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Operational Review

Annual Report 1998

aINGENUITY AT WORK

ABB is a global $ 30 billion engineering and technology Group servingcustomers in electrical power generation, transmission and distribution;automation; oil, gas and petrochemicals; industrial products andcontracting; and financial services. The Group employs 200,000 peoplein over 100 countries.

ABB AB (Sweden) and ABB AG (Switzerland) are the two sole owners in equal parts of ABB Asea Brown

Boveri Ltd, Zurich (Switzerland), which is the holding company of the ABB Group with approximately

1,000 companies around the world. The two parent companies each provide a transparent vehicle for

investing in ABB as virtually all of their income and stockholders’ equity comes from their respective

50-percent shares of the ABB Group income and equity.

The complete ABB Group and Parent Companies Annual Report 1998 consists of this Operational Review

and a Financial Review. For a copy of the Financial Review, please contact ABB Investor Relations at the

address printed on the back of this report.

The ABB Group publishes its annual report in English, German and Swedish. The English-language version

is binding. It also issues quarterly financial results in April, July and October. All figures shown for the

ABB Group are in U.S. dollars. In addition, separate annnual reports are published by some ABB national

and business entities. ABB also publishes annual environmental and technology reports.

ABB AB VästeråsSweden

ABB AGBaden

Switzerland

ABB Asea Brown Boveri LtdZurich

Switzerland

ABB Group1,000 Companies

33 Business Areas Organized into7 Business Segments

ABB AB Shareholders

50% 50%

ABB AG Shareholders

Key figures

(US$ in millions, unless otherwise stated) 1998 1997 1996 1995

Orders received 31,462 34,803 33,884 35,163

Revenues 30,872 31,265 33,767 32,751

Operating earnings after depreciation 2,111 1,137 2,113 2,181

Income before taxes 1,865 853 1,901 2,003

Net income 1,305 572 1,233 1,315

Stockholders’ equity 5,959 5,283 5,875 5,243

Total assets 32,383 29,784 30,896 32,076

Capital expenditure for tangible fixed assets 865 1,093 1,168 1,171

Capital expenditure for acquisitions 274 302 333 315

Expenditure for research and development 2,463 2,657 2,638 2,627

Operating earnings after depreciation/revenues (%) 6.8 3.6 6.3 6.7

Return on capital employed (%) 21.1 12.2 19.9 21.8

Return on equity (%) 23.2 10.3 22.2 28.4

Number of employees 199,232 213,057 214,894 209,637

Net income per share

ABB AB A shares (in SEK) 5.52 2.32 4.42 4.99

ABB AB B shares (in SEK) 5.52 2.32 4.42 4.99

ABB AG bearer shares (in CHF) 103.30 46.80 85.40 90.20

ABB AG registered shares (in CHF) 20.66 9.36 17.08 18.04

Dividend per share1

ABB AB A shares (in SEK)2 2.18 2.10 1.75 1.60

ABB AB B shares (in SEK)2 2.18 2.10 1.75 1.60

ABB AG bearer shares (in CHF) 41.00 40.00 38.00 30.00

ABB AG registered shares (in CHF) 8.20 8.00 7.60 6.00

1 1998 proposed.2 Per-share data 1995 to 1996 have been adjusted for the 10 :1 stock split in ABB AB shares effective as of April 21, 1997.

Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share inAdtranz in 1998 except for the operating results up to the third quarter.

Revenues per Region 1998

Employees per Region 1998

EuropeThe AmericasAsiaMiddle East and Africa


54%

22%

14%

10%

64%

16%

14%

6%

ABB Asea Brown Boveri LtdInvestor RelationsP. O. Box 8131CH-8050 ZurichSwitzerland Phone +41 (0)1 317 7111Telefax +41 (0)1 311 9817

ABB Asea Brown Boveri LtdEnvironmental AffairsV. Esplanaden 9a 4 F1SE-35231 VäxjöSwedenPhone +46 (0)470 22 005Telefax +46 (0)470 22 002

ABB Asea Brown Boveri LtdCorporate CommunicationsP. O. Box 8131CH-8050 ZurichSwitzerland Phone +41 (0)1 317 7111Telefax +41 (0)1 311 7958

Internet addresshttp://www.abb.com

a

1

Key Figures Contents

Revenues per Segment 1998(US$ in millions)

94 95 96 97 98

10,000

20,000

30,000

40,000

Group Orders Received (US$ in millions)

94 95 96 97 98

10,000

20,000

30,000

40,000

Group Revenues(US$ in millions)

94 95 96 97 98

1,000

2,000

3,000

4,000

Group Operating Earnings(US$ in millions)

Power Generation

Power Transmission

Power Distribution

Automation

Oil, Gas and Petrochemicals

Products and Contracting

Financial Services

*50% of Adtranz –operating earnings only

291

374

179

521

175

419 403

–69*

2 Highlights of 1998

3 Letter from the Chairman

4 President’s Comments

8 ABB Group Organization

10 Power Generation

12 Power Transmission

14 Power Distribution

16 Automation

18 Oil, Gas and Petrochemicals

20 Products and Contracting

22 Financial Services

24 Research and Development

25 Preparing for the Millennium

26 Environment

27 Group Information and Financial Summary

28 ABB Board of Directors

29 Management

32 Consolidated Financial Statements

35 Country Statistics

36 ABB Group Statistical Data

Operating Earnings after Depreciationper Segment 1998(US$ in millions)

8,530

4,038

2,607

7,036

2,860

6,385

860

Orders Received per Segment 1998(US$ in millions)

8,260

4,428

2,672

7,015

3,324

6,464

860

As per September 1, 1998, ABB changed its Group management structure. Prior years’ business data hasbeen restated to reflect the reclassification of certain business areas. ABB Group data in total remainsunaffected.

The statements in this review relating to matters that are not historical facts are forward-looking statementsthat are not guarantees of future performance and involve risks and uncertainties, including but not limitedto: future global economic conditions; foreign exchange rates; regulatory approvals; market conditions; theactions of competitors and other factors beyond the control of the company.

2

Orders received in 1998 fell 10 percent to $ 31.5 bil-

lion. Adjusted for acquisitions and divestitures and

expressed in local currencies, orders were 1 percent

lower. Revenues were 1 percent lower at $ 30.1 bil-

lion, and 8 percent higher on a comparable scope

and in local currencies. Return on capital employed

was 21.1 percent.

Earnings were substantially higher in Power

Generation as the restructuring announced in 1997

improved costs and as revenues rose in the service

and retrofit business. Power Transmission and Power

Distribution also reported higher earnings, reflecting

higher invoicing in several deregulated markets and

productivity improvements.

Oil, Gas and Petrochemicals and Products and

Contracting also saw higher earnings. Earnings were

lower in Automation, due to cyclical shifts in de-

mand in some key industries, project overruns and

costs associated with addressing the Year 2000 issue.

Financial Services recorded its best year ever.

ABB took a number of significant steps in 1998 for

improved growth. ABB acquired Elsag Bailey to

position itself as a leader in the global industrial

automation market. It was the biggest acquisition in

ABB’s history. The company made a number of other

strategic acquisitions, and in early 1999 completed

the divestiture of its 50-percent share in Adtranz, its

rail transportation joint venture with DaimlerChrysler.

Also, the industrial segments were realigned to

better match changing market conditions and the re-

gional management layer was dissolved to adapt

to the globalized business environment and increase

efficency. The restructuring announced in late 1997

was more than 90 percent completed in 1998.

The downturn in Asia delayed large projects, espe-

cially in the area of steam power plants. This was

offset to some extent by projects in other emerging

markets, such as the $ 835-million oil-fired power

plant in Saudi Arabia, and in the U.S., where ABB

won a $ 600-million contract to build a major petro-

chemical facility in Port Arthur, Texas.

ABB’s Year 2000 Task Force continued to work with

customers and ABB companies to prepare informa-

tion technology systems for the Year 2000 transition.

The company continued to open new markets with

technology innovations in all of its core businesses.

ABB spent 8 percent of revenues, or $ 2.5 billion, on

research and development in 1998.

Highlights of 1998

3

Letter from the Chairman

Percy BarnevikChairman of the Board of Directors

Percy Barnevik

Chairman of the Board of Directors

ABB’s fundamental approach to business is to make

its customers more successful by providing them

with the strengths of a globalized company, deliv-

ered by local people who really understand what

our customers need. Combined with a commitment

to entrepreneurial values – speed, flexibility, front-

line management responsibility – ABB also aims to

move early, anticipating change instead of just

reacting to it. These are the keys to ABB’s long-term

growth and profitability.

ABB took several bold steps in 1998 in pursuit

of these goals. The company created new industrial

segments that will allow it to better meet the

challenges of fast-changing markets with good

growth potential. In one of those markets, industrial

automation, ABB made its biggest-ever acquisition,

Elsag Bailey Process Automation NV. The addition of

this global player reinforces ABB’s position as a

world leader in this high-growth and technology-

intense market. The divestiture of ABB’s 50-percent

share in the Adtranz rail joint venture with

DaimlerChrysler announced at the beginning of 1999

reconfirms the company’s strategy to lessen its

dependence on heavy asset businesses with mod-

erate growth rates.

ABB also dissolved the regional management level,

which had successfully fulfilled its mandate to firmly

establish ABB in all parts of the world, and rein-

forced its efforts to achieve global synergies. These

changes make the company faster and more efficient,

and they mean that ABB gets more out of its strong

decentralized organization.

ABB continued to build its head start in emerging

markets and in Central and Eastern Europe. In

the short-term, our strong position in Latin America

and in the Middle East and Africa has largely offset

the impact of the short-term downturn in Asia. In the

long-term, these markets will clearly be the world’s

primary drivers of economic growth, and ABB will

be there to support that process with clean, efficient

and cost-effective solutions. Just as important,

ABB and all of its stakeholders derive an enormous

benefit from the talent, creativity and enthusiasm

of its people in these regions. Despite the economic

turbulence of 1998, I am confident that this regional

growth strategy will continue to bring rewards well

into the next century.

While having a good strategy is important, success

is about execution – getting it done. That, in turn,

boils down to the people and here I would like to

thank, on behalf of the Board and shareholders,

ABB’s people for their energy and initiative, for

putting their customers first, for their dedication to

the company, its values and goals.

Even against the background of rapid change seen

in the 11 years since the creation of ABB, 1998

can safely be called a watershed year. But amid the

challenges, 1998 offered opportunities for companies

able to respond early to the shifting global business

environment.

Our response to the challenges of 1998 and beyond

is as simple as it is ground-breaking: ensuring

increased value-orientation through a rekindled focus

on our strengths – knowledge, technology and inno-

vation.

The knowledge focus and our moves to ensure

more market transparency underpinned the realign-

ment of ABB’s Group segment structure. That

move sharpens our business focus by better matching

the segments to their markets and underscores

ABB’s commitment to respond faster to the needs of

customers, employees and other stakeholders.

The acquisition of Elsag Bailey Process Automation

and the divestiture of our 50-percent share in the

Adtranz rail joint venture with DaimlerChrysler also

show that we intend to deliver on our promises to

expand into knowledge- and service-intensive areas

and to lessen our dependence on heavy asset-based

businesses.

“Ingenuity at Work”

On the cover of this report, in newspaper and tele-

vision advertising, and on billboards at the world’s

major airports, you can read ABB’s slogan: “Ingenuity

4

at Work.” The slogan stands for what we do, pro-

viding new and useful advances in technology and

engineering for sustainable economic growth. But

it also stands for how we do it, working in an atmo-

sphere of innovation, action-orientation and entre-

preneurship. An unbureaucratic and decentralized

culture encourages ABB people everywhere to

make the most of a strong local presence coupled

with global resources in technology, production

and financing.

ABB also stands for sustainability, for a sense of

corporate responsibility that serves the long-term

interest of the company and our owners, the

shareholders. We achieve that by helping build

the bedrock for economic development; by making

the environment a priority; by transferring know-

how and technology into the countries where

we are active; and through dialogue with those who

take an interest in what we do – governments,

communities, non-governmental organizations and

the media.

One of the major challenges facing global companies

is the attraction, retention and management of talent.

We rely on managers who understand the forces that

shape our global and local business environment –

and how to harness the enormous creative potential

of the people in our diversified, multicultural Group.

Putting that combined ingenuity to work is our

future.

And in the watershed year of 1998, our people

rose to the challenges before us. My colleagues on

President’s Comments

5

Göran LindahlPresident and Chief Executive Officer

the Group Executive Committee and I would like

to thank them for their tireless efforts in making this

difficult year a success.

Focus on research and technology

Building value through knowledge and applying

ingenuity also involves directly tapping the resources

of our 20,000 engineers and scientists. To ensure

that we can continue to add intelligence to products,

solutions and services, ABB spent $ 2.5 billion on

Research and Development (R&D) in 1998.

We link ABB’s R&D network closely to the global

hubs of technological innovation, with leading

universities, research institutions and other centers

of excellence. At the same time, 80 percent of our

R&D is carried out in ABB’s local businesses close

to our customers.

A large portion of our product portfolio has been

developed in the last five years, which helps explain

why ABB has become one of top three companies

in each of our core industries. Our dedication to

results-oriented R&D is, to my mind, truly “Ingenuity

at Work”. And new products are steadily intro-

duced as a result, also in 1998. We saw the first

commercial order for ABB’s Powerformer, a break-

through in generator technology that eliminates

the need for transformer equipment and saves as

much as 30 percent in total lifecycle cost of a

power plant. A new ABB application for silicon car-

bide will allow electrical equipment to carry

10 times more power than before. Our products to

monitor and control underwater oil and gas pipeline

systems can reduce offshore development costs by

30 percent. These and similar innovations form the

basis for future growth.

ABB and the environment

In ABB, we welcome the increasing concern for

the environment and growing commitment to sus-

tainable development. Industry has a vital role to

play through technology improvements and higher

efficiencies. By sharing our technological know-

how around the world, ABB is making a special

contribution to sustainability. Inside ABB, we are

implementing an environmental management system

according to the ISO 14001 standard.

Setting concrete goals is always the key. On the

issue of greenhouse gas reductions, I proposed a

major pilot project in an address to the World

Energy Congress in Houston last year. I feel we

should aim to cut carbon dioxide emissions by

1 gigaton, a quarter of the United Nations goal,

across the energy chain. This project, as we envisage

it, should be a cooperation between business,

government, multilateral institutions, universities

and other organizations.

To ensure constructive engagement, I work on

behalf of ABB and industry as one of eleven

commissioners in the World Commission on Dams,

whose goal it is to find a balanced way to assess

the impacts of large hydro dams.

6

Financial review

Volatile financial markets reflecting considerable

uncertainty in 1998 resulted in reduced customer

spending in some of ABB’s key markets. The

downturn in Asia that began in 1997 continued and

spread to Russia during 1998, as well as parts of

Latin America at the beginning of 1999.

As a result of these trends, overall demand fell during

the year and 1998 orders received were $ 31,462

million. Adjusted for acquisitions and divestitures, in

particular the sale of our stake in Adtranz, and

expressed in local currencies, orders decreased by

1 percent.

In addition, our earnings were burdened by costs

associated with the Year 2000 issue and by provisions

to cover a potential $ 84-million fine from the

European Commission in connection with an anti-

trust ruling in the European district heating business.

However, our early efforts to adjust our cost base

through restructuring and to expand into higher

growth industries through acquisitions, divestitures

began to yield significant benefits in 1998. As a

result, operating earnings increased 5 percent to

$ 2.1 billion (excluding the 1997 restructuring charge).

As a percent of revenues, personnel expenses

decreased to 29.4 percent from last year’s low level

of 30.2 percent and material expenses declined to

44.3 percent from 45.3 percent.

Our ongoing efforts to reduce working capital have

continued to benefit our net cash position which,

despite the significant cash outflows related to our

restructuring program, remained at $ 1.6 billion,

the same level as at year-end 1997. Return on equity

in 1998 was 23.2 percent (1997: 10.3 percent) and

return on capital employed was 21.1 percent (1997:

12.2 percent). Excluding the 1997 restructuring

charge from 1997 net income, 1998 return on equity

and return on capital employed increased.

Outlook for 1999 and beyond

The growth in Power Generation’s gas-fired

related activities will continue, particularly in North

America. Orders and earnings in 1999 are expected

to exceed the 1998 level. Orders and earnings

are also expected to increase in Power Transmission

and Power Distribution. Power Transmission ex-

pects steady, moderate growth in demand with an

increasing focus on systems and comprehensive

solutions. Power Distribution markets are expected

to show high growth in an increasingly deregu-

lated environment. In Products and Contracting,

demand for standardized low-voltage products is

expected to remain stable, but growth will be

above-average in service and in some specialized

contracting activities. Orders and earnings are ex-

pected to exceed the 1998 level.

Cyclical demand variations will continue for Auto-

mation during 1999. Overall, orders are expected to

increase and, excluding the effect of the Elsag Bailey

integration, earnings are expected to increase as

well. The integration of Elsag Bailey will somewhat

dilute earnings for the next two years. Demand for

7

Göran Lindahl

President and Chief Executive Officer

Oil, Gas and Petrochemicals is expected to grow at

a lower rate as a consequence of low oil prices. With

the segment’s focus on areas such as deepwater

and subsea activities, as well as upgrades and expan-

sion of refineries, orders are expected to exceed

and earnings to reach about the same level as 1998.

Financial Services will continue its expansion into

areas requiring financial structuring solutions often

combined with industrial projects, and operating

earnings are not expected to reach the same level as

in 1998.

In a difficult economic environment, orders and

revenues for ABB Group are expected to grow.

The 1999 net cash position will not reach the same

level as at the end of 1998, primarily because of

cash outlays for the Elsag Bailey acquisition.

Net income in 1999 is expected to exceed the level

of 1998.

