected the elimination of
approximately 3,500 positions in marketing and administration ($363 million),
R&D ($59 million), and manufacturing ($31 million); the elimination of duplicate
facilities ($43 million); and other exit costs resulting from the merger ($22
million). Implementation of the restructuring plan was completed by December 31,
1997. Remaining reserves of $7 million consist of annuity separation payments
which will be paid by the first quarter of 2000. Additional information
regarding the restructurings is provided in Note 3 to the consolidated financial
statements. Merger costs of $67 million also were recorded in 1996. As described
earlier, these charges resulted primarily from the combination of operations.
         The company also incurred $41 million in restructuring-related charges
in 1998. These charges, while not included in restructuring, are one-time costs
associated with the turnaround program and include the establishment of a new
global headquarters in New Jersey and registration and validation costs
associated with the company's manufacturing rationalization program.

NONOPERATING INCOME AND EXPENSE
The decline in both interest income and interest expense in 1998 and 1997 was
largely due to lower average interest-bearing assets and liabilities in both
years and to lower interest rates in 1997, mainly in Europe. The gain on the
initial public offering of stock for Biacore of $55 million was recorded as
nonoperating income in 1996. Of the total gain, $8 million represented the gain
on the issuance of new shares. Further information is presented in Note 5 to the
consolidated financial statements.

INCOME TAXES
The annual effective tax rate was 32 percent, 31 percent and 33 percent for
1998, 1997 and 1996, respectively. Excluding nonrecurring items, the rate was 32
percent in 1998, down from 34 percent in 1997 and 35 percent in 1996. The lower
1998 and 1997 rates were the result of increased earnings in jurisdictions with
lower tax rates. Additionally, nonrecurring charges were taxed at higher rates
in 1997 than those incurred in 1996.

COMPREHENSIVE INCOME
Effective in 1998, the company adopted SFAS No. 130 which established standards
for reporting comprehensive income and its components. Comprehensive income is
defined as all nonowner changes in equity and equals net earnings plus other
comprehensive income (OCI). For Pharmacia & Upjohn, OCI consists of currency
translation adjustments, unrealized gains and losses on available-for-sale
securities, and minimum pension liability adjustments. Comprehensive income
(loss) in millions for 1998, 1997, and 1996 was $674, 


                                       38
<PAGE>   7
$(85) and $422, respectively. Comprehensive income was less than net earnings in
1998 because unrealized losses on available-for-sale securities, coupled with
the minimum pension liability adjustments, more than offset favorable currency
translation adjustments (CTA). Favorable CTA reflected the weaker U.S. dollar at
December 31, 1998, relative to its general strength at the prior year-end. In
1997 and 1996, the stronger U.S. dollar was responsible for large CTA losses
which drove comprehensive income lower than net income in these years.
Additional information regarding OCI is provided in Note 2 to the consolidated
financial statements.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

<TABLE>
<CAPTION>

===============================================================
As of December 31,             1998         1997         1996
---------------------------------------------------------------
<S>                           <C>           <C>         <C>   
Dollars in millions
Working capital               $ 1,681       $1,639      $ 2,392
Current ratio                  1.59:1       1.61:1       1.96:1
Debt to total capitalization     13.0%        15.7%        14.5%
===============================================================
</TABLE>


At year-end 1998, the company's working capital and current ratio were generally
consistent with the previous year-end. Both liquidity measures decreased from
1996 to 1997 due to declines in receivables and short-term investments. The
decrease in the percentage of debt to total capitalization from 1997 to 1998
reflects declining debt levels. Despite a modest reduction in debt in 1997, the
percentage of debt to total capitalization increased over 1996 due to a decline
in shareholders' equity. Negative currency translation adjustments recorded in
equity caused much of this decline coupled with lower 1997 earnings levels. As
indicated below, net financial assets have remained relatively constant from
1996 through 1998, increasing slightly each year.

<TABLE>
<CAPTION>

=================================================================
As of December 31,                   1998        1997        1996
-----------------------------------------------------------------
<S>                                <C>         <C>         <C>   
Dollars in millions
Cash, cash equivalents and
 investments                       $1,663      $1,848      $1,849
Short-term and long-term debt         840       1,035       1,058
-----------------------------------------------------------------
Net financial assets               $  823      $  813      $  791
=================================================================
</TABLE>


Net cash provided by operations is a major source of funds to finance working
capital, shareholder dividends, and capital expenditures. Cash from operations
totaled $932 million in 1998, $1,222 million in 1997, and $805 million in 1996.
The decrease in 1998 was largely attributable to increases in receivables and
inventories. The prior year increase was due to a decrease in receivables and an
increase in liabilities. The increase in liabilities resulted from certain
significant unusual transactions previously discussed including the GENOTROPIN
rights repurchase and the litigation-related accruals. The 1996 operating cash
flows were lower due to large cash expenditures related to the merger and
restructuring and increases in receivables, inventories, and other current
assets.
         In addition to net cash provided by operations, two major sources of
cash in 1998 were the proceeds on the sale of the nutrition business of $332
million and the proceeds from sales of investments net of purchases of $264
million, together accounting for a $455 million increase in sources compared to
the prior year. Cash proceeds from employee stock option exercises increased in
1998 because of higher stock market prices.
         Over the three-year period from 1996 to 1998, significant uses of cash
included the company's quarterly dividend payment to shareholders and
expenditures for property, plant, and equipment (capital). Capital expenditures
in millions were $644 in 1998, $577 in 1997, and $656 in 1996. Anticipated
capital spending for 1999 of approximately $650 million includes expansion and
improvements to research and manufacturing facilities in the U.S., Belgium,
Puerto Rico, and Sweden.
         In November 1998, the company announced a $1 billion stock repurchase
program. Management expects to complete the program over a two-year period. In
January 1999, the company repurchased 1.8 million shares for approximately $100
million.
         The company's future cash provided by operations and borrowing capacity
are expected to cover normal operating cash flow needs, planned capital
spending, dividend payments, and stock repurchases that may be approved by the
board of directors for the foreseeable future. As of December 31, 1998, lines of
credit available for company use totaled $1,073 million, of which $500 million
are committed and $27 million were used as of year end. The company had A-1+ and
P-1 ratings for its commercial paper and AA- and A1 general bond ratings from
Standard & Poor's and Moody's, respectively, as of December 31, 1998.
         The company utilizes currency exchange forward and option contracts
according to established policies to mitigate the effect of currency exchange
rate fluctuations. Because currency exchange forward and option contracts used
to hedge anticipated transaction exposures are marked to market each period, but
only some of the underlying transactions have been recorded, the timing of
recognition of the related gains and losses may not match. Gains and losses from
contracts related to hedges for product shipments are recognized as "Cost of
Products Sold" and are included in the operating section of the statement of
cash flows. Gains and losses from currency exchange forward and option contracts
related to hedges on other activities are recognized as "All Other, Net," and
are included in the investment section of the statement of cash flows. Further
information is presented in Note 14 to the consolidated financial statements and
in the market risk sensitivity analysis that follows.

MARKET RISK
Market risk represents the risk of a change in the value of a financial
instrument, derivative or nonderivative, caused by fluctuations in interest
rates, currency exchange rates, and equity prices. The company handles market
risk in 


                                       39
<PAGE>   8


accordance with established policies and thereby enters into various derivative
transactions. No such transactions are entered into for trading purposes.
         Because the company's cash and investments exceed short and long-term
debt, the exposure to interest-rate risk relates primarily to the investment
portfolios. Most of the investments in the long-term portfolio are at fixed
rates. The company is actively managing the investment portfolios to increase
its return on investment, but in order to ensure liquidity, will only invest in
instruments with high credit quality where a secondary market exists. The
company holds no derivatives related to its interest-rate exposure; is in a
position to keep all investments until final maturity; and maintains long-term
debt at fixed rates.
         The following sensitivity analysis presents the hypothetical change in
fair value of those financial instruments held by the company at December 31,
1998, which are sensitive to changes in interest rates. Market risk is estimated
as the potential change in fair value resulting from an immediate hypothetical
one percentage point parallel shift in the yield curve. The fair values of the
company's investments and loans are based on quoted market prices or discounted
future cash flows. As the carrying amounts on short-term loans and investments
maturing in less than 180 days approximate the fair value, these are not
included in the sensitivity analysis. The fair value of investments over 180
days is $411 million. The fair value of debt included in the analysis is $389
million and excludes Employee Stock Ownership Plan (ESOP) guaranteed debt.
Although not expected, a one percentage point change in the interest rates would
change the fair value of investments over 180 days by $6 million and debt by $3
million.
         The company's management of currency exposure is primarily focused on
reducing the negative impact of currency fluctuations on consolidated cash flow
and earnings. The company uses forward contracts, cross-currency swaps, and
currency options to actively manage the net exposure in accordance with
established hedging policies. The company hedges intercompany loans and deposits
as well as a portion of both firm commitments and anticipated transactions. The
company has concentrated most of the currency exposure in facilities in Sweden,
Italy and Belgium. The largest exposures from these units are against the
Japanese yen and the U.S. dollar.
         Certain derivatives entered into in order to hedge assets, liabilities,
firm commitments, and forecasted transactions are exposed to currency
fluctuations. A ten percent decrease in the Swedish krona and Italian lira would
have a negative impact on fair value of those derivatives by $23 million and $6
million, respectively; a ten percent increase in the Japanese yen would have a
negative impact of $13 million; and a ten percent decrease in the U.S. dollar
would have a negative impact of $6 million.
         The company also has investments in equity securities. All such
investments are classified as long term investments. The fair market value of
these investments is $170 million, of which 60 percent are listed on a stock
exchange or quoted in an over-the-counter market. If the market price of these
securities would decrease by ten percent, the fair value of the equities would
decrease by $10 million. Further discussion of financial instruments is provided
in Notes 9 and 15 to the consolidated financial statements.

LITIGATION AND CONTINGENT LIABILITIES
Various suits and claims arising in the ordinary course of business, primarily
for personal injury alleged to have been caused by the use of the company's
products, are pending against the company and its subsidiaries. The company also
is involved in several administrative and judicial proceedings relating to
environmental concerns, including actions brought by the U.S. Environmental
Protection Agency (EPA) and state environmental agencies for remedial clean-up
at approximately 50 sites.
         Based on information currently available and the company's experience
with lawsuits of the nature of those currently filed or anticipated to be filed
which have resulted from business activities to date, the amounts accrued for
product and environmental liabilities are considered adequate. Although the
company cannot predict and cannot make assurances with respect to the outcome of
individual lawsuits, the ultimate liability should not have a material effect on
its consolidated financial position. Unless there is a significant deviation
from the historical pattern of resolution of such issues, the ultimate liability
should not have a material adverse effect on the company's consolidated
financial position, its results of operations, or liquidity.
         The company has been a party, along with many other U.S. drug
manufacturers and wholesalers, in numerous related federal and state civil
antitrust lawsuits brought by U.S. independent and chain retail pharmacies and
consumers. These suits claim violations of antitrust and pricing laws as a
result of the defendants providing discounts and rebates to allegedly favor
managed care customers that were not offered to the plaintiffs. Several of the
suits are class actions. The company announced in 1998 that it has reached a
settlement with plaintiffs in the federal class action cases that had been
consolidated in federal court in Chicago, Illinois. The company believes that
any potential remaining liability above amounts accrued will not have a material
adverse effect on the company's consolidated financial position, its results of
operations, or liquidity. Further discussion of current litigation matters is
provided in Note 13 to the consolidated financial statements.
         The company's estimate of the ultimate cost to be incurred in
connection with environmental situations could change due to uncertainties at
many sites with respect to potential clean-up remedies, the estimated cost of
clean-up, and the company's share of a site's cost. With regard to the company's
discontinued industrial chemical facility in North Haven, Connecticut, the
company may soon be required to submit a corrective measures study report to the
EPA. As the corrective action process progresses, it may become


                                       40
<PAGE>   9

appropriate to reevaluate the existing reserves designated for remediation in
light of changing circumstances. It is reasonably possible that a material
increase in accrued liabilities will be required but it is not possible to
determine what, if any, exposure exists at this time or when the expenditures
might be made.
         In 1997, the company adopted American Institute of Certified Public
Accountants' Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." SOP 96-1 provides additional guidance for recognizing, measuring
and disclosing environmental remediation liabilities. The effect of initially
applying the provisions of SOP 96-1 was not material to the consolidated
financial statements. The company's estimated liability includes both direct and
indirect costs associated with remediation and is reduced to reflect the
anticipated participation of other potentially responsible parties where such
parties are considered solvent and it is probable that they will pay their
respective share of relevant costs. Such accruals are adjusted as further
information develops or circumstances change. Costs of future expenditures do
not reflect any claims for recoveries and are not discounted to their present
value.

