<PAGE>
                                CARTER-WALLACE
 
                                ANNUAL REPORT
                                FOR THE YEAR
                             ENDED MARCH 31 1997

<PAGE>
      EXECUTIVE OFFICES
      1345 Avenue of the Americas, New York, N.Y. 10105
      212-339-5000
 
      RESEARCH LABORATORIES
      Cranbury, New Jersey
      Montreal, Canada
 
      MANUFACTURING PLANTS
      Cranbury, New Jersey
      Colonial Heights, Virginia
      Decatur, Illinois
      Santa Ana, California
      Winsted, Connecticut
      Montreal, Canada
      Folkestone, England
      Milan, Italy
      Pisa, Italy
      Mexico City, Mexico
      New Plymouth, New Zealand
      Barcelona, Spain
 
      TRANSFER AND DISBURSING AGENT
      The Bank of New York
      101 Barclay Street
      New York, N.Y. 10286
      800-524-4458
 
      REGISTRAR OF STOCK
      The Bank of New York
      101 Barclay Street
      New York, N.Y. 10286
 
      SHAREHOLDER RELATIONS
      Ruder Finn, Inc.
      800-984-1777


<PAGE>
                           CARTER-WALLACE, INC.
                           ANNUAL REPORT
                           For the year ended March 31, 1997


<TABLE>
<CAPTION>

                                   FINANCIAL HIGHLIGHTS                 1997              1996
                           <S>                                      <C>               <C>
                           Net sales                                $648,755,000      $658,940,000
                           Earnings before one-time charges and
                             taxes                                    45,349,000        54,797,000
                           Earnings before taxes                      45,349,000        12,797,000
                           Net earnings                               26,756,000         7,550,000
                           Earnings per share before one-time
                             charges                                      $  .58            $  .70
                           Earnings per share                             $  .58            $  .16
                           Dividends                                   7,423,000         7,384,000
                           Dividends per share                            $  .16            $  .16
                           Average shares outstanding                 46,389,000        46,160,000
                           Number of stockholders of record
                                Common                                     2,656             2,894
                                Class B common                             1,471             1,605
</TABLE>

---------------------------------------------------------------------
                [LOGO]
                The Company markets
                toiletries, pharmaceuticals,
                diagnostic specialties,
                proprietary drugs and pet products
---------------------------------------------------------------------
 
   CONTENTS
 
   Report to Stockholders                                                      2
 
   Summary of Selected Financial Data                                          7
 
   Management's Discussion and
     Analysis of Results of Operations
     and Financial Condition                                                   8
 
   Description of Business Segments                                           11
 
   Consolidated Balance Sheets                                                12
 
   Consolidated Statements of Earnings
     and Retained Earnings                                                    14
 
   Consolidated Statements of Cash Flows                                      15
 
   Notes to Consolidated Financial Statements                                 16
 
   Independent Auditors' Report                                               32
 
   Directors and Officers                                      Inside Back Cover

<PAGE>
REPORT TO STOCKHOLDERS
 
In the fiscal year ended March 31, 1997, the Company's consolidated sales were
$648,755,000 compared to the prior year's sales of $658,940,000.
 
The Company earned $.58 per share for the fiscal year ended March 31, 1997
compared to $.16 per share in the prior year. The results of operations for the
year ended March 31, 1997 include introductory spending related to Astelin Nasal
Spray for the symptoms of seasonal allergic rhinitis which was launched during
the fourth quarter. One-time pre-tax charges in the prior year were $42,000,000
or $.54 per share.
 
SALES
 
Sales in the Company's two business segments were Consumer Products $405,592,000
and Health Care Products $243,163,000. Consumer Products were 63% and Health
Care Products were 37% of total sales. These sales compare to a year ago of
$412,362,000 and $246,578,000, respectively.
 
Foreign sales by subsidiaries and branches operating outside the United States
were $210,606,000 for the fiscal year ended March 31, 1997 compared with
$206,576,000 the previous year. This represents 32% and 31%, respectively of
total sales. Health Care Products accounted for 36% and Consumer Products 64% of
foreign sales. Lower foreign exchange rates had the effect of decreasing foreign
sales by approximately $1,900,000.
 
DIVIDENDS
 
Dividends of $.16 per share were paid in both the current and prior year. The
Company has paid dividends for 114 consecutive years.
 
CARTER PRODUCTS DIVISION
 
A continuation of retail trade consolidations, the trend toward private label
price pressure and competitive product introductions in key business segments
marked this year's business environment. In spite of these conditions, the
Division continued to stimulate the consumers' interest while matching their
desire for fresh products that meet their ever exacting needs by launching
several new products to strengthen the Division's brand franchises.
 
The Arrid line maintained sales volume despite intense competition in the
anti-perspirant/deodorant market. Innovative product introductions included
Arrid XX Ultra Clear Spray, the first aerosol positioned as a clear spray, and
Arrid XX Ultra Clear Solid, an innovative solid formula that turns clear
instantly when applied. Additionally, Arrid XX Gel was restaged with a new,
faster drying gel formula and an all new, state-of-the-art container. Package
graphics for the entire Arrid line were also contemporized.
 
The Division's condom brands achieved another record market share of well over
60% of total condom sales. The Trojan, Class Act and Naturalamb brands increased
position in their respective segments. Leadership advertising, strong promotion
and comprehensive educational programs helped improve our dominant position.
Trojan Ultra Pleasure and Class Act Smooth Sensation condoms were successfully
introduced.
 
The Nair line remained the number one brand of hair remover with increased sales
volume. Nair Cream for the Face achieved a substantial increase in consumer
sales since its repositioning in early 1995. Nair 3-IN-1 Lotion Hair Remover and
Nair Washable Waxing Gel were successfully introduced during the year, adding to
the full array of Nair products.
 
The Division continues to be one of the leading marketers of in-home pregnancy
and ovulation test kits. The First Response Pregnancy and Ovulation Test Kits
performed well in an increasingly competitive category. Answer Pregnancy and
Ovulation Diagnostic Test Kits faced increased competitive pressure from private
label brands in the price/value segment of this product category.
 
The Pearl Drops line increased sales volume and refocused on the value of Pearl
Drops Toothpolish with new packaging graphics and the introduction of Pearl
Drops Icy Cool Mint Gel Toothpaste which was successfully launched into the
whitening toothpaste segment of the business.
 
WALLACE LABORATORIES
 
The Division's year was highlighted by the FDA's approval and the Division's
subsequent introduction
2

<PAGE>
of Astelin (azelastine) Nasal Spray during the fourth fiscal quarter. Astelin, a
product licensed from ASTA Medica AG, is used to treat symptoms of seasonal
allergic rhinitis in people twelve years of age and older. It is unique in that
it is the only prescription antihistamine nasal spray available in the U.S.
market.
 
Clinical studies demonstrated that Astelin Nasal Spray is effective in relieving
symptoms of seasonal allergic rhinitis on the very first dose and can be used on
days when symptoms are present.
 
Astelin Nasal Spray is being co-promoted by the sales force of Muro
Pharmaceutical, Inc., a division of ASTA Medica AG, and is the primary product
promoted by the Wallace Division sales force. It will receive major promotional
support throughout the year with particular emphasis during the spring and fall
allergy seasons.
 
Division sales and marketing efforts also support those in-line products that
have demonstrated response to promotion such as the cough/cold product lines,
Rynatan and Organidin NR, as well as the Soma line of muscle relaxants. In
addition, sales of Rynatuss Tablets and Pediatric Suspension reached an all-time
high.
 
Felbatol, the Division's antiepileptic, is promoted for those patients whose
epilepsy is not controlled by other medications and when the risk of its use is
deemed acceptable in light of the benefits it confers.
 
Phase III clinical development of Taurolin (taurolidine) for use in treatment of
sepsis is continuing.
 
The Division continues to explore new pharmaceutical product opportunities,
acquisitions that
broaden or complement its product lines, as well as co-promotional agreements
with other companies.
 
WAMPOLE LABORATORIES
 
Sales increased substantially over the prior year and achieved the highest level
in the history of the Division.
 
This strong performance was primarily due to the continued success of the enzyme
immunoassay product lines that were introduced in December, 1995. Tests to
detect the intestinal pathogen C. difficile along with serological tests for H.
pylori, rubella and other infectious diseases were particularly strong
performers. The Division introduced five new enzyme immunoassay tests for
autoimmune and infectious diseases and expects to continue to introduce several
new products to the line throughout calendar year 1997.
 
The Division maintained its leadership position in rapid serological testing
with impressive sales increases for the MONO-plus and Mono-Latex tests for
infectious mononucleosis. MONO-plus received FDA approval that allows use of the
product with whole blood samples. In January, 1997 the Division signed an
agreement for exclusive marketing rights to a line of color-change serological
tests, the first of which, Color-Card Mono, was introduced in March. The Impact
RPR test for the serologic detection of syphilis also showed good growth.
 
In January, the Division introduced the Spuncrit system for the measurement of
hematocrit and hemoglobin in whole blood samples. This system is waived under
the Clinical Laboratories Improvement Act and is expected to complement the
Division's Stat-Crit system which recently received waived status for its
hematocrit assay.
 
The trend in hospital laboratories toward automation of test procedures had a
negative impact on sales of labor-intensive assays such as Isostat for the rapid
detection of micro-organisms in the blood and the Division's line of
immunofluorescent tests.
 
LAMBERT KAY DIVISION
 
The pet supply business continued to change rapidly as the larger superstore
chains acquire regional chains, while building more new stores to become
national in scope. Distributors are merging with other distributors and, in one
case, a manufacturer. The Division is developing strategies to effectively
market its products to all segments of the trade. The Lambert Kay brand is sold
through pet stores, while
                                                                               3

<PAGE>
the Lassie and Tiny Tiger brands are sold through food, drug and discount
stores.
 
A number of new Lambert Kay products were introduced during the year. To
capitalize on the trend toward natural products, a line of shampoos under the
Grass Roots brand with the natural ingredients of oatmeal, herbal essence, silk
amino acids and aloe was introduced. Further enhancing the broad Lambert Kay
shampoo line, five 18-ounce shampoos offering extra value were added. To lighten
the sometimes arduous task of shampooing, the labels depict dogs in a variety of
costumes and carry whimsical names such as Bust A Bug, Knotty Problems, Groom &
Grow, Polar White and Near & Dear.
 
Continuing the trend toward natural products, a 16-item line of B-Natural
brewer's yeast nutritional supplements was introduced. Brewer's yeast is
believed by many to provide important health benefits to dogs, including that of
repelling fleas. The line includes tablets, crumbles and treats. Most have
garlic in their formula and all except the treat include Linatone, a well-known
Lambert Kay brand of nutritional supplement.
 
Capitalizing on the success of both Fresh 'N Clean and Lassie puppy
housebreaking pads, the Home Alone brand with extra absorbency was released for
adult dogs who stay at home all day while their owners are away. Citrus pet
stain and odor remover, containing d-limonene to impart a fresh citrus scent,
was also introduced with three sizes for consumer convenience.
 
INTERNATIONAL DIVISION
 
The Division's sales advanced to another record in the past year. In addition to
selective price increases, the Division benefited from higher unit volumes. Very
strong sales results were recorded in a number of countries, particularly in
Australia and Mexico, which showed double-digit growth.
 
Consumer products continued to advance in several areas. Pearl Drops showed
significant growth in Australia due to the introduction of a new line of
whitening tooth polishes. Pearl Drops continues to be a leading brand in
England, Germany and several other European countries. The Trojan brand of
condoms continued to hold the leading market share in Canada and enjoyed
excellent sales growth in Mexico. Our dominant share in the topical analgesic
market in Canada with Antiphlogistine Rub A-535 was maintained, while Dencorub
continued to perform well in Australia. Strong growth continued for our Lineance
line of cosmetic products in France and the Curash line of baby care products
showed notable growth in Australia. Sales of home pregnancy kits advanced in
several countries including Mexico and Italy, in spite of increasing
competition. Nair depilatories continued to enjoy a strong presence in the
Middle East, particularly Saudi Arabia, while in Spain Taky depilatories showed
growth largely related to the launch of a new microwaveable wax.
 
The Division's line of health care and pharmaceutical products displayed strong
gains in several markets. In Canada, Ovol, an antiflatulent product, showed
substantially higher sales and Gravol antinauseant maintained its dominant
market share. In France, Sterimar nasal decongestant continued to respond well
to consumer advertising and promotion and showed impressive growth. In Italy,
Cerulisina, an OTC preparation to remove ear wax posted significant gains and
the Odontovax line of oral hygiene products was launched in Italy during the
year with initial acceptance very encouraging. In Mexico, pharmaceutical sales
showed very significant growth led by Pangavit, a line of vitamin supplements,
Alter H2, an antacid, and Hidramox, a wide spectrum antibiotic.
 
In the diagnostic sector, an automated immunoassay system was introduced in
Italy to accommodate the line of recently acquired radioimmunoassay products.
This system will faciliate the workload and workflow for high volume testing
laboratories. Our subsidiary in Italy now commands a leadership position in
blood testing products for thyroid disorders and autoimmune diseases. New tests
have recently been introduced for disorders of bone metabolism. The
newly-acquired line of ELISA (enzyme immunoassay) tests showed strong sales in
Europe.
4

<PAGE>
Throughout Europe, our Isolator microbiology product line, a rapid and highly
sensitive blood culture system, showed good growth in these expanding markets.
New, rapid color-change tests for the detection of fungal and intestinal
parasite infections were successfully introduced in France.
 
RESEARCH AND DEVELOPMENT
 
Expenses for research and development totaled $27, 284,000 for the fiscal year
ended March 31, 1997 compared to $26,494,000 in the prior fiscal year.
 
Since October 1994, research and development of Astelin Nasal Spray for rhinitis
and Taurolin (taurolidine) for the treatment of sepsis has continued through
independent research facilities managed by internal supervisory personnel.
Research is also continuing on Felbatol (felbamate).
 
The Astelin Nasal Spray New Drug Application ("NDA") was approved on November 4,
1996 and launched on March 10, 1997. The Astelin (azelastine) tablet NDA for
rhinitis is pending at the FDA. The Company has not yet decided whether to seek
final approval for this NDA. The Astelin (azelastine) tablet NDA for asthma will
be withdrawn as soon as it is no longer needed to support the other two NDAs.
 