ABB’s longer-term targets remain unchanged. The

Group’s strategic shift during the last two years will

continue with a clear focus on expanding in knowl-

edge- and service-based sectors as well as reducing

our dependence on heavy asset businesses. This

strategic shift will continue to result in a reduction of

the capital needed. Further improved efficiency in

our resource utilization will remain a priority. We

also expect continued improvement of key financial

ratios. Annual growth of at least 6 percent on

average over the business cycle, considerable reduc-

tion of working capital in relation to revenues and

an increase in net income margin from 4.2 percent in

1998 to the 6–7 percent level within 3 years remain

major objectives for the Group.

8

Renato Fassbind

Chief Financial Officer

Accounting

Controlling

Consolidation

Insurance

Mergers & Acquisitions

Risk Management

Real Estate

Reporting

Taxes and Finance

Executive Committee

Business Segment

Business Areas/Functions

Alexis Fries

Power Generation

Gas and Combi-Cycles

Steam Power Plants

Power Plant Systems

Nuclear Systems

Environmental Systems

Power Plant Service

Sune Karlsson

Power Transmission

Cables

High-Voltage Products and Substations

Power Lines

Power Systems

Power Transformers

T&D Service and Support

Senior Corporate Officers Markus Bayegan Group R&D

Tomas Ericsson Corporate Projects / Finance & Administration

Göran Lindahl

President and CEO

Audit

Corporate Communications

Environmental Affairs

Global Processes

International Consulting

Investor Relations

Legal Affairs

Management Resources

ABB Group Organization

9

Gorm Gundersen

Oil, Gas andPetrochemicals

Oil, Gas andPetrochemicals

Armin Meyer

Products andContracting

Contracting

Low-Voltage Productsand Systems

Air Handling Equipment

Service

Jan Roxendal

Financial Services

Treasury Centers

Leasing and Financing

Insurance

Structured Finance

Energy Ventures

Sune Karlsson

Power Distribution

Distribution Systems

Distribution Transformers

Medium-Voltage Equipment

Jörgen Centerman

Automation

Automation PowerProducts

Instrumentation andControl Products

Flexible Automation

Marine andTurbochargers

Metals and Minerals

Petroleum, Chemical andConsumer Industries

Pulp and Paper

Utilities

Executive Committee

From left to right:Alexis FriesSune KarlssonRenato FassbindGöran LindahlGorm GundersenJörgen CentermanArmin MeyerJan Roxendal

10

ABB continues to play an important role in

the challenging, fast-changing power genera-

tion market. Higher demand in the U.S. and

the Middle East helped offset the downturn in

Asia, where project delays reduced our order

intake. We continued to build market position

for our advanced gas turbine technology

around the world. The restructuring announced

in late 1997 is ahead of schedule, while we

continued to improve our project selection

process to secure our margins. As a result,

earnings improved substantially.

Technology is key

Customer requirements continued to shift in

response to ongoing privatization and deregu-

lation. In a more competitive environment,

our customers are looking for high fuel effi-

ciency and reliability, low emissions, and

full-scope suppliers who can deliver complete

projects anywhere in the world. That includes

financing, complete after-sales service, opera-

tion and maintenance, and cost-effective retro-

fit to get more out of existing assets.

Technology continued to play a key role in

our ability to meet these changing demands.

ABB won orders for several combined-cycle

power plants equipped with our sequential

combustion GT24/GT26 gas turbines. This

technology has proven especially attractive in

deregulating markets where its very high effi-

ciency and low emissions help customers

reduce costs while producing cleaner power.

Major orders in 1998 included plants in the

U.K., the U.S., Taiwan and Mexico, bringing to

50 the total number of GT24/GT26 turbines

ordered to date worldwide.

ABB also won the first order for its new

GTX100 gas turbine from a municipal utility in

Sweden. The GTX100 provides large turbine

efficiency and emission performance in the

low- to mid-output power range and is well

suited to the growing small-scale power mar-

ket. ABB also saw the first commercial order

for its new generator technology, called the

Powerformer, with an order for a district heat-

ing power plant. By eliminating the need

for step-up transformer equipment, the Power-

former decreases the total lifecycle cost of a

power plant.

Another market development is the growth

in distributed power, where small power plants

provide energy or heat to localized areas or

even individual factories and buildings. When

plants produce both electricity and heat

(Combined Heat and Power), they achieve

much higher efficiencies. These plants

Power Generation

“Technology is key

to delivering greater

value to our customers

and maintaining a com-

petitive edge.”

Alexis Fries, Power

Generation segment

head

1 2

11

Orders Received1, 2

(US$ in millions)

Operating Earnings1

(US$ in millions)

98 8,260

97 9,465

96 8,861

95 9,287

94 8,854

Revenues1

(US$ in millions)

98 8,530

97 7,646

96 8,561

95 8,903

94 7,756

98 291

97 105

96 112

95 324

94 297

can be an economically and environmentally

attractive option for our customers in deregu-

lated markets, and the U.S. has recently

announced a goal to double the use of such

plants. ABB is meeting this demand with a

modular turnkey design that includes remote

control systems, full service, and financing.

Emerging markets

Steam turbines and boilers are the main com-

ponents of coal- and oil-fired power plants

and coal is the primary fuel for power genera-

tion in much of Asia. As a result, the project

delays in Asia caused by financial uncertainty

have had a corresponding impact on our steam

power plant business. However, the outlook

shows continued demand in India and China,

where important domestic coal reserves will

be used. In 1998, orders in other parts of the

world have offset the Asian delays. Key among

those was the turnkey 1,100-megawatt oil-fired

Shoaiba steam power plant in Saudi Arabia.

Increasing service revenues is an important

strategic goal for ABB. To help achieve that

goal, we have as of 1999 created a global

business area dedicated solely to the service

needs of its customers. The six-year extension

of a major service contract at the Midland

Power Plant in the U.S. and a 10-year opera-

tion and maintenance contract at a large plant

in Argentina are examples of the business

opportunities that lie ahead in this important

sector.

Looking forward, we expect growth in the

demand for gas-fired power plants and for

smaller distributed power plants. Large power

plants will continue to be built in the emerging

markets to sustain continued industrialization,

although no major turnaround is expected in

Asia in 1999. Deregulation will further drive

growth in the service and revamp market,

especially in Europe and North America. ABB

has the technology, the people and the geo-

graphic scope to meet all of these demands

well into the future.

Business Areas in the Power Generation Segment

Orders Received 1998 1997(US$ in millions)

Gas and Combi-Cycles 3,134 2,917

Steam Power Plants 2,575 3,076

Power Plant Systems 1,602 2,127

Nuclear Systems 404 742

Environmental Systems 525 760

Power Plant Service (new in 1999) – –

Other(not assigned to specific Business Area) 80 93

Intra-Segment transactions – 60 – 250

Total 8,260 9,465

Segment Activities:

Gas turbine and combined-cycle power plants

Turnkey fossil-fuelled powerplants and components

Air pollution and control sys-tems

Clean coal systems

Combined heat and power,district heating

Hydro and diesel power plants

Complete service, mainte-nance and retrofit

Advanced light-water reactorsand fuel

1. GTX100 gas turbine 2. Lumut power station, Malaysia3. Midland heat and power plant, USA 4. Powerformer high-voltage generator

3 4

12

ABB reinforced its position as the world’s

leading power transmission company in 1998,

keeping up orders received and increasing

revenues and earnings in a very competitive

market. Ongoing deregulation led to higher

demand for turnkey system solutions, espe-

cially in the Americas, the Middle East and

Europe. The economic downturn in Asia

dampened growth but that was offset by order

growth in other regions. Continued improve-

ments in our cost structure also contributed to

our better results for the year, and the new

stand-alone segment is now focused on build-

ing its leading position.

Latin America continued to be one of the most

progressive regions for privatization and de-

regulation. ABB will link Brazil’s northern and

southern power grids and deliver a 1,000-mega-

watt power transmission system connecting

the electricity networks of Brazil and Argentina.

Sharing power makes better use of existing

resources and significantly improves overall

efficiency, a key cost factor in deregulated

markets. ABB is working with power transmis-

sion customers in Latin America to find ways

to transmit more power through existing lines.

In Europe, ABB is linking the electricity net-

works of Guernsey and Jersey Islands in the

English Channel to the European Grid via

France. ABB will supply high-voltage systems

and equipment for the planned High-Voltage

Direct Current (HVDC) power link between

Italy and Greece, the first electricity infrastruc-

ture project financed under the European

Union’s Trans European Networks (TENs) plan.

Thanks to our strong local presence in the

Middle East and Africa, we won several orders

there in 1998, including a turnkey 255-kilo-

meter transmission line joining northern and

central Saudi Arabia and a 220-kilovolt gas-

insulated substation, also in Saudi Arabia. ABB

is completing a regional grid to link several

countries in southern Africa, and is building a

large air-insulated substation at a power plant

in Kenya.

Some orders in Asia have been postponed

because of financial uncertainty, but ABB still

won large substation contracts in Malaysia

and China. ABB continued to position itself

for future growth in the region.

Technology leadership

As always, technology played a key role in our

performance in 1998. For example, we sup-

plied several projects with our advanced high-

voltage cable technology using cross-linked

Power Transmission

“We will meet these

challenges . . . develop-

ing innovative ways to

tap the many new busi-

ness opportunities

emerging around the

world.”

Sune Karlsson, Power

Transmission segment

head

1 2

13

polyethylene (XLPE) insulation. ABB cables

are key to our new Powerformer technology,

allowing this radically new generator to pro-

duce much higher voltages than conventional

technology.

ABB continued to build its new HVDC Light

technology, with projects in Australia and

Denmark. HVDC Light allows interconnection

of grids and also allows small-scale power

generation, such as wind power, to be con-

nected to large power networks, making

both applications more economically feasible.

ABB has also developed a new version

of its static var compensation (SVC) system,

called SVC Light, that increases power

quality.

Service and retrofit is another growth area as

cost-conscious customers invest more in main-

taining and upgrading existing systems. ABB’s

innovative Plug and Switch System (PASS®)

allows customers to easily retrofit or install

new substations using modular components

that simply plug into existing systems. The

most important order for a PASS system in

1998 was for a substation in Brisbane,

Australia. We also help customers become

more competitive by upgrading products or

providing new grid management concepts.

Cost management is another key to profitabil-

ity. ABB has standardized designs, products

and manufacturing processes at 27 power

transformer production plants worldwide. The

economies of scale achieved will reduce costs

and boost quality even further.

Deregulation and privatization will continue

and in many cases accelerate. Competitive

pressures will grow for our customers and for

us. Demand for turnkey solutions, service

and retrofit and more technology-rich solutions

will continue to rise. ABB will meet these

challenges through cost and technology lead-

ership, and by developing innovative ways

to tap the many new business opportunities

emerging around the world.

1. Transformer manufacturing, China 2. GIS substation, Taiwan3. HVDC Light, Sweden 4. High-voltage equipment service, Switzerland5. 400 kV XLPE cables, Germany

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)

98 4,428

97 4,354

96 3,873

95 4,393

94 4,405

98 4,038

97 3,739

96 4,470

95 4,292

94 3,961

98 374

97 316

96 364

95 366

94 396

Business Areas in the Power Transmission Segment


Cables 525 752

High-Voltage Products and Substations 1,154 1,409

Power Lines 719 864

Power Systems 845 381

Power Transformers 1,057 1,079

T & D Service and Support 295 119



Total 4,428 4,354

Segment Activities:

Products and solutions forpower cables

Air- and gas-insulatedswitchgear products, solutionsand high-current systems

Products and solutions foroverhead lines

High-voltage direct currentsystems, reactive power com-pensation and capacitors

Power transformers, reactors,components and insulatingmaterial.

Retrofit, maintenance,operations, consultancy andproject development

4 5

14

The newly created Power Distribution Segment

improved orders received and earnings in

1998. Demand was stable or higher in most

regions, with the exception of Asia, where

investment in infrastructure remains low.

However, growth opportunities are being cre-

ated worldwide by ongoing deregulation and

privatization and ABB is well positioned to

expand its share of this dynamic market. By

creating a separate Power Distribution seg-

ment, ABB intends to take full advantage of

these growth opportunities now and in the

future.

Power Distribution focuses on the products,

solutions and services to distribute electricity

locally to end users. Our service offering

also includes business management software

to operate electricity trading systems. Our

customers are the utilities that “manage the

wires,” commercial institutions and industrial

customers, such as chemical, automotive

and pulp and paper companies. They are local

communities, building contractors, big and

small customers, global and local.

But despite their differences, they want the

same things – innovative technology with

more functionality and built-in intelligence,

flexible turnkey solutions, global quality stan-

dards, and a competitive cost. ABB strives to

meet these demands quickly in all of its

markets. For example, ABB won a long-term

contract to supply electricity to the London

underground, a traffic system that carries more

than 700 million passengers a year. In the

Cayman Islands, ABB has entered into a seven-

year strategic alliance with the local utility to

expand the local electricity distribution system,

including the design and installation of sub-

stations and related systems. In Mexico, ABB

is delivering a distribution substation to the

Mexican Petroleum Company (PEMEX) on

a turnkey basis at its Dos Bocas sea terminal

on the Gulf of Mexico.

Deregulation in the power sector means allow-

ing consumers to choose from whom they

want to buy electricity, and under what condi-

tions. That opens opportunities for power

companies to trade electricity like a commod-

ity in an open market. ABB is at the forefront

of this development, supplying the business

management software that allows power gen-

erators to feed data on electricity availability

and price into a central exchange system.

Power consumers can then choose from whom

they wish to purchase their electricity. ABB

has delivered electricity trading systems to the

U.S. state of California as well as to customers

Power Distribution

“We work together with

our customers to help

them meet the chal-

lenges of fast-changing

privatized and deregu-

lated markets.”

Sune Karlsson,

Power Distribution

segment head

1 2

15

in Singapore and Australia, and played a key

role in the system recently launched in the

U.K. It’s a market with good growth potential.

As competition increases, power grid cus-

tomers need precise information about how

cost-effectively their networks are functioning.

They need to find and correct problems

quickly, reliably and at competitive costs. They

need software that integrates operational in-

formation into a management system that cov-

ers all aspects of their business, from outage

control to billing. At the same time, more cus-

tomers are outsourcing operations such as

engineering, construction, service and retrofit.

As a result, when they place an order, they

want suppliers who can put together a com-

plete package, including financing and

business consulting services. The creation of

new business areas called T&D Service and

Support (part of the Power Transmission seg-

ment but serving both the Transmission and

Distribution segments) and Distribution

Systems is aimed at tapping these new oppor-

tunities.

Looking ahead, ABB is determined to expand

its position in the electrical distribution busi-

ness. We offer the wide range of system solu-

tions that competitive customers are looking

1. Single-phase distribution transformers, USA 2. New medium-voltage switchboard3. Power distribution, London Underground, UK 4. Rural electrification, Americas

for, both in new equipment and upgrading and

servicing existing installations. We have

economies of scale in technology and product

development that allow us to expand that

product line and bring more innovative prod-

ucts to market quickly. Our global presence

means we can deliver products, solutions and

services to both global and local customers,

no matter where they are.

Most importantly, we work together with our

customers to help them meet the challenges of

fast-changing privatized and deregulated mar-

kets. We can help them anticipate change and

shape their new roles in the markets of the

future.

Business Areas in the Power Distribution Segment

Orders Received1 1998 1997(US$ in millions)

Distribution Systems 753 716

Distribution Transformers 845 887

Medium-Voltage Equipment 1,154 1,141

Other(not assigned to specific Business Area) – –


Total 2,672 2,664

Segment Activities:

Solutions and systems fordistributing energy to rural,urban and industrial cus-tomers as well as for airportinstallations

Distribution transformers

Products for distributionof electrical energy includingmedium-voltage switch-boards, apparatus and pre-fabricated factoryassemblies

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)

98 2,672

97 2,664

96 2,932

95 2,933

94 1,933

98 2,607

97 2,647

96 2,847

95 2,419

94 1,882

98 179

97 159

96 163

95 107

94 82

3 4

16

Automation

With the creation of a new Automation

Segment and the acquisition of Elsag Bailey,

ABB is now signalling its ambition to further

strengthen its leading global position in this

growth business.

In Automation we serve customers in almost

every industrial sector and country in the

world. Our results in 1998 reflect this mix of

business cycles and regional development.

Demand was lower in many industries as com-

modity prices fell, but was stable or higher in

oil, gas and petrochemicals and in the marine

sector. Demand was mixed in Europe and

lower in the Americas. Industrial investments

in Asia stabilized at a low level. Overall, orders

and earnings were lower.

Managing in real time

The backbone of our process automation

business is the Advant® OCS (Open Control

System). Advant monitors and controls a

wide range of industrial processes, such as the

milling of pulp and paper, steel or textiles;

oil, gas and chemical refining; food processing;

manufacturing of products from pharma-

ceuticals to automobiles; and the production,

transmission and distribution of electricity.

Advant also allows customers to integrate their

production systems with their enterprise,

resource and planning (ERP) systems, provid-

ing a link to ordering, billing and shipping. By

linking the Advant OCS with ABB instrumenta-

tion and measurement systems and a full range

of drives – devices that control the speed of

industrial motors – customers can manage the

entire manufacturing and business process in

real time, thereby improving productivity and

quality.

We demonstrated our full system capabilities

in 1998 with an order to deliver automation

platforms and drive systems to the world’s

largest paper mill, the US$ 1 billion Asia Pulp

and Paper facility near Shanghai, China.

The delivery includes a total of more than 150

operator and process stations, electrification

and drives for three paper machines, and

an ABB Smart AdvisorTM system that monitors

the paper-making process – at 4,500 different

points in one paper machine – and automati-

cally advises machine operators of potential

problems and how to correct them.

ABB is the world’s largest supplier of AC

(alternating current) drives, which control the

speed of electrical motors. We continued to

introduce new products in 1998 to help cus-

tomers improve energy efficiency and reduce

operating costs. There are significant growth

“Economies of scale

from our broad product

range and global scope

will mean greater value

to our customers and

shareholders.”