YEAR 2000 
DATE RECOGNITION PROBLEM 
The company's global program to address the year 2000 (Y2K) date recognition
problem was launched in early 1997. The goal of the program is to ensure the
millennium event does not have a material adverse effect on the company's
business operations. The project, managed by a global team consisting of
technical, functional and business leaders, is led by a program director who
reports to the chief information officer (CIO) and an executive operations
group. Hundreds of employees worldwide are involved in this effort.
         The program encompasses three distinct efforts: (1) assessment and
remediation of information technology (IT) systems; (2) assessment and
remediation of embedded systems; and (3) assessment of high-level business risks
and development of contingency plans to address those risks. Status reports of
the global program's progress have been regularly provided to the company's
board of directors since the inception of the program. Assessment, remediation,
and testing of both IT and embedded systems have been completed for most
business-critical systems and are expected to be finished by mid-1999 for
remaining systems. With all systems anticipated to be individually tested by
mid-1999, the latter half of the year is reserved for integration testing, a
more comprehensive exercise to ensure critical systems will work together. The
high-level business risk assessment is completed and development of the
resulting contingency plans are well underway, especially for those plans
involving steps to be taken during 1999.
         Much of the Y2K effort is being supported by a reallocation of existing
resources. The company anticipates total spending of $150 million between 1997
and 2000 largely on replacement of applications that, for reasons other than Y2K
non-compliance, had been previously selected for replacement. Many of the
replacement applications, such as the new SAP financial systems, offer improved
functionality and commonality over predecessor systems and, at the same time,
resolve the Y2K problem. To date, the company estimates actual spending of $110
million of the total projected costs.
         There are many factors beyond the company's control that could cause
the Y2K problem to seriously disrupt operations and the company can provide no
assurance that these factors will not cause it to experience business
disruptions. For example, a widespread failure in the utilities industry could
severely interrupt or even halt the company's operations. There are other risks,
however, for which the company may prepare and, in so doing, reduce its
exposure. These risks include a disruption in the supply of product with
particular emphasis on failures of raw material suppliers, third-party
manufacturers, and external distribution channels; internal infrastructure
failures such as utilities, communications, internal IT services and integrated
IT systems; non-U.S. government failures, especially as they impact import and
export activity; and major customer failures or interruptions. The scope of the
company's efforts regarding these risks is focused on key products, key markets,
critical suppliers, and major customers.
         To reduce the impact of these failures were they to occur, the company
is developing contingency plans for the most critical business processes. These
plans represent a diversity of approaches and include maintaining higher
inventory levels, developing secondary sources for strategic product chain
links, and documenting back-up procedures and manual work-arounds. The ongoing
assessment of critical external partners also plays an important role in
contingency planning with appropriate actions mapped out at predetermined
decision points depending on the outcome. The company is in the process of
sending questionnaires to all major suppliers, third-party manufacturers, and
customers and auditing critical suppliers and third-party manufacturers in an
attempt to calculate, to the extent possible, where the company faces the
greatest risk of failure. In addition, management will implement a company-wide
program to strictly control and limit changes to major IT systems during the
latter half of 1999 to reduce potential additional exposures and to concentrate
IT resources on integration testing and other Y2K-related efforts. Neither this
program nor the previously mentioned reallocation of resources will have an
adverse effect on non-Y2K mission-critical projects. Barring critical failures
arising from factors beyond the company's direct control, management believes
that by meeting the objectives of its Y2K program, the date recognition problem
should not have a material adverse effect on the company's consolidated
financial position, its results of operations, or liquidity.

OTHER INFORMATION
Effective January 1, 1999, several European countries began operating with a new
common currency, the euro. The euro will completely replace these countries'
national currencies


                                       41
<PAGE>   10

by January 1, 2002. The conversion to the euro will require changes in the
company's operations as systems and commercial arrangements are modified to deal
with the new currency. Management created a project team to evaluate the impact
of the euro conversion on the company's operations and to develop and execute
action plans, as necessary, to successfully effect the change. The cost of this
effort is not expected to be material. While information technology systems are
planned to be fully euro-compliant by the year 2000, a minimum of
euro-compliance for strategic locations will be achieved in 1999. The conversion
to the euro may have competitive implications on pricing and marketing
strategies; however, any such impact is not known at this time. The introduction
of the euro will not significantly change the currency exposure of the company,
but will reduce the number of transactions performed in the market. At this
point in its overall assessment, management believes the impact of the euro
conversion on the company will not be significant; however, uncertainty exists
as to the effects the euro currency will have on the marketplace. As a result,
there is no guarantee that all problems will be foreseen and corrected, or that
no material disruption of the company's business will occur.
         In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as assets and
liabilities measured at fair value. The accounting treatment of gains and losses
resulting from changes in the value of derivatives depends on the use of the
derivative and whether it qualifies for hedge accounting. The company will adopt
SFAS No.133 as required no later than January 1, 2000, and is currently
assessing the impact of adoption on its financial position, results of
operations, and liquidity.
         In 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires start-up costs and organization costs to be expensed
as incurred. The SOP is effective beginning in 1999 and will be adopted by the
company at that time. Management does not anticipate its impact to be material
to the consolidated financial statements. The AICPA also issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" in 1998 which the company adopted. The statement requires
capitalization of certain costs incurred in the development of internal-use
software, including external direct material and service costs, employee payroll
and payroll-related costs, and capitalized interest. Prior to adoption of SOP
98-1, the company expensed these costs as incurred. The effect of initially
applying the provisions of SOP 98-1 was not material to the consolidated
financial statements.

FORWARD-LOOKING INFORMATION
Many matters discussed in this annual report are forward-looking statements that
involve risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting the company's
operations, markets, products, services and prices, and other factors more
specifically discussed in the company's filings with the Securities and Exchange
Commission.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

=========================================================================================================================
YEARS ENDED DECEMBER 31                                      1998         1997        1996        1995(a)         1994(a)
-------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>          <C>          <C>             <C>    
Dollar amounts in millions, except per-share data
Operating revenue                                          $ 6,893      $ 6,710      $ 7,286      $ 7,095         $ 6,823
Earnings from continuing operations                            691          323          562          739             833
Total assets                                                10,312       10,380       11,173       11,461          10,947
Long-term debt                                                 290          394          567          603             678
Diluted earnings per share from continuing operations      $  1.31      $   .61      $  1.07      $  1.41         $  1.60
Dividends declared per share(b)                            $  1.08      $  1.08      $  1.08      $   .27              
=========================================================================================================================
</TABLE>

(a) Pharmacia & Upjohn was formed through the 1995 merger of Pharmacia AB and
    The Upjohn Company. The merger was accounted for as a pooling of interests
    under U.S. generally accepted accounting principles. All data (except
    dividends) prior to the November 1995 merger date have been combined as if
    the companies had been merged during the prior periods. 
(b) Separate dividend information for Pharmacia AB and The Upjohn Company prior
    to the merger has not been presented because the information would not be
    meaningful.


                                       42
<PAGE>   11

                Reports of Management and Independent Accountants

                    -----------------------------------------
                    Pharmacia & Upjohn, Inc. and subsidiaries


REPORT OF MANAGEMENT

Management is responsible for the consolidated financial statements and the
other financial information included in this Annual Report. The Board of
Directors, acting through its Audit Committee which is composed solely of
directors who are not employees of the company, oversees the financial reporting
process. The financial statements have been prepared in accordance with U.S.
generally accepted accounting principles and include amounts based on judgments
and estimates made by management. Actual results could differ from amounts
estimated.
         Management has established systems of internal controls over financial
reporting designed to provide reasonable assurance that the financial records
used for preparing financial statements are reliable and that assets are
safeguarded from unauthorized use or disposition. Internal auditors review
accounting and control systems. The systems are also reviewed by the independent
accountants to the extent deemed necessary to express the opinion set forth in
their report.
         Management takes corrective actions to improve reporting and control
systems in response to recommendations by the internal auditors and independent
accountants. The appointment of the independent accountants is recommended by
the Audit Committee to the Board of Directors.


Fred Hassan, President and Chief Executive Officer


Christopher J. Coughlin, Executive Vice President and Chief Financial Officer


February 10, 1999

REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS,
PHARMACIA & UPJOHN, INC.

In our opinion, the consolidated balance sheets and the related consolidated
statements of earnings, shareholders' equity, and cash flows (pages 44 to 60)
present fairly, in all material respects, the financial position of Pharmacia &
Upjohn, Inc. and its subsidiaries 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 Pharmacia &
Upjohn, Inc.'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
February 10, 1999


                                       43
<PAGE>   12
                       Consolidated Statements of Earnings



                    -----------------------------------------
                    Pharmacia & Upjohn, Inc. and subsidiaries

<TABLE>
<CAPTION>

======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31                                                1998              1997             1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>              <C> 
Dollar amounts in millions, except per-share data 
OPERATING REVENUE:
Net sales                                                                    $6,758            $6,586           $7,176
Other revenue                                                                   135               124              110
----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE                                                       6,893             6,710            7,286
OPERATING COSTS AND EXPENSES:
Cost of products sold                                                         2,031             2,049            2,116
Research and development                                                      1,199             1,217            1,266
Marketing, administrative and other                                           2,633             2,665            2,642
Restructuring                                                                    92               316              518
Biotech                                                                         (52)               73               --
Loss on sale of nutrition                                                        52                --               --
Merger costs                                                                     --                --               67
----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                                                                938               390              677
Interest income                                                                  89               110              159
Interest expense                                                                (25)              (33)             (56)
Gain on sale of subsidiary stock                                                 --                --               55
All other, net                                                                   14                 1                3
----------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES                                                  1,016               468              838
Provision for income taxes                                                      325               145              276
----------------------------------------------------------------------------------------------------------------------
NET EARNINGS                                                                  $ 691             $ 323            $ 562
----------------------------------------------------------------------------------------------------------------------
Earnings per common share: 
   Basic                                                                      $1.33             $ .61            $1.08
   Diluted                                                                    $1.31             $ .61            $1.07
======================================================================================================================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                       44
<PAGE>   13

                           Consolidated Balance Sheets

                    -----------------------------------------
                    Pharmacia & Upjohn, Inc. and subsidiaries

<TABLE>
<CAPTION>

======================================================================================================================
DECEMBER 31                                                                                      1998             1997   
----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions 
<S>                                                                                           <C>              <C>
CURRENT ASSETS:
Cash and cash equivalents                                                                     $   857          $   775
Short-term investments                                                                            352              539
Trade accounts receivable, less allowance of $103 (1997: $89)                                   1,417            1,303
Inventories                                                                                     1,032              958
Deferred income taxes                                                                             406              335
Other                                                                                             468              417
----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                            4,532            4,327
Long-term investments                                                                             454              534
Properties, net                                                                                 3,226            3,306
Goodwill and other intangible assets, net                                                       1,238            1,287
Other noncurrent assets                                                                           862              926
----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                  $10,312          $10,380
======================================================================================================================
CURRENT LIABILITIES:
Short-term debt                                                                               $   332            $ 401
Accounts payable                                                                                  506              425
Compensation and compensated absences                                                             266              186
Dividends payable                                                                                 141              141
Income taxes payable                                                                              389              404
Other                                                                                           1,217            1,131
----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                       2,851            2,688
Long-term debt                                                                                    290              394
Guarantee of ESOP debt                                                                            218              240
Postretirement benefit cost                                                                       344              337
Deferred income taxes                                                                             238              362
Other noncurrent liabilities                                                                      771              821
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                               4,712            4,842
======================================================================================================================
SHAREHOLDERS' EQUITY:
Preferred stock, one cent par value; authorized 100,000,000 shares,
   issued Series A convertible 6,863 shares at stated value (1997: 6,996 shares)                  277              282
Common stock, one cent par value; authorized 1,500,000,000 shares,
   issued 508,682,707 shares (1997: 508,647,507 shares)                                             5                5
Capital in excess of par value                                                                  1,376            1,440
Retained earnings                                                                               5,493            5,364
ESOP-related accounts                                                                            (254)            (260)
Treasury stock                                                                                    (35)             (48)
Accumulated other comprehensive income:
   Currency translation adjustments                                                            (1,246)          (1,298)
   Unrealized investment gains, net                                                                 5               53
   Minimum pension liability adjustment                                                           (21)              --
----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                                      5,600            5,538
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                    $10,312          $10,380
======================================================================================================================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.