A large scale, multi-centered clinical efficacy trial for Taurolin
(taurolidine), an antitoxin for the treatment of sepsis, is ongoing.
 
FACILITIES
 
The expansion and renovation of the condom manufacturing facility in Colonial
Heights, Virginia, which the Company purchased in April, 1995, was completed in
April, 1996. Originally 68,000 square feet, the facility is now 200,000 square
feet and in October, 1996 it was fully equipped and operational.
 
The facility, one of the finest condom manufacturing plants in the world, has
been equipped with a combination of new state-of-the-art equipment and
refurbished equipment relocated from the Rincon, Puerto Rico and Trenton, New
Jersey facilities which were closed in March, 1995 and October, 1996,
respectively.
 
LITIGATION
 
The Company is a defendant in certain actions which are discussed in Note 19,
"Litigation Including Environmental Matters" of the Notes to the Consolidated
Financial Statements.
 
PEOPLE
 
Suzanne Hoyt Garcia was elected to the Board of Directors in April, 1997
bringing the Board to nine members. Mrs. Garcia is owner of La Tierra
Beneficiaries (real estate development) and Santa Fe Ranch.
 
Several senior management changes occurred in the past year. We are fortunate to
have been able to replace our departing executives with seasoned executives who
have considerable knowledge of our business and the strategies we have defined
for the future growth and development of the Company.
 
In March, 1997 Daniel J. Black, President and Chief Operating Officer, retired
after 37 years with the Company. During his tenure Mr. Black witnessed many
changes in our business environment and contributed much to our development
through some challenging times.
 
Ralph Levine, formerly Vice President, Secretary and General Counsel replaced
Mr. Black as President and Chief Operating Officer. Mr. Levine has been with the
Company for more than 34 years and is a member of the Company's Board of
Directors and Executive Committee.
 
Paul A. Veteri became Executive Vice President and Chief Financial Officer,
effective April 1, 1997. Mr. Veteri was Vice President and Chief Financial
Officer and has been with the Company for 21 years. He is a member of the
Company's Board of Directors and Executive Committee.
 
Stephen R. Lang joined the Company to succeed Mr. Levine as Vice President,
Secretary and General Counsel. Mr. Lang has advised the Company on legal matters
during his 34 years with Whitman Breed Abbott & Morgan where he was a Partner
and Chairman of the Litigation Department.
 
                                                                               5

<PAGE>
Mark Wertlieb has joined the Company as Vice President, Taxes. Before joining
Carter-Wallace, Mr. Wertlieb was a Tax Partner with KPMG Peat Marwick LLP. He
succeeded Donald J. Stack, who retired after 21 years with the Company.
 
Gregory J. Drohan was appointed President of the reorganized Carter-Horner Inc.
Mr. Drohan joined Carter Products, Canada in 1987 as Director of Sales. He was
appointed Vice President Marketing and Sales in 1993 and was named President of
Carter Products, Canada in 1994.
 
J. Robert Fraser retired as President of Frank W. Horner, Inc., after 31 years
with the Company.
 
Jordi Pruja was appointed Managing Director of Icart S.A. in Spain.
 
                                    *  *  *
 
We have made considerable progress in our efforts to streamline and strengthen
our businesses and enhance our brand franchises. We appreciate the ongoing trust
and confidence of the consumers and professionals who use our products, and the
loyal support of our employees, shareholders and suppliers. We thank them for
their interest and confidence in Carter-Wallace.
 
Henry H. Hoyt, Jr.,
Chairman of the Board and
Chief Executive Officer
 
Ralph Levine,
President and
Chief Operating Officer
 
                                                                  June 12, 1997
 
6

<PAGE>
Carter-Wallace, Inc. and Subsidiaries
 
                       SUMMARY OF SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                     YEARS ENDED MARCH 31
                                               ----------------------------------------------------------------
                                                 1997          1996          1995          1994          1993
                                               ----------------------------------------------------------------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
<S>                                            <C>           <C>           <C>           <C>           <C>
OPERATIONS
  Net sales                                    $648,755      $658,940      $663,642      $664,789      $653,511
  Earnings before one-time charges in 1996
     and 1995, taxes and the cumulative 
     effect of accounting changes in 1994        45,349        54,797        42,310        37,382        68,406
  Net earnings (loss) before the
     cumulative effect of accounting
     changes                                     26,756         7,550(a)    (56,268)(b)    26,609        47,200(d)
  Net earnings (loss)                            26,756         7,550(a)    (56,268)(b)   (20,030)(c)    47,200(d)
  Net earnings (loss) per share before the
     cumulative effect of accounting
     changes in 1994                                .58           .16(a)      (1.22)(b)       .58          1.03(d)
  Net earnings (loss) per average share
     of common stock outstanding                    .58           .16(a)      (1.22)(b)      (.44)(c)      1.03(d)
  Dividends per share                               .16           .16           .29           .33           .33
  Average common shares outstanding              46,389        46,160        46,108        45,900        45,786
FINANCIAL POSITION
  Working capital                              $142,972      $137,083      $100,596      $185,159      $184,175(e)
  Net property, plant and equipment             154,844       139,273       137,608       157,059       150,070
  Total assets                                  685,922       718,925       680,224       628,562       595,550(e)
  Long-term debt                                 51,025        55,928        23,115         9,309        13,184
  Stockholders' equity                          349,154       332,896       327,139       393,508       429,161(e)
OTHER DATA
  Capital expenditures                         $ 31,066      $ 35,228      $ 18,853      $ 24,305      $ 25,500
  Book value per share                             7.53          7.18          7.08          8.54          9.37(e)
  Number of employees                             3,460         3,610         3,670         4,060         4,020

<FN> 
(a) Reflects one-time charges against pre-tax earnings of $42,000 ($24,780 after
    tax or $.54 per share) related to the closure of the Trenton facility,
    restructuring charges and net adjustments to the provision for loss on
    Felbatol (felbamate) and the discontinuance of the Organidin (iodinated
    glycerol) product line.
 
(b) Reflects one-time charges against pre-tax earnings of $129,340 ($80,566
    after tax or $1.75 per share) related to the discontinuance of the Organidin
    (iodinated glycerol) product line, the provision for loss on Felbatol
    (felbamate) and restructuring charges.
 
(c) Reflects the cumulative effect of adopting Statements of Financial
    Accounting Standards No. 106 "Employers' Accounting for Post Retirement
    Benefits Other than Pensions" and No. 112 "Employers' Accounting for
    Postemployment Benefits" of $46,639 after tax or $1.02 per share.
 
(d) Includes income of $10,000 before taxes, or $6,000 after taxes ($.13 per
    share) related to a licensing agreement with Schering-Plough Corporation
    granting exclusive marketing rights in all markets except the United States
    and its territories and possessions, Canada and Mexico, to Felbatol
    (felbamate).
 
(e) Restated to reflect a change in accounting for income taxes.
 
</TABLE>
             ------------------------------------------------------
 
                         QUARTERLY DATA ON COMMON STOCK
 
             The high and low selling prices of the Company's
             common stock, principally traded on the New York Stock
             Exchange (symbol CAR), for the two most recent fiscal
             years were as follows:
 
<TABLE>
<CAPTION>
                                   FISCAL YEARS ENDED MARCH 31
                       ----------------------------------------------------
                                 1997                        1996
                        ----------------------      ----------------------
 QUARTER ENDED            HIGH          LOW           HIGH          LOW
                       -----------  -----------    -----------  -----------
<S>                    <C>          <C>            <C>          <C>
June 30                    $18          $13 1/4        $13 3/8      $10 1/4
September 30                14 5/8       10 3/8         13 1/2       10 1/8
December 31                 16 1/2       11 3/8         13 1/8       10 1/8
March 31                    16 1/2       13 1/8         16 3/4       11 1/8
</TABLE>
 
             A dividend of $.04 per share was declared in all four
             quarters of 1997 and 1996.
 
                                                                               7

<PAGE>
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                                   CONDITION
 
--------------------------------------------------------------------------------
NET SALES AND EARNINGS
 
Net earnings were $26,756,000 or $.58 per share in the year ended March 31, 1997
compared with $7,550,000 or $.16 per share in the prior year. The results of
operations for the year ended March 31, 1997 include net introductory spending
related to the launch of Astelin Nasal Spray for seasonal allergic rhinitis. In
the prior year one-time pre-tax charges amounted to $42,000,000 or $.54 per
share.
 
Net sales in 1997 were $648,755,000 compared to prior year's sales of
$658,940,000. Domestic sales decreased $14,215,000 or 3.1% and foreign sales
increased $4,030,000 or 2.0%. Lower foreign exchange rates had the effect of
decreasing foreign sales by $1,900,000.
 
Sales of Consumer Products decreased $6,770,000 or 1.6% in 1997 due to reduced
volume in domestic operations. Factory sales of worldwide antiperspirant and
deodorant products were $111,923,000 in 1997, or 1.6% higher than the
$110,147,000 sales level in 1996 due to higher unit volume. Sales of condoms and
certain other consumer product lines were lower than the prior year.
 
Health Care sales decreased $3,415,000 or 1.4% in 1997 from the prior year due
to lower unit volume. Health Care sales benefited from the introduction of
Astelin Nasal Spray for allergic rhinitis in the fourth quarter of 1997 as well
as a full year's sales of the BioWhittaker and Clark diagnostic lines acquired
in December, 1995. Sales of the Company's pharmaceutical products, particularly
Organidin NR, continue to be adversely affected by generic competition. Selling
price increases had a positive effect on sales in comparison with the prior year
period. The Company continues to maintain the provision previously established
for possible Organidin NR returns.
 
Net sales in 1996 were $658,940,000 compared to prior year's sales of
$663,642,000. Domestic sales decreased $29,088,000 or 6% and foreign sales
increased $24,386,000 or 13% from the prior year. Lower foreign exchange rates
had the effect of decreasing foreign sales by approximately $2,400,000.
 
Sales of Consumer Products increased $11,505,000 or 3% in 1996 due to higher
volume in international operations. Acquisitions in France and Australia made in
1995 as well as higher sales of existing products in Europe and Latin America
contributed a substantial portion of the international sales growth of Consumer
Products. Condom sales in 1996 exceeded sales in 1995 principally in the
domestic market. Factory sales of worldwide antiperspirant and deodorant
products were $110,147,000 in 1996, or 10.6% lower than the $123,146,000 sales
level in 1995. This decline was due to reduced unit volume.
 
In 1996, Health Care sales declined $16,207,000 or 6% from the prior year due to
lower unit volume largely as a result of reduced sales of Felbatol (felbamate).
In 1995, sales of Organidin Iodinated Glycerol, which was discontinued in June
1994, amounted to approximately $21,000,000. 1996 sales of Organidin NR, a
reformulated version of Organidin which was introduced in September, 1994
amounted to approximately $30,100,000, an increase of $18,100,000 over the prior
year. Selling price increases had a positive effect on sales in this segment.
Health Care sales benefited from the acquisitions of the BioWhittaker and Clark
diagnostic lines in 1996 and the Technogenetics line of diagnostic products in
Italy in 1995.
 
Interest income decreased in 1997 by $902,000 or 17.6% from the prior year due
to a reduction in interest bearing investments. In 1996 interest income was
higher than 1995 due to an increase in interest bearing investments.
 
COSTS AND EXPENSES
 
Cost of goods sold as a percentage of net sales was 37.6% in 1997 compared to
37.4% in 1996 due primarily to changes in product mix. The cost of goods sold
percentage in 1996 increased over the 36.2% in 1995 due to changes in product
mix and cost increases. Throughout this period the Company has attempted to
minimize the effects of higher costs by selective price increases and cost
control measures.
 
In 1997, advertising, marketing and other selling expenses increased from the
prior year by $1,513,000 or .6%. The launch of Astelin Nasal Spray for seasonal
allergic rhinitis in the fourth quarter of 1997 was supported by introductory
spending levels. In the Consumer Products segment spending was lower than the
prior year. In 1996, advertising, marketing and other selling expenses were
lower than the prior year by $4,264,000 or 2%, due to lower expenses in the
Health Care segment. In 1996, spending in the Consumer Products segment was
higher than the prior year due principally to higher expenses in international
operations in support of acquisitions.
 
Research and development expenses in 1997 increased $790,000 or 3.0% as a result
of higher spending in the Consumer Products segment. Research and development
expense in the Health Care segment was lower than the prior year. In 1996
research and development expenses decreased by $14,821,000 or 36% from the prior
year due primarily to lower spending in the Health Care segment for felbamate as
well as the completion of Astelin (azelastine) clinical trials. The Company is
continuing its research and development of Taurolin (taurolidine), an antitoxin
for the treatment of sepsis, and to the extent such work exceeds the Company's
remaining internal research and development resources,
8

<PAGE>
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                             CONDITION (CONTINUED)
 
--------------------------------------------------------------------------------
such work will be done through independent research facilities.
 
General and administrative expenses increased $806,000, or 1%, due primarily to
a provision for a trade receivable related to the bankruptcy of a pharmaceutical
wholesaler, reduced in part by lower rent expense. General and administrative
expenses decreased $2,687,000 or 3% in 1996 primarily as a result of lower rent
and reduced employee benefit costs.
 
Interest expense increased in 1997 by $297,000 or 7.6% over the prior year as a
result of borrowings related largely to the expansion of the Company's Colonial
Heights, VA condom facility. Interest expense in 1996 was higher than 1995 by
$1,377,000 or 54.8% as a result of the financing related to international
acquisitions made in 1995 and interest costs related to expansion of the
Colonial Heights, VA facility.
 
Other expenses decreased by $2,691,000 or 29.6% in 1997 from the prior year
principally as a result of a charge in 1996 of approximately $2,400,000 related
to a write-off of the carrying value of a discontinued product. Other expenses
decreased by $495,000 or 5% in 1996 from the prior year principally as a result
of lower expense for long-term incentive awards. As noted above, other expenses
in 1996 included a charge related to a write-off of the carrying value of a
discontinued product.
 
The consolidated income tax rate in 1997 and 1996 was 41%. In 1995, the Company
had a 35.3% tax benefit on its reported consolidated loss. Tax rates in 1996,
1997 and future years are and will be adversely affected by the cessation of
Puerto Rico operations and the absence of research and development tax credits.
 
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The Company is
required to adopt this statement no later than the fiscal year ending March 31,
1998. Adoption of this statement is not expected to have a material effect on
the Company's earnings per share.
 