Jörgen Centerman,

Automation segment

head

1 2

17

opportunities, especially in the microdrives

used to control small motors, which are used

almost universally in industry to run pumps

and fans. Some 30 million small motors

are sold each year without any form of speed

control. ABB has targeted that market with

a full line of microdrives that make small

motor speed control economically more attrac-

tive.

ABB is also the world’s largest supplier of

flexible automation and industrial robotics

systems. With an established presence in the

global automotive market, ABB has now

broadened its customer base into the food

processing and pharmaceutical industries.

New products in 1998 supported that expan-

sion. One is the FlexPicker robot used in

so-called “pick-and-place” processes, such as

sorting and packaging foods, medical or

hygiene products. Operating at high speed

and programmable to handle a variety of dif-

ferent products, the FlexPicker provides cus-

tomers with huge improvements in flexibility,

operating costs and plant safety.

The acquisition of Elsag Bailey was the biggest

in ABB’s history and positions the company as

the world leader in every major market. ABB

also acquired U.K.-based August Systems, and

Alfa Laval Automation, headquartered in

Sweden.

A major focus of our new Automation segment

will be to gain the full economies of scale

offered by our broad product range and our

global scope. Synergies in product develop-

ment, supply management, production and

distribution will allow us to expand our tech-

nology lead, manage costs even better, deliver

higher quality and, in the end, greater value

to our customers and our shareholders.

1. Azipod marine propulsion system 2. Alpha Stars meter installation, USA3. Panipat refinery, India 4. Interstand dimension control system, Sweden5. FlexPicker pick and place robot

Orders Received1

(US$ in millions)

98 7,015

97 7,338

96 7,482

95 7,469

94 6,200

Revenues1

(US$ in millions)

98 7,036

97 7,344

96 7,550

95 6,987

94 5,901

Operating Earnings1

(US$ in millions)

98 521

97 646

96 674

95 496

94 382

Business Areas in the Automation Segment


Automation Power Products 1,738 1,792

Instrumentation and Control Products 1,265 1,304

Flexible Automation 1,365 1,437

Marine and Turbochargers 663 582

Metals and Minerals 603 689

Petroleum, Chemical andConsumer Industries 314 392

Pulp and Paper 471 605

Utilities 1,150 1,154



Total 7,015 7,338

Segment Activities:

Automation power productssuch as drives, motors andpower electronics

Instrumentation and controlproducts such as fielddevices for sensing, control-ling and actuating; analyzers;metering equipment; controland information systems

Flexible automation androbotics products andsystems

Diesel engine superchargers

Application expertise, projectmanagement, and integratedsystem deliveries to marketssuch as electrical and waterutilities, the petrochemical,chemical and consumerindustries, metals and min-ing, pulp and paper, marineand automotive

53 4

18

ABB’s Oil, Gas and Petrochemicals business

enjoyed another year of good growth in 1998.

We saw double-digit growth in operating

earnings, and a significant increase in the order

backlog. We achieved this despite a slow-

down in overall investment by many of our

customers in the face of falling oil prices.

Our technology leadership played a key role

in this result.

For example, ABB has long focused on deep-

water exploration and production technolo-

gies. These make it possible to develop oil and

gas resources in even deeper water than

previously possible. Because of the long-term

nature of many of these developments, they

are less vulnerable to short-term fluctuations in

oil prices.

In the first half of 1999, ABB will complete the

installation of the world’s first commercial

subsea separation and injection system, called

SUBSIS. Located in the North Sea, about 60

kilometers (37 miles) west of Bergen, Norway,

and at a depth of 340 meters (1,130 feet), the

system will separate water from the oil stream,

clean it, and re-inject it into the well to provide

additional pressure used to pump more oil.

By moving the separation plant from a platform

to the seabed, ABB’s solution reduces costs,

improves safety, and enhances oil recovery.

ABB also launched enhancements to its MS-

700TM well-head family to meet the extreme

performance requirements of deep and ultra-

deep waters down to 3,000 meters (9,750 feet).

We are further supporting offshore well

development with a new line of control buoys,

fully equipped with communications systems

to control subsea systems remotely and to

relay operating information back to a central

control base.

On the downstream side – where oil and gas

are refined and processed into other products

– ABB won a US$ 600-million order from a

joint venture between German chemicals com-

pany BASF and Belgian oil and petrochemical

group Petrofina to build the world’s largest

“cracker,” a catalytic chemical reactor used, in

this case, to produce ethylene and propylene –

almost two billion pounds of each per year.

Other large petrochemicals orders included

a 700,000-metric-ton per year ethylene plant

in Saudi Arabia. ABB is also building its

position as a supplier of process technology

to producers of reformulated gasoline, used

to reduce harmful exhaust emissions. Through

a joint venture with Chemical Research &

Licensing Company of the U.S., called Catalytic


“We intend to build our

technology leadership

and further strengthen

our position in this

dynamic and high-

potential market.”

Gorm Gundersen,

Oil, Gas and Petro-

chemicals segment

head

1 2 3

19

Distillation Technologies, ABB is supplying

technologies to a gasoline desulfurization

unit in Louisiana and a number of gasoline

refineries in Mexico operated by PEMEX, the

state-owned oil company.

Building partnerships

Strategic partnerships are an important way to

ensure growth in this technology-intensive

global business. ABB established other long-

term partnerships to develop, license and

market various petrochemical processes with

U.S. oil and gas company Exxon, the Royal

Dutch/Shell Group, and Criterion Catalyst Co.

of the U.S. We also entered into a long-term

partnership with Russian oil and gas group

Gazprom. The agreement covers the manufac-

ture of systems and equipment in natural gas

exploration, recovery, oil and gas processing,

transport and storage, including technology

transfer. It also involves the joint development

of oil and gas projects, both in Russia and in

other countries, such as the US$ 170-million

order to build compressor stations in Poland

for the Yamal gas pipeline running from Russia

to Germany.

ABB aims to meet its growth targets in the oil,

gas and petrochemicals business through a

combination of organic growth and targeted

acquisitions. ABB has made a number of

strategic acquisitions in this area in recent

years and continued the trend in 1998 with the

purchase of the deep water division of U.S.-

based Han Padron Associates, a world leader

in floating systems technology for deep water.

In 1999, ABB expects overall growth in the oil,

gas and petrochemicals markets to slow from

very high levels as customers continue to adjust

to oil prices near 25-year lows. However,

significant growth opportunities remain, espe-

cially where our technologies can help cus-

tomers improve their profitability. We intend to

build our technology leadership and further

strengthen our position in this dynamic and

high-potential market.

1. High integrity pipeline protection system 2. Horizontal Tree, UK3. Ethylene plant, Indonesia 4. Subsea separation and injection system5. Petrochemical refinery, China

Business Areas in the Oil, Gas and Petrochemicals Segment


Oil, Gas and Petrochemicals 3,324 3,126


Intra-Segment transactions – –

Total 3,324 3,126

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)

98 3,324

97 3,126

96 2,596

95 1,952

94 1,553

98 2,860

97 2,396

96 2,045

95 1,470

94 1,233

98 175

97 123

96 114

95 50

94 15

Segment Activities:

Refineries and petrochemical plants

Subsea production systems

Floating production systems

Pressure-containing equipment

Maintenance and modification of offshore andonshore facilities

4 5

20

ABB’s Products and Contracting Segment de-

signs, manufactures and installs a wide range

of electrical and mechanical products and

systems used in industrial and commercial

facilities, from light switches, push buttons,

heating and air conditioning to self-regulating

indoor environmental controls, security and

energy management systems, even facility

management. Our contracting activities focus

on buildings, industrial plants and certain

outdoor installations, such as telecommunica-

tions networks and airports. In addition, we

provide full service, maintenance and repair

programs to customers in most industrial

sectors. We work very closely together with

our customers – on any given day, an average

of more than 20,000 of our people are on site

with our customers.

We improved our results in 1998 in a mixed

market. Although growth slowed somewhat in

some of our products and contracting markets,

overall demand was higher than the year

before in Western Europe, the Middle East and

Africa. In the Americas, demand was slightly

lower. Orders were also down in Asia, in line

with the economic situation in the region.

Contracting is often a very local business

with many relatively small local or regional

players. That opens an opportunity for ABB,

with both a strong local presence and access

to a very wide product scope and global

economies of scale. For example, we com-

pleted work on the new Gardermoen airport

in Oslo, Norway, in 1998, where we were

responsible for supplying and installing the

electrical and ventilation systems, lighting,

the control system for baggage handling, secu-

rity and a waste disposal system. ABB is also

handling the airport’s longer-term service and

maintenance.

Intelligent systems

In their highly competitive businesses, our cus-

tomers expect suppliers to deliver products

that can do more than ever, with built-in intel-

ligence, self-regulating, extremely energy

efficient. That makes the product side of this

business technology intensive. ABB met this

challenge in 1998 and consolidated its position

as a market leader with the launch of a num-

ber of new products, such as INSUM, an intel-

ligent motor protection, monitoring and

communication system. INSUM uses advanced

electronic sensoring and feedback systems to

control power distribution to industrial motors,

ensuring they run at optimal efficiency and

minimizing downtime. Customers for this and

similar systems in 1998 included a pulp and


1 2

“We strive to offer

superior value to our

customers and a

challenging and inno-

vative environment for

our people.”

Armin Meyer, Products

and Contracting

segment head

21

paper mill in France and a coal-fired power

plant near Leipzig, Germany.

ABB has also developed a high-performance

fan for mines and tunnels. The fan blades are

made of a special high-strength material that

can withstand the very high speeds required to

maintain efficient air circulation in such

demanding environments. The first significant

orders were taken in the U.K. and Singapore.

ABB has pioneered the Full Service partner-

ship concept, a long-term agreement in which

ABB takes over design, execution and manage-

ment of all of our customer’s service and

maintenance activities, often including supply

of new equipment. In fact, the goal of these

partnerships is to significantly improve the effi-

ciency and productivity of our customers’

processes. ABB now has 2,500 service experts

working with more than 100 major full-service

customers in different industries around the

world. New customers include Krems Chemie

in Austria and Hoechst in Germany. Krems

Chemie is one of Austria’s biggest chemical

companies, specialized in the production of

natural and artificial resins. Krems transferred

its entire service team into a new 50-50 joint

venture company with ABB, using ABB man-

agement and service expertise.

1. Electric overload relay 2. Oslo (Gardermoen) Airport, Norway3. Full service partnership with Hoechst, Germany 4. Natural History Museum, UK

Investments were made to enhance our opera-

tions in key areas. We set up a fully automated

line for fan manufacturing in Finland and

started a production line for air handling units

in Taiwan. The strategy to expand the global

network of service workshops continues, with

acquisitions during 1998 in Australia, Thailand

and Zimbabwe.

By taking advantage of our global sales and

distribution network, strong local presence in

key markets and our technological leader-

ship, we strive to offer superior value to our

customers and a challenging and innovative

work environment for our people.

Business Areas in the Products and Contracting Segment

Orders Received1 1998 1997(US$ in millions)

Contracting 3,023 3,059

Low-Voltage Products and Systems 2,131 2,142

Air Handling Equipment 514 545

Service 777 751



Total 6,464 6,488

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)

98 6,464

97 6,488

96 7,069

95 6,949

94 6,082

98 6,385

97 6,381

96 6,969

95 6,861

94 5,903

98 419

97 399

96 370

95 422

94 263

Segment Activities:

Design, installation andmaintenance of electricaland ventilation systems

Complete infrastructuresystems for industrial andcommercial buildings

Low-voltage products andsystems to protect, switchand control. Electrical instal-lation material

Industrial fans and ventilationproducts and systems

Service, repair of industrialequipment and maintenancemanagement

3 4

22

The volatility of world financial markets in

1998 provided both challenges and opportuni-

ties for ABB’s Financial Services segment,

whose business focuses on supporting sales

and providing financing and risk management

tools for the Group’s industrial segments. On

balance, the segment was able to improve

its results and reported a record income before

taxes.

The challenges resulted from the financial

turmoil in Southeast Asia and Russia and con-

cerns that it could spread to other emerging

markets. That delayed investments in some

large infrastructure projects as customers

adapted to the financial uncertainty. It also

made it harder to find partners willing to

share financial risks.

New Opportunities

At the same time, it opened opportunities for

suppliers like ABB who can show their cus-

tomers how to overcome the financial hurdles.

Continued privatization and deregulation

and the corresponding growth of independent

power producers (IPPs) increased demand for

innovative financing even further. ABB

Financial Services met these challenges and

helped secure a number of large projects

in 1998, both in emerging and mature markets.

The biggest single order of the year for ABB

was the 1,100-megawatt oil-fired power

plant at Shoaiba, Saudi Arabia, valued at more

than US$ 800 million. ABB structured the

13-year financing package, which was the

biggest financing of its type ever done in

the Saudi electricity sector. The package

included a deferred payment scheme for the

customer.

ABB also arranged flexible financing for the

288-megawatt gas-fired Azito power plant in

Ivory Coast, Africa. Our financing partners

included the International Finance Corporation

of the U.S., the U.K.-based Commonwealth

Development Corporation, the World Bank’s

International Development Agency, the African

Development Bank, bi-lateral lenders in the

Netherlands and Germany, and a commercial

lender from France.

ABB arranged or contributed to the financing

of a number of major projects in Latin America

in 1998. In Mexico, ABB was one of the first

companies to use a bond issued in the U.S. for

a project in an emerging market to help

finance a 484-megawatt gas-fired combined-

cycle power plant at Monterrey. Also in

Mexico, ABB provided debt financing to

secure a project to build or expand 22 substa-

Financial Services

“The need for private

sector financing

will continue to grow

worldwide.”

Jan Roxendal,

Financial Services

segment head

1 2

23

1. Trading room, Sweden 2. Azito power plant, Ivory Coast3. Jorf Lasfar power plant, Morocco 4. Regional Treasury Center, Singapore

Operating Earnings(US$ in millions)

98 403

97 297

96 323

95 257

94 214

Business Areas in the Financial Services Segment

Income before Taxes 1998 1997(US$ in millions)

Treasury Centers 113 63

Leasing and Financing 56 56

Insurance 110 113

Structured Finance 20 19

Energy Ventures 54 46

Investment Management – 1

Holding Activities & Eliminations* 50 – 1

Total 403 297

* 1998 figure reflects the sale of the Investment Management operations.

tions for the Mexican state electrical utility.

Furthermore, ABB contributed to financing

power projects in Chile, Brazil and Argentina.

Growing new markets

Our financial expertise supports ABB’s expan-

sion into promising new markets. In power

generation, ABB can lease small power plants

to individual factories or commercial buildings,

allowing the customer to avoid large upfront

capital investment. In a deregulated environ-

ment, such solutions can be an economically

attractive alternative to buying power from

a utility. In the Automation segment, we will

offer more comprehensive lease structures to

our robotics customers. We expect to increase

our financing activities in this segment and

in Oil, Gas and Petrochemicals to reflect their

good growth potential.

The volatility of financial markets in 1998 also

provided trading opportunities and resulted

in higher earnings for our treasury centers in

Sweden, Switzerland, Norway and the U.S.

The new regional Treasury Center Asia Pacific

opened in Singapore and will serve our

companies in Asia and provide ABB with

complete coverage of financial markets in all

time zones. The insurance business, mean-

while, expanded its presence in Switzerland

to focus on political risk insurance, often a

key element of financing emerging market

projects.

While we expect no substantial economic

rebound in Southeast Asia in 1999, the need

for private sector financing will continue to

grow worldwide. India and China remain very

important markets in this regard. After some

years of stagnation, IPPs in the United States

have emerged as a growth market. Latin

America will also continue to offer good op-

portunities for private financing. With its

global scope and broad expertise in so many

different businesses, Financial Services will

continue to make the most of the many growth

opportunities in the years ahead.

Segment Activities:

Management of Group liquidassets and borrowings,positions on foreignexchange and money mar-kets within predefined risklimits

Financial consulting services

Asset backed financing,large financial packages,financing for investmentsand financial advisoryservices

Traditional reinsurance,financial insurance/reinsur-ance and insurance broker-age

Project and export financeadvisory services, andcountertrade

Project underwriting anddebt financing

Project development and equity financing of IPPprojects

3 4

24

Technology is a main driver of growth and

profitability at ABB. Innovations allow us to

deliver more value to our customers, open

up new growth markets and, by improving the

efficiency and environmental performance

of our products, to contribute to sustainable

development on a global level and help our

customers become more competitive.

With some 20,000 scientists and engineers

around the world, and R&D expenditures of

US$ 2.5 billion a year – about 8 percent of

revenues – ABB is committed to building and

maintaining its technology leadership.

A few highlights show the span of our innova-

tion and some of our achievements in 1998:

■ The first commercial application of our high-

voltage generator, the POWERFORMER®,

that generates electricity at any level needed

without a step-up transformer. It was

successfully taken into operation in Porjus,

northern Sweden in 1998. We continue

to spread this technology into many other

areas of our business.

■ By using the most advanced high-power

semiconductor devices, electricity can

be supplied with the right quality and lowest

possible losses. In 1998, ABB inaugurated

a state-of-the-art production line for these

devices in Lenzburg, Switzerland. Intensive

research will continue in the emerging area

of silicon carbide technology.

■ Our strong growth in the application of

robots in flexible automation continued in

1998 with the introduction of our high-

speed FlexPicker® robot, able to carry out

100 operations a minute, one of the fastest

robots on the market today.

Part of our strength lies in our ability to

bring together people from around the globe

to focus on the technology needs of our

customers. Our scientists and engineers work

together in virtual teams linked through our

global computer network, or in one of our nine

corporate research labs in the U.S. and

Europe, or together with our customers.

Partnerships with suppliers and with outside

institutions, such as universities, also play

a key role in our ability to take ideas from the

drawing board to the market quickly.

We aim to be among the leading knowledge-

based companies of the future, building on

the depth and breadth of our expertise and the

diversity of our people to deliver products,

systems and complete solutions that make our

customers more successful.