                                       45
<PAGE>   14

                 Consolidated Statements of Shareholders' Equity

                    -----------------------------------------
                    Pharmacia & Upjohn, Inc. and subsidiaries

<TABLE>
<CAPTION>

======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31                                              1998              1997              1996
----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions 
<S>                                                                       <C>               <C>                 <C>   
PREFERRED STOCK:
Balance at beginning of year                                              $     282         $     287           $  291
Redemptions and conversions                                                      (5)               (5)              (4)
----------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                          277               282              287
----------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at end of year                                                            5                 5                5
----------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year                                                  1,440             1,457            1,457
Stock option, incentive and dividend reinvestment plans                         (57)              (22)              10
Retirements, conversions and other                                               (7)                5              (10)
----------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                        1,376             1,440            1,457
----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year                                                  5,364             5,603            5,603
Net earnings                                                                    691               323              562
Dividends declared                                                             (549)             (549)            (549)
Dividends on preferred stock (net of tax)                                       (13)              (13)             (13)
----------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                        5,493             5,364            5,603
----------------------------------------------------------------------------------------------------------------------
ESOP-RELATED ACCOUNTS:
Balance at beginning of year                                                   (260)             (266)            (272)
Third-party debt repayment                                                       16                11                8
ESOP expense exceeding cash contributed                                          (2)                5               --
Additional loan                                                                  (5)               (7)              --
Rollover of interest on ESOP note receivable                                     (3)               (3)              (2)
----------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                         (254)             (260)            (266)
----------------------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year                                                    (48)               (8)             (18)
Stock options and incentive plans                                               130                54              103
Purchases of treasury stock                                                    (117)              (94)             (93)
----------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                          (35)              (48)              (8)
----------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year                                                 (1,245)             (837)            (697)
Other comprehensive loss                                                        (17)             (408)            (140)
----------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                       (1,262)           (1,245)            (837)
----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                $   5,600         $   5,538           $6,241
======================================================================================================================

COMPREHENSIVE INCOME (NET OF TAX):
Currency translation adjustments                                          $      52         $    (443)         $  (127)
Unrealized investment gains (losses)                                            (48)               35              (13)
Minimum pension liability adjustments                                           (21)               --               --
----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss                                                        (17)             (408)            (140)
Net earnings                                                                    691               323              562
----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS)                                         $     674         $     (85)         $   422
======================================================================================================================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.








                                       46
<PAGE>   15


                      Consolidated Statements of Cash Flows


                    -----------------------------------------
                    Pharmacia & Upjohn, Inc. and subsidiaries

<TABLE>
<CAPTION>

======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31                                                1998              1997           1996
----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions 
<S>                                                                         <C>                 <C>           <C>     
CASH FLOWS FROM OPERATIONS:
Net earnings                                                                $   691             $ 323         $    562
Adjustments to net earnings:
   Depreciation                                                                 318               324              343
   Amortization of intangibles                                                  112               116              130
   Restructuring                                                                 92               316              518
   Cash expended on restructurings                                             (140)             (132)            (344)
   Loss on sale of nutrition                                                     52                --               --
   Net gains on sales of noncurrent assets                                       20               (35)             (79)
   Write-downs of investments, properties and intangibles                         9                43              106
   Deferred income taxes                                                       (173)             (286)             (94)
   Net (earnings) loss from equity investments                                  (57)               68               (5)
   Other                                                                         10                17                2

Changes in:
   Accounts receivable (net)                                                    (65)              196             (218)
   Inventories                                                                  (91)             (127)             (69)
   Accounts payable                                                              66                32              (25)
   Income taxes payable                                                         (16)              107               52
   Other current and noncurrent assets and liabilities                          104               260              (74)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operations                                                 932             1,222              805
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED) PROVIDED BY INVESTMENT ACTIVITIES:
Additions of properties                                                        (644)             (577)            (656)
Proceeds from sales of properties                                                37                70               50
Proceeds from sale of nutrition                                                 332                --               --
Purchases of investments                                                       (646)             (979)          (1,551)
Proceeds from sales of investments                                              910             1,120            2,105
Other                                                                            (3)              (48)              (6)
----------------------------------------------------------------------------------------------------------------------
Net cash required by investment activities                                      (14)             (414)             (58)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of debt                                                   60                40               38
Repayment of debt and ESOP guaranteed loan                                     (243)              (72)            (410)
Net increase (decrease) in debt with initial maturity of 90 days or less         (3)               26               33
Dividend payments                                                              (566)             (567)            (567)
Purchases of treasury stock                                                    (117)              (94)             (93)
Proceeds from stock options exercises                                            80                18               83
Other                                                                            --                 1               (4)
----------------------------------------------------------------------------------------------------------------------
Net cash required by financing activities                                      (789)             (648)            (920)
----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                         (47)              (26)             (27)
----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                                          82               134             (200)
Cash and cash equivalents, beginning of year                                    775               641              841
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                      $   857             $ 775         $    641
======================================================================================================================   
Cash paid during the year for:
Interest (net of amounts capitalized)                                       $    21             $  29         $     60
Income taxes                                                                $   398             $ 281         $    287
Noncash investing activity:
Assets disposed of in exchange for equity securities                        $    54             $  --         $     --
======================================================================================================================  
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.






                                       47
<PAGE>   16
                   Notes to Consolidated Financial Statements
                Dollar amounts in millions, except per-share data
                    -----------------------------------------
                    Pharmacia & Upjohn, Inc. and subsidiaries


1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
The consolidated financial statements are presented on the basis of accounting
principles that are generally accepted in the U.S. All professional accounting
standards that are effective as of December 31, 1998, have been taken into
consideration in preparing the financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make certain estimates and assumptions which affect the
reported earnings, financial position and various disclosures. Actual results
could differ from those estimates.

Principles of Consolidation
The consolidated financial statements include the accounts of the company and
all majority-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. Investments in affiliates which
are not majority owned are reported using the equity method and are recorded in
other noncurrent assets. Gains and losses resulting from the issuance of
subsidiaries' stock are recognized in consolidated earnings.

Currency Translation
The results of operations for non-U.S. subsidiaries, other than those located in
highly inflationary countries, are translated into U.S. dollars using the
average exchange rates during the year, while assets and liabilities are
translated using period-end rates. Resulting translation adjustments are
recorded as currency translation adjustments in shareholders' equity. For
subsidiaries in highly inflationary countries, currency gains and losses
resulting from translation and transactions are determined using a combination
of current and historical rates and are reported directly in the consolidated
statements of earnings.

Cash Equivalents
The company considers all highly liquid debt instruments with an original
maturity of 91 days or less to be cash equivalents.

Investments
In addition to cash equivalents, the company has investments in debt securities
that are classified in the consolidated balance sheet as short-term (restricted
bank deposits and securities that mature in more than 91 days but not more than
one year and securities with maturities beyond one year which management intends
to sell within one year) or long-term (maturities beyond one year). The company
also has investments in equity securities, all of which are classified as
long-term investments.
         Investments are further categorized as being available for sale or
expected to be held to maturity. Investments categorized as available-for-sale
are marked to market based on fluctuations in the market values of the
securities, with the resulting adjustments, net of deferred taxes, reported as a
component of other comprehensive income in shareholder's equity until realized
(see Note 2). Investments categorized as held-to-maturity are carried at
amortized cost, without recognition of gains or losses that are deemed to be
temporary, because the company has both the intent and the ability to hold these
investments until they mature.

Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for substantially all U.S. inventories and the
first-in, first-out (FIFO) method for substantially all non-U.S. inventories.

Properties
Property, plant and equipment are recorded at acquisition cost. Depreciation is
computed principally on the straight-line method for financial reporting
purposes, while accelerated methods are used for income tax purposes where
permitted. Maintenance and repair costs are charged to earnings as incurred
including repair costs associated with the year 2000 date recognition problem.
Costs of renewals and improvements are capitalized. Upon retirement or other
disposition of property, any gain or loss is included in earnings.
         Consistent with prior years, purchased computer software is capitalized
and amortized over the software's useful life. Effective in 1998,
internally-developed software is also capitalized and amortized over its useful
life with the adoption of the American Institute of Certified Public
Accountants' (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." Prior to adoption,
the company expensed these costs as incurred. The effect of initially applying
the provisions of SOP 98-1 was not material to the consolidated financial
statements.








                                       48
<PAGE>   17



Goodwill and Other Intangibles
Goodwill represents the excess of the purchase cost over the fair value of net
assets acquired in a business or product acquisition and is presented net of
accumulated amortization. Amortization of goodwill is recorded on a
straight-line basis over periods ranging primarily from 5 to 20 years. Rights
acquired under patent are reported at acquisition cost. Amortization is
calculated on a straight-line basis over the remaining legal lives of the
patents. Other intangible assets are amortized over the useful lives of those
assets.

Income Taxes
The company applies an asset and liability approach to accounting for income
taxes. Deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the years in which the differences are expected to reverse. The company records
deferred income taxes on subsidiaries' earnings that are not considered to be
permanently invested in those subsidiaries.

Currency Exchange Contracts
Forward currency exchange contracts, cross-currency interest-rate swaps, and
currency options (hereafter referred to as contracts) are held for purposes
other than trading. Contracts held to hedge anticipated transactions are marked
to market at each balance sheet date with resulting gains and losses recognized
in earnings. Contracts that hedge recorded assets and liabilities are valued at
the month-end exchange rate with resulting exchange gains and losses recognized
in earnings, offsetting the respective losses and gains recognized on the
underlying recorded exposure. Any premium or discount is amortized over the life
of the contract. The carrying values of all contracts are generally reported
with other current assets or other current liabilities. Gains or losses from
currency transactions that are designated as hedges of currency net investments
are classified as currency translation adjustments in shareholders' equity.
         In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets and liabilities measured at fair
value. The accounting treatment of gains and losses resulting from changes in
the value of derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. The company will adopt SFAS No. 133 as required
no later than January 1, 2000, and is currently assessing the impact of adoption
on its consolidated financial statements.