CLOSURE OF THE TRENTON CONDOM MANUFACTURING FACILITY
 
The Company closed its condom manufacturing plant in Trenton, New Jersey in
October, 1996. The condom production previously performed at Trenton has been
transferred to the Company's facility in Colonial Heights, VA. The decision to
close the Trenton plant resulted in a one-time charge to pre-tax earnings in the
year ended March 31, 1996 of $23,100,000 ($13,630,000 after taxes or $.30 per
share), consisting of plant closing costs including equipment write-offs
($17,800,000) and employee termination costs ($5,300,000).
 
RESTRUCTURING OF OPERATIONS AND FACILITIES
 
Prompted by the discontinuance of its line of iodinated glycerol formulation of
Organidin products and by the significant adverse effect on existing and
potential sales of Felbatol (felbamate) due to use restrictions, the Company
engaged in a restructuring program beginning in the year ended March 31, 1995
with the intent of reducing costs and increasing efficiencies.
 
In connection with this restructuring program, the Company incurred one-time
pre-tax charges of $16,500,000 in the year ended March 31, 1996 and $74,060,000
in the year ended March 31, 1995. The restructuring charges of $90,560,000
recorded over the two years consist primarily of estimated employee termination
costs ($30,800,000), estimated plant closing costs including equipment
write-offs ($26,000,000) and costs associated with the subleasing of office
space on which the Company holds a long-term lease ($27,800,000).
 
The restructuring program resulted in a worldwide reduction of approximately 990
employees including 120 vacancies that were not filled.
 
Approximately $17,200,000 of the $90,560,000 provision for restructuring charges
remain to be utilized in future periods. Substantially all of the $17,200,000
represents expected future cash outlays for subleasing costs.
 
FELBATOL (FELBAMATE)
 
As previously reported, in the year ended March 31, 1995 the Company incurred a
one-time charge to pre-tax earnings of $37,780,000 related to use restrictions
for Felbatol. This charge was adjusted by $8,200,000 to $45,980,000 in the year
ended March 31, 1996. Depending on future sales levels, additional inventory
write-offs may be required. If for any reason the product at some future date
should no longer be available in the market, the Company will incur an
additional one-time charge that would have a material adverse effect on the
Company's results of operations and possibly on its financial condition. Should
the product no longer be available, the Company currently estimates that the
additional one-time charge, consisting primarily of inventory write-offs and
anticipated returns of product currently in the market, will be in the range of
$20,000,000 to $25,000,000 on a pre-tax basis.
 
DISCONTINUANCE OF THE ORGANIDIN (IODINATED GLYCEROL) PRODUCT LINE
 
As previously reported, in the year ended March 31, 1995 the Company incurred a
one-time charge to pre-tax earnings of $17,500,000 related to discontinuance of
the Organidin (iodinated glycerol) product line. In the year ended March
                                                                               9

<PAGE>
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                             CONDITION (CONTINUED)
 
--------------------------------------------------------------------------------
31, 1996 an adjustment was made to reduce the provision for loss on Organidin by
$5,800,000 largely as a result of smaller than anticipated product returns.
 
ASTELIN
 
In November, 1996, the Food and Drug Administration approved the Company's New
Drug Application to market Astelin Nasal Spray for seasonal allergic rhinitis.
The Company launched Astelin Nasal Spray, a product licensed from ASTA Medica
AG, in the fourth quarter of fiscal 1997 supported by introductory levels of
marketing spending.
 
In accordance with the terms of the Company's agreement with ASTA Medica AG, a
joint venture is expected to be formed during fiscal 1998 under which the
Company will be responsible for all manufacturing, selling, marketing and
administrative activities for Astelin and will receive compensation for these
activities from the joint venture.
 
LIQUIDITY
 
Funds provided from operations and the Company's short-term investments and cash
equivalents are the main source for financing working capital requirements,
additions to property, plant and equipment, the payment of dividends and the
purchases of treasury stock. External borrowings are incurred as needed to
satisfy cash requirements relating to seasonal business fluctuations and to
finance major facility expansion programs and major acquisitions.
 
At March 31, 1997, the Company had available various bank credit lines amounting
to $215,000,000 consisting of $195,000,000 in domestic credit lines and
$20,000,000 in foreign credit lines, of which $347,000 of the foreign lines were
utilized at March 31, 1997. There were no domestic borrowings under credit lines
at March 31, 1997. The domestic lines are made up of a $150,000,000 revolving
credit facility expiring on October 1, 2000 and $45,000,000 in uncommitted
credit lines from various banks.
 
The pre-tax one-time charges of $171,340,000 recorded in the years ended March
31, 1995 and March 31, 1996, consist of net cash requirements of $115,000,000
and non-cash write-offs of $56,340,000. Approximately $28,800,000 of the total
cash requirements of $115,000,000 was paid in 1995, $35,100,000 was paid in
1996, $31,300,000 was paid in 1997 and $3,300,000 is expected to be paid in the
fiscal year ending March 31, 1998. The anticipated cash benefit from income
taxes related to these one-time charges is estimated to be $66,000,000 which
will be received over a period of years. The net cash outlay for the one-time
charges after consideration of the tax benefits is approximately $49,000,000.
 
CAPITAL RESOURCES
 
Capital expenditures were $31,070,000 in 1997, $35,230,000 in 1996 and
$18,850,000 in 1995. Capital expenditures are expected to be lower in 1998 than
in 1997.
 
10

<PAGE>
                        DESCRIPTION OF BUSINESS SEGMENTS
 
--------------------------------------------------------------------------------
The Company is engaged in the manufacture and sale of a diversified line of
products in the Consumer Products and Health Care business segments described
below:
 
CONSUMER PRODUCTS
 
These products are promoted directly to the consumer by television and other
advertising media and are sold to wholesalers and various retailers. They are
manufactured and sold domestically by our consumer products divisions and some
are sold throughout the rest of the world by various subsidiaries and
distributors. Principal products include:
 
ANTI-PERSPIRANTS AND DEODORANTS
 
* Arrid Extra Dry and Arrid XX
* Lady's Choice
 
OTHER CONSUMER PRODUCTS
 
* Answer and First Response at-home pregnancy and ovulation test kits
* Carter's laxative
* H-R lubricating jelly
* Nair depilatories and waxes
* Pearl Drops whitening toothpolish and whitening toothpaste
* Rigident denture adhesive
* Trojan, Class Act and Naturalamb condoms
* Boundary dog and cat repellant
* Color Guard flea and tick collars and chain products
* Fresh 'n Clean grooming products,
     stain and odor remover and puppy housebreaking pads
* Lassie and Tiny Tiger pet product lines
* Linatone food supplement
* Twinco chains, slicker brushes and combs
* Vermont Style chew toys
* X-O-Trol flea and tick household and dog sprays and household foggers
 
HEALTH CARE
Health care products are promoted primarily to physicians, pharmacists,
hospitals, laboratories and clinics by a staff of specially trained professional
sales representatives and by advertising in professional journals. These
products are manufactured and sold domestically by our professional products
divisions and some are sold throughout the rest of the world by various
subsidiaries and distributors. Principal products include:
 
* Astelin Nasal Spray for the treatment of symptoms of seasonal allergic
     rhinitis
* Felbatol for the treatment of seizures associated with epilepsy
* Organidin NR family of expectorants/antitussives
* Ryna line of cough/cold products
* Soma brand muscle relaxants
* Butisol sedative hypnotic
* Depen penicillamine for severe rheumatoid arthritis
* Doral sedative hypnotic
* Lufyllin xanthine bronchodilator
* Maltsupex laxative
* VoSoL topical antibacterial and antifungal agent
* Clearview product line of rapid tests for the determination of pregnancy,
     group A streptococcus and chlamydia
* Impact, FIAX and other branded enzyme and fluorescent immunoassay tests to
     detect a broad range of infectious and autoimmune diseases
* Isostat product line to aid in the detection of micro-organisms in blood
* Mono-Test, Mono-Latex and MONO-plus for the detection of mononucleosis
* Rheumaton and Rheumatex for the detection of rheumatoid factor
* Stat-Crit and Spuncrit, portable instruments for use in measuring blood
     hematocrit levels
* Streptozyme for the detection of streptococcal antibodies
 
                           --------------------------
INTERNATIONAL PRODUCT LINES
In addition to many of the products listed above, the Company sells the
following products exclusively in certain International markets:
 
CONSUMER PRODUCTS
* Bi-Solution acne treatment products
* Cerox adhesive tapes and bandages
* Confidelle, Discover and Gravix at-home pregnancy test kits
* Cossack line of men's grooming products
* Curash line of skin care products
* Email Diamant toothpastes
* Eudermin line of skin care and toiletry products
* GranVista non-prescription eyeglasses
* Lineance line of anti-cellulite and associated skin care products
* Odontovax line of oral hygiene products
* Poupina line of skin care and toiletry products
* Taky depilatories and waxes
 
HEALTH CARE
* Antiphlogistine Rub A-535 and Dencorub topical analgesics
* Atasol analgesic/antipyretic
* Bentasil medicated throat lozenges
* Cerulisina otic solution
* Diovol antacid products
* Gravol antinauseant
* Jordan toothbrushes
* Maltlevol and Pangavit vitamin supplements
* Ovol antiflatulent
* Sterimar nasal decongestant
* Technogenetics line of diagnostic tests for thyroid metabolism,
    fertility/pregnancy conditions and other hormonal (endocrine) disorders
 
                                                                              11

<PAGE>
 
Carter-Wallace, Inc. and Subsidiaries
                          CONSOLIDATED BALANCE SHEETS
                           AT MARCH 31, 1997 AND 1996
 
<TABLE>
<CAPTION>
ASSETS                                                                      1997                 1996
<S>                                                                     <C>                  <C>
---------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents                                               $ 35,124,000         $ 51,185,000
Short-term investments, principally certificates of deposit               18,667,000           20,034,000
Accounts receivable-trade, less allowances of
  $6,730,000 in 1997 and $6,716,000 in 1996                              117,466,000          126,288,000
Other receivables                                                          5,219,000            5,643,000
Inventories
  Finished goods                                                          50,918,000           55,427,000
  Work in process                                                         11,744,000           13,327,000
  Raw materials and supplies                                              24,559,000           23,450,000
                                                                        ------------         ------------
                                                                          87,221,000           92,204,000
                                                                        ------------         ------------
Deferred taxes                                                            27,932,000           32,408,000
Prepaid expenses and other current assets                                  9,527,000            9,011,000
                                                                        ------------         ------------
TOTAL CURRENT ASSETS                                                     301,156,000          336,773,000
                                                                        ------------         ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
  Land                                                                     3,008,000            2,956,000
  Buildings and improvements                                             110,031,000           99,331,000
  Machinery, equipment and fixtures                                      156,329,000          137,645,000
  Leasehold improvements                                                  22,118,000           21,323,000
                                                                        ------------         ------------
                                                                         291,486,000          261,255,000
  Accumulated depreciation and amortization                              136,642,000          121,982,000
                                                                        ------------         ------------
                                                                         154,844,000          139,273,000
                                                                        ------------         ------------
INTANGIBLE ASSETS
  Excess of purchase price of businesses acquired over the
     net assets at date of acquisition, less amortization                 88,855,000           95,628,000
  Patents, trademarks, contracts and formulae, less
     amortization                                                         34,484,000           35,794,000
                                                                        ------------         ------------
                                                                         123,339,000          131,422,000
                                                                        ------------         ------------
DEFERRED TAXES                                                            41,889,000           50,803,000
OTHER ASSETS                                                              64,694,000           60,654,000
                                                                        ------------         ------------
                                                                        $685,922,000         $718,925,000
                                                                        ------------         ------------
                                                                        ------------         ------------
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
12

<PAGE>
 
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                                        1997                 1996
<S>                                                                     <C>                  <C>
---------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable                                                        $ 34,867,000         $ 38,941,000
Accrued expenses                                                         102,790,000          132,331,000
Notes payable                                                              3,258,000            6,054,000
Taxes on income                                                           17,269,000           22,364,000
                                                                        ------------         ------------
TOTAL CURRENT LIABILITIES                                                158,184,000          199,690,000
                                                                        ------------         ------------
LONG-TERM LIABILITIES
Long-term debt                                                            51,025,000           55,928,000
Deferred compensation                                                     14,631,000           13,503,000
Accrued postretirement benefit obligation                                 69,432,000           68,588,000
Other long-term liabilities                                               43,496,000           48,320,000
                                                                        ------------         ------------
TOTAL LONG-TERM LIABILITIES                                              178,584,000          186,339,000
                                                                        ------------         ------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000 shares,
  without par value; issued--none                                            --                   --
Common stock, authorized 80,000,000 shares,
  par value $1 per share, one vote per share; issued
  34,655,000
  shares in 1997 and 34,613,000 shares in 1996                            34,655,000           34,613,000
Class B common stock, authorized 13,056,800 shares, par
  value $1 per share, ten votes per share; issued 12,550,000
  shares in 1997 and 12,592,000 in 1996                                   12,550,000           12,592,000
Capital in excess of par value                                             3,588,000            3,268,000
Retained earnings                                                        329,906,000          310,573,000
                                                                        ------------         ------------
                                                                         380,699,000          361,046,000
Less:
  Foreign currency translation adjustment and other                       20,965,000           18,059,000
  Treasury stock at cost--710,800 common and 153,600
     Class B common shares in 1997 and 676,800 common
     and 153,600 Class B common shares in 1996                            10,580,000           10,091,000
                                                                        ------------         ------------
TOTAL STOCKHOLDERS' EQUITY                                               349,154,000          332,896,000
                                                                        ------------         ------------
                                                                        $685,922,000         $718,925,000
                                                                        ------------         ------------
                                                                        ------------         ------------
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                                                              13

<PAGE>
Carter-Wallace, Inc. and Subsidiaries
 
                CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
                           THREE YEARS ENDED MARCH 31, 1997
 