Research and Development 1. Efficient cooling in gas turbines2. Useful products from waste3. Light waves detect voltage and current

For more information about

R&D at ABB, please see our

1998 Technology Report,

available from ABB Corporate

Communications (please

see back cover for contact

information).

1 2 3

25

Preparing for the Millennium

Because ABB serves a wide range of cus-

tomers using software products to control

many aspects of their operations, we take

active steps to ensure that our products are

either “Year 2000 compliant” or that their

impact on our customers is minimized.

The “Four Pillars” Concept

The ABB “Four Pillars” Concept is based on a

close partnership with our customers and ABB

has about 1,000 people working on the Year

2000 (Y2k) question at customer plants around

the world. The concept consists of four impor-

tant steps to support a smooth transition into

the year 2000:

Investigation: We study the Y2k behavior of

the products and systems where problems

could occur in our customers’ plants and

develop methods to improve their Y2k readi-

ness.

Inventory: We carry out an inventory of our

customers’ products, both from ABB and from

other suppliers, to get a view of potential

problems.

Developing remediation methods: We set up

pilot projects based on different kinds of

plants, such as paper mills or power plants, to

test their Y2k compliance and to develop ways

to correct problems that arise. By applying

tested solutions to similar plants, we speed up

the remediation process.

Training: We train large numbers of our cus-

tomers’ personnel and our own in the remedi-

ation methods developed during the pilot

projects. This know-how is quickly cascaded

out into our customers’ businesses to support

efforts to meet their Y2k deadlines.

With respect to products, systems and

processes in operation within ABB we are

applying the same systematic approach to

make sure we can continue serving customers

and maintaining reliable administrative,

accounting and reporting systems over the Y2k

transition period.

ABB’s assessment is that the Y2k issue and

our related efforts will not adversely affect our

production, sales or other activities nor our

ability to provide the information needed by

our various stakeholders.

The “Y2k Problem” or “Millennium Bug” refers to a characteristic of older software-based products that use calendar datesdesignated by only two digits, such as “98” rather than “1998.” As a result, at the turn of the century such software mayread “00” not as “2000” but as “1900.” The Millennium Bug can affect not only high-tech applications but also basic infra-structure such as manufacturing, inventory maintenance, communications, and any other date-specific functions. It canbe corrected by re-programming or replacing the relevant systems.

What is the Millennium Bug?

26

ABB delivers power and industrial infrastruc-

ture all over the world. Our engineering is at

the heart of almost every industrial activity.

ABB systems control resource consumption in

office towers, schools and factories. So if

we can make things more efficient, and more

efficiently, and apply those improvements

around the world by sharing technology, we

can make a real contribution to sustainable

development.

Much of our research and development is

related to improving the environmental impact

of our products and systems:

■ Gas treatment systems that capture carbon

dioxide, a major greenhouse gas, and then

recycle it for other uses.

■ Microdrives that reduce the electricity

consumption of small industrial motors by

up to 60 percent.

■ High-efficiency, low-emission gas turbines.

Because of their widespread use, cutting

emissions and improving efficiency by even

a single percentage point can have a signifi-

cant impact on the global environment.

ABB has integrated environmental goals into

the strategic planning of its global business

areas. They will make an Environmental Decla-

ration by the end of 1999, identifying goals to

improve for their environmental performance.

ABB also has an ambitious program to

improve its own environmental performance.

We are implementing an environmental man-

agement system according to ISO 14001 in our

more than 700 facilities worldwide. As of the

end of 1998, 449 sites had implemented this

standard. The remainder aim to reach that goal

during 1999.

Sustainable development will never be

achieved unless we all work together. ABB

participates in a number of international

partnerships, such as the World Commission

on Dams, whose goal is to find a balanced

way to assess the impacts of large hydro dams.

ABB continued to support the Massachusetts

Institute of Technology (MIT) joint program

on science and policy of global change, the

Alliance for Global Sustainability and its pro-

grams in China, and the one gigaton CO2

reduction program of the World Energy

Congress.

ABB fully recognizes its responsibility to work

towards sustainable development and is com-

mitted to using its global presence, technologi-

cal know-how and the creativity of its people

to take on that challenge.

Environment

ISO 14001 Implementation

98 449

97 150

96 50

95 15

For more information about

ABB’s environmental per-

formance in 1998, please

see our Environmental

Management Report, avail-

able from ABB Corporate

Communications (please

see back cover for contact

information).

27

Group Information and Financial Summary

ABB Asea Brown Boveri Group1,000 Companies

33 Business Areas organized into7 Business Segments

ABB Asea Brown Boveri Ltd

Zurich

Switzerland

ABB AGBaden

Switzerland

50%

ABB ABVästeråsSweden

50%

ABB AB Shareholders ABB AG Shareholders The complete ABB Group and Parent

Companies Annual Report 1998 consists of

this Operational Review and a Financial

Review. Copies of the Financial Review may

be obtained from ABB Investor Relations

at the address printed on the back cover of

this report.

ABB companies throughout the world report

their financial results in local currencies,

which are then translated to U.S. dollars to

establish the ABB Group’s consolidated

accounts.

28

ABB Board of Directors

Percy N. Barnevik (born 1941) Chairman

Chairman: ABB AB, Investor, Sandvik

Board Member: General Motors

Robert A. Jeker (born 1935) Vice-Chairman

Chairman: ABB AG, Batigroup, Feldschlösschen-HürlimannGeorg Fischer, Messe Basel, Stratec, Swiss Steel

Board Member: Neue Zürcher Zeitung

Former President: Credit Suisse

Gerhard Cromme (born 1943)

CEO: Fried. Krupp AG Hoesch-Krupp

Board Member: ABB AG, Allianz, Suez Lyonnaise des Eaux,Veba, Volkswagen

Jürgen Dormann (born 1940)

CEO: Hoechst

Board Member: ABB AG, Allianz, IBM Corporation

Yotaro Kobayashi (born 1933)

Chairman and Co-CEO: Fuji XEROX

Board Member: Xerox Corporation

Japanese Chairman: The Trilateral Commission

Vice Chairman: International University of Japan, Keizai Doyokai (Japan Association of Corporate Executives)

Donald H. Rumsfeld (born 1932)

Chairman: Gilead Sciences

Board Member: ABB AB, Gulfstream Aerospace, Kellogg,Tribune Company

Former U.S. Ambassador to NATO, U.S. Secretary of Defense, CEO of G.D. Searle & Co., and CEO of General Instrument Corp.

Agostino Rocca (born 1945)

President and CEO: Techint Group

Chairman: Siderar, Techint S.A., Techint Engineering Co.,Tecpetrol

Deputy Chairman: Siderca

Advisory Member: New York Stock Exchange (NYSE), Praxair, Santander Group

Edwin Somm (born 1933)

President: The Association of Swiss Engineering Employers, The Swiss Association of Machinery Manufacturers

Board Member: ABB AG, Georg Fischer, SIG, Swiss Steel

Peter D. Sutherland (born 1946)

Chairman and Managing Director: GoldmanSachs International

Co-Chairman: BP Amoco

Board Member: ABB AB, Ericsson, Investor

Former Director-General GATT and WTO, Former EU Commissioner

Björn Svedberg (born 1937)

Board Member: ABB AB, Gambro, Investor, SAAB, SAGA Petroleum

Lodewijk C. van Wachem (born 1931)

Chairman: Royal Dutch Petroleum

Board Member: Akzo Nobel, ATCO, Bayer, BMW, IBM, Philips, Zurich Financial Services

Former President and CEO: Royal Dutch/Shell

Beat Hess, Secretary to the Board

Auditors

KPMG Klynveld Peat Marwick Goerdeler SAZurich

Ernst & Young AGZurich

Proposed Changes in the ABB Board of Directors

Messrs. Björn Svedberg and Lodewijk C. vanWachem will resign from the ABB Group Board ofDirectors at the Annual General Meeting on March 18,1999. The Board thanks them for their outstandingcontributions to the company.

The Board intends to propose to the shareholders onMarch 18, 1999 to newly elect to the ABB Group BoardMr. Martin Ebner, Chairman of BZ Group Holding andPresident of BZ Bank, Switzerland and Mr. JacobWallenberg, Chairman of Skandinaviska Enskilda Bankenand member of the management group of Investor AB,Sweden. In addition, the President and CEO of the ABBGroup, Mr. Göran Lindahl is proposed to join the Board.

Further, the remaining members will be proposed forreelection to the ABB Group Board.

The ABB Group has also declared its intention to reelectMr. Percy N. Barnevik as Chairman of the ABB GroupBoard and Mr. Robert A. Jeker as Vice-Chairman.

29

Group Executive Committee

Göran Lindahl (born 1945) President and Chief Executive OfficerCorporate Staffs and Functions: Audit, Corporate Communications,

Environmental Affairs, Global Processes, International Consulting, Investor Relations, Legal Affairs, Management Resources

Jörgen Centerman (born 1951) Executive Vice PresidentBusiness Segment: Automation

Renato Fassbind (born 1955) Executive Vice PresidentBusiness Function: Chief Financial OfficerCorporate Staffs: Accounting, Mergers and Acquisitions,

Real Estate, Reporting and Control,Risk Management and Insurance,Taxes and Finance

Alexis Fries (born 1955) Executive Vice PresidentBusiness Segment: Power Generation

Gorm Gundersen (born 1944) Executive Vice PresidentBusiness Segment: Oil, Gas and Petrochemicals

Sune Karlsson (born 1946) Executive Vice PresidentBusiness Segments: Power Transmission, Power Distribution

Armin Meyer (born 1949) Executive Vice PresidentBusiness Segment: Products and Contracting

Jan Roxendal (born 1953) Executive Vice PresidentBusiness Segment: Financial Services

Senior Corporate Officers

Markus Bayegan (born 1944) Research and Development, Technology Evaluation

Tomas Ericsson (born 1935) Corporate Projects/Finance and Administration

Management

30

Corporate Staffs and Functions

Accounting, Reporting and Control Jimmy Yap

Audit Adelheid Schilliger

Corporate Communications Björn Edlund

Government Affairs andMultilateral Banks Richard O’Toole

Environmental Affairs Jan Strömblad

Global Processes Eric Elzvik

International Consulting Bengt Skantze

Investor Relations Manfred Ebling

Legal Affairs Beat Hess

Management Resources Arne Olsson

Mergers and Acquisitions Eric Lint

Real Estate Walter Stücklin

Risk Management and Insurance Charles Salek

Taxes and Finance Alfred Storck

Corporate Research & Development

– in Finland Juhani Pylkkänen

– in Germany Kurt-Volker Boos

– in Italy Giandomenico Testi

– in Norway Jan Bugge

– in Sweden Harry Frank

– in Switzerland Maurice Campagna

– Corporate Programs Gernot Gessinger

Business Area Managers

Power Generation

Gas and Combi-Cycles John Gaskell

Steam Power Plants Howard Pierce

Environmental Systems Howard Pierce

Power Plant Systems Leif Nilsson

Power Plant Service Walter Gränicher

Nuclear Systems Michael F. Barnoski

Power Segment Manufacturing Franz Killer

Power Transmission

High-Voltage Products and Substations Josef Dürr

Power Transformers François Gabella

Cables Petter Arvidson

Power Lines Bo-Göran Persson

Power Systems Bo Normark

T&D Service and Support Joachim Schneider

Power Distribution

Distribution Systems Kurt Håkansson

Distribution Transformers Peter Smits

Medium-Voltage Equipment Andrew Eriksson

Automation

Automation Power Products Jouko Karvinen

Instrumentation andControl Products Richard McAllister

Flexible Automation Per Otto Dyb

Marine and Turbochargers Andreas Fokkens

Metals and Minerals Jonny Axelsson

Petroleum, Chemicals and Consumer Industries Chester Mroz

Pulp and Paper Dinesh Paliwal

Utilities Michael Hirth


Oil, Gas and Petrochemicals Gorm Gundersen


Low-Voltage Products and Systems Tom Sjökvist

Contracting Rolf Karg

Service Jan Coene

Air Handling Equipment Ulf Bennet

Financial Services

Energy Ventures Peter Giller

Insurance Göran Thorstensson

Leasing & Financing Johan Löwenhielm

Structured Finance Lennart Blecher

Treasury Centers

– in Northern Region Peter Carlsson

– in Southern Region Thomas Meyer

31

Country Managers

Europe

Austria Rudolf Petsche

Benelux Countries Jacques de Raad

Czech Republic Frank Duggan

Denmark S. A. Koch-Christensen

Estonia Bo Henriksson

Finland Matti Ilmari

France Max Abitbol

Germany Horst Dietz

Greece Costas Cosmadakis

Hungary Peter Hegedüs

Ireland Diarmuid O’Sullivan

Italy Umberto Di Capua

Latvia Rolf A. Hellström

Lithuania Vytautas Niedvaras

Norway Øivind Lund

Poland Miroslaw Gryszka

Portugal Carlos Dias

Romania Peter Simon

Russia Michel Tchesnakoff

Slovak Republic Bernhard Koehler

Spain Fernando Conte

Sweden Anders Narvinger

Switzerland Alois Sonnenmoser

Turkey Alfred Barth

Ukraine Åke Davidsson

United Kingdom Eric Drewery

Middle East and Africa

Dubai/UAE Ulf G. Strömbäck

Egypt Gian Francesco Imperiali

Israel Jacob Shani

Ivory Coast Koen Beckers

Morocco Jean-Claude Lanzi

Nigeria Wolfgang Pfeiffer

Saudi Arabia Bengt Andersson

South Africa Carlos Poñe

Tanzania Bo Erik Lansryd

Zimbabwe Vittorio Semilia

Americas

Argentina Ulises de la Orden

Bolivia Nelson Izquierdo

Brazil Cedric Lewis

Canada Paul Kefalas

Chile Victor Ballivian

Colombia Napoleao Olmedo

Ecuador Julio Barriga

Mexico Benny Olsson

Peru Eduardo Soldano

USA Peter S. Janson

Venezuela Oswald Weinreich

Asia

Australia Tommie Bergman

China/Hong Kong SAR Rolf Schaumann

India Kumar Kaura Kuldip

Japan Lave Lindberg

Korea Håkan Borin

Malaysia Zubir Zainal Abidin

New Zealand Tommie Bergman

Philippines Thomas Ng

Singapore Paul Ziegler

Taiwan Felix Vest

Thailand Terawat Thisabhiramya

Vietnam Erik Nylund

32

Consolidated Financial Statements

Year ended December 31 (US$ in millions) Notes 1998 1997

Revenues 30,872 31,265

Material expenses – 13,606 – 14,232

Personnel expenses – 9,044 – 9,498

Other expenses – 5,085 – 4,973

Changes in work in progress and finished goods – 132 180

Depreciation of fixed assets – 926 – 997

Unusual items 32 – 608

Operating Earnings after Depreciation 2,111 1,137

Earnings from equity accounted companies 0 2

Dividend income 25 10

Interest income 462 325

Interest expense – 734 – 616

Exchange differences 1 – 5

Income before Taxes 1,865 853

Income Taxes – 543 – 258

Net Income before Minority Interests 1,322 595

Minority interests – 17 – 23

Net Income 1,305 572

Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998except for the operating results up to the third quarter.

Main exchange rates used in the translation of the Financial Statements

ISO Average Year-end Average Year-endCodes 1998 / US$ 1998 / US$ 1997/ US$ 1997/ US$

Australian Dollar AUD 1.58 1.63 1.35 1.53

Canadian Dollar CAD 1.48 1.55 1.39 1.43

Chinese Yuan Renminbi CNY 8.28 8.28 8.29 8.28

Danish Krone DKK 6.70 6.38 6.56 6.82

Finnish Markka FIM 5.35 5.09 5.16 5.42

French Franc FRF 5.90 5.62 5.79 5.99

German Mark DEM 1.76 1.68 1.72 1.79

Indian Rupee IDR 41.13 42.50 36.39 39.21

Italian Lira ITL 1,736.11 1,658.37 1,694.92 1,760.56

Norwegian Krone NOK 7.54 7.61 7.03 7.35

Polish Zloty PLN 3.50 3.50 3.26 3.51

Pound Sterling GBP 0.60 0.60 0.61 0.60

Spanish Peseta ESP 149.43 142.67 145.58 151.68

Swedish Krona SEK 7.95 8.13 7.61 7.90

Swiss Franc CHF 1.45 1.38 1.44 1.45

European Currency Unit (ECU) XEU 0.89 0.86 0.88 0.91

Income Statement

33


December 31 (US$ in millions) 1998 1997

Assets

Current Assets

Cash and cash equivalents 7,790 5,790

Trade receivables 6,173 5,656

Inventories 4,444 4,907

Other current assets 4,463 4,283

Total Current Assets 22,870 20,636

Fixed Assets

Financing receivables 2,145 1,815

Shares and participations 750 385

Intangible assets 1,927 1,981

Construction in progress 173 242

Machinery and equipment 2,428 2,479

Land and buildings 2,090 2,246

Total Fixed Assets 9,513 9,148

Total Assets 32,383 29,784

Liabilities and Equity

Current Liabilities

Trade payables 5,225 4,566

Provisions 4,286 5,233

Other current liabilities 4,963 5,006

Short-term loans 3,409 1,715

Total Current Liabilities 17,883 16,520

Non-Current Liabilities

Advances from customers 2,646 2,612

Medium- and long-term loans 2,808 2,511

Pension liabilities 1,771 1,748

Deferred taxes 1,001 790

Total Non-Current Liabilities 8,226 7,661

Minority Interests 315 320

Stockholders’ Equity

Share capital 2,087 2,087

Restricted reserves 1,103 965

Other reserves and retained earnings 1,464 1,659

Net income 1,305 572

Total Stockholders’ Equity 5,959 5,283

Total Liabilities and Equity 32,383 29,784


Balance Sheet

34

Statement of Cash Flows


Year ended December 31 (US$ in millions) 1998 1997

Cash Flow from Operating Activities

Income before taxes1 1,865 853

Adjustments for depreciation of fixed assets 926 997

Adjustments for changes in provisions – 551 546

Adjustments for changes in pension liabilities 35 11

Other adjustments – 149 – 328

2,126 2,079

Changes in operating assets and liabilities:

Changes in trade receivables – 631 – 264

Changes in other current assets – 686 – 754

Changes in inventories 168 – 293

Changes in trade payables 744 650

Changes in other current liabilities (excl. income taxes due) – 46 279

Changes in advances from customers 857 498

406 116

Income Taxes Paid – 428 – 404

Net Cash Flow from Operating Activities 2,104 1,791

Cash Flow Related to Investing Activities

Changes in financing receivables – 300 – 232

Acquisitions (net of cash acquired)2 – 274 – 288

Capital expenditure for tangible fixed assets – 865 – 1,093

Proceeds from divestitures (net of cash disposed)2 60 738

Proceeds from disposal of tangible fixed assets 288 153

Net Cash Flow Related to Investing Activities2 – 1,091 – 722

Cash Flow Related to Financing Activities2

Changes in short-term loans 1,672 – 640

Changes in medium- and long-term loans 286 734

Dividends paid – 507 – 446

Other items2 – 509 – 69

Net Cash Flow Related to Financing Activities2 942 – 421

Effects of Translation Differences on Cash and Cash Equivalents 45 – 411

Net Change in Cash and Cash Equivalents 2,000 237

Cash and cash equivalents – beginning of year 5,790 5,553

Cash and cash equivalents – end of year 7,790 5,7901 Actual interest received/paid does not differ materially from “Interest Income/Expenses” as included in income before taxes, and is thus not explicitly

shown in the above presentation.2 1997 restated to reflect the net amount of cash acquired or disposed.