Environmental Remediation Liabilities
In 1997, the company adopted SOP 96-1, "Environmental Remediation Liabilities,"
which provides additional guidance for recognizing, measuring and disclosing
environmental remediation liabilities. The effect of initially applying the
provisions of SOP 96-1 was not material to the consolidated financial
statements. The company accrues for these losses when they are probable and
reasonably estimable based on current law and existing technologies. The
estimated liability is reduced to reflect the anticipated participation of other
potentially responsible parties where such parties are considered solvent and it
is probable that they will pay their respective share of relevant costs. The
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures do not reflect any claims for recoveries and are
not discounted to their present value. Accruals for environmental liabilities
are classified in the consolidated balance sheets primarily as other noncurrent
liabilities.

Employee Stock Options
Employee stock options are accounted for pursuant to Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees."

Reclassifications
Certain reclassifications have been made to conform prior years' data to the
current presentation.

2 OTHER COMPREHENSIVE INCOME

Effective January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." The statement establishes standards for reporting
comprehensive income and its components. Comprehensive income is defined as all
nonowner changes in equity and is equal to net earnings plus other comprehensive
income (OCI). OCI for the company includes three components: changes in currency
translation adjustments, unrealized gains and losses on available-for-sale
securities, and minimum pension liability adjustments. The following table shows
the changes in each OCI component. Reclassification adjustments represent items
that are included in net earnings in the current period but previously were
reported in OCI. To avoid double counting these items






                                       49
<PAGE>   18


in comprehensive income, gains are subtracted from OCI, while losses are added.

<TABLE>
<CAPTION>

===================================================================
                                                  TAX
FOR THE YEAR ENDED                   BEFORE     EXPENSE      NET OF
DECEMBER 31, 1998                       TAX   OR (BENEFIT)     TAX
-------------------------------------------------------------------
<S>                                   <C>         <C>         <C>  
Currency translation adjustments      $  51       $  (1)      $  52
-------------------------------------------------------------------
Unrealized investment (losses)          (52)        (20)        (32)
 Less: reclassification adjustments
 for gains realized in net earnings      24           8          16
-------------------------------------------------------------------
Net unrealized investment (losses)      (76)        (28)        (48)
-------------------------------------------------------------------
Minimum pension
 liability adjustments                  (33)        (12)        (21)
-------------------------------------------------------------------
Other comprehensive (loss)            $ (58)      $ (41)      $ (17)
===================================================================
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------------------------------------------------------
Currency translation adjustments      $(446)      $  --       $(446)
 Less: reclassification adjustments
for (losses) realized in net earnings
from the sales of subsidiaries           (3)         --          (3)
-------------------------------------------------------------------
Net currency translation
 adjustments                           (443)         --        (443)
-------------------------------------------------------------------
Unrealized investment gains              85          40          45
 Less: reclassification adjustments
for gains realized in net earnings       23          13          10
-------------------------------------------------------------------
Net unrealized investment gains          62          27          35
-------------------------------------------------------------------
Other comprehensive
 (loss) income                        $(381)      $  27       $(408)
===================================================================
FOR THE YEAR ENDED
DECEMBER 31, 1996
-------------------------------------------------------------------
Currency translation adjustments      $(128)     $   (1)      $(127)
-------------------------------------------------------------------
Unrealized investment gains              31           6          25
 Less: reclassification adjustments
for gains realized in net earnings       52          14          38
-------------------------------------------------------------------
Net unrealized investment (losses)      (21)         (8)        (13)
-------------------------------------------------------------------
Other comprehensive (loss)            $(149)      $  (9)      $(140)
===================================================================
</TABLE>

3  RESTRUCTURING

In 1997, the company announced a comprehensive restructuring and turnaround
program that would result in restructuring charges of approximately $450 during
1997 and 1998. The company has structured the turnaround program in two phases
reflecting management development and approval of plans. The turnaround program
was initiated in the third quarter 1997 and has been scheduled to be materially
completed by December 31, 1999. The objectives of the turnaround program were to
significantly rationalize infrastructure, establish a global headquarters in New
Jersey, and eliminate duplicate resources in manufacturing, administration, and
research and development (R&D). The turnaround program mainly affects the
company's core pharmaceutical segment and corporate administration groups, with
minor restructuring of businesses included in the nonpharmaceutical segment. In
the third and fourth quarters of 1997, the company recorded phase one charges
totaling $316. The second phase of the turnaround program was finalized in the
fourth quarter of 1998, resulting in an additional restructuring charge of $92.
         The charge of $92 recorded in 1998 was comprised of employee separation
costs of $68; write-downs of fixed assets and abandoned manufacturing projects
of $8; and other costs of $16.
         The 1997 restructuring charge of $316 for the first phase of the
turnaround program primarily related to employee separation costs of $134;
write-downs of fixed assets and abandoned manufacturing projects of $162; and
other costs of $20.
         The total restructuring charges for 1998 and 1997 included involuntary
employee separation costs for 580 and 1,320 employees worldwide, respectively.
The 1998 charge included elimination of positions in marketing and
administration of $55, R&D of $9, and manufacturing of $4. These amounts
included an adjustment of $16 of the phase one accruals, mainly attributable to
lower employee separation costs and, to a lesser extent, changes in plan
estimates. The 1997 charge included elimination of positions in marketing and
administration of $81, R&D of $22, and manufacturing of $31. As of December 31,
1998, the company had paid $101 in severance costs in connection with the 1998
and 1997 charges. The remaining balance for employee separation costs related to
the turnaround program was $101 at December 31, 1998 comprised mainly of charges
related to the phase two charge and remaining annuity separation payments for
the phase one charge. The company expects employee reductions for the 1998 and
1997 charges to be substantially completed by December 31, 1999.
         The 1998 and 1997 restructuring charges included asset write-downs for
excess manufacturing, administration, and R&D facilities totaling $8 and $162,
respectively. The 1998 amount included an adjustment of $15 of the phase one
accruals, mainly attributable to changes in plan estimates, favorable outcomes
on sales of facilities, and actual facility closure costs below the original
estimates. At December 31, 1998, facilities presently being marketed had a net
book value of $47. Fixed asset write-downs were based on appraisals less costs
to sell.
         Other costs included in the 1998 and 1997 restructuring charges of $16
and $20, respectively, were primarily comprised of cancelled contractual lease
obligations and, to a lesser extent, demolition and other costs. Offsetting 1998
charges in this grouping was an adjustment of $6 related to all restructuring
charges prior to 1997. The company expects substantial completion of the
1997-1998 restructuring by December 31, 1999.









                                       50
<PAGE>   19
         In 1996, the company recorded restructuring charges of $518 primarily
associated with the merger. The charges reflected the elimination of
approximately 3,500 positions in marketing and administration ($363), R&D ($59),
and manufacturing ($31); the elimination of duplicate facilities ($43); and
other exit costs resulting from the merger ($22). Implementation of the
restructuring plan was completed by December 31, 1997. Remaining reserves of $7
consist of annuity separation payments which will be paid by the first quarter
of 2000.
         The following table displays a roll-forward of the liabilities for
business restructurings from December 31, 1996 to December 31, 1998:

<TABLE>
<CAPTION>


==============================================================
                               EMPLOYEE
                             SEPARATION
                                  COSTS       OTHER      TOTAL
--------------------------------------------------------------
<S>                               <C>         <C>        <C>  
Balance December 31, 1996         $ 201       $ 25       $ 226
Additions                           134         20         154
Deductions                         (182)       (25)       (207)
--------------------------------------------------------------
Balance December 31, 1997           153         20       $ 173
Additions                            68         16          84
Deductions                         (113)       (12)       (125)
--------------------------------------------------------------
Balance December 31, 1998         $ 108       $ 24       $ 132
==============================================================
</TABLE>

4 INCOME TAXES

The provision for income taxes included in the consolidated statements of
earnings consisted of:

<TABLE>
<CAPTION>

=========================================================
YEARS ENDED DECEMBER 31      1998        1997        1996
---------------------------------------------------------
<S>                         <C>         <C>         <C>  
CURRENTLY PAYABLE:
U.S.                        $  68       $  34       $ 171
Non-U.S.                      432         429         214
---------------------------------------------------------
Total currently payable       500         463         385
---------------------------------------------------------
DEFERRED:
U.S.                          (66)        (46)       (100)
Non-U.S.                     (109)       (272)         (9)
---------------------------------------------------------
Total deferred               (175)       (318)       (109)
---------------------------------------------------------
Provision for income taxes  $ 325       $ 145       $ 276
=========================================================
</TABLE>

Differences between the company's effective tax rate and the U.S. statutory tax
rate were as follows:

<TABLE>
<CAPTION>

================================================================
PERCENT OF PRETAX INCOME            1998        1997        1996
----------------------------------------------------------------
<S>                                 <C>        <C>         <C>  
Statutory tax rate                  35.0%       35.0%       35.0%
Lower rates in other
 jurisdictions, net                 (4.4)      (10.9)       (3.9)
Goodwill amortization and other
 non-deductible expenses             3.0         6.7         4.2
All other, net                      (1.6)         .2        (2.3)
----------------------------------------------------------------
Effective tax rate                  32.0        31.0        33.0
================================================================
</TABLE>

The lower rates in other jurisdictions are principally attributable to
manufacturing operations in jurisdictions subject to more favorable tax rates.
Excluding nonrecurring items, the annual effective tax rate was 32 percent, 34
percent and 35 percent for 1998, 1997 and 1996, respectively. 
         Deferred income taxes are in the consolidated balance sheets as
follows:

<TABLE>
<CAPTION>
================================================================================
                                    1998        1998         1997       1997
DECEMBER 31                        ASSETS   LIABILITIES     ASSETS   LIABILITIES
--------------------------------------------------------------------------------
<S>                                <C>           <C>       <C>           <C> 
Current                            $   406       $ 49      $   335       $  3
Noncurrent                         $   408       $238      $   382       $362
--------------------------------------------------------------------------------         
Components of deferred taxes were:
 Property, plant and
  equipment                        $    --       $210      $    --       $277
 Inventory                             172         --          185         --
 Compensation and
  benefit plans                        194         60          174         60
 Swedish tax deferrals                  --         31           --         62
 Tax loss and tax credit
  carryforwards                        265         --          167         --
 Environmental and product
  liabilities                           59         --          107         --
 Restructuring and
  discontinued operations              111         --          107         --
 Tax on unremitted earnings             --        108           --        121
 All other                             271         95          293        124
--------------------------------------------------------------------------------
Subtotal                             1,072        504        1,033        644
Valuation allowances                   (41)        --          (37)        --
--------------------------------------------------------------------------------
Total deferred taxes               $ 1,031       $504      $   996       $644
--------------------------------------------------------------------------------
Net deferred tax assets            $   527                 $   352
================================================================================
</TABLE>


Valuation allowances have been provided for certain deferred tax assets that are
not likely to be realized. Tax loss carryforwards of $94 have various expiration
dates through 2011. At December 31, 1998, undistributed earnings of subsidiaries
considered permanently invested, for which deferred income taxes have not been
provided, were approximately $3,000.

5 GAIN ON SALE OF MAJORITY INTEREST IN SUBSIDIARY

In December 1996, the company completed the sale of a portion of its holdings in
its wholly-owned subsidiary, Biacore International AB, through an initial public
offering, reducing the company's ownership to 41 percent. The investment in
Biacore, previously consolidated, is now accounted for using the equity method.
Biacore develops, manufactures, and markets advanced scientific instruments
employing affinity-based biosensor technology.








                                       51
<PAGE>   20

         The global offering included 5.75 million total shares (or American
Depository Shares) at $16 per share. Of the total shares, 1.5 million were newly
issued and 4.25 million were sold by the company. The sale generated net
proceeds to the company of $57 and a gain of $55 recorded in 1996. The gain is
composed of an $8 gain on the issuance of new shares and a $47 gain on the sale
of existing shares.