<TABLE>
<CAPTION>
                                                                 1997             1996             1995
<S>                                                          <C>              <C>              <C>
-----------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
Revenues:
  Net sales                                                  $648,755,000     $658,940,000     $663,642,000
  Interest income                                               4,226,000        5,128,000        3,574,000
  Royalty and other income                                      3,200,000        3,409,000        2,762,000
                                                             ------------     ------------     ------------
                                                              656,181,000      667,477,000      669,978,000
                                                             ------------     ------------     ------------
Cost and Expenses:
  Cost of goods sold                                          243,657,000      246,220,000      240,318,000
  Advertising and promotion                                   122,407,000      123,573,000      125,450,000
  Marketing and other selling                                 127,444,000      124,765,000      127,152,000
  Research and development                                     27,284,000       26,494,000       41,315,000
  General and administrative                                   79,440,000       78,634,000       81,321,000
  Provision for restructuring of operations and
  facilities                                                      --            16,500,000       74,060,000
  Provision for condom plant closing                              --            23,100,000          --
  Provision for loss on Felbatol                                  --             8,200,000       37,780,000
  Provision for loss on discontinuance of the Organidin
     (iodinated glycerol) product line                            --            (5,800,000)      17,500,000
  Interest                                                      4,186,000        3,889,000        2,512,000
  Other                                                         6,414,000        9,105,000        9,600,000
                                                             ------------     ------------     ------------
                                                              610,832,000      654,680,000      757,008,000
                                                             ------------     ------------     ------------
Earnings (loss) before taxes on income                         45,349,000       12,797,000      (87,030,000)
     Provision (benefit) for taxes on income                   18,593,000        5,247,000      (30,762,000)
                                                             ------------     ------------     ------------
Net earnings (loss)                                          $ 26,756,000     $  7,550,000     $(56,268,000)
                                                             ------------     ------------     ------------
                                                             ------------     ------------     ------------
Net earnings (loss) per average share of common stock        $        .58     $        .16     $      (1.22)
                                                             ------------     ------------     ------------
                                                             ------------     ------------     ------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Amount at beginning of year                                  $310,573,000     $310,407,000     $380,047,000
Net earnings (loss)                                            26,756,000        7,550,000      (56,268,000)
                                                             ------------     ------------     ------------
                                                              337,329,000      317,957,000      323,779,000
Dividends--$.16 per share in 1997 and 1996, and
  $.29 per share in 1995                                       (7,423,000)      (7,384,000)     (13,372,000)
                                                             ------------     ------------     ------------
Amount at end of year                                        $329,906,000     $310,573,000     $310,407,000
                                                             ------------     ------------     ------------
                                                             ------------     ------------     ------------
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
14

<PAGE>
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                             THREE YEARS ENDED MARCH 31, 1997
 
<TABLE>
<CAPTION>
                                                                 1997             1996             1995
<S>                                                          <C>              <C>              <C>
-----------------------------------------------------------------------------------------------------------
Net earnings (loss)                                          $ 26,756,000     $  7,550,000     $(56,268,000)
Adjustments to reconcile net earnings (loss) to cash
  flows provided by operating activities:
     Provision for one-time charges                               --            42,000,000      129,340,000
     Cash payments for one-time charges                       (31,302,000)     (35,063,000)     (28,819,000)
     Depreciation and amortization                             14,604,000       15,356,000       16,359,000
     Amortization of patents, trademarks, contracts and
       formulae                                                 4,645,000        6,090,000        8,723,000
     Amortization of excess of purchase price of
       businesses acquired over the net assets at date 
       of acquisition                                           4,088,000        3,474,000        2,760,000
     Other changes in assets and liabilities:
       Decrease (increase) in accounts and other
         receivables                                            5,787,000       (6,217,000)      13,845,000
       Decrease (increase) in inventories                       3,918,000         (986,000)       1,058,000
       (Increase) decrease in prepaid expenses                   (635,000)      (1,810,000)       1,301,000
       (Decrease) increase in accounts payable and
         accrued expenses                                      (6,152,000)      12,343,000       28,498,000
       Increase in deferred compensation                          803,000        4,762,000        2,493,000
       Decrease (increase) in deferred taxes                   12,847,000          (84,000)     (45,939,000)
       Other changes                                           (6,181,000)      (9,605,000)     (11,796,000)
                                                             ------------     ------------     ------------
Cash flows provided by operating activities                    29,178,000       37,810,000       61,555,000
                                                             ------------     ------------     ------------
Cash flows used in investing activities:
  Additions to property, plant and equipment                  (31,066,000)     (35,228,000)     (18,853,000)
  Acquisition of product lines from BioWhittaker, Inc.
     and Clark Laboratories                                      (500,000)     (12,977,000)         --
  Payments for international acquisitions, net of cash
    received:
     The Sante Beaute line in France                              --               --           (19,670,000)
     Technogenetics in Italy                                      --               --            (4,928,000)
     The Curash line in Australia                                 --               --            (3,660,000)
  Payments for licensing agreements                               --              (250,000)      (1,000,000)
  Decrease (increase) in short-term investments                 1,043,000       (1,451,000)      14,081,000
  Other investing activities                                      186,000        2,089,000          856,000
                                                             ------------     ------------     ------------
Cash flows used in investing activities                       (30,337,000)     (47,817,000)     (33,174,000)
                                                             ------------     ------------     ------------
Cash flows used in financing activities:
  Dividends paid                                               (7,423,000)      (7,384,000)     (13,372,000)
  Increase in borrowings                                          347,000       37,033,000        6,801,000
  Payments of debt                                             (6,624,000)      (4,280,000)      (4,348,000)
  Purchase of treasury stock                                     (380,000)      (4,216,000)        (838,000)
                                                             ------------     ------------     ------------
Cash flows used in financing activities                       (14,080,000)      21,153,000      (11,757,000)
                                                             ------------     ------------     ------------
Effect of foreign exchange rate changes on cash
  and cash equivalents                                           (822,000)         (59,000)         163,000
                                                             ------------     ------------     ------------
(Decrease) increase in cash and cash equivalents             $(16,061,000)    $ 11,087,000     $ 16,787,000
                                                             ------------     ------------     ------------
                                                             ------------     ------------     ------------
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                                                              15

<PAGE>
      Carter-Wallace, Inc. and Subsidiaries
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
--------------------------------------------------------------------------------
 
1. SUMMARY OF ACCOUNTING POLICIES
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Carter-Wallace,
Inc. and all of its subsidiaries (the "Company"). All significant intercompany
transactions have been eliminated.
 
Use of Estimates
 
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and use assumptions
that affect certain reported amounts and disclosures. Actual amounts may differ.
 
Cash Equivalents and Short-term Investments
 
Cash equivalents consist of certificates of deposit and other short-term
securities with maturities of three months or less when purchased. Investments
with a maturity of greater than three months but less than one year are
classified as short-term investments. The carrying value of cash equivalents and
short-term investments approximated fair value at March 31, 1997 and 1996.
 
Inventories
 
Inventories are valued at the lower of cost or market on the first-in, first-out
(FIFO) method, except for certain domestic inventories which are stated at cost
on the last-in, first-out (LIFO) method.
 
Property, Plant and Equipment
 
Depreciation is provided over the estimated useful lives of the assets,
principally using the straight line method. Leasehold improvements are amortized
on a straight line basis over the life of the related asset or the life of the
lease, whichever is shorter. Expenditures for renewals and betterments are
capitalized. Upon sale or retirement of assets, the appropriate asset and
related accumulated depreciation accounts are adjusted and the resultant gain or
loss is reflected in earnings. Maintenance and repairs are charged to expense as
incurred.
 
Intangible Assets
 
The excess of purchase price of businesses acquired over net assets at date of
acquisition is assessed to the product or group of products which constitute the
business acquired and amortized over no longer than 40 years for amounts
relating to acquisitions subsequent to October 31, 1970. The cost of patents,
formulae and contracts is amortized on a straight line basis over their legal or
contractual lives. The cost of trademarks is being amortized over no longer than
40 years for amounts relating to acquisitions subsequent to October 31, 1970.
Amounts related to intangibles acquired prior to October 31, 1970 are not
material.
 
The Company's policy in assessing the recoverability of intangible assets is to
compare the carrying value of the intangible asset with cash flow generated by
products related to the intangible asset. In addition, the Company continually
evaluates whether adverse developments indicate that an intangible asset may be
impaired.
 
Income Taxes
 
Deferred income taxes are determined using the liability method based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of enacted tax laws.
 
Advertising and Marketing Costs
 
Advertising, promotion and other marketing costs are charged to earnings in the
period in which they are incurred.
 
Earnings per Common Share
 
Net earnings (loss) per share of common stock is based on the average number of
common and Class B common shares outstanding during the year: 46,389,000 in
1997, 46,160,000 in 1996 and 46,108,000 in 1995. Inclusion of shares issuable
under stock option plans would not reduce reported net earnings per share.
 
2. INVENTORIES
 
Inventories computed on the last-in, first-out (LIFO) method comprised 10% and
8% of inventories included in current assets at year end 1997 and 1996,
respectively. If these inventories had been valued on the FIFO inventory method
(which approximates current or replacement cost), total inventories would have
been approximately $9,600,000 and $10,000,000 higher than reported at March 31,
1997 and 1996, respectively. Felbatol inventories of $12,850,000 at March 31,
1997 and $15,350,000 at March 31, 1996, not expected to be sold in the next
fiscal year, are included in Other Assets.
 
16

<PAGE>
3. TAXES ON INCOME
 
The provision (benefit) for taxes on earnings was as follows:
 
<TABLE>
<CAPTION>
                                                      1997                  1996                   1995
                                                   -----------           -----------           -------------
    <S>                                            <C>                   <C>                   <C>
    Current:
         Domestic                                  $ 1,474,000           $   415,000           $   8,361,000
         Foreign                                     4,496,000             5,517,000               6,356,000
                                                   -----------           -----------           -------------
                                                     5,970,000             5,932,000              14,717,000
                                                   -----------           -----------           -------------
    Deferred:
         Domestic                                   10,486,000               816,000             (45,791,000)
         Foreign                                     2,137,000            (1,501,000)                312,000
                                                   -----------           -----------           -------------
                                                    12,623,000              (685,000)            (45,479,000)
                                                   -----------           -----------           -------------
    Total                                          $18,593,000           $ 5,247,000           $ (30,762,000)
                                                   -----------           -----------           -------------
                                                   -----------           -----------           -------------

The components of income (loss) before taxes were as follows:
 
    Domestic                                       $26,824,000           $   909,000           $(102,936,000)
    Foreign                                         18,525,000            11,888,000              15,906,000
                                                   -----------           -----------           -------------
    Total                                          $45,349,000           $12,797,000           $ (87,030,000)
                                                   -----------           -----------           -------------
                                                   -----------           -----------           -------------
</TABLE>
 
The Company's Puerto Rican subsidiaries were liquidated as part of the Company's
restructuring program during fiscal 1995 and the early part of fiscal 1996. The
undistributed earnings of these subsidiaries were repatriated free of United
States income taxes upon liquidation.
 
Deferred income taxes are provided for temporary differences between the
financial statement and tax bases of the Company's assets and liabilities. The
temporary differences gave rise to the following deferred tax assets and
liabilities at March 31:
 
<TABLE>
<CAPTION>
                                                                          1997                   1996
                                                                       -----------           ------------
    <S>                                                                <C>                   <C>
    Postretirement benefit plans                                       $30,542,000           $ 29,193,000
    Employee benefit plans                                              12,325,000             12,455,000
    Accrued liabilities                                                 23,076,000             31,330,000
    Asset valuation accounts                                            18,971,000             19,735,000
    All other                                                           11,320,000             15,370,000
    Valuation allowances                                                (3,247,000)            (3,247,000)
                                                                       -----------           ------------
         Total deferred tax assets                                      92,987,000            104,836,000
                                                                       -----------           ------------
    Depreciation                                                        13,735,000             13,424,000
    All other                                                            9,431,000              8,201,000
                                                                       -----------           ------------
         Total deferred tax liabilities                                 23,166,000             21,625,000
                                                                       -----------           ------------
    Net deferred tax assets                                            $69,821,000           $ 83,211,000
                                                                       -----------           ------------
</TABLE>
 
Realization of the Company's deferred tax assets is dependent on generating
sufficient taxable income in future years. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets will be realized, except for the valuation allowance amount. However, the
deferred tax assets could be reduced if estimates of future taxable income are
lowered. A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
 
                                                                              17

<PAGE>
The effective tax rate of the provision (benefit) for taxes on earnings as
compared with the U.S. Federal statutory income tax rate was as follows:
 
<TABLE>
<CAPTION>
                                             1997                       1996                       1995
                                    ----------------------     ----------------------     -----------------------
                                                    % TO                       % TO                        % TO
                                        TAX        PRE-TAX         TAX        PRE-TAX         TAX         PRE-TAX
                                      AMOUNT       INCOME        AMOUNT       INCOME         AMOUNT       INCOME
                                    -----------    -------     -----------    -------     ------------    -------
<S>                                 <C>            <C>         <C>            <C>         <C>             <C>
Computed tax expense (benefit)      $15,872,000      35.0%     $ 4,479,000      35.0%     $(30,461,000)    (35.0%)
Foreign income taxed at a
  different effective rate            1,581,000       3.5           (8,000)     --           1,438,000       1.7
State income taxes, net of
  federal tax benefit                 1,145,000       2.5          339,000       2.6        (4,989,000)     (5.7)
Amortization of intangibles             534,000       1.2          606,000       4.7           829,000        .9
Valuation allowance                          --        --          949,000       7.4         2,298,000       2.6
Puerto Rican income                          --        --           (9,000)     --            (910,000)     (1.0)
Other                                  (539,000)     (1.2)      (1,109,000)     (8.7)        1,033,000       1.2
                                    -----------    -------     -----------    -------     ------------    -------
                                    $18,593,000      41.0%     $ 5,247,000      41.0%     $(30,762,000)    (35.3%)
                                    -----------    -------     -----------    -------     ------------    -------
                                    -----------    -------     -----------    -------     ------------    -------
</TABLE>
 
The U.S. Internal Revenue Service completed its examination of the Company's tax
returns through fiscal year 1995 resulting in no material impact on the Company.
 