35

Country Statistics

Revenues1 (US$ in millions unless otherwise stated) Revenues Employeesand Employees

1998 1997 1998 1997

Europe 16,620 17,099 128,051 139,528

Austria 318 302 1,132 1,316

Belgium 283 282 1,364 1,393

Czech Republic 525 319 4,970 5,759

Denmark 505 530 3,608 4,035

Finland 877 845 9,635 9,241

France 574 590 2,740 2,908

Germany 3,313 3,968 23,752 29,138

Italy 1,391 1,203 7,640 8,495

Netherlands 573 467 2,632 2,197

Norway 1,144 1,116 7,603 7,209

Poland 538 526 7,971 7,738

Portugal 148 256 1,110 1,487

Russia 201 207 1,371 1,462

Spain 567 509 3,447 3,810

Sweden 2,140 2,331 24,149 24,293

Switzerland 694 826 11,661 12,483

United Kingdom 1,698 1,784 7,145 9,174

Others 1,131 1,038 6,121 7,390

The Americas 6,640 6,374 32,124 31,647

Argentina 172 177 891 684

Brazil 758 602 4,305 3,718

Canada 363 396 2,266 2,172

Mexico 310 202 2,431 1,227

USA 4,263 4,142 19,725 21,433

Others 774 855 2,506 2,413

Asia 4,474 5,427 27,313 30,912

Australia 622 791 4,731 4,748

China 663 561 4,400 4,525

India 417 511 7,901 9,630

Indonesia 228 615 1,628 1,960

Japan 663 651 940 1,138

Malaysia 225 383 663 880

Philippines 142 243 754 1,470

Singapore 142 163 885 1,071

Thailand 188 351 3,117 3,739

Others 1,184 1,158 2,294 1,751

Middle East and Africa 3,138 2,365 11,744 10,970

Egypt 220 193 2,524 1,954

Saudi Arabia 811 521 1,462 1,189

South Africa 212 253 2,627 2,703

Others 1,895 1,398 5,131 5,124

Group Total 30,872 31,265 199,232 213,057

1 Total revenues of the ABB Group from third-party customers in each region/country.

36

ABB Group Statistical Data

(US$ in millions, unless otherwise stated) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989

Consolidated Income Statement

Revenues 30,872 31,265 33,767 32,751 28,758 27,521 29,109 28,443 26,337 20,260

Depreciation of Fixed Assets – 926 – 997 – 1,044 – 1,021 – 893 – 844 – 901 – 819 – 750 – 549

Operating Earnings after Depreciation 2,111 1,137 2,113 2,181 1,574 1,311 1,219 1,417 1,386 918

Income before Taxes 1,865 853 1,901 2,003 1,362 520 861 997 1,052 872

Net Income before Minority Interest 1,322 595 1,242 1,361 795 72 528 633 628 628

Net Income 1,305 572 1,233 1,315 760 68 505 609 590 589

Consolidated Balance Sheet

Cash and Cash Equivalents 7,790 5,790 5,553 6,831 7,612 5,700 5,534 5,211 4,975 4,332

Other Current Assets 15,080 14,846 15,606 15,437 12,348 10,672 11,432 12,688 12,848 10,470

Fixed Assets 9,513 9,148 9,737 9,808 9,095 8,532 8,983 10,157 10,286 7,743

Total Assets 32,383 29,784 30,896 32,076 29,055 24,904 25,949 28,056 28,109 22,545

Current Liabilities 17,883 16,520 17,147 17,302 15,458 13,390 13,203 15,394 15,441 13,209

Advances from Customers 2,646 2,612 2,610 3,576 3,417 2,567 2,983 2,820 2,798 1,768

Medium- and Long-Term Loans 2,808 2,511 1,823 2,644 3,049 2,866 2,993 2,496 2,712 1,746

Other Long-Term Liabilities 2,772 2,538 3,094 2,971 2,732 2,244 2,384 2,547 2,442 1,447

Stockholders’ Equity incl. Minority Interest 6,274 5,603 6,222 5,583 4,399 3,837 4,386 4,799 4,715 4,375

Consolidated Statement of Cash Flows

Cash Flows from Operating Activities 2,104 1,791 834 951 2,135 1,515 1,942 2,128 1,044 1,437

Cash Flows related to Investing Activities – 1,091 – 722 – 1,118 – 402 – 501 – 839 – 373 – 316 – 1,024 – 3,951

Cash Flows related to Financing Activities 942 – 421 – 855 – 1,696 – 122 – 54 – 477 – 1,528 218 3,323

Effects of Translation Differences 45 – 411 – 139 366 400 – 456 – 769 – 48 405 27

Net Changes in Cash and Cash Equivalents 2,000 237 – 1,278 – 781 1,912 166 323 236 643 836

Other Data

Orders Received 31,462 34,803 33,884 35,163 30,827 28,644 31,153 29,209 28,938 21,348

Capital Expenditure for Tangible Fixed Assets 865 1,093 1,168 1,171 935 816 957 1,035 961 783

Capital Expenditure for Acquisitions 274 302 333 315 196 212 253 612 677 3,090

Expenditure for Research and Development 2,463 2,657 2,638 2,627 2,353 2,271 2,386 2,342 1,931 1,361

Dividends Declared Pertaining toFiscal Year (Swiss francs in millions) 740 700 650 520 370 340 340 330 300 290

Net cash/net debt position 1,573 1,564 1,204 1,997 1,686 242 – 7 – 950 – 2,110 – 1,760

Average Capital Employed 12,319 12,085 12,537 12,478 11,816 11,579 12,531 13,403 12,724 9,585

Number of Employees 199,232 213,057 214,894 209,637 207,557 206,490 213,407 214,399 215,154 189,493

Ratios

Operating Earnings after Depreciation/Revenues 6.8% 3.6% 6.3% 6.7% 5.5% 4.8% 4.2% 5.0% 5.3% 4.5%

Return on Equity 23.2% 10.3% 22.2% 28.4% 20.2% 1.8% 11.8% 13.9% 14.5% 16.8%

Return on Capital Employed 21.1% 12.2% 19.9% 21.8% 16.9% 15.4% 14.7% 14.7% 17.3% 15.1%

Financial Review

Annual Report 1998ABB Group and Parent Companies

aINGENUITY AT WORK

ABB Group

1 Outlook for 1999 and Beyond

2 Management’s Discussion and Analysis

17 Consolidated Financial Statements

20 Principles for Consolidated Financial Statements

22 Notes to the Consolidated Financial Statements

33 Auditors’ Report

34 ABB’s Global Scope and Major Subsidiaries

35 Statistical Data

36 Board of Directors

37 Financial Statements of ABB Asea Brown Boveri Ltd, Zurich

ABB AB Annual Report

42 Board of Directors, President and Auditors

45 Financial Statements

47 Notes to the Financial Statements


50 Investor Information

52 Annual General Meeting

ABB AG Annual Report

53 Board of Directors and Auditors

56 Financial Statements

58 Notes to the Financial Statements


62 Investor Information

64 Annual General Meeting

Contents

This Financial Review presents the consoli-

dated financial statements of the ABB Group

and the holding ABB Asea Brown Boveri

Ltd, Zurich, as well as the financial state-

ments of the parents ABB AB, Västerås,

ABB AG, Baden. This report conforms

to OECD guidelines and recommendations

concerning the publication of information.

The complete ABB Group and Parent

Companies Annual Report 1998 consists of

this Financial Review and an Operational

Review. For a copy of the Operational Review,

please contact ABB Corporate Communi-

cations at the address printed on the back

of this report.

The ABB Group publishes its annual report

in English, German and Swedish. The

English-language version is binding. It also

issues quarterly financial results in April,

July and October. All figures shown for the

ABB Group are in U.S. dollars. In addition,

separate annual reports are published by

some ABB national and business entities.

ABB also publishes annual environmental

and technology reports.

The statements in this review relating to mattersthat are not historical facts are forward-lookingstatements that are not guarantees of futureperformance and involve risks and uncertainties,including but not limited to: future global economicconditions; foreign exchange rates; regulatoryapprovals; market conditions; the actions of com-petitors and other factors beyond the control ofthe company.




Zurich

Switzerland

ABB AGBaden

Switzerland

50%


50%

ABB AB Shareholders ABB AG Shareholders

1

Göran Lindahl

President and Chief Executive Officer

The growth in Power Generation’s gas-fired

related activities will continue, particularly

in North America. Orders and earnings in

1999 are expected to exceed the 1998 level.

Orders and earnings are also expected to

increase in Power Transmission and Power

Distribution. Power Transmission expects

steady, moderate growth in demand with an

increasing focus on systems and compre-

hensive solutions. Power Distribution mar-

kets are expected to show high growth

in an increasingly deregulated environment.

In Products and Contracting, demand for

standardized low-voltage products is ex-

pected to remain stable, but growth will be

above-average in service and in some

specialized contracting activities. Orders and

earnings are expected to exceed the 1998

level.

Cyclical demand variations will continue for

Automation during 1999. Overall, orders

are expected to increase and, excluding the

effect of the Elsag Bailey integration, earnings

are expected to increase as well. The inte-

gration of Elsag Bailey will somewhat dilute

earnings for the next two years. Demand

for Oil, Gas and Petrochemicals is expected

to grow at a lower rate as a consequence

of low oil prices. With the segment’s focus

on areas such as deepwater and subsea

activities, as well as upgrades and expansion

of refineries, orders are expected to ex-

ceed and earnings to reach about the same

level as 1998. Financial Services will continue

its expansion into areas requiring financial

structuring solutions often combined with

industrial projects, and operating earnings

are not expected to reach the same level as

in 1998.

In a difficult economic environment, orders

and revenues for ABB Group are expected

to grow. The 1999 net cash position will

not reach the same level as at the end of

1998, primarily because of cash outlays for

the Elsag Bailey acquisition.

Net income in 1999 is expected to exceed

the level of 1998.

ABB’s longer-term targets remain unchanged.

The Group’s strategic shift during the last

two years will continue with a clear focus on

expanding in knowledge- and service-based

sectors as well as reducing our dependence

on heavy asset businesses. This strategic shift

will continue to result in a reduction of the

capital needed. Further improved efficiency

in our resource utilization will remain a pri-

ority. We also expect continued improvement

of key financial ratios. Annual growth of at

least 6 percent on average over the business

cycle, considerable reduction of working

capital in relation to revenues and an in-

crease in net income margin from 4.2 per-

cent in 1998 to the 6–7 percent level within

3 years remain major objectives for the

Group.

Göran LindahlPresident and Chief Executive Officer

Outlook for 1999 and Beyond

2

Management’s Discussion –Analysis of the Group

Key Figures (US$ in millions, unless otherwise stated) Total Group

Year ended December 31 1998 1997

Orders received 31,462 34,803

Revenues 30,872 31,265

Operating earnings after depreciation 2,111 1,137

Income before taxes 1,865 853


Stockholders’ equity 5,959 5,283

Total assets 32,383 29,784

Capital expenditure for tangible fixed assets 865 1,093

Capital expenditure for acquisitions 274 302

Divestitures 202 748

Expenditure for research and development 2,463 2,657

Operating earnings after depreciation/revenues (%) 6.8 3.6

Return on equity (%) 23.2 10.3

Return on capital employed (%) 21.1 12.2

Interest coverage ratio 4.0 2.7

Debt/equity ratio 1.0 0.8

Net cash position 1,573 1,564

Capital turnover rate 0.99 1.03

Number of employees 199,232 213,057

Net income per share

1998 1997

ABB AB A shares (in SEK) 5.52 2.32

ABB AB B shares (in SEK) 5.52 2.32

ABB AG bearer shares (in CHF) 103.30 46.80

ABB AG registered shares (in CHF) 20.66 9.36

Dividend per share1

1998 1997

ABB AB A shares (in SEK) 2.18 2.10

ABB AB B shares (in SEK) 2.18 2.10

ABB AG bearer shares (in CHF) 41.00 40.00

ABB AG registered shares (in CHF) 8.20 8.00

1 1998 proposed.Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998 except for the operating results up to the third quarter (see Note 23).

Revenues per Region 1998


Employees per Region 1998


54%

22%

14%

10%

64%16%

6%

14%

3

Management’s Discussion –Analysis of the Group

Market Conditions

Demand trends for ABB’s broad range of

infrastructure equipment and systems varied

significantly by both business sector and

region. Uncertainties as reflected by volatile

financial markets prevailed throughout the

year and changed global demand patterns,

which resulted in delays in financial closing of

certain projects. At the same time, increased

volatility provided opportunities in the

financial markets.

Customers in many industries emerged as

truly global players with correspondingly

high expectations for suppliers who provide

complete solutions, not just individual

products. Additionally, there was a tendency

toward global pricing and the drive to improve

environmental performance continued to

be an important factor for many of ABB’s cus-

tomers. The growing demand for high-

efficiency, low-emission solutions put a premi-

um on suppliers who can deliver a steady

stream of technological innovations. Further-

more, the competition faced by customers

resulted in the need to optimize existing

assets. This has increased the demand for vari-

ous types of infrastructure service, mainte-

nance and revamping. Partly due to low com-

modity prices, the pulp and paper, steel

and chemical sectors reduced capital expen-

ditures. The automotive sector also reduced

spending during the year.

Privatization and deregulation again proved

beneficial for markets in North America,

certain European countries, Australia and

New Zealand, Latin America and Africa. After

a period of uncertainty, market participants

began positioning themselves in the competi-

tive environment with new investments.

Usually these investments continue, providing

a good business environment over an ex-

tended period of time.

ABB performs approximately three-fourths

of its business in OECD countries. Although

slower than the previous year, industrial

production in these countries continued to

grow. Europe helped to compensate for

a shortfall in demand in emerging markets,

but did not experience the expected full

recovery in demand. Economies in Northern

Europe remained strong, as well as in Switzer-

land and France, whereas Germany, Italy

and Spain showed lower growth in demand.

Economic growth in North America has

slowed compared to the high levels of recent

years with reduced investments in several

industrial sectors. Japan showed reduced

economic activity, but industrial production

in Australia and New Zealand remained

solid. In the emerging markets, the economies

of Latin America also grew at a reduced

rate. India’s economy slowed, whereas growth

in China remained at a relatively good level.

Both countries were still among the strongest

growing economies in the world. With

reduced consumption and investments, the

economies of Southeast Asia were gradually

stabilizing at a low level. Several Middle

East and African economies continued their

high rates of growth.

Orders Received and Revenues

Orders received for the ABB Group reached

$ 31,462 million, a decrease of 10 percent

(1997: $ 34,803 million). Adjusted for acquisi-

tions and divestitures and expressed in

local currencies, orders were 1 percent lower

compared to last year. A discussion of the

orders received per business segment follows

on pages 9 to 16 of this Financial Review.

Large orders declined from last year’s level,

representing some 24 percent of total orders

received. Demand for standard products was

flat compared to last year’s level as the acceler-

ation in Europe was weaker than expected.

The order backlog at the end of 1998 reached

$ 25,916 million. Advance payments from

4

customers increased as a percentage of the

order backlog.

Revenues were $ 30,872 million (1997: $ 31,265

million). Adjusted for acquisitions and dives-

titures and expressed in local currencies,

revenues increased by 8 percent, reflecting the

increased order intake in previous years for

large projects.

Personnel and Organization

At the end of 1998, ABB employed 199,232

people compared to 213,057 at year-end

1997. The total number of employees decreased

by 6 percent. On a comparable basis, number

of employees decreased by 4 percent. Employ-

ment increased in service and maintenance

related areas, Oil, Gas and Petrochemicals,

Data per Business Segment according Orders Received Revenues Operating Earningsto previous structure valid through after DepreciationAugust 31, 1998 (US$ in millions)

1998 1 1997 1998 1 1997 1998 1 1997

Power Generation 8,598 10,038 9,004 8,114 302 125

Power Transmission and Distribution 8,601 8,595 8,103 7,889 654 557

Industrial and Building Systems 16,235 16,294 15,675 15,501 1,003 1,066

Financial Services 860 828 860 828 403 297

Various Activities /Corporate 2,087 2,093 2,112 2,074 – 182 – 797

Adtranz2 – 2,095 – 1,870 – 69 – 111

Total 36,381 39,943 35,754 36,276 2,111 1,137

Intra-Group transactions – 4,919 – 5,140 – 4,882 – 5,011 n/a n/a

Net Total 31,462 34,803 30,872 31,265 2,111 1,137

1 Proforma figures.2 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz

in 1998 except for the operating results up to the third quarter (see Note 23).