6 BIOTECH AND NUTRITION DIVESTITURES

In August 1997, the company merged its biotechnology supply business, Pharmacia
Biotech, with Amersham Life Science, a division of Amersham International plc,
in a noncash transaction that did not result in the recognition of a gain or
loss. The merger created a new company, Amersham Pharmacia Biotech Ltd., of
which Pharmacia & Upjohn owns 45 percent and accounts for using the equity
method. In 1998, Pharmacia & Upjohn recorded a credit of $52 primarily
representing the company's share of Amersham Pharmacia Biotech's pretax
earnings. In 1997, the company recorded $79 in charges related to the Biotech
merger and subsequent restructuring of the new company. Of this total, $36
consisted of transaction costs to effect the merger and a write-off of certain
acquired research and development costs. The Biotech line item on the
consolidated statement of earnings includes these charges as well as the
company's share of Amersham Pharmacia Biotech's pretax earnings.
         In December 1998, the company sold substantially all of its nutrition
business to Fresenius AG for a loss of $52. To comply with antitrust regulations
in Germany, operations there were not sold. As of December 31, 1998, the sale of
the operations in China was still pending.

7 EARNINGS PER COMMON SHARE

Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed assuming all stock options
that are profitable to the recipients are exercised, all preferred stock is
converted, and all incentive stock compensation is issued. Under these
assumptions, the weighted average number of common shares outstanding is
increased accordingly, and net earnings is reduced by an incremental
contribution to the Employee Stock Ownership Plan (ESOP). This contribution is
the after-tax difference between the income the ESOP would have received from
the preferred stock and the assumed dividend yield to be earned on the common
shares. The following table reconciles the numerators and denominators of the
basic and diluted earnings per share (EPS) computations:

<TABLE>
<CAPTION>

========================================================================================================================
                                                          1998       1998        1997        1997        1996       1996
YEARS ENDED DECEMBER 31                                  BASIC    DILUTED       BASIC     DILUTED       BASIC    DILUTED
------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>           <C>        <C>        <C>  
EPS numerator:
Net earnings                                             $ 691      $ 691      $  323        $323       $ 562      $ 562
Less: Preferred stock dividends, net of tax                (13)                   (13)         --         (13)        --
Less: ESOP contribution, net of tax                         --         (5)         --          (5)         --         (5)
------------------------------------------------------------------------------------------------------------------------
Income available to common shareholders                  $ 678      $ 686        $310        $318       $ 549      $ 557
------------------------------------------------------------------------------------------------------------------------
EPS denominator:
Average common shares outstanding                          508        508         508         508         508        508
Effect of dilutive securities:
 Stock options                                              --          4          --           2          --          4
 Convertible preferred stock and incentive compensation     --         10          --          11          --         11
------------------------------------------------------------------------------------------------------------------------
Total shares                                               508        522         508         521         508        523
------------------------------------------------------------------------------------------------------------------------
Earnings per share                                       $1.33      $1.31      $  .61        $.61       $1.08      $1.07
========================================================================================================================
</TABLE>

8 INVENTORIES

<TABLE>
<CAPTION>

===================================================================
DECEMBER 31                                       1998        1997
-------------------------------------------------------------------
<S>                                              <C>        <C>   
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products       $  558     $   500
Raw materials, supplies and work in process         628         618
-------------------------------------------------------------------
Inventories (FIFO basis)                          1,186       1,118
Less reduction to LIFO cost                        (154)       (160)
-------------------------------------------------------------------
Inventories                                      $1,032     $   958
===================================================================
</TABLE>

Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $521 at December 31, 1998, and $416 at December 31, 1997.




                                       52
<PAGE>   21

9 INVESTMENTS

<TABLE>
<CAPTION>

===================================================================
DECEMBER 31                                         1998       1997
-------------------------------------------------------------------
<S>                                                  <C>       <C> 
SHORT-TERM INVESTMENTS:
Available-for-sale:
Kingdom of Sweden debt instruments                   $242      $267
Government of Italy debt instruments                   --        30
Government of Belgium debt instruments                 --        10
Government of Norway debt instruments                  --        48
Mortgage certificates of deposit                        5        61
Corporate commercial paper                             15        31
Other                                                   9        81
-------------------------------------------------------------------
Total available-for-sale                              271       528
Held-to-maturity                                       81        11
-------------------------------------------------------------------
Total short-term investments                         $352      $539
===================================================================
</TABLE>


Amortized cost of short-term investments classified as available-for-sale
approximates fair market value. Short-term investments classified as
held-to-maturity consist primarily of bank certificates of deposit with
amortized cost approximating fair market value.

<TABLE>
<CAPTION>

======================================================================
                                                 UNREALIZED   
                                              --------------- CARRYING
LONG-TERM INVESTMENTS                COST     GAINS  (LOSSES)    VALUE
----------------------------------------------------------------------
<S>                                  <C>       <C>      <C>       <C> 
DECEMBER 31, 1998:
Available-for-sale:
Equity securities                     $164     $ 29     $(23)     $170
Mortgage-backed securities--
 guaranteed by the
 U.S. Government                       144        4       --       148
----------------------------------------------------------------------
Total available-for-sale              $308     $ 33     $(23)      318
Held-to-maturity                                                   136
----------------------------------------------------------------------
Total long-term investments                                       $454 
----------------------------------------------------------------------
December 31, 1997:
Available-for-sale:
Equity securities                     $ 55       $77     $ --     $132
Mortgage-backed securities--
 guaranteed by the
 U.S. Government                       179         4       --      183
----------------------------------------------------------------------
Total available-for-sale              $234       $81     $ --      315
Held-to-maturity                                                   219
----------------------------------------------------------------------
Total long-term investments                                       $534
======================================================================
</TABLE>


The total of unrealized gains (net of deferred taxes) included in shareholders'
equity amounted to $5 at December 31, 1998, compared to $53 and $18 at December
31, 1997 and 1996, respectively.
         During 1997 and 1996 the company sold debt securities in the
held-to-maturity category for the amortized cost of $25 and $70, respectively.
Because these sales were initiated through the call option of the issuer, which
effectively accelerates the maturity date of the security, no gain or loss was
realized. No sales of held-to-maturity securities occurred in 1998.
         The proceeds realized from the sale of available-for-sale debt
securities were $229, $939 and $1,128 for 1998, 1997 and 1996, respectively.
Profits realized on these sales are recorded as interest income. During 1998,
1997 and 1996, the proceeds realized from the sale of available-for-sale equity
securities amounted to $53, $4 and $123. Profits realized on these sales are
recorded in other nonoperating income. Based on original cost, gains of $24, $23
and $52 were realized on all sales of available-for-sale securities in 1998,
1997 and 1996, respectively.
         Long-term investments held to maturity are summarized as follows:

<TABLE>
<CAPTION>

=============================================================
                     1998        1998        1997        1997
                     FAIR   AMORTIZED        FAIR   AMORTIZED
DECEMBER 31         VALUE        COST       VALUE        COST
-------------------------------------------------------------
<S>                  <C>         <C>         <C>         <C> 
Guaranteed by the
 U.S. Government     $ 71        $ 71        $ 92        $ 83
Commonwealth of
 Puerto Rico debt
instruments            35          35          73          71
Bank obligations:
 Certificates of
  deposit              10          10          15          15
 Other                 20          20          51          50
-------------------------------------------------------------
Long-term
 investments held
 to maturity         $136        $136        $231        $219
=============================================================
</TABLE>


At December 31, 1998, long-term mortgage-backed securities available for sale
had scheduled maturities ranging from 2001 to 2024. Scheduled maturities of
long-term securities to be held to maturity were from 2000 to 2022.

10 PROPERTIES, NET

<TABLE>
<CAPTION>

=========================================================
DECEMBER 31                              1998        1997
---------------------------------------------------------
<S>                                   <C>         <C> 
Land                                  $   100     $    92
Buildings and improvements              1,868       1,897
Equipment                               3,068       3,037
Construction in process                   730         794
Less allowance for depreciation        (2,540)     (2,514)
---------------------------------------------------------
Properties, net                       $ 3,226     $ 3,306
=========================================================
</TABLE>

11 LINES OF CREDIT AND LONG-TERM DEBT

The company has a borrowing facility amounting to $500 which was unused as of
December 31, 1998. The facility is available through 2004 largely to support
commercial paper borrowings in the U.S. and Europe. While the facility does not
require compensating balances, it is subject to various fees. The company also
has uncommitted lines of credit amounting to $573 available with various
international banks, of which $546 were unused at December 31, 1998.






                                       53
<PAGE>   22
         Long-term debt consisted of the following:

<TABLE>
<CAPTION>

=========================================================
DECEMBER 31                              1998        1997
---------------------------------------------------------
<C>                                      <C>         <C> 
5.875% Notes due 2000                    $200        $200
6.182-6.843% Medium-Term Notes due 1999    80         238
0.818-11.85% Italian Government Loans
 due 1999-2004                             46          54
7.5% Industrial Revenue Bonds due 2023     40          40
3.78% Industrial Revenue Bonds due 2008    --           6
Other                                      23          28
Current maturities                        (99)       (172)
---------------------------------------------------------
Total long-term debt                     $290        $394
=========================================================
</TABLE>


Current maturities of long-term debt are included with short-term debt in the
consolidated balance sheets. Annual aggregate maturities of long-term debt
during the next five years are: 2000--$216; 2001--$11; 2002--$7; 2003--$5 and
2004--$51. The company has guaranteed $275 original principal amount of ESOP
9.79% notes due in 2004. At December 31, 1998, the balance of the guarantee was
$240 of which $22 was classified as current. Principal payments that began in
1995 cause the recognition of compensation expense (see Note 18). Annual
aggregate maturities of guaranteed debt during the five years subsequent to 1999
are: 2000--$28; 2001--$35; 2002--$44; 2003--$53 and 2004--$59.
         Information regarding interest expense and weighted average interest
rates follows:

<TABLE>
<CAPTION>

=====================================================================
YEARS ENDED DECEMBER 31                  1998        1997        1996
---------------------------------------------------------------------
<S>                                     <C>         <C>         <C>  
Interest cost incurred                  $  61       $  64       $  89
Less: Capitalized on construction         (36)        (31)        (33)
---------------------------------------------------------------------
Interest expense                        $  25       $  33       $  56
---------------------------------------------------------------------
Weighted average interest rate on
 short-term borrowings at end
 of period                               6.36%       7.27%       5.99%
=====================================================================
</TABLE>

12 COMMITMENTS AND OTHER CONTINGENT LIABILITIES

Future minimum payments under noncancellable operating leases at December 31,
1998, approximately 80 percent real estate and 20 percent equipment, are as
follows: 1999--$79; 2000--$59; 2001--$38; 2002--$29; 2003--$29 and later
years--$99.
         Capital asset spending committed for construction and equipment but
unexpended at December 31, 1998, was approximately $480.
         The consolidated balance sheets include accruals for estimated product
litigation and environmental liabilities. The latter includes exposures related
to discontinued operations, including the industrial chemical facility and
several sites which, under the Comprehensive Environmental Response,
Compensation, and Liability Act, are commonly known as Superfund sites (see Note
13). The company's ultimate liability in connection with Superfund sites depends
on many factors, including the number of other responsible parties, their
financial viability, and the remediation methods and technology to be used.
Actual costs incurred may vary from the estimates given the inherent
uncertainties in evaluating environmental exposures.
         With regard to its discontinued industrial chemical facility in North
Haven, Connecticut, the company may soon be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency (EPA). As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required but it is not possible to determine what, if any,
exposure exists at this time.