4. FOREIGN OPERATIONS
 
Net current assets and net sales of the Company's foreign subsidiaries and
branches operating outside of the United States, and the Company's equity in net
assets and net earnings of such operations were:
 
<TABLE>
<CAPTION>
                                            1997                   1996                   1995
                                        ------------           ------------           ------------
          <S>                           <C>                    <C>                    <C>
          Net current assets            $ 83,540,000           $ 88,440,000           $ 80,147,000
          Equity in net assets           125,757,000            117,585,000            108,009,000
          Net sales                      210,606,000            206,576,000            182,190,000
          Net earnings                    11,892,000              7,872,000              9,238,000
</TABLE>
 
The equity adjustment from foreign currency translation is comprised of the
following:
 
<TABLE>
<CAPTION>
                                                                     YEARS ENDED MARCH 31
                                                               ---------------------------------
                                                                  1997                  1996
                                                               -----------           -----------
          <S>                                                  <C>                   <C>
          Opening balance                                      $17,245,000           $18,949,000
          Current year                                           3,720,000            (1,704,000)
                                                               -----------           -----------
          Ending balance                                       $20,965,000           $17,245,000
                                                               -----------           -----------
                                                               -----------           -----------
</TABLE>
 
At March 31, 1997, the Company had entered into forward foreign exchange
contracts in the amount of $21,600,000 related to intercompany loans between
certain of its subsidiaries. The forward exchange contracts are intended to
reduce the risk of fluctuating exchange rates on intercompany loan arrangements.
These contracts mature at various dates from April, 1997 to February, 1998.
 
5. NOTES PAYABLE AND LONG-TERM DEBT
 
Notes Payable
 
Notes payable consisting of borrowings from banks under available lines of
credit were $347,000, $746,000 and $4,096,000 and the current portion of
long-term debt was $2,911,000, $5,308,000 and $1,320,000 at March 31, 1997, 1996
and 1995, respectively. Data related to the amount of short-term borrowings
outstanding during the year is not presented since it is immaterial.
 
18

<PAGE>
The Company has available various bank credit lines amounting to $215,000,000 of
which $195,000,000 is for domestic borrowings and $20,000,000 is for
international borrowings. The availability of the lines of credit is subject to
review by the banks involved. Commitment fees are immaterial.
 
Long-Term Debt
 
Long-term debt at March 31 is summarized below:
 
<TABLE>
<CAPTION>
                                                                               1997              1996
                                                                            -----------       -----------
<S>                                                                         <C>               <C>
Promissory Notes, 7.62%, payable in equal annual installments of
  $7,000,000 from December 21, 2003 through December 21, 2007               $35,000,000       $35,000,000
Secured Italian lira term loans, adjustable rate payable in installments
  through July 1, 2001                                                        4,942,000         6,427,000
Connecticut Development Authority Industrial Development Bond, 6.75%
  payable October 1, 1998                                                     4,300,000         4,300,000
Unsecured French franc loans, at fixed and variable rates, payable in
  installments through August 5, 2001                                         3,135,000         8,126,000
City of Decatur, Illinois adjustable rate Industrial Revenue Bond
  payable December 1, 2010                                                    3,000,000         3,000,000
Promissory Notes, 6.02%, payable no later than September 12, 1998             2,069,000         2,266,000
Unsecured Australian dollar term loan, 9.64%, payable in equal annual
  installments through July 28, 1998                                            778,000         1,147,000
Unsecured Italian lira loans, rates of 4.5%-5.5%, payable in semi-annual
  installments through July, 2002                                               712,000           970,000
                                                                            -----------       -----------
                                                                             53,936,000        61,236,000
Less, current portion of long-term debt included in notes payable            (2,911,000)       (5,308,000)
                                                                            -----------       -----------
                                                                            $51,025,000       $55,928,000
                                                                            -----------       -----------
                                                                            -----------       -----------
</TABLE>
 
Maturities of long-term debt for each of the four fiscal years 1999 through 2002
are $8,367,000, $1,836,000, $1,883,000 and $882,000, respectively.
 
The Italian lira loans are secured by irrevocable letters of credit. Commitment
fees are immaterial. Interest on these loans is the Milan Interbank Offered Rate
plus a nominal increment, adjusted quarterly.
 
With respect to the French franc loans, interest on the adjustable rate loans is
the Paris Interbank Offered Rate plus a nominal increment, adjusted quarterly.
Fixed rates are from 7.5% to 7.75%. Arrangements were made at the inception of
the loans to convert a portion of the loans from adjustable rate to fixed rate.
 
Interest on the City of Decatur, Illinois Industrial Revenue Bond is 70% of the
prime rate through December, 2000, adjustable thereafter.
 
The Company issued promissory notes, payable no later than September 12, 1998,
in connection with the acquisition of the net assets of Youngs Drug Products
Corporation and affiliates. Prepayments of all or portions of the notes are
required as certain contractual conditions are satisfied.
 
Certain of the Company's long-term debt agreements contain covenants which
require the Company to maintain a minimum level of net worth and limit total
long-term liabilities to a stated percentage of total capitalization.
 
The fair value of long-term debt, including current maturities, was $53,103,000
at March 31, 1997 and $61,139,000 at March 31, 1996.
 
                                                                              19

<PAGE>
6. COMMON STOCK, CLASS B COMMON STOCK AND CAPITAL IN EXCESS OF PAR VALUE
 
The Company has two classes of common stock with a par value of $1.00 per share.
Class B common stock generally has ten votes per share on all matters and votes
as a class with common stock which has one vote per share. The transfer of Class
B common stock is restricted; however, Class B common stock is at all times
convertible into shares of common stock on a share-for-share basis. Common stock
and Class B common stock have identical rights with respect to cash dividends
and upon liquidation.
 
Activity for the years ended March 31, 1997, 1996 and 1995 was as follows:
 
<TABLE>
<CAPTION>
                                                                                CLASS B         CAPITAL IN
                                                              COMMON            COMMON           EXCESS OF
                                                               STOCK             STOCK           PAR VALUE
<S>                                                         <C>               <C>               <C>
                                                            -----------       -----------       -----------
Balance at March 31, 1994                                   $34,432,000       $12,773,000       $ 1,972,000
Conversion of Class B common stock to Common Stock               96,000           (96,000)          --
Cost of treasury stock under market value at date of
  award or issuance                                             --                --                212,000
                                                            -----------       -----------       -----------
Balance at March 31, 1995                                    34,528,000        12,677,000         2,184,000
Conversion of Class B common stock to Common Stock               85,000           (85,000)          --
Cost of treasury stock under market value at date of
  award or issuance                                             --                --              1,084,000
                                                            -----------       -----------       -----------
Balance at March 31, 1996                                    34,613,000        12,592,000         3,268,000
Conversion of Class B common stock to Common Stock               42,000           (42,000)          --
Cost of treasury stock under market value at date of
  award or issuance                                             --                --                320,000
                                                            -----------       -----------       -----------
Balance at March 31, 1997                                   $34,655,000       $12,550,000       $ 3,588,000
                                                            -----------       -----------       -----------
                                                            -----------       -----------       -----------
</TABLE>
 
The tax benefit on the appreciation of restricted stock awards and the cost of
treasury stock over or under the market value of the stock on the date of the
award or issuance have been applied to capital in excess of par value. To the
extent that charges from the cost of treasury stock over the market value at the
date of the award exceed accumulated credits to capital in excess of par value
in the prior years, the excess was charged to retained earnings.
 
7. RETIREMENT PLANS
 
The Company has several contributory and non-contributory pension plans in which
substantially all employees with over one year of service participate. The
Company's funding policy is to make annual contributions to these plans in
amounts equal to the minimum required by applicable regulations. The plans'
assets are invested primarily in common stocks and corporate and government
bonds.
 
The pension expense for the years ended 1997, 1996 and 1995 included the
following components:
 
<TABLE>
<CAPTION>
                                                            1997                1996                1995
                                                         -----------         -----------         -----------
<S>                                                      <C>                 <C>                 <C>
Service cost-benefits earned during the period           $ 8,127,000         $ 6,839,000         $ 8,019,000
Interest cost on projected benefit obligation             14,721,000          14,484,000          13,689,000
Actual return on assets                                  (27,487,000)        (42,145,000)         (1,449,000)
Net amortization and deferral                              9,875,000          25,385,000         (15,441,000)
Curtailment/settlement (gain) loss                           106,000           1,611,000            (549,000)
                                                         -----------         -----------         -----------
     Total pension expense                               $ 5,342,000         $ 6,174,000         $ 4,269,000
                                                         -----------         -----------         -----------
                                                         -----------         -----------         -----------
</TABLE>
 
During the year ended March 31, 1997 the Company recognized a settlement loss of
$106,000 in conjunction with retirements.
 
During the year ended March 31, 1996 the Company recognized curtailment and
settlement losses of  $1,611,000 in conjunction with the closure of the Trenton
manufacturing plant and the Canadian facilities integration. These losses were
included as components of the respective one-time charges.
 
During the year ended March 31, 1995 the Company recognized a curtailment gain
of $549,000 in conjunction with the restructuring program. This gain was
included as a credit to the one-time charges for restructuring of operations and
facilities.
 
20

<PAGE>
The following table sets forth the funded status of the plans at March 31, 1997
and 1996:
<TABLE>
<CAPTION>
                                                                      PLANS IN WHICH
                                            -------------------------------------------------------------------
                                                    ASSETS EXCEED                          ACCUMULATED
                                                     ACCUMULATED                            BENEFITS
                                                      BENEFITS                            EXCEED ASSETS
                                            -----------------------------         -----------------------------
<CAPTION>
                                                1997             1996                 1997             1996
                                            ------------     ------------         ------------     ------------
<S>                                         <C>              <C>                  <C>              <C>
Actuarial present value of benefit
  obligations:
     Vested                                 $130,082,000     $113,945,000         $ 27,343,000     $ 48,981,000
     Nonvested                                 3,444,000        1,790,000              286,000          751,000
                                            ------------     ------------         ------------     ------------
Accumulated benefit obligation              $133,526,000     $115,735,000         $ 27,629,000     $ 49,732,000
                                            ------------     ------------         ------------     ------------
                                            ------------     ------------         ------------     ------------
Projected benefit obligation                $154,455,000     $136,445,000         $ 40,900,000     $ 71,480,000
Plan assets at fair value                    213,286,000      177,154,000            2,929,000       25,881,000
                                            ------------     ------------         ------------     ------------
Plan assets in excess of (less than)
  projected benefit obligation                58,831,000       40,709,000          (37,971,000)     (45,599,000)
Unrecognized net (gain) or loss              (34,381,000)     (14,005,000)            (140,000)       5,744,000
Prior service not recognized in pension
  costs                                       (1,202,000)      (1,442,000)          14,333,000       14,903,000
Unrecognized net transition (asset)
  liability                                   (6,122,000)      (8,635,000)             105,000          260,000
Minimum liability adjustment                     --               --                (1,686,000)      (1,357,000)
                                            ------------     ------------         ------------     ------------
Prepaid (accrued) pension costs recognized
  in the consolidated balance sheets        $ 17,126,000     $ 16,627,000         $(25,359,000)    $(26,049,000)
                                            ------------     ------------         ------------     ------------
                                            ------------     ------------         ------------     ------------
</TABLE>
 
The principal assumptions used in determining 1997, 1996 and 1995 actuarial
values were:
 
             Discount rate                                       7 - 9%
             Rate of increase in compensation levels             4 - 6%
             Expected long-term rate of return on plan assets    8 -10%
 
Expense for the employee savings plan under which the Company matches the
contributions of participating employees up to a designated level was
$1,421,000, $1,506,000 and $1,597,000 in 1997, 1996 and 1995 respectively.
 
8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
 
The Company provides certain health care and life insurance benefits for retired
employees. The cost of the benefits is accrued during the years the employees
render service until they attain full eligibility for those benefits.
 
The components of the postretirement benefit expense for the years ended March
31, 1997, 1996 and 1995 are:
 
<TABLE>
<CAPTION>
                                                            1997                1996                1995
                                                         -----------         -----------         -----------
<S>                                                      <C>                 <C>                 <C>
Service cost -- benefits earned during the year          $ 1,914,000         $ 1,615,000         $ 2,068,000
Interest cost on accumulated postretirement benefit
  obligation                                               3,659,000           3,697,000           3,770,000
Net amortization and deferral                             (3,414,000)         (3,540,000)         (3,198,000)
Curtailment gain                                             --               (1,313,000)         (3,357,000)
                                                         -----------         -----------         -----------
Net periodic postretirement benefit expense (income)     $ 2,159,000         $   459,000         $  (717,000)
                                                         -----------         -----------         -----------
                                                         -----------         -----------         -----------
</TABLE>
 
During the year ended March 31, 1996 the Company recognized curtailment gains of
$1,313,000 in conjunction with the closure of the Trenton manufacturing facility
and the Canadian facilities integration. These gains were included as credits to
the respective one-time charges. During the year ended March 31, 1995 the
Company recognized a curtailment gain of $3,357,000 in conjunction with the
restructuring program. This gain was included as a credit to the one-time
charges for restructuring of operations and facilities.
 
                                                                              21

<PAGE>
The following table sets forth the accumulated postretirement benefit obligation
of the plans at March 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                1997                1996
                                                             -----------         -----------
               <S>                                           <C>                 <C>
               Retirees                                      $28,079,000         $26,174,000
               Active participants eligible for
                 retirement                                   10,544,000          11,327,000
               Other active participants                      14,194,000          13,268,000
                                                             -----------         -----------
               Accumulated postretirement benefit
                 obligation                                   52,817,000          50,769,000
               Unrecognized net gain                           8,438,000           7,131,000
               Unrecognized prior service credit               8,177,000          10,688,000
                                                             -----------         -----------
               Accrued postretirement benefit
                 obligation                                  $69,432,000         $68,588,000
                                                             -----------         -----------
                                                             -----------         -----------
</TABLE>
 
The assumed health care cost trend rate used to measure the accumulated
postretirement benefit obligation for those over age 65 is 11 percent for 1997
trending to 5 percent over a seven-year period. For those under age 65, the
trend rate is 7.5 percent for 1997 trending to 5 percent over a seven year
period. A one percent increase in the assumed respective annual medical cost
trend rate would increase the accumulated postretirement benefit obligation by
approximately $3,200,000 and the service and interest components of net
postretirement benefit expense by $300,000.
 
Other principal actuarial assumptions used in determining the accumulated
postretirement benefit obligation were:
 
<TABLE>
                 <S>                                                          <C>
                 Discount rate                                                     7-9%
                 Rate of increase in compensation levels                           4-6%
</TABLE>
 
9. LONG-TERM INCENTIVE PLANS

1977 Restricted Stock Award Plan
 
The plan as amended provides for awards of not more than 2,750,000 shares of
common stock, subject to adjustments for stock splits, stock dividends and other
changes in the Company's capitalization to key employees, to be issued either
immediately after the award or at a future date. As a result of the
three-for-one stock split in April, 1992 and the issuance of the Class B common
stock in 1987, the 2,750,000 shares of common stock provided for in the Plan has
been adjusted to 5,593,154 shares. As provided in the Plan and subject to
restrictions, shares awarded may not be disposed of by the recipients for a
period of five years from the date of the award. Cash dividends on shares
awarded are held by the Company for the benefit of the recipients, subject to
the same restrictions as the award. Such dividends (without interest) are paid
to the recipients upon lapse of the restrictions. The cost of the awards, equal
to the fair market value at the date of award, is being charged to operations in
equal annual amounts over a five year period commencing at the date of the
award.
 