Changes in ABB’s business segment/business area (BA) structure as per year-end 1998 versus year-end 1997:Power Generation

– BAs “Utility Steam Power Plants” and “Fossil CombustionSystems and Services” merged into new BA SteamPower Plants

– BAs “Power Generation Industry”, “Hydro Power Plants”and “District Heating” merged into new BA Power PlantSystems

– BA “Nuclear Power Plants” renamed Nuclear Systems

Power Transmission

– Majority of BA “High-Voltage Switchgear” renamed High-Voltage Products and Substations

– Service related businesses of various other BAs com-bined to form new BA T&D Service and Support

– Remaining Power Transmission BAs from former PowerTransmission and Distribution segment

Power Distribution

– Part of BA “High-Voltage Switchgear” renamed Distribu-tion Systems

– Remaining Power Distribution BAs from former PowerTransmission and Distribution segment

Automation

– BA “Power Plant Control” from Power Generation seg-ment

– BA “Network Control and Protection” from Power Trans-mission and Distribution segment

– BAs “Automation and Drives”, “Instrumentation, “FlexibleAutomation”, “Motors”, and “Superchargers” from formerIndustrial and Building Systems segment


– BA “Oil, Gas and Petrochemical” from former Industrialand Building Systems segment


– BAs “Installation Material”, “Low Voltage Apparatus” and“Low Voltage Systems” from former Industrial and Build-ing Systems segment merged into new BA Low VoltageProducts and Systems

– Remaining BAs within this segment from former Industrialand Building Systems segment

Financial Services

– BA “Project and Trade Finance” merged into BA Struc-tured Finance

– BA “Investment Management” divested

5

Financial Services and in certain activities

within Automation.

The adjustment of the cost base announced

in October 1997 included the closure of 12 fac-

tories, one in the U.S. and the remaining in

Europe, as well as the downsizing of several

more units particularly in Germany, Italy and

Sweden. By the end of 1998, this resulted in

an overall reduction of 12,600 employees and

another 1,000 are planned during the first

half of 1999. Accordingly, some 2,000 positions

more than originally planned under this pro-

gram will have been removed. Program costs

remained below budget with more than 90

percent of the planned reductions and costs

completed and incurred by the end of 1998.

The early and fast adjustment of the cost base

with an average payback of two years contin-

ued to enhance the Group’s competitiveness.

As a consequence of the restructuring pro-

gram to enhance competitiveness, the number

of employees decreased in Germany, Italy,

Switzerland and the U.S. Changes in the em-

ployment levels for Central and Eastern

Europe varied by country, but decreased in

total. Led by certain Latin American countries,

personnel levels in the Americas increased.

In Asia, the number of employees increased in

Taiwan and New Zealand, but decreased

overall. ABB employment increased in the

Middle East and Africa.

As per September 1, 1998, ABB changed its

Group management structure to boost busi-

ness growth areas, create new synergies

and ensure greater responsiveness in local and

globalized markets.

The former “Industrial and Building Systems”

segment was divided into three new segments

– Automation; Oil, Gas and Petrochemicals;

and Products and Contracting. The former

“Power Transmission and Distribution” segment

became two separate segments – Power

Transmission and Power Distribution. Certain

activities of the Power Generation and Power

Transmission segments were transferred to the

new Automation segment, whereas Financial

Services remained basically unchanged.

As such, prior years’ business segment data

have been restated to reflect the reclassifica-

tion of certain business areas. ABB Group data

in total remains unaffected.

Simultaneously, regional organizations were

dissolved after having fulfilled their mandate to

coordinate ABB’s expansion in Europe, the

Americas and Asia. Country organizations re-

main as before, continuing to build ABB’s

multidomestic presence in markets around

the world.

Research and Development

In 1998, ABB’s spending on R&D reached

$ 2,463 million, representing 8 percent of Group

revenues (1997: $ 2,657 million or 8.5 percent).

With a strong commitment to technology

leadership, ABB focuses on development of

core competencies and skills of strategic im-

portance for future growth. Continuous prod-

uct development and improvement in com-

bination with special high risk, high impact

projects assure a steady flow of innovative

products addressing the future needs of cus-

tomers. Through active portfolio management,

ABB maintains the right balance between short-

and long-term R&D and assures that the return

on investment is optimized. Overall efficiency

of R&D spending substantially increased as the

efforts targeted break-through projects.

Millennium Change – Year 2000 Issue

The Year 2000 issue arises from the almost

universal practice of using only two digits

in program source codes to denote the year.

ABB management has appointed a task

force and gives the Year 2000 issue top pri-

ority. The task force has created and imple-

mented strategies, priorities and action plans

6

that address Year 2000 issues in products

and systems as well as internal systems.

The ABB Four-Pillar-Concept includes prod-

uct investigation, plant inventory, metho-

dology development and training. The concept

has been implemented throughout the Group

in liaison with customers. This approach has

been confirmed by insurers, major internation-

al customers, and other impartial third parties

as representing a leading practice in a compre-

hensive Year 2000 program.

Development of software, upgrading, pro-

viding new, efficient solutions as well as tech-

nical support are the essence of ABB’s daily

business. ABB’s annual investments in product

development and information technology

infrastructure are considerable. The Year 2000

issues and related efforts are an integral part

of ABB’s business. The preparation of com-

puters and microprocessors for the millennium

change resulted in costs of $ 100 million in

1998 and costs of $ 150 million are expected in

1999. More than half of these costs relate to

customer systems and the remaining to ABB

internal preparations. More than half of the

total costs impact the Automation segment.

Acquisitions and Divestitures,

Capital Expenditures

Acquisitions during 1998 amounted to $ 274

million (1997: $ 302 million). Several ac-

quisitions were made in the fields of process

automation and chemical, oil and gas.

Besides acquiring one of Europe’s largest

suppliers of process control systems and

automation equipment, Alfa Laval Automation,

ABB also made a public offer in cash to

acquire Elsag Bailey Process Automation.

Upon receiving all of the necessary approvals,

the transaction was completed after the

end of the reporting period. The acquisition

was valued at $ 2,100 million, including debt

of about $ 600 million.

During the year, ABB acquired a leading

supplier for the development and deployment

of deepwater floating systems for the off-

shore oil and gas industry, as well as a leading

provider of industrial safety systems for

petrochemical and petroleum operations. Also

in Argentina, Hungary, Poland and the

U.K., ABB acquired companies mainly active

in the areas of service, retrofit and mainte-

nance.

During 1998, ABB decided to divest its stake

in ABB Daimler-Benz Transportation Group

(Adtranz), the rail transportation joint venture.

Subsequent to year-end, DaimlerChrysler

agreed to acquire ABB’s 50-percent share of

the joint venture for cash compensation of

$ 472 million. ABB discontinued the propor-

tionate consolidation of its 50-percent share

in Adtranz in 1998, recognizing a $ 69 million

operating loss for the first nine months and

without realizing capital gains in 1998. In 1999,

ABB will realize a net capital gain of $ 41 mil-

lion from the sale of Adtranz. In accordance

with ABB’s strategy to concentrate on growth

businesses, various non-core activities have

been divested in Japan, Sweden and the U.S.

During 1998, ABB made divestitures totaling

$ 202 million (1997: $ 748 million). In addition,

real estate with a value of $ 238 million was

sold. Successful implementation of the restruc-

turing program, improved cycle times and

consolidation of facilities created opportunities

for additional real estate sales.

Capital expenditures for tangible assets in

1998 reached $ 865 million (1997: $ 1,093

million). Of that, $ 87 million (1997: $ 133 mil-

lion) was for land and buildings, and $ 778

million for machinery and equipment (1997:

$ 960 million).

Foreign Exchange Effects

During 1998, ABB prepared for the introduc-

tion of the euro at the beginning of 1999

as the official common currency in many Euro-

pean countries. ABB will continue to express

the Group’s financial statements in U.S. dollars.

In 1998, a weakened U.S. dollar had a 2-per-

cent positive effect on ABB’s balance sheet,

where assets and liabilities are translated from

local currencies into U.S. dollars at year-end

exchange rates. Average exchange rates for the

U.S. dollar, however, strengthened compared

to most currencies. Accordingly, using average

rates to translate the consolidated income

statement from local currencies into U.S. dol-

lars, exchange rate effects reduced orders

received, revenues and result figures by about

3 percent.

ABB requires all industrial profit centers to

hedge orders and anticipated cash flows

in order to protect their local currency earn-

ings. ABB’s multidomestic strategy assures

that in all major markets where ABB gener-

ates revenues it also incurs corresponding

costs. This limits the effect of currency fluctua-

tions on the local books and maintains long-

term competitiveness. The major part of the

value added in the Group was associated

with the following currencies: the U.S. dollar,

Nordic currencies, the Deutschmark, the

Swiss franc, and the Italian lira. Global sourc-

ing initiatives within these countries strive

to maximize purchases from low-cost coun-

tries in Western and Central Europe as well

as Asia.

Cash Position and Dividends

At year-end 1998, ABB’s net cash position

(defined as cash and cash equivalents minus

short-, medium-, and long-term loans) was

$ 1,573 million, about the same as last year

(1997: $ 1,564 million), despite the funds

needed for restructuring measures in 1998

in excess of $ 400 million. Strong focus on

working capital reduction programs con-

tributed to this improvement. Accordingly, 1998

net working capital1 as a percent of revenues

improved to 8.7 percent (1997: 10.2 percent).

Net cash from operating activities increased

again from last year’s high level to $ 2,104 mil-

lion.

During 1998, ABB completed ten new bond

issues for a total of $ 748 million in the form

of public offerings or private placements.

All of these issues were documented under

ABB’s Euro Medium-Term Note (EMTN)

program. At the end of 1998, ABB long-term

senior debt continued to be rated Aa2 by

Moody’s Investors Service and was rated AA–

by Standard & Poor’s. Short-, medium- and

long-term loans increased by $ 1,991 million,

of which $ 1.2 billion relate to prefinancing

for the Elsag Bailey acquisition.

ABB’s dividend policy is to pay out between

30 and 50 percent of consolidated net income

for the year. In January 1999, the ABB Board

of Directors proposed a dividend for 1998

of CHF 740 million to its two parent compa-

nies, ABB AB and ABB AG (1997: CHF 700

million). Translated into dollars at the time of

the decision, it corresponds to 40 percent

of ABB net income for 1998 (1997: 41 percent

when excluding the restructuring charge from

1997 net income).

Earnings

Operating earnings after depreciation in 1998

amounted to $ 2,111 million (1997: $ 1,137 mil-

lion), an increase of 5 percent compared

to 1997 when excluding the 1997 restructuring

charge. A discussion of the earnings by seg-

ment follows on pages 9 to 16 in this Financial

Review.

Successful restructuring programs and global

process initiatives, such as outsourcing and

shared services, helped to reduce both

personnel and material expenses as a percent

of revenues2. Personnel expenses decreased

7

1 Net working capital includes trade and other current receiv-ables plus inventories, less trade payables, other current liabilities(excluding taxes due) and advances from customers.

2 Including changes in work in progress and finished goods.

8

further from last year’s low level to 29.4 per-

cent (1997: 30.2 percent) and material ex-

penses decreased to 44.3 percent (1997: 45.3

percent). Reflecting the increased level of

outsourcing and deconsolidation of Adtranz,

other expenses increased to 16.5 percent (1997:

15.8 percent).

Unusual items were net $ 32 million (1997:

$ –608 million). Unusual income, mostly

capital gains from divestitures and real estate

sales, amounted to $ 114 million, primarily

from the sale of non-core operations such as

ABB’s investment management business in

Financial Services. Unusual costs of $ 82 mil-

lion included costs for ongoing rationalization

activities related to several ABB companies

and additional provisions to cover the possible

outcome of a fine from the EU Commission.

On a regional basis, the largest contributors to

the Group’s operating profits were Sweden,

Norway, Finland, Switzerland, Germany and

the U.S. Europe improved the most with strong

support from Germany, Italy and Switzerland;

aided by successful restructuring, each posted

significant improvements over the previous

year. While earnings from the Nordic countries

declined from last year’s high level, these

countries continued to contribute significantly

to results. Earnings in the Americas declined

as a result of restructuring and project cost

overruns. In Australia, New Zealand and China,

profitability improved, whereas most other

Asian countries posted lower earnings. Several

large projects helped to push operating earn-

ings higher in the Middle East and Africa

and in particular, Saudi Arabia showed higher

profitability.

Regional operating margins, based on domestic

and export revenues within the respective

region, developed as follows in 1998: Europe

8.0 percent (1997: 7.8 percent); the Americas

4.1 percent (1997: 4.1 percent); Asia 2.2 percent

(1997: 4.1 percent); the Middle East and Africa

9.4 percent (1997: 8.5 percent).

Income before taxes reached $ 1,865 million

(1997: $ 853 million), an increase of 8 percent

compared to the previous year excluding the

restructuring charge.

In 1998, ABB’s income related taxes amounted

to $ 543 million (1997: $ 258 million), corre-

sponding to an overall tax rate for 1998 of 29

percent.

Net income for 1998 increased to $ 1,305 mil-

lion (1997: $ 572 million). Excluding the

previous year’s restructuring charge, net income

increased by 11 percent.

Reported return on equity in 1998 was

23.2 percent (1997: 10.3 percent, excluding

restructuring charge 21.1 percent) and return

on capital employed was 21.1 percent

(1997: 12.2 percent, excluding restructuring

charge 19.4 percent).

The outlook for 1999 can be found on page 1

of this Financial Review.

9

Management’s Discussion –Analysis of the Business Segments

Data per Business Segment Orders Received Order Backlog Revenues(US$ in millions)

1998 1997 1998 1997 1998 1997

Power Generation 8,260 9,465 12,444 13,345 8,530 7,646

Power Transmission 4,428 4,354 4,070 3,471 4,038 3,739

Power Distribution 2,672 2,664 1,409 1,487 2,607 2,647

Automation 7,015 7,338 4,013 3,907 7,036 7,344

Oil, Gas and Petrochemicals 3,324 3,126 2,845 2,534 2,860 2,396

Products and Contracting 6,464 6,488 2,231 2,192 6,385 6,381

Financial Services 860 828 – – 860 828

Various Activities /Corporate* 2,031 2,037 157 231 2,049 2,012

Adtranz1 – 2,095 – 5,161 – 1,870

Total 35,054 38,395 27,169 32,328 34,365 34,863

Intra-Group transactions – 3,592 – 3,592 – 1,253 – 1,168 – 3,493 – 3,598

Net Total 31,462 34,803 25,916 31,160 30,872 31,265

Data per Business Segment Operating Earnings Capital Expenditure Average Number of(US$ in millions) after Depreciation Capital Employed Employees

1998 1997 1998 1997 1998 1997 1998 1997

Power Generation 291 105 144 200 2,854 2,847 39,484 41,584

Power Transmission 374 316 125 139 1,723 1,786 26,927 26,319

Power Distribution 179 159 76 79 965 970 16,511 17,465

Automation 521 646 179 202 2,574 2,535 43,384 43,183

Oil, Gas and Petrochemicals 175 123 55 55 709 823 8,774 8,160

Products and Contracting 419 399 145 148 1,558 1,641 53,753 54,115

Financial Services 403 297 14 13 n/a n/a 894 885

Various Activities/Corporate* – 182 – 797 127 210 1,936 1,159 9,505 9,989

Adtranz1 – 69 – 111 – 47 – 324 – 11,357

Total 2,111 1,137 865 1,093 12,319 12,085 199,232 213,057

1 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998 except for the operating results up to the third quarter (see Note 23).

*Activities included under Various Activities/Corporate

This category comprises local businesses (orders received in 1998: $ 310 million) in several countries and internal services performed for ABBcompanies, including information management and processing centers, con-sulting services for operational units, corporate research and developmentand management of ABB real estate.

Data per Region Orders Received 2 Revenues2 Average Capital (US$ in millions) Capital Employed Expenditure

1998 1997 1998 1997 1998 1997 1998 1997

Europe 16,420 18,506 16,620 17,099 8,213 8,166 607 819

The Americas 7,944 7,028 6,640 6,374 2,782 2,612 169 169

Asia 3,138 6,258 4,474 5,427 1,010 1,033 66 80

Middle East and Africa 3,960 3,011 3,138 2,365 314 274 23 25

Total 31,462 34,803 30,872 31,265 12,319 12,085 865 1,093

2 Total orders received and revenues of the ABB Group from third-party customers in each region.

10

The shifting demand toward gas-fired powerplants accelerated during 1998. Particularly inthe Americas and the Middle East, the growingdemand for gas turbines and combined-cycleplants had a positive impact on orders re-ceived and helped to mitigate the slowdownresulting from project delays in Asia.

Nevertheless, orders received in 1998 slipped13 percent to $ 8,260 million (1997: $ 9,465million). Gas turbine related activities in-creased strongly in 1998 and orders receivedwere higher in Gas and Combi-Cycles.Major orders were booked in the United ArabEmirates, the U.S., Chile, Ivory Coast andMexico. Several orders also included long-termservice and retrofit contracts.

Steam Power Plants showed lower volumesin Asia and Europe. This shortfall was partlycompensated for by a major turnkey orderin Saudi Arabia. Facing mostly the same busi-ness environment as steam power plants,Environmental Systems was adversely affectedby the market situation in Asia and EasternEurope and also by the general delay of waste-to-energy power plant projects in Europe.Within Power Plant Systems, the industrialpower generation activities had better ordersreceived while orders for hydro power plantswere below the exceptionally high level of1997. In Nuclear Systems, projects focusedmainly on nuclear power service and mainte-nance in France.

Order margins continued to improve as a result of restructuring and cost reductionefforts. Selective bidding, supply manage-ment and proportionally more service volumealso helped to improve margins.