13 LITIGATION

The company is involved in a number of legal and environmental proceedings.
These include a substantial number of product liability suits claiming damages
as a result of the use of the company's products and administrative and judicial
proceedings at approximately 50 "Superfund" sites.
         While it is not possible to predict or determine the outcome of legal
actions brought against the company, or the ultimate cost of environmental
matters, the company continues to believe that any potentially unaccrued costs
and liabilities associated with such matters will not have a material adverse
effect on the company's consolidated financial position. Unless there is a
significant deviation from the historical pattern of resolution of these issues,
there should not be a material adverse effect on the company's consolidated
financial position, its results of operations or liquidity.
         The company has been a party along with a number of other defendants
(both manufacturers and wholesalers) in several federal civil antitrust
lawsuits, some of which were consolidated and transferred to the Federal
District Court for the Northern District of Illinois. These suits, brought by
independent pharmacies and chains, generally allege unlawful conspiracy, price
discrimination and price fixing and, in some cases, unfair competition, and
specifically allege that the company and the other named defendants violated the
following: (1) the Robinson-Patman Act by giving substantial discounts to
hospitals, nursing homes, mail-order pharmacies and health maintenance
organizations ("HMOs") without offering the same discounts to retail drugstores,
and (2) Section I of the Sherman Antitrust Act by entering into illegal vertical
combination with other manufacturers and wholesalers to restrict certain
discounts and rebates so they benefited only favored customers. The Federal
District Court for the Northern District of Illinois certified a national class
of retail pharmacies in November 1994. Similar actions by proposed retailer
classes have been filed in the state courts of Alabama, California, Minnesota,
Mississippi, and Wisconsin. Eighteen class action lawsuits seeking damages based
on the same alleged conduct have been filed in 14 states and the District of
Columbia. The plaintiffs claim to represent consumers who purchased prescription
drugs in those








                                       54
<PAGE>   23


jurisdictions and four other states. Two of the lawsuits have been dismissed.
The company announced in 1998 that it reached a settlement with the plaintiffs
in the federal class action cases for $103. The company believes that any
potential remaining liability above amounts accrued will not have a material
adverse effect on the company's consolidated financial position, its results of
operations, or liquidity.

14 CURRENCY RISK MANAGEMENT

The company is exposed to currency exchange rate fluctuations related to certain
intercompany and third-party transactions, primarily intercompany sales from
Sweden and Italy to other European countries, the U.S. and Japan. The exposures
and related hedging program are managed centrally using forward currency
contracts, cross-currency swaps and currency options to hedge a portion of both
net recorded currency transaction exposures on the balance sheet as well as net
anticipated currency transactions. The company also has hedged part of its net
investment in Japan. Financial instruments for trading purposes are neither held
nor issued by the company.
         The company's program to hedge net anticipated currency transaction
exposures is designed to protect cash flows from potentially adverse effects of
exchange rate fluctuations. At December 31, 1998, the contract amount of the
company's outstanding contracts used to hedge net transaction exposure was $690.
Of these contracts, 20 percent were denominated in Japanese yen, 11 percent were
denominated in U.S. dollars, 8 percent were denominated in German marks, and 17
percent were denominated in mainly other European currencies all against Swedish
kronor; 10 percent were denominated in various currencies, mainly Japanese yen
and U.S. dollars, against Italian lira; and 34 percent in various currencies,
mainly European currencies and Japanese yen, against U.S. dollars.
         Gains and losses on hedges of intercompany loans and deposits offset
the currency exchange gains and losses of the underlying loans and deposits. At
December 31, 1998, the contract amount of forward exchange contracts held for
balance sheet financial exposure hedging program was $756. Of these contracts,
59 percent were denominated in U.S. dollars against European currencies; 17
percent were denominated in U.S. dollars against Japanese yen; 4 percent were
denominated in Swedish kronor against various European currencies; and 20
percent were denominated in various other currencies mainly against the Swedish
krona and the U.S. dollar.
         Because the contract amounts are stated as notional amounts, the amount
of contracts disclosed above is not a direct measure of the exposure of the
company through its use of derivatives. These contracts generally have
maturities that do not exceed twelve months and require the company to exchange
currencies at agreed-upon rates at maturity. The counterparties to the contracts
consist of a limited number of major international financial institutions. The
company does not expect any losses from credit exposure.

15 FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the company's financial
instruments were as follows:

<TABLE>
<CAPTION>

==================================================================
                                   1998     1998    1997      1997
                                 CARRYING   FAIR  CARRYING    FAIR
DECEMBER 31                       AMOUNT   VALUE   AMOUNT    VALUE
------------------------------------------------------------------
<S>                                <C>      <C>      <C>      <C> 
FINANCIAL ASSETS:
 Short-term investments            $352     $352     $539     $539
 Long-term investments              454      454      534      546
 Forward currency
  exchange contracts
  Hedges of loans and deposits       (7)      (7)     (14)     (14)
  Hedges of anticipated
    transactions                    (13)     (13)     (10)     (10)
FINANCIAL LIABILITIES:
 Short-term debt                    332      332      401      401
 Long-term debt                     290      299      394      394
 Guaranteed ESOP debt               218      241      240      280
==================================================================
</TABLE>


Because maturities are short-term, fair value approximates carrying amount for
cash and cash equivalents, short-term investments, accounts receivable,
short-term debt, and accounts payable. Fair values of forward currency exchange
contracts, long-term investments, long-term debt, and guaranteed ESOP debt were
estimated based on quoted market prices for the same or similar instruments or
on discounted cash flows.

16 CONCENTRATIONS OF CREDIT RISK

The company invests excess cash in deposits with major banks throughout the
world and in high quality short-term liquid debt instruments. Such investments
are made only in instruments issued or enhanced by high quality institutions.
Financial instruments which potentially subject the company to concentrations of
credit risk consist principally of short-term investments in instruments issued
by the Kingdom of Sweden; otherwise, amounts invested in a single institution
are limited to minimize risk. The company has not incurred losses related to
these investments.
         The company sells a broad range of pharmaceutical products to a diverse
group of customers operating throughout the world. In the U.S. and Japan, the
company makes substantial sales to relatively few large wholesale customers.
Credit limits, ongoing credit evaluation, and account monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required.









                                       55
<PAGE>   24


17 SHAREHOLDERS' EQUITY

Preferred Stock
The Series A Convertible Perpetual Preferred Stock is held by the Employee Stock
Ownership Trust (ESOP Trust). The per-share stated value is $40,300.00 and the
preferred stock ranks senior to the company's common stock as to dividends and
liquidation rights. Each share is convertible, at the holder's option, into
1,450 shares of the company's common stock and has voting rights equal to 1,450
shares of common stock. The company may redeem the preferred stock at any time
after July 20, 1999, or upon termination of the ESOP at a minimum price of
$40,300.00 per share. Dividends, at the rate of 6.25 percent, are cumulative,
paid quarterly, and charged against retained earnings.

Common Stock
The number of common shares outstanding at December 31, 1998, 1997 and 1996 was
508,000,489; 507,234,696; and 508,283,260, respectively. On a per-share basis,
dividends were declared on common stock at a rate of $1.08 in 1998 and 1997.
Common stock dividends payable were $137 at December 31, 1998 and 1997.

Capital in Excess of Par Value
Amounts of paid-in capital that exceed the par value ($.01 per share) of the
company's common stock are recorded in this account. This method was also
followed for all prior periods, including those preceding the November 1995
merger of Pharmacia AB and The Upjohn Company, because the common stock was
assumed to have been outstanding for all years. The tax benefit related to the
exercise of certain stock options reduces income taxes payable and is reflected
as capital in excess of par. Offsetting this is the difference between the cost
of treasury shares and cash received for them, if any, when used to satisfy
stock option exercises and other employee stock awards.

ESOP-related Accounts
The company holds a note receivable from the ESOP Trust that matures on February
1, 2005; bears interest at 6.25 percent; and may be added to or repaid, in whole
or in part, at any time. Accrued interest at the end of any calendar year is
added to the note principal. At December 31, 1998, the note principal balance
was $56. Also, upon recognition of the company's guarantee of the debt of the
ESOP Trust, an offsetting amount was recorded in shareholders' equity. As
guaranteed debt is repaid, this amount diminishes correspondingly (see Notes 11
and 18). Also, to the extent the company recognizes expense more rapidly than
the corresponding cash contributions are made to the Trust, this account is
reduced. The balance in this account at December 31, 1998, was $198.

Treasury Stock
The balance at December 31, 1998, and 1997 was $35 and $48, respectively,
carried at cost. The number of treasury shares used in 1998 for stock options
and employee benefit plans, net of shares acquired, was 730,593.

Accumulated Other Comprehensive Income
Accumulated other comprehensive income reflects the cumulative balance of (1)
currency translation adjustments, the adjustments of translating the financial
statements of non-U.S. subsidiaries from local currencies into U.S. dollars (see
Note 1); (2) unrealized gains and losses on investments categorized as
available-for-sale, net of deferred taxes and reclassifications (see Note 2);
and (3) minimum pension liability adjustments, net of deferred tax (see Notes 2
and 20).

Shareholder Protection Rights Plan
In February 1997, the board of directors approved a shareholder protection
rights plan, declaring a dividend of one right for each share of the company's
common stock outstanding on or after March 7, 1997. Exercisable 10 days after
any person or group acquires 15 percent or more or commences a tender offer for
15 percent or more of the company's common stock, the rights entitle holders to
effectively purchase a specified amount of the company's common stock at an
exercise price equal to half of its market value. The rights are redeemable for
$.01 per right and have a life of 10 years, unless redeemed earlier by the
company. In lieu of cash payment, the company has the option to exchange stock
for rights unless the acquiring person acquires more than 50 percent of the
company's common stock.

18 EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

The ESOP is a funding vehicle for the Employee Savings Plan covering certain
U.S. employees. As the ESOP Trust makes debt principal and interest payments, a
proportionate amount of preferred stock is released for allocation to plan
participants. The preferred shares are allocated to participants' accounts based
upon their respective savings plan contributions and the dividends earned on
their previously allocated preferred shares. As of December 31, 1998, 1,878
preferred shares had been released and allocated; 352 shares were released but
unallocated; and 4,633 shares remained unreleased, of which 37 shares are
committed to be released.




                                       56
<PAGE>   25


         Under the agreement whereby the company guaranteed third-party debt of
the ESOP Trust, the company is obligated to provide sufficient cash annually to
the Trust to enable it to make required principal and interest payments. The
company satisfies this annual cash flow requirement through payment of dividends
on all preferred shares outstanding, loans and cash contributions. The company
has fully and unconditionally guaranteed the ESOP Trust's payment obligations
whether at maturity, upon redemption, upon declaration of acceleration, or
otherwise. The holders of the debt securities have no recourse against the
assets of the ESOP Trust except in the event that the Trust defaults on payments
due and the company also fails to make such payments. In that event, the holders
may have recourse against unallocated funds held by the Trust. At December 31,
1998, assets of the ESOP trust consisted primarily of $277 of Pharmacia &
Upjohn, Inc., Series A Convertible Perpetual Preferred Stock.
         ESOP expense is determined by a formula that apportions debt service to
each year of the plan based on shares allocated to participants and deducts
dividends paid on all preferred stock held by the trust.
         Key measures of the ESOP are presented in the table that follows.