Award transactions for the past three years were:
 
<TABLE>
<CAPTION>
                                                                         SHARES
                                                      ---------------------------------------------
                                                        1997              1996              1995
                                                      ---------         ---------         ---------
          <S>                                         <C>               <C>               <C>
          Cumulative awards--beginning of year        3,466,250         3,466,250         3,417,122
          New awards                                     --                --                49,128
                                                      ---------         ---------         ---------
          Cumulative awards--end of year              3,466,250         3,466,250         3,466,250
                                                      ---------         ---------         ---------
                                                      ---------         ---------         ---------
</TABLE>
 
The financial statements reflect the transfer of the awarded shares from
treasury stock as of the date of their issuance. Outstanding awards of 91,793
shares at March 31, 1997 will be issued at a future date no later than five
years from the date of the award. For shares that have been issued, the market
value at the date of the awards was $680,000, $6,080,000 and $2,672,000 in 1997,
1996, and 1995, respectively. The cost of treasury stock for these awards was
$346,000, $5,015,000 and $2,463,000 in 1997, 1996 and 1995, respectively.
 
1996 Long-Term Incentive Plan
 
The plan provides for awards of not more than 4,500,000 shares of common stock,
subject to adjustment for stock splits, stock dividends and other changes in the
Company's capitalization to key employees, to be issued either immediately after
the award or at a future date. The awards consist of restricted and/or deferred
stock or options, or a combination thereof. At March 31, 1997 there were
2,706,600 shares available for grant under the 1996 long-term incentive plan.
 
22

<PAGE>
Stock Options
 
Under this plan, both qualified and non-qualified options may be granted to key
executive employees at fair market value at the date of grant. The right to
exercise the options, in installments, commences one year from the date of grant
and expires ten years after that date. Effective April 1, 1996, the Company
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation". As permitted by the
Statement, the Company has chosen to continue to account for options granted
under the plan using the intrinsic value method. Accordingly, no compensation
expense has been recognized for these options. Had the fair value method of
accounting, as defined in SFAS No. 123, been applied to the Company's stock
options, the Company's net income would have been reduced by approximately
$1,020,000, or $.02 per share in 1997 and $160,000, or less than $.01 per share
in 1996. The weighted-average fair value of options granted in 1997 and 1996 was
$6.54 and $6.43, respectively. For purposes of fair market value disclosures,
the fair market value of an option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
 
<TABLE>
<CAPTION>
                                                             1997                1996
                                                             ----                ----
                    <S>                                      <C>                 <C>
                    Risk-Free Interest Rate                  6.4 %               5.6 %
                    Expected Life                              8  yrs.             8  yrs.
                    Volatility                               41.0%               41.0%
                    Dividend Yield                           1.5 %               1.5 %
</TABLE>
 
A summary of the status of stock options granted under this plan as of March 31,
1997 and 1996 and changes during the years ended on those dates is presented
below:
 
<TABLE>
<CAPTION>
                                                    1997                                    1996
                                       -------------------------------         -------------------------------
                                                         WEIGHTED-AVG.                           WEIGHTED-AVG.
                                        OPTION             EXERCISE             OPTION             EXERCISE
                                        SHARES               PRICE              SHARES               PRICE
                                       ---------         -------------         ---------         -------------
<S>                                    <C>               <C>                   <C>               <C>
Outstanding April 1                    1,054,080            $ 13.75               --                $--
Granted                                  549,860              13.43            1,054,080              13.75
Exercised                                 --                 --                   --                 --
Forfeited                               (171,720)             13.75               --                 --
                                       ---------                               ---------
Outstanding March 31                   1,432,220            $ 13.63            1,054,080            $ 13.75
                                       ---------                               ---------
                                       ---------                               ---------
</TABLE>
 
The following table summarizes information about stock options outstanding at
March 31, 1997:
 
<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                  ---------------------------------------------------       -------------------------------
  RANGE OF          NUMBER          WEIGHTED-AVG.       WEIGHTED-AVG.         NUMBER          WEIGHTED-AVG.
  EXERCISE        OUTSTANDING         REMAINING           EXERCISE          EXERCISABLE         EXERCISE
   PRICES         AT 3/31/97            LIFE                PRICE           AT 3/31/97            PRICE
-------------     -----------       -------------       -------------       -----------       -------------
<S>               <C>               <C>                 <C>                 <C>               <C>
  $12.13 to
  $13.75           1,432,220          9.3 years            $ 13.63            263,520            $ 13.75
</TABLE>
 
Stock Awards
 
Restricted and/or deferred stock awards which are awarded subject to
restrictions, may not be disposed of by the recipient for a period of four years
from the date of the award. Cash dividends on shares awarded are held by the
Company for the benefit of the recipients, subject to the same restrictions as
the award. Such dividends (without interest) are paid to the recipients upon
lapse of the restrictions. The cost of the awards, equal to the fair market
value at the date of award, is being charged to operations in equal annual
amounts over a four year period commencing at the date of the award. During
fiscal year 1997 awards of an aggregate of 172,800 shares were made. At March
31, 1997, 130,960 of these shares have been deferred and will be issued at a
future date no later than four years from the date of the award. For shares that
have been issued in 1997 the market value on the date of the awards was $91,000.
The cost of treasury stock for these awards was $101,000. Awards forfeited
during the year and returned to treasury stock consisted of 40,707 shares valued
at $556,000. The differences between the market value at the date of the awards
and the cost of the treasury stock were included in capital in excess of par
value.
 
                                                                              23

<PAGE>
10. ACQUISITIONS
 
In December, 1995, the Company acquired the enzyme immunoassay and
immunofluorescent lines of diagnostic products from BioWhittaker, Inc. The
purchase price for these product lines was $10,000,000. The Company also agreed
to purchase certain inventories at cost.
 
In a separate transaction with Clark Laboratories in December, 1995, the Company
has obtained exclusive sales and marketing rights to Clark's line of enzyme
immunoassay diagnostic products in the United States and has entered into a
long-term supply agreement with Clark related to the manufacture of certain
diagnostic products. The fee for these rights was $2,000,000.
 
In August, 1994, the Company acquired the Sante Beaute line of products in
France for approximately $21,000,000. This business consists of the Email
Diamant oral hygiene products, Lineance body care products and other skin and
bath products.
 
In August, 1994, the Company acquired Technogenetics S.r.l., a subsidiary of
Recordati S.p.A. for approximately $5,900,000 in Italy. Technogenetics
manufactures and sells diagnostic test kits used by clinical laboratories for
the diagnosis of human diseases.
 
In July, 1994, the Company acquired for approximately $3,700,000 the Curash line
of baby care and other consumer products in Australia.
 
These acquisitions are being accounted for by the purchase method and,
accordingly, their results of operations are included in the Company's results
of operations from the acquisition date. Pro forma results of operations are not
presented since the effect would not be material.
 
11. SHORT-TERM INVESTMENTS
 
At March 31, 1997 and 1996, short-term investments were intended to be held to
maturity as defined in SFAS No. 115 and have contractual maturities of less than
one year. The amortized cost approximated fair value. The amortized cost of
certificates of deposit were $18,667,000 and $18,577,000, respectively, in 1997
and 1996. In addition, included in 1996 were Canadian government securities in
the amount of $1,457,000.
 
12. CLOSURE OF THE TRENTON CONDOM MANUFACTURING FACILITY
 
The Company closed its condom manufacturing plant in Trenton, New Jersey in
October, 1996. The condom production previously performed at Trenton has been
transferred to the Company's facility in Colonial Heights, VA. The decision to
close the Trenton plant resulted in a one-time charge to pre-tax earnings in the
year ended March 31, 1996 of $23,100,000 ($13,630,000 after taxes or $.30 per
share), consisting of plant closing costs including equipment write-offs
($17,800,000) and employee termination costs ($5,300,000).
 
13. RESTRUCTURING OF OPERATIONS AND FACILITIES
 
Prompted by the discontinuance of its line of iodinated glycerol formulation of
Organidin products and by the significant adverse effect on existing and
potential sales of Felbatol (felbamate) due to use restrictions, the Company
engaged in a restructuring program beginning in the year ended March 31, 1995
with the intent of reducing costs and increasing efficiencies.
 
In connection with this restructuring program, the Company incurred one-time
pre-tax charges of $16,500,000 in the year ended March 31, 1996 and $74,060,000
in the year ended March 31, 1995. The restructuring charges of $90,560,000
recorded over the two years consist primarily of estimated employee termination
costs ($30,800,000), estimated plant closing costs including equipment
write-offs ($26,000,000) and costs associated with the subleasing of office
space on which the Company holds a long-term lease ($27,800,000).
 
The restructuring program resulted in a worldwide reduction of approximately 990
employees including 120 vacancies that were not filled.
 
Approximately $17,200,000 of the $90,560,000 provision for restructuring charges
remain to be utilized in future periods. Substantially all of the $17,200,000
represents expected future cash outlays for subleasing costs.
 
24

<PAGE>
14. BUSINESS SEGMENTS (DOLLARS IN THOUSANDS)
 
Information on the Company's Business Segments is presented below.
 
Carter-Wallace, Inc. is engaged in the manufacture and sale of a diversified
line of products in the Consumer Products and Health Care business segments. A
listing of the major products in each segment is included in "Description of
Business Segments" on page 11.
 
Consumer products are promoted directly to the consumer by television and other
advertising media and are sold to wholesalers and various retailers. They are
manufactured and sold domestically by the Company's consumer products divisions
and some are sold throughout the rest of the world by various subsidiaries and
distributors.
 
Health care products are promoted primarily to physicians, pharmacists,
hospitals, laboratories and clinics by a staff of specially trained professional
sales representatives and by advertising in professional journals. These
products are manufactured and sold domestically by the Company's professional
products divisions and some are sold throughout the rest of the world by various
subsidiaries and distributors.
 
The Company sells its diversified line of products worldwide. Some of the
Company's domestic divisions sell to a small number of high volume customers,
the largest of which accounted for approximately 9.0% of consolidated net sales
during fiscal 1997.
 
<TABLE>
<CAPTION>
Business Segments                                                         MARCH 31
                                                  ---------------------------------------------------------
                                                    1997                     1996                    1995
                                                  ---------                --------                --------
<S>                                               <C>                      <C>                     <C>
Sales
  Health Care                                     $ 243,163                $246,578                $262,785
  Consumer
     Anti-Perspirants and Deodorants                111,923                 110,147                 123,146
     Other Consumer Products                        293,669                 302,215                 277,711
                                                  ---------                --------                --------
  Consolidated                                    $ 648,755                $658,940                $663,642
                                                  ---------                --------                --------
                                                  ---------                --------                --------
Operating Profit
  Health Care                                     $  48,792                $ 53,477 (a)            $(51,222)(e)
  Consumer
     Anti-Perspirants and Deodorants                  3,290                 (12,073)(b)             (10,758)(f)
     Other Consumer Products                         38,935                  18,881 (c)              31,547 (g)
  Net interest income                                    40                   1,239                   1,062
  Other (expense) net of other income                (1,049)                 (1,629)                 (1,765)
  General corporate expenses                        (44,659)                (47,098)(d)             (55,894)(h)
                                                  ---------                --------                --------
  Earnings (loss) before taxes on income          $  45,349                $ 12,797                $(87,030)
                                                  ---------                --------                --------
                                                  ---------                --------                --------
<FN> 
(a) Includes one-time pre-tax charges of $3,743 related to restructuring and
    adjustments to prior year one-time charges for Organidin (iodinated
    glycerol) and Felbatol.
 
(b) Includes one-time pre-tax charge of $3,916 related to restructuring.
 
(c) Includes one-time pre-tax charge of $30,330 related to restructuring and
    the closure of the Trenton condom manufacturing facility.
 
(d) Includes one-time pre-tax charge of $4,011 related to restructuring.
 
(e) Includes one-time pre-tax charges of $92,977 related to Organidin
    (iodinated glycerol), Felbatol and restructuring.
 
(f) Includes one-time pre-tax charge of $5,503 related to restructuring.
 
(g) Includes one-time pre-tax charge of $18,685 related to restructuring.
 
(h) Includes one-time pre-tax charge of $12,175 related to restructuring.

</TABLE>
 
                                                             25

<PAGE>
 
Business Segments (continued)

<TABLE>

<S>                                               <C>                      <C>                     <C>
Identifiable Assets
  Health Care                                     $ 178,608                $190,926                $188,316
  Consumer
     Anti-Perspirants and Deodorants                 62,246                  61,323                  72,620
     Other Consumer Products                        254,281                 251,544                 231,525
  Corporate Assets                                  190,787                 215,132                 187,763
                                                  ---------                --------                --------
  Total Assets                                    $ 685,922                $718,925                $680,224
                                                  ---------                --------                --------
                                                  ---------                --------                --------
Depreciation and Amortization
  Health Care                                     $   8,135                $  9,726                $ 11,521
  Consumer
     Anti-Perspirants and Deodorants                  3,745                   3,481                   3,808
     Other Consumer Products                          8,242                   8,570                   8,002
                                                  ---------                --------                --------
  Total Operating Segments                        $  20,122                $ 21,777                $ 23,331
                                                  ---------                --------                --------
                                                  ---------                --------                --------
Capital Expenditures
  Health Care                                     $   4,473                $  3,020                $  4,640
  Consumer
     Anti-Perspirants and Deodorants                  2,627                   1,141                   1,877
     Other Consumer Products                         22,736                  30,705                  11,631
                                                  ---------                --------                --------
  Total Operating Segments                        $  29,836                $ 34,866                $ 18,148
                                                  ---------                --------                --------
                                                  ---------                --------                --------
Geographic Areas
Sales
  U.S.A.                                          $ 438,149                $452,364                $481,452
  Other North America                                60,930                  58,637                  60,841
  Other Countries                                   149,676                 147,939                 121,349
                                                  ---------                --------                --------
  Consolidated                                    $ 648,755                $658,940                $663,642
                                                  ---------                --------                --------
                                                  ---------                --------                --------
Operating Profit
  U.S.A.                                          $  71,680                $ 47,128 (a)            $(43,765)(d)
  Other North America                                10,604                   1,658 (b)               5,887 (e)
  Other Countries                                     8,733                  11,499                   7,445 (f)
  Net interest income                                    40                   1,239                   1,062
  Other (expense) net of other income                (1,049)                 (1,629)                 (1,765)
  General corporate expenses                        (44,659)                (47,098)(c)             (55,894)(g)
                                                  ---------                --------                --------
  Earnings (loss) before taxes on income          $  45,349                $ 12,797                $(87,030)
                                                  ---------                --------                --------
                                                  ---------                --------                --------
Identifiable Assets
  U.S.A.                                          $ 336,740                $331,339                $330,493
  Other North America                                37,223                  39,342                  37,474
  Other Countries                                   121,172                 133,112                 124,494
  Corporate Assets                                  190,787                 215,132                 187,763
                                                  ---------                --------                --------
  Total Assets                                    $ 685,922                $718,925                $680,224
                                                  ---------                --------                --------
                                                  ---------                --------                --------
<FN> 
Corporate assets include principally cash and cash equivalents, short-term
investments, miscellaneous receivables, deferred taxes and other miscellaneous
assets.
 