Revenues in 1998 reached $ 8,530 million, a12 percent increase compared to the previousyear (1997: $ 7,646 million). The increaseis mainly a consequence of invoicing on largenew equipment contracts for Gas and Combi-Cycles and for industrial turbines in PowerPlant Systems.

Operating earnings in 1998 increased substan-tially to $ 291 million (1997: $ 105 million). Suc-

cessful execution of the restructuring initiativestogether with higher revenues and additionalvolume in the service and retrofit business arethe main reasons for this substantial improve-ment.

Emphasis will continue on margin improve-ments through selective tendering and effi-cient project execution. ABB, with its leadingtechnologies, will benefit from increaseddemand for highly efficient system solutionsin increasingly deregulated and privatizedmarkets. Orders as well as earnings for 1999are expected to exceed the level of 1998.

Power Generation

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)

Number of Employees1

AverageCapital Employed(US$ in millions)

98 8,260

97 9,465

96 8,861

95 9,287

94 8,854

98 8,530

97 7,646

96 8,561

95 8,903

94 7,756

98 39,484

97 41,584

96 42,094

95 44,344

94 39,861

98 2,854

97 2,847

96 3,149

95 2,922

94 2,234

98 291

97 105

96 112

95 324

94 297Business Areas in the Power GenerationSegment

Orders Received (US$ in millions) 1998 1997

Gas and Combi-Cycles 3,134 2,917

Steam Power Plants 2,575 3,076

Power Plant Systems 1,602 2,127

Nuclear Systems 404 742

Environmental Systems 525 760



Total 8,260 9,465

Significant Orders for the Power Generation Segment in 1998 (US$ in millions)

Oil-fired steam power plant Saudi Arabia 835

Gas-fired power and desalination plant U.A.E. 600

Gas-fired combined-cycle power plant U.S. 350

Gas-fired combined-cycle power plant Mexico 250

Gas-fired combined-cycle power plant Chile 170

Modernization and maintenance order for power plant U.S. 170

Compressor stations for a natural gas pipeline Poland 170

Gas-fired combined-cycle power plant Greece 160

Gas-fired combined-cycle cogenerationpower plant Canada 160

Gas-fired power plant andtransmission line Ivory Coast 150

Operation and maintenance contract for power plant Argentina 127

Orders Received per Region


38%

31%

10%

21%

11

Power Transmission

Demand in the power transmission marketsin 1998 continued to be driven by the needfor more efficient long distance transmission,a focus on enhancing and upgrading existingsystems, and a shift towards cost-optimizingsystem solutions. Ongoing deregulationand privatization, as well as further expansionof cross-border transmission links, led tocontinued demand for transmission productsand systems in Latin America, the MiddleEast and parts of Europe. Asian demand fortransmission products and systems weakeneddue to the economic situation in some keymarkets, while delayed investments impactedbusiness in India.

Orders received amounted to $ 4,428 million,2 percent above the previous year (1997:$ 4,354 million). Large orders for transmissionprojects were secured in Italy, the U.K., Saudi Arabia and Brazil by Power Lines, PowerSystems and High-Voltage Products andSubstations. Power Transformers kept ordersreceived on the same level in a competitivemarket with flat demand.

Revenues increased by 8 percent to $ 4,038million (1997: $ 3,739 million). In particular,Power Systems reported a strong increase as aresult of invoicing on large projects.

Operating earnings of $ 374 million were18 percent higher than last year (1997: $ 316million). Earnings growth in Power Linesand Power Systems, as well as further improve-ments for Power Transformers, contributed themost to the higher earnings.

To further promote higher quality and increasedproductivity, Power Transformers acceleratedthe use of common technological platforms.Power Systems continued with its successfulcommercial introduction of High-Voltage DirectCurrent Light (HVDC Light) and Static VarCompensation Light (SVC Light) technologiesfor efficient electric power transmission andimproved power quality.

Growth opportunities are expected to continuethrough 1999 as the stagnant demand in Asiais more than compensated by business in other

regions, such as the Americas, the MiddleEast and Europe. Both orders and earnings areexpected to increase in 1999.

Business Areas in the Power Transmission Segment


Cables 525 752

High-Voltage Products and Substations 1,154 1,409

Power Lines 719 864

Power Systems 845 381

Power Transformers 1,057 1,079

T & D Service and Support 295 119



Total 4,428 4,354

Significant Orders for the Power Transmission Segment in 1998 (US$ in millions)

Cross-border transmission link Argentina/Brazil 280

Power links for northern and southern Brazil Brazil 170

High-voltage systems Italy/Greece 100

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)



98 4,428

97 4,354

96 3,873

95 4,393

94 4,405

98 4,038

97 3,739

96 4,470

95 4,292

94 3,961

98 26,927

97 26,319

96 25,785

95 24,469

94 26,142

98 1,723

97 1,786

96 2,100

95 1,874

94 1,743

98 374

97 316

96 364

95 366

94 396



49%

26%

12%

13%

12

Power Distribution

Power distribution systems and productsare used to move electricity from high-voltage substations to end users. In addition,control systems enable electricity providersto monitor electricity distribution. The PowerDistribution segment, comprising about one-third of the former Power Transmissionand Distribution segment, was createdin 1998 to focus on new opportunities in thedistribution markets where deregulationand privatization are fuelling growth. Withinthis new segment, Distribution Systemswas created as a new business area to furtherconcentrate on integrated electrical distributionsystems and new solutions targeted at theneeds of utilities, industry, airports and othercommercial consumers.

Global demand for distribution systems andproducts continued to grow in 1998. Inparticular, North America was positively im-pacted by the strong U.S. economy withits high levels of residential and non-residentialhousing starts. Demand in Europe, ABB’sglobal presence and market penetration al-lowed the segment to compensate for thereduced investment activity in various Asiancountries.

Orders received of $ 2,672 million were atthe same level as last year (1997: $ 2,664million). Orders in Distribution Systems in-creased based on several significant contractawards. One, the expansion of the electricitydistribution system for the Cayman Islands,was based on a seven-year strategic alliancewith the local utility. Another contract in-volved the delivery of a turnkey distributionsubstation and control system to the MexicanPetroleum Company. With good growth inEurope and the Middle East, Medium-VoltageEquipment also reached higher ordersreceived. Distribution Transformers ordersremained somewhat below the previousyear’s level.

Revenues of $ 2,607 million were 1 percentbelow the previous year (1997: $ 2,647 million)and Medium-Voltage Equipment posted a goodincrease.

Operating earnings increased by 13 percentto $ 179 million (1997: $ 159 million) due tohigher earnings in all business areas.

ABB’s future focus will be on developingcomprehensive innovative solutions fordistribution networks. These networks willinclude the application of communicationmedia to monitor and control the networkfrom remote locations. Supported by thegrowing demand for system solutions, theintroduction of new products and thecontinued deregulation and privatization ofcertain regional electricity markets, ordersand earnings in Power Distribution are ex-pected to increase in 1999.

Business Areas in the Power Distribution Segment


Distribution Systems 753 716

Distribution Transformers 845 887

Medium-Voltage Equipment 1,154 1,141



Total 2,672 2,664

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)



98 2,672

97 2,664

96 2,932

95 2,933

94 1,933

98 2,607

97 2,647

96 2,847

95 2,419

94 1,882

98 16,511

97 17,465

96 18,469

95 16,197

94 15,088

98 965

97 970

96 1,064

95 910

94 721

98 179

97 159

96 163

95 107

94 82



41%

37%

14%

8%

13

Automation

With the creation of the new Automation Seg-ment, ABB has positioned itself as a leadingglobal supplier of instrumentation, control andautomation power products, systems and ser-vices. Automation serves a wide range of indus-tries such as utilities, chemicals, oil and gas,pharmaceuticals, pulp and paper, automotive,metals and minerals, marine, food and beverages.

In 1998, ABB made a number of strategicacquisitions in this segment. Key among themwas Alfa Laval Automation, a major Europeansupplier of process control systems and auto-mation equipment. U.K.-based August Systemswas also acquired, allowing ABB to substan-tially broaden its offering of industrial safetysystems in the petrochemical and other sectors.Subsequent to year-end, the acquisition ofElsag Bailey Process Automation was com-pleted with 40 manufacturing units employing11,000 people in more than 30 countries.

Low commodity prices in various industriesand uncertainty caused by volatile financialmarkets reduced customer investments incertain regions. Consequently, global demandfor automation equipment in 1998 was lowerthan in previous years. Orders received in1998 decreased by 4 percent to $ 7,015 million(1997: $ 7,338 million).

In Europe, demand for large systems developedpositively. The Americas showed signs of aslowdown in several process and manufactur-ing industries as prices for many raw materialsand bulk products continued to decrease in1998. Industrial investments in Asia stabilizedon a low level compared to previous years andorders received in that region were below lastyear’s level.

Demand for automation power products suchas variable speed drives, power electronicsystems, electrical motors and machines grewstrongly in the first half of the year, espe-cially in Europe. After a drop in demand atmid-year, orders received in AutomationPower Products recovered due to new productlaunches and customer support programs.Orders received for Utilities and Instrumenta-tion and Control Products remained flatwhile Pulp and Paper, Metals and Minerals aswell as Petroleum, Chemical and ConsumerIndustries were below last year’s level.

Flexible Automation experienced declining in-vestments in the automotive industry, whereasrecord high automobile production ratescontributed to good orders in the service busi-ness. Its focus on selected global auto-partsmakers and the increased focus on generalindustry and consumer goods contributed to asteady base order development. Investmentsin the marine, oil and gas industries remainedhigh during 1998 and in particular, Marineand Turbochargers once again increased theirorders received.

Revenues in 1998 totaled $ 7,036 million, adecrease of 4 percent (1997: $ 7,344 million).Operating earnings reached $ 521 million(1997: $ 646 million) due to exceptional projectcosts overruns in Flexible Automation andPetroleum, Chemical and Consumer Industriesand costs for the millennium change. Thenew organization will focus on further im-proving project execution, increasing customerfocus and reducing costs.

Cyclical demand variations will continue forAutomation during 1999. Orders are expectedto increase and, excluding the effect of theElsag Bailey integration, earnings are expectedto increase as well. The integration of ElsagBailey will somewhat dilute earnings duringthe next two years.

Business Areas in the Automation Segment


Automation Power Products 1,738 1,792

Instrumentation and Control Products 1,265 1,304

Flexible Automation 1,365 1,437

Marine and Turbochargers 663 582

Metals and Minerals 603 689

Petroleum, Chemical and Consumer Industries 314 392

Pulp and Paper 471 605

Utilities 1,150 1,154



Total 7,015 7,338

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)



98 7,015

97 7,338

96 7,482

95 7,469

94 6,200

98 7,036

97 7,344

96 7,550

95 6,987

94 5,901

98 43,384

97 43,183

96 41,788

95 38,917

94 37,163

98 2,574

97 2,535

96 2,742

95 2,535

94 2,272

98 521

97 646

96 674

95 496

94 382



57%

26%

12%

5%

14


ABB Oil, Gas and Petrochemicals offers a com-plete range of services, products and systemsto the global oil, gas, refinery and petrochemi-cal industries, including design and construc-tion of complete onshore and offshore plants.

The upstream market in oil and gas explo-ration as well as the downstream market withrefineries and petrochemicals developedpositively during most of 1998. Demand de-creased in certain markets toward the endof the year with reduced drilling activity as aconsequence of lower oil prices.

Orders received for 1998 increased by 6 per-cent to $ 3,324 million (1997: $ 3,126 million).In the downstream market, major ordersincluded a turnkey contract for an ethyleneand polypropylene plant in the U.S. stateof Texas, which will be the largest of its typein the world. An ABB-led consortium final-ized the turnkey contract for a gas chemicalcomplex in Uzbekistan. ABB also was awardeda turnkey contract for an ethylene plant inSaudi Arabia, confirming ABB’s strong positionin this sector. In the upstream market, ABBreceived a contract for the development of theKuito oil field off the coast of Angola, as wellas a contract for a complete subsea system tothe Snorre B development in the Norwegiansector of the North Sea. These projects confirmABB’s position as a major global player in thesubsea market.

Revenues rose 19 percent above last year at$ 2,860 million (1997: $ 2,396 million), reflectinghigh activity within all product lines.

Operating earnings amounted to $ 175 million,an increase of 42 percent (1997: $ 123 million).This positive development was the result ofefficient large project management, improvedmargins in the service market and generallyhigher volumes.

The segment’s capabilities as a full rangesupplier of deepwater subsea and floating pro-duction systems were improved with the ac-quisition of additional deepwater engineeringexpertise. ABB worked actively to broadenits process technology base in 1998 through

exclusive market agreements with partnersfor chlorine technologies and distillateprocesses. A commercial demonstration plantwas successfully started for the Bisphenol Aprocess, jointly developed with Sinopec inChina. Furthermore, ABB achieved a numberof breakthroughs in catalyst developmentsusing its broad base of chemical engineeringexpertise.

The segment will focus on those areas wherehigh investment activity is expected despitethe expectation for low oil prices in 1999. Onthe upstream side, this includes deepwaterdevelopments, subsea production and process-ing and other areas not dependent on drillingactivities. ABB will support this businesswith the launch of new products, especially inthe area of oil well monitoring and reservoircontrol, i.e. downhole technology. With respectto downstream activities, particular focus willbe placed on refinery upgrade and expansionin order to meet the demand for more environ-mentally friendly transportation fuels.

With this approach, orders are expected to ex-ceed the 1998 level and earnings for 1999 areexpected to reach about the same level as1998.

Business Areas in the Oil, Gas and Petrochemicals Segment


Oil, Gas and Petrochemicals 3,324 3,126


Intra-Segment transactions – –

Total 3,324 3,126

Significant Orders for the Oil, Gas and Petro-chemicals Segment in 1998 (US$ in millions)

Ethylene and polypropylene plant U.S. 600

Ethylene plant Saudi Arabia 400

Subsea production system Norway 160

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)



98 3,324

97 3,126

96 2,596

95 1,952

94 1,553

98 2,860

97 2,396

96 2,045

95 1,470

94 1,233

98 8,774

97 8,160

96 7,379

95 6,122

94 6,253

98 709

97 823

96 912

95 778

94 462

98 175

97 123

96 114

95 50

94 15



40%

34%

2%

24%

15

The segment Products and Contracting com-prises a comprehensive range of productsfor electrical, ventilation and air conditioningsystems, design and execution of completeinstallations for industrial and commercialbuildings, and service of industrial equipmentand processes.

The growth in demand in Western Europeremained positive, although the building andconstruction sector, which influences approxi-mately half of the segment’s products andservices, showed signs of slowing. Industrialproduct markets weakened mainly due tolower demand from Asia. Markets in NorthAmerica remained strong throughout theyear, although signs of lower growth rates inthe U.S. are now surfacing. Demand in LatinAmerica slowed significantly in the secondpart of 1998 due to the financial turmoil in thisregion.

Orders received in 1998 totaled $ 6,464 million,basically the same level as the previous year(1997: $ 6,488 million).

Although the demand for Low-Voltage Productsand Systems slowed in the second half of1998, orders received reached the same levelas 1997. Volume growth in Western Europe andthe U.S. compensated for the order declinein Asia.

Orders for Contracting remained on a highlevel. Increased demand in Finland, Norwayand the U.K. resulted in higher orders receivedfor installation activities. Volumes in the con-struction business were lower due to a moreselective project approach and the difficultmarket situation in Asia. Activities in sectorssuch as airport installations, marine, communi-cations and building services increased.

Air Handling Equipment suffered from themarket decline in Asia where orders forfans and air conditioning products fell sub-stantially. The European market for ventilationwas stable, while products for industrialapplications reported lower volumes due toreduced demand from Asian customers incement, steel and other industries.

Service continued to grow in line with higherdemand for service, revamping and mainte-nance. The full service contract business con-tinued to increase and several new partner-ships and joint ventures with customers wereestablished. Several small acquisitions weremade in the area of workshops to repair rotat-ing machines.

Revenues in 1998 totaled $ 6,385 million(1997: $ 6,381 million). Operating earnings in1998 reached $ 419 million, an increase of5 percent compared to last year (1997: $ 399million). Earnings in Europe showed goodimprovement due to higher volumes and alower cost structure, while the results in Asiaand Latin America weakened due to thedepressed market situation. This also led topricing pressure and restructuring. The focusto reduce administration costs, increaseproductivity and restructure non-profitablebusinesses continued and mitigated dete-riorating markets.

Market growth in industrialized countries over-all is expected to be on a low level in 1999due to reduced investments in both the con-struction and industrial sectors. However,service and maintenance will remain a growtharea and new partnerships and investmentswill be pursued in this field. New products inkey areas will place the segment in a relativelystronger position. Orders and earnings in 1999are expected to exceed the level of 1998.


Business Areas in the Products and Contracting Segment


Contracting 3,023 3,059

Low-Voltage Products and Systems 2,131 2,142

Air Handling Equipment 514 545

Service 777 751



Total 6,464 6,488

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)



98 6,464

97 6,488

96 7,069

95 6,949

94 6,082

98 6,385

97 6,381

96 6,969

95 6,861

94 5,903

98 53,753

97 54,115

96 54,152

95 52,733

94 52,502

98 1,558

97 1,641

96 1,722

95 1,710

94 1,460

98 419

97 399

96 370

95 422

94 263



80%

9%

7%

4%

16

ABB Financial Services reported record earn-ings in 1998. Higher price volatility in con-nection with instability in Asia led to wideningcredit spreads and a preference for highercreditor quality. Stock markets suffered severeset-backs, but recovered again before year-end. Interest rates decreased in the U.S. andEurope as inflation rates continued to fall.In Europe, the expectation of lower inflationand the pending introduction of the europushed bond yields down further during theyear.

Income before taxes totaled $ 403 million(1997: $ 297 million).

Treasury Centers substantially increased earn-ings. The increased volatility in the financialmarkets provided good trading opportunitiesand most of the earnings were derived fromtrading in bond and money markets. Concen-tration of risk trading to a limited numberof treasury centers continued. During 1998, anew Asian treasury center was establishedin Singapore.