<TABLE>
<CAPTION>

===============================================================
YEARS ENDED DECEMBER 31
DOLLARS IN MILLIONS                 1998        1997       1996
---------------------------------------------------------------
<S>                                 <C>         <C>         <C>
Interest expense of ESOP Trust      $27         $28         $28
Dividend income of ESOP Trust        17          18          18
Company contribution to
 ESOP Trust                          18          12          16
Company ESOP expense (net)           13          14          14
===============================================================
</TABLE>

19 STOCK COMPENSATION

Incentive and nonqualified stock options are granted to certain employees.
Options granted in 1998 have a ten-year term and vest at the end of three years
or vest pro rata over three years. All options have an exercise price equal to
the market value of the underlying stock at date of grant. Since the company has
elected the disclosure-only alternative under SFAS No. 123 and continues to
account for stock options per the terms of APB No. 25, no compensation expense
is recognized in earnings.
         Upon a stock-for-stock exercise of an option, an active employee will
receive a new, nonqualified "reloaded" option at the then-current market price
for the number of shares surrendered to exercise the option. The "reloaded"
option will have an exercise term equal to the remaining term of the original
exercised option.
         The number of shares authorized for grants each year is equal to 1.25
percent of outstanding common shares and is cumulative. Information concerning
option activity and balances follows:


<TABLE>
<CAPTION>
=============================================================
                                         WEIGHTED
                                          AVERAGE      NUMBER
                                   EXERCISE PRICE   OF SHARES
                                        PER SHARE        (000)
-------------------------------------------------------------
<S>                                       <C>          <C>   
Balance outstanding, January 1, 1996      $24.32       12,571
Granted                                    38.26        3,585
Exercised                                  24.49       (4,146)
Canceled                                   35.17          (77)
-------------------------------------------------------------
Balance outstanding, December 31, 1996     28.50       11,933
Granted                                    37.04        4,444
Exercised                                  24.07       (1,526)
Canceled                                   38.27         (179)
-------------------------------------------------------------
Balance outstanding, December 31, 1997     31.43       14,672
Granted                                    40.40        9,777
Exercised                                  28.68       (4,246)
Canceled                                   39.65         (623)
-------------------------------------------------------------
Balance outstanding, December 31, 1998    $36.25       19,580
=============================================================
</TABLE>


<TABLE>
<CAPTION>

===========================================================================
COMPOSITION OF THE                   WEIGHTED         WEIGHTED
DECEMBER 31, 1998 BALANCE:            AVERAGE          AVERAGE       NUMBER
OPTIONS HAVING A                    REMAINING   EXERCISE PRICE    OF SHARES
PER-SHARE EXERCISE PRICE OF:             LIFE        PER SHARE        (000)
---------------------------------------------------------------------------
<S>                               <C>              <C>               <C>
$19.44--19.99                      3.74 years       $19.63              620
$20.00--29.99                      3.89 years        24.99            3,178
$30.00--39.99                      7.82 years        37.23            7,942
$40.00--49.99                      8.67 years        40.71            7,580
$50.00--56.34                      7.77 years        53.30              260
---------------------------------------------------------------------------
                                                                     19,580
Less non-exercisable options       9.18 years        39.90            8,699
---------------------------------------------------------------------------
Exercisable options                                 $38.42           10,881
===========================================================================
</TABLE>


Had the company elected to measure stock compensation using the fair value of
the awards at grant date under the provisions of SFAS No. 123, the company's net
income and earnings per share would have been reduced by approximately $20 or
$.04 per share for 1998, $24 or $.05 per share for 1997, and $25 or $.05 per
share for 1996. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for 1998, 1997 and 1996, respectively: dividend yield of 2.7, 2.83,
and 2.8 percent; volatility of 24, 21, and 21 percent; risk-free interest rate
of 4.72, 5.45, and 5.4 percent; and an expected life of 5.1, 5.3, and 5.5 years.






                                       57
<PAGE>   26


20 RETIREMENT BENEFITS

The company has various pension plans covering substantially all employees.
Benefits provided under the defined benefit pension plans are primarily based on
years of service and the employee's compensation. The company also provides
nonpension benefits to eligible retirees and their dependents, primarily in the
form of medical and dental benefits. The following tables summarize the changes
in benefit obligations and plan assets during 1997 and 1998.

<TABLE>
<CAPTION>

====================================================================
                                                    OTHER RETIREMENT
                                  PENSION BENEFITS       BENEFITS
CHANGE IN BENEFIT OBLIGATION:      1998     1997      1998     1997
--------------------------------------------------------------------
<S>                               <C>      <C>       <C>       <C>
Benefit obligation at
 beginning of year                $1,394   $1,266    $ 393     $ 366
Service cost                          56       52       10         9
Interest cost                         91       90       27        26
Benefits paid                       (133)    (105)     (19)      (18)
Actuarial (gain) loss                 53      114      (10)        7
Plan amendment and other
 adjustments                         (14)      27        5         3
Currency exchange effects              8      (50)      --        --
--------------------------------------------------------------------
Benefit obligation at
 end of year                      $1,455   $1,394    $ 406     $ 393
====================================================================

<CAPTION>

====================================================================
CHANGE IN PLAN ASSETS:             1998     1997      1998      1997
--------------------------------------------------------------------
<S>                               <C>      <C>       <C>       <C> 
Fair value of plan assets
 at beginning of year             $1,387   $1,247    $ 170     $ 144
Actual return on plan assets         184      215       40        27
Employer contribution                 38       26       18        16
Benefits paid                       (133)    (105)     (19)      (18)
Other adjustments                     (5)      21        2         1
Currency exchange effects              6      (17)      --        --
--------------------------------------------------------------------
Fair value of plan assets at
 end of year                      $1,477   $1,387    $ 211     $ 170
====================================================================

<CAPTION>

====================================================================
AT DECEMBER 31,                     1998     1997     1998      1997
--------------------------------------------------------------------
<S>                               <C>      <C>       <C>       <C>   
Funded status                     $   22   $   (7)   $(195)    $(223)
Unrecognized net actuarial
 (gains) losses                      (11)      (4)    (115)      (74)
Amortized net transition asset       (45)     (56)      --        --
Unrecognized prior service cost       41       33      (34)      (40)
--------------------------------------------------------------------
Prepaid (accrued) benefit cost    $    7   $  (34)   $(344)    $(337)
====================================================================

</TABLE>

The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $346, $291, and $90 as of December 31, 1998, and
$361, $302, and $78 as of December 31, 1997, respectively. The benefit
obligation and fair value of plan assets for benefit plans with obligations in
excess of plan assets were $752 and $301, as of December 31, 1998, and $810 and
$290 as of December 31, 1997, respectively.

<TABLE>
<CAPTION>

====================================================================
AT DECEMBER 31,                    1998     1997      1998     1997
--------------------------------------------------------------------
<S>                               <C>      <C>       <C>       <C>   
Total accrual balances            $(221)   $(221)    $(344)    $(337)
Total prepaid balances              190      187        --        --
Minimum pension liability
 offsets:
 Intangible assets                    5       --        --        --
 Shareholders' equity
  (pretax)                           33       --        --        --
--------------------------------------------------------------------
Prepaid (accrued) benefit cost    $   7    $ (34)    $(344)    $(337)
====================================================================

<CAPTION>

====================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31,                                    1998     1997
--------------------------------------------------------------------
<S>                                                   <C>       <C>  
Discount rate                                         6.66%     6.95%
Salary growth rate                                    3.68      4.20 
Return on plan assets                                 9.21      9.27 
Health care cost rate--initially                      5.83      6.33 
                  trending down to                    5.00      5.00 
====================================================================
</TABLE>


The consolidated net expense amounts in the following table are exclusive of
curtailments, settlements, and termination benefit costs associated with
restructurings. Net amounts of $4, $5 and $25 before tax were recorded in 1998,
1997 and 1996, respectively, within restructuring charges. During 1996, the
company recognized administrative credits of $24 related to curtailments of its
postretirement life insurance plans. The curtailments resulted principally from
elimination of the company's obligation to provide future postretirement life
insurance benefits for those retirees electing to switch to the new plan.






                                       58
<PAGE>   27


<TABLE>
<CAPTION>

=============================================================================================================
                                                     PENSION BENEFITS               OTHER RETIREMENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST:       1998       1997        1996        1998        1997       1996
-------------------------------------------------------------------------------------------------------------
<S>                                           <C>        <C>         <C>          <C>         <C>        <C> 
Service cost                                  $  56      $  52       $  55        $ 10        $  9       $ 10
Interest cost                                    91         90          88          27          26         26
Expected return on plan assets                 (109)      (102)       (100)        (15)        (12)       (10)
Amortization of transition amount                (9)        (9)         (9)         --          --         --
Amortization of prior service cost                5          4           4          (3)         (4)        (4)
Recognized actuarial loss (gain)                  3          4           3          (2)         (1)        (1)
-------------------------------------------------------------------------------------------------------------
Net periodic benefit cost                        37         39          41          17          18         21
Curtailment gain                                 (3)        --          --          --          --        (24)
-------------------------------------------------------------------------------------------------------------
Net benefit cost                              $  34      $  39       $  41        $ 17        $ 18       $ (3)
=============================================================================================================
</TABLE>

The assumption concerning health care cost trend rate has a significant effect
on the amounts reported. Increasing the rate by one percentage point in each
year would increase the postretirement benefit obligation as of December 31,
1998, by $52 and the total of service and interest cost components of net
postretirement benefit cost for the year by $6. Conversely, decreasing the rate
by one percentage point in each year would decrease the postretirement benefit
obligation as of December 31, 1998, by $46 and the total of service and interest
cost components of net postretirement benefit cost for the year by $5.
         The company recorded an additional minimum liability of $38 for
underfunded plans at December 31, 1998. This liability represents the amount by
which the accumulated benefit obligation exceeds the sum of the fair market
value of plan assets and accrued amounts previously recorded. The additional
liability is offset by an intangible asset ($5) to the extent of previously
unrecognized prior service cost. The remaining amount ($33) is recorded, net of
tax benefits, as a reduction to shareholders' equity within accumulated other
comprehensive income.

21 SEGMENT INFORMATION

Effective January 1, 1998, the company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement requires
enterprises to report certain information about segments including information
about products, geographic areas, and major customers.
         The company's core business is the development, manufacture and sale of
pharmaceutical products. Based on commonalities, the pharmaceutical segment
includes prescription and nonprescription products for humans and animals. The
prescription products include general therapeutics, ophthalmology and hospital
products including oncology, and diversified therapeutics. Nonprescription
products include product line extensions of key prescription drugs, plus
products to treat tobacco dependency. Animal health products derive largely from
human pharmaceutical research and also include feed additives, growth
promotants, and reproduction facilitators for livestock and pets.
         The nonpharmaceutical segment includes diagnostics, nutrition, plasma
and biotechnology. Diagnostics provides services to identify specific allergies
in people. Nutrition sells food replacement products, primarily to hospitals.
Plasma is a therapeutic area that prepares and markets products derived from
blood plasma. Biotechnology primarily represents minority equity positions in
biotechnology joint ventures that manufacture and market reagents, chemicals,
and systems for biotechnology companies and academic research laboratories.
         The following table shows revenues and expenses for the company's
operating segments and reconciling items necessary to total to amounts reported
in the consolidated financial statements. Information about segment assets,
interest income and expense, and income taxes is not provided on a segment level
as the segments are reviewed based on operating income. Corporate support
functions and restructuring charges also are not allocated to segments. There
are no inter-segment revenues. Depreciation is not available on a segmental
basis.