(a) Includes one-time pre-tax charges of $31,987 related to restructuring, the
    closure of the Trenton condom manufacturing facility and adjustments to
    prior year one-time charges for Organidin (iodinated glycerol) and Felbatol.
 
(b) Includes one-time pre-tax charges of $6,002 related to restructuring and an
    adjustment to the prior year one-time charge for Felbatol.
 
(c) Includes one-time pre-tax charges of $4,011 related to restructuring.
 
(d) Includes one-time pre-tax charges of $115,315 related to restructuring,
    Organidin (iodinated glycerol) and Felbatol.
 
(e) Includes one-time pre-tax charge of $950 related to Felbatol.

(f) Includes one-time pre-tax charge of $900 related to restructuring.
 
(g) Includes one-time pre-tax charge of $12,175 related to restructuring.

</TABLE>
 
26

<PAGE>
15. RENTAL EXPENSE AND LEASE COMMITMENTS (DOLLARS IN THOUSANDS)
 
Rental expense for operating leases with a term greater than one year for 1997,
1996 and 1995 was as follows:
 
<TABLE>
<CAPTION>
                                REAL PROPERTY
    RENTAL           REAL        SUB-RENTAL       NET REAL     EQUIPMENT
    EXPENSE        PROPERTY        INCOME         PROPERTY     AND OTHER
---------------    --------     -------------     --------     ---------
<S>                <C>            <C>             <C>           <C>         
     1997          $ 6,600        $  (1,640)      $ 4,960       $ 6,260
     1996            6,308             (484)        5,824         6,170
     1995            8,320             (688)        7,632         6,389
</TABLE>
 
The real property rental expense for 1997 and 1996 excludes approximately $2,200
and $2,400, respectively, of rental costs which have been charged to the
one-time charges for restructuring of operations and facilities.
 
Minimum rental commitments, in thousands of dollars, under non-cancellable
leases in effect at March 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                REAL PROPERTY
MINIMUM RENTAL       REAL        SUB-RENTAL       NET REAL     EQUIPMENT     CAPITAL LEASE
  COMMITMENTS      PROPERTY        INCOME         PROPERTY     AND OTHER      OBLIGATIONS
---------------    --------     -------------     --------     ---------     -------------
<S>                <C>          <C>               <C>          <C>           <C>
     1998          $ 8,187        $  (2,989)      $ 5,198       $   468         $    81
     1999            8,185           (2,989)        5,196           352              81
     2000            7,885           (2,989)        4,896           164              81
     2001            8,205           (3,084)        5,121            37              82
     2002            7,715           (3,299)        4,416            --              62
   2003-2012        67,251          (31,645)       35,606            --              --
                                                                             -------------
                                                                                    387
Less interest and executory cost                                                    (80)
                                                                             -------------
Present value of minimum lease payments (of which $54 is included in
    current liabilities)                                                        $   307
                                                                             -------------
                                                                             -------------
</TABLE>
 
Included in the real property rental commitments indicated above is
approximately $17,000 of future rental costs which were included in the one-time
charges for restructuring of operations and facilities. These costs are
associated with the subleasing of office space on which the Company holds a
long-term lease.
 
16. SUPPLEMENTAL FINANCIAL INFORMATION
 
The following is presented in support of balance sheet captions:
<TABLE>
<CAPTION>
                                                                                MARCH 31
                                                                    --------------------------------
                                                                      1997                    1996
                                                                    --------                --------
                           Intangible Assets:                            (dollars in thousands)
    <S>                                                             <C>                     <C>
    Excess of purchase price of businesses acquired over the
      net assets at date of acquisition                             $117,152                $119,836
      Trademarks                                                      28,908                  29,033
      Other                                                           29,046                  32,459
                                                                    --------                --------
                                                                     175,106                 181,328
      Accumulated amortization                                        51,767                  49,906
                                                                    --------                --------
                                                                    $123,339                $131,422
                                                                    --------                --------
                                                                    --------                --------
    Accounts Payable:
      Trade                                                         $ 33,716                $ 37,464
      Other                                                            1,151                   1,477
                                                                    --------                --------
                                                                    $ 34,867                $ 38,941
                                                                    --------                --------
                                                                    --------                --------
    Accrued Expenses:
      Salaries and wages                                            $ 29,361                $ 28,222
      Advertising and promotion                                       14,418                  17,597
      One-time charges                                                 8,929                  31,272
      Retirement plans                                                 7,390                  10,035
      Other                                                           42,692                  45,205
                                                                    --------                --------
                                                                    $102,790                $132,331
                                                                    --------                --------
                                                                    --------                --------
    Other Long-Term Liabilities:
      Retirement plans                                              $ 20,679                $ 16,920
      One-time charges                                                15,520                  24,011
      Other                                                            7,297                   7,389
                                                                    --------                --------
                                                                    $ 43,496                $ 48,320
                                                                    --------                --------
                                                                    --------                --------
</TABLE>
 
Income taxes paid were $10,240,000, $14,204,000 and $7,700,000 in 1997, 1996,
and 1995 respectively. Interest paid was
$4,498,000, $3,256,000 and $2,213,000 in 1997, 1996 and 1995, respectively.
 
                                                                              27

<PAGE>
17. FELBATOL (FELBAMATE)
 
As previously reported, in the year ended March 31, 1995 the Company incurred a
one-time charge to pre-tax earnings of $37,780,000 related to use restrictions
for Felbatol. This charge was adjusted by $8,200,000 to $45,980,000 in the year
ended March 31, 1996. Depending on future sales levels, additional inventory
write-offs may be required. If for any reason the product at some future date
should no longer be available in the market, the Company will incur an
additional one-time charge that would have a material adverse effect on the
Company's results of operations and possibly on its financial condition. Should
the product no longer be available, the Company currently estimates that the
additional one-time charge, consisting primarily of inventory write-offs and
anticipated returns of product currently in the market, will be in the range of
$20,000,000 to $25,000,000 on a pre-tax basis.
 
18. DISCONTINUANCE OF THE ORGANIDIN (IODINATED GLYCEROL) PRODUCT LINE
 
As previously reported, in the year ended March 31, 1995 the Company incurred a
one-time charge to pre-tax earnings of $17,500,000 related to discontinuance of
the Organidin (iodinated glycerol) product line. In the year ended March 31,
1996 an adjustment was made to reduce the provision for loss on Organidin by
$5,800,000 largely as a result of smaller than anticipated product returns.
 
19. LITIGATION INCLUDING ENVIRONMENTAL MATTERS
 
Environmental Matters
 
The United States Environmental Protection Agency ("EPA") advised the Company
and over 200 other companies in 1982 that they may be potentially responsible
parties ("PRPs") under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") with respect to waste deposited at the Lone Pine
Landfill in Freehold, NJ. The Company and over 115 other PRPs, without admitting
liability, have entered into two consent decrees with EPA agreeing to conduct a
cleanup of the Lone Pine Landfill, and the cleanup is in progress. The total
estimated cost of the cleanup is $104 to $120 million in current dollars. In
addition, the Company and other PRPs are negotiating with EPA, the Department of
Interior, and New Jersey to resolve natural resource damage claims which could
cost as much as $3 million. After factoring in past and expected recoveries from
nonsettlors, the Company's net share of the cleanup and natural resource damage
claims (exclusive of defense costs) is expected to be $8 to $9.7 million, of
which it has paid about $7 million to date. In August, 1989, the Company
instituted suit in New Jersey state court against twenty-two insurers to
recover, inter alia, the Company's share of costs at Lone Pine, including
related legal fees. The Company has reached settlements in this case with 18 of
the insurers. To date, the Company has received approximately $12.3 million in
settlement payments and is seeking additional reimbursement. The Company expects
to be fully reimbursed for its share of the currently estimated cleanup and
natural resource damage costs at Lone Pine.
 
The Company and nine other settling PRPs are parties to two actions in N.J.
state court involving a cleanup contractor at Lone Pine concerning amounts
allegedly owed to that contractor. The first action was filed by the contractor
on July 7, 1995 against the settling PRPs (including the Company), who
subsequently filed counterclaims against the contractor. The Company and the
nine other settling PRPs brought an action against the contractor on July 10,
1995. Both lawsuits were subsequently consolidated. A settlement in principle
has been reached in these cases. As part of that settlement, the settling PRPs
will pay $1,287,500 to the contractor. The Company's anticipated share of that
$1,287,500 is approximately $115,000. These amounts are included in the cleanup
cost estimate and the Company's estimated share set forth above.
 
The Company faces potential liability involving waste material generated by the
Lambert Kay division at its former manufacturing facility in Winsted,
Connecticut. In May 1991, EPA issued special notice letters under CERCLA to
Lambert Kay and about 50 other PRPs notifying them of potential liability with
respect to waste deposited at the Barkhamsted-New Hartford landfill in
Barkhamsted, Connecticut. In September 1991 and in February 1994, the Company
and 21 other PRPs, without admitting liability, entered into consent agreements
under which the PRPs agreed to perform certain investigation and engineering
evaluation work at the site including the remedial investigation and feasibility
study and to reimburse EPA for certain costs. The estimated cost of this work is
about $4.2 million. The Company's share of this cost is estimated to be
$124,000, which the Company has paid or received credit for. In addition, the
Company and other settling PRPs have sued certain nonsettlors for their share of
these costs and have obtained some settlement recoveries. Based on preliminary
information from the investigation work (which is not completed), the total cost
for performing the current and future work at Barkhamsted, including the
investigation work, is estimated to be $13.3 to $41.3 million. In June 1995, the
Connecticut legislature authorized the issuance of bonds to pay for
approximately $7 million of the future cleanup costs at the site. The issuance
of these bonds is expected to reduce the amount of cleanup costs subject to PRP
funding by that amount. Based on
28

<PAGE>
expected PRP participation in future cleanup work and other factors, the Company
anticipates that its share of all cleanup costs subject to PRP funding
(including costs incurred to date) will be not more than 4 to 5%, or about
$252,000 to $1,715,000. Thus, although applicable environmental law provides for
joint and several liability for the cost of cleanup work, the Company believes,
based on present estimates, that substantially all of the cleanup costs will be
paid by other PRPs.
 
The Company believes, based upon the information available at this time, that
the matters discussed above will not have a material effect on its financial
statements.
 
Other Litigation
 
Two federal securities class action suits filed in 1994 by stockholders against
the Company and certain of its present and former officers in the United States
District Court, Southern District of New York have been consolidated for all
purposes and the plaintiffs have filed a Consolidated Amended Complaint and a
Second Amended Class Action Complaint. The consolidated action purports to be on
behalf of all persons who purchased the Company stock in the period from January
20, 1994 through July 31, 1994. The complaint alleges that certain statements
made by the Company with respect to future sales and marketing prospects for
Felbatol were false and fraudulent, and that the Company omitted to state
material facts necessary to make statements made not misleading. Both the
Consolidated Amended Complaint and the Second Amended Class Action Complaint,
which seek damages in an unspecified amount, have been dismissed by the District
Court for failure to state a claim upon which relief can be granted. Plaintiffs
are pursuing an appeal from the dismissal to the United States Court of Appeals
for the Second Circuit.
 
In December, 1994, an alleged shareholder of the Company instituted an action in
the Supreme Court of the State and County of New York which purports to be
brought derivatively on behalf and for the benefit of the Company against the
directors of the Company for breach of fiduciary duty, gross mismanagement and
waste of corporate assets in connection with the development and marketing of
Felbatol. The complaint, which seeks unspecified compensatory and punitive
damages, was ordered dismissed by the Supreme Court. Plaintiff has noticed an
appeal to the Appellate Division, First Department.
 
A pharmaceutical product liability class action (Valentino) was filed against
the Company in August, 1994, in the United States District Court, Northern
District of California. The complaint, which was amended in early 1995, purports
to be on behalf of all persons who started using Felbatol prior to August, 1994.
The complaint alleges that the Company is liable for strict product liability,
negligence, breach of express and implied warranty, negligent infliction of
emotional distress and negligent misrepresentation related to side effects of
Felbatol. The complaint seeks unspecified compensatory and punitive damages and
injunctive relief. A second product liability class action seeking substantially
similar relief (Bryan) was filed against the Company in the United States
District Court for the Eastern District of Pennsylvania for injuries allegedly
suffered as a result of using Felbatol, and has been transferred and
consolidated with the action in the Northern District of California.
 
In addition to these two class actions, 48 individual product liability actions
relating to Felbatol were filed against the Company. While 29 have been settled
and/or dismissed, 19 of these individual actions remain unresolved. Damages are
specified in 10 of these remaining actions in amounts ranging from $100,000 to
$169,000,000. In the aggregate, the complaints in these actions seek $35,000,000
in compensatory damages and $169,000,000 in punitive damages. In the other
unresolved individual actions, the damages sought are unspecified.
 