                                       59
<PAGE>   28
Segments for year ended December 31, 1998

<TABLE>
<CAPTION>

==================================================================================================================
                                                      PHARMACEUTICAL  NONPHARMACEUTICAL RECONCILING ITEMS    TOTAL
------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>               <C>             <C>             <C>   
Net sales                                                 $ 6,127           $ 631           $   --          $6,758
------------------------------------------------------------------------------------------------------------------
Earnings from equity affiliates                           $     1           $  56           $   --          $   57
------------------------------------------------------------------------------------------------------------------
Amortization expense                                      $    22           $   9           $   81          $  112
------------------------------------------------------------------------------------------------------------------

Operating income (loss) before corporate                  $ 1,329           $ 149           $ (137)         $1,341
Corporate and all other                                                                                       (325)
------------------------------------------------------------------------------------------------------------------
Earnings before taxes                                                                                       $1,016
==================================================================================================================
</TABLE>




Segments for year ended December 31, 1997

<TABLE>
<CAPTION>

==================================================================================================================
                                                     PHARMACEUTICAL  NONPHARMACEUTICAL  RECONCILING ITEMS    TOTAL
------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>             <C>             <C>   
Net sales                                                 $ 5,690           $ 896           $  --           $6,586
------------------------------------------------------------------------------------------------------------------
Earnings (loss) from equity investments                   $     5           $ (73)          $  --           $  (68)
------------------------------------------------------------------------------------------------------------------ 
Amortization expense                                      $    20           $   9           $  87           $  116
------------------------------------------------------------------------------------------------------------------

Operating income (loss) before corporate                  $ 1,086           $  25           $(126)          $  985
Corporate and all other                                                                                       (517)
------------------------------------------------------------------------------------------------------------------
Earnings before taxes                                                                                       $  468
==================================================================================================================
</TABLE>


As part of the global turnaround program, the structure of the company has
changed significantly from 1996 to 1998. It is therefore not practicable to
display segmental earnings information for the year ended December 31, 1996, on
a basis comparable to that presented above. Net sales of the pharmaceutical
segment in 1996 totaled $6,025 while nonpharmaceutical sales were $1,151. The
reconciling item for amortization expense represents goodwill amortization
resulting from acquisitions by Pharmacia AB prior to the 1995 merger with The
Upjohn Company. In addition to amortization, unallocated noncorporate general
and administrative expenses are included in the other reconciling item.
Corporate and all other amounts represent general and administrative expenses of
corporate support functions, unusual items such as restructuring charges and
litigation accruals, and net nonoperating income.
         The company's products are sold throughout the world to a wide range of
customers including pharmacies, hospitals, chain warehouses, governments,
physicians, wholesalers, and other distributors. No single customer accounts for
10 percent or more of the company's consolidated sales.
         The top selling 20 products in 1998 represent approximately 54 percent
of total sales with no one product constituting more than 6 percent of total
sales. A more comprehensive analysis of product sales performance is provided in
the Financial Review on pages 35-36. The following table shows the company's
sales geographically. U.S. exports to third-party customers are less than 10
percent of U.S. sales.

<TABLE>
<CAPTION>

====================================================================
GEOGRAPHIC SALES FOR YEARS ENDED DECEMBER 31         1998     1997
--------------------------------------------------------------------
<S>                                               <C>         <C>    
Sales to customers in:
United States                                     $2,498      $2,081 
Japan                                                565         624 
Italy                                                461         460 
Germany                                              412         405 
United Kingdom                                       352         300 
Sweden                                               284         317 
France                                               275         254 
Spain                                                168         185 
Rest of the world                                  1,743       1,960 
--------------------------------------------------------------------
Total sales                                       $6,758      $6,586 
====================================================================
</TABLE>


         Long-lived assets include property, plant and equipment, goodwill and
other intangibles, all net of depreciation or amortization.


<TABLE>
<CAPTION>

====================================================================
Long-lived assets, December 31                     1998        1997
--------------------------------------------------------------------
<S>                                               <C>         <C>   
United States                                     $1,832      $1,801
Sweden                                               995       1,322
Italy                                                443         416
Japan                                                186         188
United Kingdom                                       133         147
Ireland                                              123          81
Rest of the world                                    752         638
--------------------------------------------------------------------
Total long-lived assets                           $4,464      $4,593
====================================================================
</TABLE>







                                       60
<PAGE>   29


                        Eight-Year Summary of Operations



                    -----------------------------------------
                    Pharmacia & Upjohn, Inc. and subsidiaries


<TABLE>
<CAPTION>

======================================================================================================================
Years ended December 31                    1998      1997      1996      1995      1994       1993      1992      1991
----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions, except per-share data
<S>                                     <C>       <C>       <C>       <C>       <C>         <C>      <C>       <C>    
OPERATING RESULTS
Net sales                               $ 6,758   $ 6,586   $ 7,176   $ 6,949   $ 6,704     $6,507   $ 5,910   $ 5,292
Other revenue                               135       124       110       146       119         54        28        22
----------------------------------------------------------------------------------------------------------------------
Operating revenue                         6,893     6,710     7,286     7,095     6,823      6,561     5,938     5,314
----------------------------------------------------------------------------------------------------------------------
Cost of products sold                     2,031     2,049     2,116     1,967     1,877      1,822     1,623     1,415
Research and development                  1,199     1,217     1,266     1,254     1,163      1,144       940       785
Marketing, administrative and other       2,633     2,665     2,642     2,617     2,583      2,596     2,393     2,183
Biotech                                     (52)       73        --        --        --         --        --        --
Restructuring                                92       316       518       104        20        269        46        58
Loss on nutrition sale                       52        --        --        --        --         --        --        --
Merger costs                                 --        --        67       138        --         --        --        --
----------------------------------------------------------------------------------------------------------------------
Operating costs and expenses              5,955     6,320     6,609     6,080     5,643      5,831     5,002     4,441
----------------------------------------------------------------------------------------------------------------------
Operating income                            938       390       677     1,015     1,180        730       936       873
Interest income                              89       110       159       216       157        227       248       166
Interest expense                            (25)      (33)      (56)      (94)     (112)      (183)     (136)     (119)
Gain on sale of subsidiary stock             --        --        55        --        --         --        --        --
All other, net                               14         1         3        (1)       46          4      (101)      (10)
----------------------------------------------------------------------------------------------------------------------
Earnings from continuing
   operations before income taxes         1,016       468       838     1,136     1,271        778       947       910
Provision for income taxes                  325       145       276       397       438        217       243       307
----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations         691       323       562       739       833        561       704       603
Discontinued operations, net                 --        --        --        --         2         46      (129)      164
Cumulative effect of accounting
   changes (net of tax)                      --        --        --        --        --        (19)     (224)       --
----------------------------------------------------------------------------------------------------------------------
Net earnings                                691       323       562       739       835        588       351       767
----------------------------------------------------------------------------------------------------------------------
Dividends on preferred stock
   (net of tax)                              13        13        13        13        12         12        12        12
----------------------------------------------------------------------------------------------------------------------
Net earnings on common stock            $   678   $   310   $   549   $   726   $   823     $  576   $   339   $   755
----------------------------------------------------------------------------------------------------------------------
Net earnings per common share:
Diluted                                 $  1.31   $   .61   $  1.07   $  1.41   $  1.60     $ 1.13   $   .67   $  1.46
======================================================================================================================
FINANCIAL POSITION
Cash and cash equivalents               $   857   $   775   $   641   $   841   $   652     $  393     $ 373   $   544
Short-term investments                      352       539       696       974     1,134        447     1,176       670
Trade accounts receivable, net            1,417     1,303     1,705     1,535     1,480      1,416     1,272     1,109
Inventories                               1,032       958     1,012       976       887        833       728       735
Other current assets                        874       752       841       648       652        559       436       480
----------------------------------------------------------------------------------------------------------------------
Current assets                            4,532     4,327     4,895     4,974     4,805      3,648     3,985     3,538
Net assets of discontinued operations        --        --        --        --        --        278     1,989     2,644
Properties                                3,226     3,306     3,602     3,393     3,074      2,906     2,517     2,495
Goodwill and other intangibles, net       1,238     1,287     1,522     1,722     1,795      1,843     1,556     1,813
Other noncurrent assets                   1,316     1,460     1,154     1,372     1,273      1,220       826       855
----------------------------------------------------------------------------------------------------------------------
Total assets                            $10,312   $10,380   $11,173   $11,461   $10,947     $9,895   $10,873   $11,345
----------------------------------------------------------------------------------------------------------------------
Short-term debt, including current
   maturities of long-term debt         $   332   $   401     $ 235     $ 524   $   766      $ 769     $ 500   $   216
Other current liabilities                 2,519     2,287     2,268     2,116     2,110      2,001     2,077     1,572
Long-term debt and ESOP debt                508       634       823       870       953        950       739       919
Other noncurrent liabilities              1,353     1,520     1,606     1,564     1,508      1,411     1,158       949
Shareholders' equity                      5,600     5,538     6,241     6,387     5,610      4,764     6,399     7,689
----------------------------------------------------------------------------------------------------------------------
Total liabilities and
   shareholders' equity                 $10,312   $10,380   $11,173   $11,461   $10,947     $9,895   $10,873   $11,345
======================================================================================================================
</TABLE>





                                       61
<PAGE>   30

                                 Quarterly Data



                    -----------------------------------------
                    Pharmacia & Upjohn, Inc. and subsidiaries


<TABLE>
<CAPTION>

======================================================================================================================
1998 (UNAUDITED)                                     FIRST QUARTER   SECOND QUARTER     THIRD QUARTER   FOURTH QUARTER
----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions, except per-share data
<S>                                                        <C>              <C>               <C>              <C>    
Net sales                                                  $ 1,586          $ 1,654           $ 1,669          $ 1,849
Other revenue                                                   26               37                38               34
----------------------------------------------------------------------------------------------------------------------
Operating revenue                                            1,612            1,691             1,707            1,883
Cost of products sold                                          485              493               515              538
Research and development                                       274              292               272              361
Marketing, administrative and other                            601              717               634              681
Biotech                                                         (9)              (9)              (15)             (19)
Restructuring                                                   --               --                --               92
Loss on sale of nutrition                                       --               --                --               52
----------------------------------------------------------------------------------------------------------------------
Operating income                                               261              198               301              178
Interest income                                                 24               21                20               24
Interest expense                                                (6)              (5)               (6)              (8)
All other, net                                                  (2)               2                 7                7
----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes                                   277              216               322              201
Provision for income taxes                                      88               70               103               64
----------------------------------------------------------------------------------------------------------------------
Net earnings                                               $   189          $   146           $   219          $   137
======================================================================================================================

Net earnings per common share:
Basic                                                      $   .37          $   .28           $   .42          $   .26
Diluted                                                    $   .36          $   .28           $   .41          $   .26
----------------------------------------------------------------------------------------------------------------------
Dividends declared per share                               $   .27          $   .27           $   .27          $   .27
----------------------------------------------------------------------------------------------------------------------
Market Price:
High                                                       $45.875          $46.688           $51.688          $57.250
Low                                                        $33.750          $38.250           $40.438          $44.875
======================================================================================================================

<CAPTION>


======================================================================================================================
1997 (UNAUDITED)                                     FIRST QUARTER   SECOND QUARTER     THIRD QUARTER   FOURTH QUARTER
Dollar amounts in millions, except per-share data
----------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>              <C>               <C>              <C>    
Net sales                                                  $ 1,635          $ 1,703           $ 1,551          $ 1,697
Other revenue                                                   27               35                36               26
----------------------------------------------------------------------------------------------------------------------
Operating revenue                                            1,662            1,738             1,587            1,723
Cost of products sold                                          503              550               476              520
Research and development                                       283              281               268              385
Marketing, administrative and other                            602              652               585              826
Biotech merger and restructuring costs                          --               --                31               42
Restructuring charges                                           --               --               125              191
----------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                        274              255               102             (241)
Interest income                                                 29               25                26               30
Interest expense                                                (7)             (11)               (6)              (9)
All other, net                                                  (2)               1                (2)               4
----------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes                            294              270               120             (216)
Provision for income taxes                                     100               92                41              (88)
----------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                        $   194          $   178           $    79          $  (128)
======================================================================================================================

Net earnings (loss) per common share:
Basic                                                      $   .38          $   .34           $   .15          $  (.26)
Diluted                                                    $   .37          $   .34           $   .15          $  (.26)
======================================================================================================================

</TABLE>






                                       62