The District Court certified the Valentino action as a class action on March 15,
1995. Following interlocutory appeal, on November 5, 1996 the United States
Court of Appeals for the Ninth Circuit vacated and remanded the Valentino class
certification to the District Court, thus decertifying the class. Thereafter,
the parties reached a negotiated settlement of all the individual claims
asserted in the Valentino and Bryan actions, as well as all other
Felbatol-related claims which had been asserted by counsel for the Valentino and
Bryan plaintiffs, whether or not filed as actions. On May 27, 1997 the District
Court, on consent of the class plaintiffs, granted the Company's motion (1) to
dismiss, with prejudice, all claims asserted in the Valentino and Bryan
complaints and (2) to dismiss, without prejudice, all class action claims
averred therein. Payments under this settlement were covered primarily by the
Company's product liability insurance, with the balance covered by reserves
provided in prior years for one-time charges.
 
The Company has product liability insurance in the amount of $88,000,000 for
claims made in the year ended March 31, 1995 and has obtained comparable limits
of insurance coverage for claims made in the fiscal years ending March 31, 1996,
March 31, 1997 and March 31, 1998, with certain exceptions relating to the
nature of the claimed injury. These amounts of product liability insurance will
be reduced in some of the fiscal years by payments made for the aforementioned
negotiated settlement.
                                                                              29

<PAGE>
While the Company believes that its product liability insurance would cover
punitive damages judgments, its insurance carriers have neither confirmed nor
denied this belief. In the law of certain states there is an expressed public
policy against the enforceability of insurance covering punitive damages. The
amounts to be paid by the Company in settlement of the Valentino and Bryan cases
were in the nature of compensation only, and did not include any allowance for
dismissal of the plaintiffs' punitive damages allegations. The Company's
principal product liability insurance carriers have confirmed their coverage of
the compensatory claims asserted in Valentino and Bryan and have expressly
approved this settlement. The Company does not believe that they would either
disclaim coverage or oppose any potential settlements or judgments in the
remaining unresolved Felbatol-related actions.
 
The Company, along with numerous other drug manufacturers, wholesalers and
suppliers, was named in a series of class action suits the first of which was
filed in August, 1994 in the California Superior Court, San Francisco County,
brought on behalf of all California independent retail pharmacists who have
purchased any brand name prescription drugs since August, 1989. The complaint
alleged that the defendants, including the Company, entered into a conspiracy to
fix prices for brand-name prescription drugs and gave lower prices to certain
favored purchasers while the alleged favored prices were denied to the
plaintiffs. Plaintiffs are seeking injunctive relief and unspecified trebled
compensatory damages, restitution of unspecified amounts by which defendants are
alleged to be unjustly enriched and litigation costs, interest and attorney's
fees. Class certification of the price-fixing conspiracy claims was granted by
order dated June 23, 1995 for a class of independent retail pharmacists and
small chains with ten or fewer California locations. An individual action
brought by two mid-size chain pharmacies was subsequently coordinated with the
consolidated class action as an add-on case asserting virtually identical claims
and demands for relief. Plaintiffs in that action amended their complaint to
seek class certification which has not been granted.
 
The Company, along with numerous other drug manufacturers, has been named in a
class action suit filed in July, 1994 in California Superior Court, County of
San Francisco, brought on behalf of a class of California consumers who
purchased drugs from independent retail pharmacies alleging that certain drug
manufacturers and wholesalers and suppliers, including the Company, conspired to
fix prices for brand-name prescription drugs that were sold to California
independent retail pharmacists. The complaint seeks unspecified trebled
compensatory damages relating to overcharges, restitution of amounts by which
defendants were allegedly unjustly enriched and litigation costs, interest and
attorney's fees. By court order dated August 16, 1995, class certification was
granted to the extent of certifying a class of California consumers who
purchased drugs from independent retail pharmacies and pharmacy chains with ten
or fewer California locations. Two add-on putative class actions were thereafter
filed and coordinated with the consolidated class action, seeking to expand the
class to include consumers who purchased drugs from chain pharmacies with more
than ten locations in California. The expanded class has not been certified.
 
The Company, along with numerous other drug manufacturers, an Alabama drug
wholesaler and a national mail-order pharmacy, had initially been named in a
class action suit filed in May, 1994 in the Alabama Circuit Court, Greene
County, brought on behalf of a class of independent drug stores and pharmacies
and alleging that the named, and certain unnamed, defendants discriminated
against the plaintiffs in according more favorable prices to mail-order
pharmacies and large health care providers pursuant to an alleged conspiracy to
regulate or fix the price, or limit the quantity, of prescription drugs sold in
the State of Alabama in violation of Alabama law. By a First Amended Complaint
dated January 17, 1995, the three named plaintiffs retracted all class claims.
In subsequent, amended pleadings, plaintiffs have sought to reassert their class
action claims, alleging that the defendant drug manufacturers, wholesalers and
health maintenance organizations had engaged in a price-fixing conspiracy,
monopolization and attempted monopolization, fraud and civil conspiracy, in
violation of Alabama statutory and common law, and seeking a declaratory
judgment, statutory damages of $500 per instance of alleged injury, unspecified
actual and punitive damages, litigation costs and interest. Plaintiffs' motion
for class certification and defendants' motion to strike the class action
allegations are now pending before the court. The court granted defendants'
motion to change the venue of the action and the case has been transferred to
the Alabama Circuit Court for Tuscaloosa County.
 
The Company, along with numerous other drug manufacturers was named in a class
action lawsuit filed in January, 1996 in Alabama Circuit Court, Clarke County,
brought on behalf of a class of consumers who purchased brand-name prescription
drugs from independent retail pharmacies in jurisdictions alleged to grant
standing to "indirect purchasers" to bring suit upon price overcharge claims,
including Alabama, the District of Columbia, Kansas, Maine, Michigan, Minnesota,
Mississippi, New Mexico and Wisconsin. Plaintiffs allege that, in violation of
Alabama law, defendants conspired to sell brand-name prescription drugs to
mail-order pharmacies at lower prices than those charged to independent retail
drug pharmacies and that as a result, plaintiffs have paid supra-competitive
prices for brand-name prescription drugs. The case was certified for class
treatment by the state court but was then removed by defendants to federal court
and transferred to the Northern District of Illinois. The
30

<PAGE>
federal court vacated the class certification order of the state court. An
appeal by plaintiffs from the federal court's refusal to remand the case to
Alabama state court is pending. Plaintiffs seek unspecified compensatory and
punitive damages, an injunction, litigation costs and attorney's fees.
 
In October, 1992, a suit was filed by Unilever PLC against the Company's
subsidiary in the United Kingdom alleging patent infringement by certain of the
Company's diagnostic products. The complaint seeks injunctive relief and
unspecified compensatory damages.
 
The Company believes, based on opinion of counsel, it has good defenses to each
of the above-described legal actions and should prevail. The Company might at
some point in time elect to attempt to settle one or more of these cases. At
this stage, however, the Company does not know whether these cases, or any of
them, will be settled or at what amounts.
 
The Company is engaged in litigation with Tambrands Inc. in Supreme Court of the
State and County of New York arising out of a patent infringement and
misappropriation suit previously filed against them in the United States
District Court, Southern District of New York, by New Horizons Diagnostics
Corporation ("NHDC"), et al. The NHDC suit, which was settled and discontinued
in July 1996, asserted claims with respect to certain "gold sol" technology
(used in the Company's First Response and Answer home pregnancy and ovulation
predictor test kits) the Company had acquired from Tambrands pursuant to a
written purchase agreement in March 1990. The Company paid an immaterial amount
toward that settlement. In the pending Supreme Court action, Tambrands seeks
reimbursement from the Company of an unspecified portion of the amount paid by
Tambrands in settlement of the NHDC suit and for defense costs. The Company
believes it has good defenses, under the terms of the purchase agreement, to
Tambrands' claim.
 
Additional product liability claims related to Felbatol use have been threatened
against the Company. At this point, the Company cannot evaluate the merits of
such claims and does not know whether or to what extent legal actions will arise
from such claims and, therefore, is unable to predict the financial impact they
may have.
 
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
Quarterly net sales, gross margin, net earnings (loss) and earnings (loss) per
share are set forth in the following table (dollars in thousands, except per
share amounts).
 
<TABLE>
<CAPTION>
                                                       QUARTER ENDED
                                   -----------------------------------------------------
<S>                                <C>            <C>            <C>            <C>               <C>
1997                               JUNE 30        SEPT. 30       DEC. 31        MARCH 31          TOTAL YEAR
----                               -------        --------       -------        --------          ----------
  Net sales                        $169,889       $159,532       $163,020       $156,314           $648,755
  Gross margin                      107,426         97,224        104,766        95,682             405,098
  Net earnings                        9,260          5,601         10,514         1,381              26,756
  Earnings per share                    .20            .12            .23           .03                 .58
1996
----
  Net sales                        $177,037       $154,810       $162,004       $165,089           $658,940
  Gross margin                      114,645         95,098        103,143        99,834             412,720
  Net earnings (loss)                   861         (4,524)        10,278           935               7,550
  Earnings (loss) per share             .02           (.10)           .22           .02                 .16
</TABLE>
 
The quarter ended June 30, 1995 includes one-time charges to pre-tax earnings of
$20,100 related to the closure of the Trenton condom manufacturing facility.
 
The quarter ended September 30, 1995 includes one-time charges to pre-tax
earnings of $16,500 consisting of $10,200 for restructuring and $6,300 related
to the consolidation of two Canadian operations.
 
The quarter ended March 31, 1996 includes one-time charges to pre-tax earnings
of $5,400 related to the closure of the Trenton condom manufacturing plant
($3,000) and a net adjustment of the prior year one-time charges for Felbatol
(an additional $8,200) and for Organidin (a reduction of $5,800). Also included
in the quarter is an approximate $2,400 charge related to a write-off of the
carrying value of a discontinued product.
 
                                                                              31

<PAGE>
INDEPENDENT AUDITORS' REPORT
 
  KPMG Peat Marwick LLP               CERTIFIED PUBLIC ACCOUNTANTS
                                      345 Park Avenue
                                      New York, NY 10154
 
The Board of Directors and Stockholders
Carter-Wallace, Inc.:
 
We have audited the accompanying consolidated balance sheets of Carter-Wallace,
Inc. and subsidiaries as of March 31, 1997 and 1996 and the related consolidated
statements of earnings and retained earnings and cash flows for each of the
years in the three-year period ended March 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carter-Wallace, Inc.
and subsidiaries as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
 

                                            KPMG Peat Marwick LLP


May 27, 1997
 
32

<PAGE>
Carter-Wallace, Inc. and Subsidiaries
 
BOARD OF DIRECTORS
 
Henry H. Hoyt, Jr.
Chairman and Chief Executive Officer
 
Ralph Levine
President and Chief Operating Officer
 
Paul A. Veteri
Executive Vice President, Finance and Chief Financial Officer
 
David M. Baldwin
Chairman, David M. Baldwin Realty Company, Inc.
 
Daniel J. Black
Consultant to the Company
 
Dr. Richard L. Cruess
Professor of Surgery, Center for Medical Education,
McGill University
Montreal, Quebec, Canada
 
Suzanne H. Garcia
Owner, La Tierra Beneficiaries (real estate development)
and Santa Fe Ranch
 
Scott C. Hoyt
Vice President, New Products
Carter Products Division of the Company
 
Herbert M. Rinaldi
Of Counsel
Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein
 
SCIENTIFIC ADVISORY BOARD
 
Joseph S. Harun, M.D., Chairman
Former Vice President, Medical and Scientific Affairs
Carter-Wallace, Inc.
 
Paul Calabresi, M.D.
Professor of Medicine and Chairman Emeritus,
Department of Medicine
Brown University
Providence, RI
 
Robert E. Canfield, M.D.
Irving Professor of Medicine
Columbia University, College of Physicians and Surgeons
New York, NY
 
Barton F. Haynes, M.D.
Chairman, Department of Medicine
Duke University Medical Center
Durham, NC
 
Noel Rose, M.D., Ph.D.
Professor of Pathology, Molecular Microbiology and Immunology
Director of Immunology
Johns Hopkins University, Schools of Medicine and Public Health
Baltimore, MD
 
Morton K. Schwartz, Ph.D.
Chairman, Department of Clinical Chemistry
Memorial Sloan Kettering Cancer Center
New York, NY
 
EXECUTIVE OFFICERS
Henry H. Hoyt, Jr.
Chairman of the Board and Chief Executive Officer
Ralph Levine
President and Chief Operating Officer
Paul A. Veteri
Executive Vice President, Finance and Chief Financial Officer
T. Rosie Albright
Vice President, Consumer Products, U.S.
John Bridgen, Ph.D.
Vice President, Diagnostics, U.S.
Robert A. Cuthbert
Vice President, Pet Products, U.S.
Donald R. Daoust, Ph.D.
Vice President, Quality Control
Peter J. Griffin
Vice President and Controller
Adrian J. L. Huns
Vice President, International
Michael J. Kopec
Vice President, Manufacturing
Stephen R. Lang
Vice President, Secretary and General Counsel
Thomas B. Moorhead
Vice President, Human Resources
George H. Ohye
Vice President, Compliance and Regulatory
Herbert Sosman
Vice President, Pharmaceuticals, U.S.
C. Richard Stafford
Vice President, Corporate Development
James L. Wagar
Vice President and Treasurer
Mark Wertlieb
Vice President, Taxes
 
DIVISIONAL MANAGEMENT
 
T. Rosie Albright, President, Carter Products
John Bridgen, Ph.D., President, Wampole Laboratories
Robert A. Cuthbert, President, Lambert Kay
Adrian J. L. Huns, President, International
Michael J. Kopec, President, Manufacturing
Herbert Sosman,  President, Wallace Laboratories
 
PRINCIPAL SUBSIDIARIES
 
Howard E. Cocker, Managing Director, Carter-Wallace Limited (United Kingdom)
Francois Depoil, President, Laboratoires Fumouze S. A. (France)
Gregory J. Drohan, President, Carter-Horner Inc. (Canada)
Allan W. Nash, Managing Director, Carter-Wallace (Australia)
Pty. Limited
Jordi Pruja, Managing Director, Icart S.A. (Spain)
Lino Santambrogio, Managing Director, S.p.A. Italiana
Laboratori Bouty (Italy)
Francis Santiago, President, Carter Wallace, S. A. (Mexico)
 
                                                               Printed in U.S.A.

<PAGE>
                             CARTER-WALLACE, INC.
                          1345 Avenue of the Americas
                               New York, NY 10105