Earnings for Leasing and Financing in 1998were about the same level as in 1997. Signedcontract volume reached $ 549 million. The re-tail leasing activity continued its expansion inNorthern Europe. The lease arranging unitwas further strengthened and is now operatingin five locations including a newly openedentity in Singapore.

Earnings within Insurance also remained onthe same level as last year. The long-term trendof falling insurance premiums continued. Atthe same time, claims started to increase. Theimpact on the insurance sector of HurricaneMitch, one of the strongest ever to hit theAmerican continent, was limited. The under-writing result was unchanged compared tolast year and investment income increasedsomewhat compared to the high result of theprevious year.

Structured Finance was instrumental in closingseveral important projects in 1998, includingthe underwriting of debt financing for theOriental Centro transmission project in Mexico.

Financial Services

Financial agreements were arranged for a totalproject value of $ 4.7 billion, in support ofABB equipment sales totaling $ 3.6 billion. Thelargest of these was for a gas chemical com-plex in Uzbekistan. Structured Finance’s earn-ings were unchanged compared to last year.

Energy Ventures achieved higher earnings in1998. Equity holdings in the Midland andPontook power stations in the U.S. were di-vested. Several projects were being developedin 1998 and one, the Azito project in the IvoryCoast, reached financial closing.

The consolidated assets of Financial Servicesamounted to $ 20.5 billion and representedmarketable securities held by the TreasuryCenters and Insurance, financial leases heldby Leasing and Financing, equity partici-pations held by Energy Ventures, lending toABB projects by Structured Finance andlending to ABB companies by the TreasuryCenters. During 1998, ABB divested its In-vestment Management operations.

Earnings for 1999 are not expected to reachthe same level as in 1998.

Business Areas in the Financial Services Segment

Income before Taxes 1998 1997(US$ in millions)

Treasury Centers 113 63

Leasing and Financing 56 56

Insurance 110 113

Structured Finance 20 19

Energy Ventures 54 46

Investment Management – 1

Holding Activities & Eliminations* 50 – 1

Total 403 297

* 1998 figure reflects the sale of the Investment Management operations.

Orders Received1, 2

(US$ in millions)

Revenues1

(US$ in millions)

Operating Earnings1

(US$ in millions)


98 860

97 828

96 479

95 446

94 361

98 860

97 828

96 479

95 446

94 361

98 894

97 885

96 825

95 863

94 816

98 403

97 297

96 323

95 257

94 214

17


Income Statement


Revenues 1 30,872 31,265

Material expenses – 13,606 – 14,232


Other expenses 2 – 5,085 – 4,973

Changes in work in progress and finished goods – 132 180

Depreciation of fixed assets 3 – 926 – 997

Unusual items 4 32 – 608

Operating Earnings after Depreciation 2,111 1,137

Earnings from equity accounted companies 0 2

Dividend income 25 10

Interest income 5 462 325

Interest expense 5 – 734 – 616

Exchange differences 1 – 5

Income before Taxes 1,865 853

Income Taxes 6 – 543 – 258

Net Income before Minority Interests 1,322 595

Minority interests – 17 – 23

Net Income 1,305 572

Note: 1997 figures reflect ABB’s 50-percent stake in Adtranz; ABB discontinued the proportionate consolidation of its 50-percent share in Adtranz in 1998 except for the operating results up to the third quarter (see Note 23).

Main exchange rates used in the translation of the Financial Statements

ISO Average Year-end Average Year-endCodes 1998 / US$ 1998 / US$ 1997/ US$ 1997/ US$

Australian Dollar AUD 1.58 1.63 1.35 1.53

Canadian Dollar CAD 1.48 1.55 1.39 1.43

Chinese Yuan Renminbi CNY 8.28 8.28 8.29 8.28

Danish Krone DKK 6.70 6.38 6.56 6.82

Finnish Markka FIM 5.35 5.09 5.16 5.42

French Franc FRF 5.90 5.62 5.79 5.99

German Mark DEM 1.76 1.68 1.72 1.79

Indian Rupee IDR 41.13 42.50 36.39 39.21

Italian Lira ITL 1,736.11 1,658.37 1,694.92 1,760.56

Norwegian Krone NOK 7.54 7.61 7.03 7.35

Polish Zloty PLN 3.50 3.50 3.26 3.51

Pound Sterling GBP 0.60 0.60 0.61 0.60

Spanish Peseta ESP 149.43 142.67 145.58 151.68

Swedish Krona SEK 7.95 8.13 7.61 7.90

Swiss Franc CHF 1.45 1.38 1.44 1.45

European Currency Unit (ECU) XEU 0.89 0.86 0.88 0.91

18


Balance Sheet

December 31 (US$ in millions) Notes 1998 1997

Assets

Current Assets

Cash and cash equivalents 7,19 7,790 5,790

Trade receivables 19 6,173 5,656

Inventories 8 4,444 4,907

Other current assets 9,19 4,463 4,283

Total Current Assets 22,870 20,636

Fixed Assets

Financing receivables 7,19 2,145 1,815

Shares and participations 10 750 385

Intangible assets 11 1,927 1,981

Construction in progress 12 173 242

Machinery and equipment 12 2,428 2,479

Land and buildings 12 2,090 2,246

Total Fixed Assets 9,513 9,148

Total Assets 18 32,383 29,784


Current Liabilities

Trade payables 19 5,225 4,566


Other current liabilities 13,19 4,963 5,006

Short-term loans 7, 19 3,409 1,715

Total Current Liabilities 17,883 16,520

Non-Current Liabilities

Advances from customers 14 2,646 2,612

Medium- and long-term loans 7 2,808 2,511

Pension liabilities 21 1,771 1,748

Deferred taxes 15 1,001 790

Total Non-Current Liabilities 8,226 7,661

Minority Interests 315 320


Share capital 2,087 2,087

Restricted reserves 1,103 965

Other reserves and retained earnings 1,464 1,659


Total Stockholders’ Equity 16 5,959 5,283

Total Liabilities and Equity 32,383 29,784


19



Income before taxes1 1,865 853

Adjustments for depreciation of fixed assets 926 997

Adjustments for changes in provisions – 551 546

Adjustments for changes in pension liabilities 35 11

Other adjustments – 149 – 328

2,126 2,079

Changes in current operating assets and liabilities:

Changes in trade receivables – 631 – 264

Changes in other current assets – 686 – 754

Changes in inventories 168 – 293

Changes in trade payables 744 650

Changes in other current liabilities (excl. income taxes due) – 46 279

Changes in advances from customers 857 498

406 116

Income Taxes Paid – 428 – 404

Net Cash Flow from Operating Activities 2,104 1,791

Cash Flow Related to Investing Activities

Changes in financing receivables – 300 – 232

Acquisitions (net of cash acquired)2 22 – 274 – 288

Capital expenditure for tangible fixed assets – 865 – 1,093

Proceeds from divestitures (net of cash disposed)2 22 60 738

Proceeds from disposal of tangible fixed assets 288 153

Net Cash Flow Related to Investing Activities2 – 1,091 – 722

Cash Flow Related to Financing Activities

Changes in short-term loans 1,672 – 640

Changes in medium- and long-term loans 286 734

Dividends paid – 507 – 446

Other items2 – 509 – 69

Net Cash Flow Related to Financing Activities2 942 – 421

Effects of Translation Differences on Cash and Cash Equivalents 45 – 411

Net Change in Cash and Cash Equivalents 2,000 237

Cash and cash equivalents – beginning of year 5,790 5,553

Cash and cash equivalents – end of year 7,790 5,790

1 Actual interest received /paid does not differ materially from “Interest Income/Expenses” as included in income before taxes and shown in Note 5,and is thus not explicitly shown in the above presentation.

2 1997 restated to reflect the net amount of cash acquired or disposed.



Statement of Cash Flows

20

Principles for Consolidated Financial Statements

A. GeneralThe consolidated financial statements of ABB AseaBrown Boveri Ltd and its subsidiaries have beenprepared in accordance with the accounting standardsand interpretations issued by the International Account-ing Standards Committee (IASC).

Changes resulting from newly effective IAS are de-scribed in section N below.

Because of the international nature of the Group’s activ-ities and the fact that more of its business is transactedin US$ than in any other currency, the consolidatedfinancial statements are published in that currency.

B. Principles of ConsolidationThe consolidated financial statements include ABB AseaBrown Boveri Ltd and all companies in which it has,directly or indirectly, more than 50% of the voting rightsor over which it exerts decisive influence. Companiesare contained in the consolidation as from the date ofacquisition. Earnings in divested companies are includedup to the date of sale.

Following the decision taken in 1998 to divest ABB’sshare in the ABB Daimler-Benz Transportation Group(Adtranz), the proportionate consolidation of thisbusiness is discontinued. In the year-end accounts,Adtranz is treated as a participation (for details refer toNote 23).

Material investments in companies where ABB AseaBrown Boveri Ltd, directly or indirectly, has not morethan 50% and not less than 20% of the voting rightsare accounted for by the equity method.

Goodwill from acquisitions is capitalized and amortizedover periods not exceeding 20 years.

Assets, liabilities and equity as well as income andexpenses of fully consolidated companies are reflectedin their entirety in the consolidated financial statements.The shares in net income and equity attributable tominority shareholders are stated separately in the con-solidated income statement and balance sheet.

Intercompany balances and transactions, including in-tercompany profits, are eliminated.

C. RevenuesRevenues include sales and other operating income.Sales are reported net of sales or value added tax,returned goods and trade discounts.

D. Revenue RecognitionRevenues from products and services are recognizedat the date of delivery. Revenues from constructioncontracts are recognized according to the percentage-of-completion method. Depending on the type ofbusiness, the stage of completion is determined bydelivery events, by units of delivery or by a surveyof work performed.

E. Foreign CurrenciesTranslation of financial statementsFinancial statements of Group companies expressedin currencies other than US$ are translated at year-endrates of exchange with respect to the balance sheet,and average rates of exchange for the year with respectto the income statement. Translation adjustments areincluded in stockholders’ equity and have no effect onnet income.

In high inflation countries, monetary balance sheetpositions in local currency are stated at closing valuesprior to conversion at the year-end US$ rate. Fixedassets are kept at historic US$ values from acquisitiondates. Revenues and expenses are generally convertedat the exchange rates prevailing at the date incurred.All translation gains/losses from restatements of balancesheet positions are included in net income.

Foreign currency transactionsTransactions in foreign currencies are converted at therate of exchange prevailing at the transaction date.

Foreign currency receivables and payables covered byforward contracts are stated at contracted forwardrates. Other receivables and payables in foreign curren-cies are translated at year-end market rates. Resultingexchange differences are included in net income.

F. Tangible Fixed AssetsTangible fixed assets are stated at cost, less accumu-lated depreciation using the straight-line method overtheir estimated useful lives.

The depreciation periods normally are:– production tools*, EDP-equipment 3 years– machinery and equipment 5–15 years– buildings 15–50 years* other than wear and tear tools which are expensed

G. Research and DevelopmentResearch and general development costs are expensedas incurred. Certain development costs related toproducts in early or pre-commercialization phase arecapitalized under intangible assets. Engineering anddesign costs directly related to contracts are capital-ized in work in progress.

H. Financial Assets and LiabilitiesBalance sheet positions from investing and financingactivities are normally reported at cost. Adjustments forfinancial assets are made if their carrying amountexceeds the value realizable in the foreseeable future.

Entities primarily engaged in transactions with financialinstruments carry their related financial assets andliabilities as well as their off balance sheet positions atfair values. Gains and losses from changes in the fairvalues of such positions are recognized in income asthey arise.

I. InventoriesPurchased goods are stated at the lower of cost –determined on the basis of weighted average prices orby the “first-in, first-out” method – or replacementvalue, while manufactured goods are valued at

21

the lower of manufacturing cost or net realizable value.Appropriate provisions are made for obsolescence.

J. Employee Retirement BenefitsThe cost of defined retirement benefits is determinedon an actuarial basis using accrued benefit valuationmethods which reflect service rendered by employeesto the date of valuation and incorporate assumptionsconcerning employees’ projected salaries. Currentservice costs are charged to income in the periods inwhich the services are rendered. Past service costs,experience adjustments and the effects of changes inactuarial assumptions on retirement benefit costs arecharged or credited to income systematically overa period approximating the average of the expectedremaining working lives of participating employees.

Obligations from retiree medical benefits in the U.S.incurred up to the end of 1992 are being amortized inthe net income over a period of 20 years.

K. ProvisionsProvisions provide cover for identifiable warranties,penalties, loss orders, committed costs for deliveredplant orders, country risks and restructuring measures.

L. TaxationAll taxes ultimately to be paid on income referring tothe reporting period are provided for. These taxes arecalculated in accordance with the regulations inforce in each country. Irrecoverable withholding taxeson current dividends received are included in the taxcharge for the year.

In addition, deferred taxes are recognized by applyingthe balance sheet approach for all future tax conse-quences of transactions and other events treated differ-ently in the financial statements compared to thetax returns. The future benefits of unused tax lossesand tax credits are recognized if their realization isprobable. Deferred taxes are adjusted for changes intax rates, for new taxes imposed and for changes inthe tax system in order to reflect the expected futuretax effects.

M. Orders Received and Order BacklogAmounts stated for orders received and order backlogare expressed at the price level estimated for the dateof delivery of each order.

N. Changes in the 1998 accountsIn 1998 the revised IAS12, Income Taxes, has beenintroduced in all Group companies per January 1, 1998.This change resulted in higher deferred tax assets,partly offset by higher deferred tax liabilities. The neteffect has been credited to shareholders’ equity as achange in accounting principles.

O. Reporting Financial Information by SegmentFor purposes of satisfying the disclosure requirementsunder IAS 14 regarding geographical and businesssegments, reference is made to these figures disclosedin the Group’s Management’s Discussion on pages9–16 of the Financial Review. Following the Group reor-ganization announced in 1998, the Segments arepresented in the new structure and comparable data of

previous periods are restated accordingly. This numeri-cal information is an integral part of these financialstatements.

P. Definition of Key Ratios/ConceptsThe ratios shown for the Group are calculated as fol-lows:

a) Return on equityNet income as a percentage of average stockholders’equity.

b) Return on capital employedIncome before taxes plus interest expense and ex-change differences as a percentage of average capitalemployed. Capital employed consists of stockholders’equity, minority interest, pension liabilities and short-,medium- and long-term loans. Loans taken up at year-end 1998 to finance the Elsag Bailey acquisition in1999, have been excluded from the calculation.

c) Interest coverage ratioIncome before taxes plus interest expense on financialliabilities divided by interest expense on financial liabili-ties.

d) Debt/equity ratioInterest-bearing short-, medium- and long-term liabili-ties, excluding pension liabilities divided by stockhold-ers’ equity plus minority interest.

e) Net cash positionCash and cash equivalents minus interest-bearingshort-, medium- and long-term liabilities, excludingpension liabilities.

f) Capital turnover rateRevenues divided by average total assets.

22

Notes to the Consolidated Financial Statements

Note 1, Revenues

Revenues include the following items:

(US$ in millions) 1998 1997

Sales 29,673 30,069

Other operating income 1,199 1,196

Total 30,872 31,265

Licence income amounted to $ 34 million ($ 32 million).

Note 2, Other Expenses


Expenses for:

Rents, leasing and external services 1,528 1,658

Packing, freight, sales commission and other delivery expenses 1,254 1,220

Communication, advertising, travel and entertainment 1,253 1,220

Repair and maintenance, insurance premiums, licence fees and other expenses 975 783

Taxes on capital and property, and other items 75 92

Total 5,085 4,973

Note 3, Depreciation of Fixed Assets


Machinery and equipment 700 760

Land and buildings 82 92

Goodwill 144 145

Total 926 997

Note 4, Unusual Items


Capital gains/ losses on sales of participations, land and buildings 114 295

Rationalization and restructuring expenses – 21 – 889

Other items – 61 – 14

Total 32 – 608

Major transactions in 1998 giving rise to capital gains included the divestment of various non-core activities mainly in the U.S.,Sweden and Japan, such as ABB’s investment management business of the Financial Services Segment.

23

Note 5, Interest Income/Expense

The net interest earned by Financial Services of $ 322 million ($ 303 million) which also includes risk earnings is capturedwithin Operating Earnings after Depreciation. The corresponding amount is deducted from the interest income reported.

Interest expense is made up of the following items:


Interest on pension liabilities 117 119

Interest on financial liabilities 617 497

Total 734 616

Note 6, Income Taxes


Current taxes on income 325 384

Deferred taxes 235 – 129

Taxes in equity accounted companies 3 3

Taxes in discontinued operations – 20 –

Total 543 258

Reconciliation of income taxes 1998

Income before taxes 1,865

Applicable tax rate* 40.8%

Applicable income tax charge* 761

Income taxed at different rates – 23

Amortization of goodwill not tax deductible 32

Use of tax losses/credits for which no deferred tax assets have been recognized in previous periods – 137

Recognition of previously not qualifying deferred tax assets – 176

Non-recognition of current or write-down of previously recognized deferred tax assets 73

Others, net 13

Total income taxes (current and deferred) 543

Effective tax rate for the year 29.1%

* The reconciliation is an aggregation of separate reconciliations prepared using the enacted tax rates of each individual tax jurisdiction.The applicable tax rate is the weighted average of those enacted tax rates.

Note 7, Financial Instruments

Cash and Cash Equivalents


Cash and bank 2,975 2,266

Marketable securities 4,815 3,524

Total 7,790 5,790

Marketable securities at fair value 4,865 3,596

Cash and cash equivalents essentially correspond to funds available on short-term notice (up to three months). Certain securitieshaving longer maturities are immediately realizable on the pertinent markets. The above amounts include $ 1.2 billion earmarked forthe prefinancing of the Elsag Bailey acquisition in 1999 with the corresponding liability contained in short-term loans.

Not included above are securities sold before year-end and subject to repurchase agreements to be executed in 1999 (1998)amounting to $ 858 million ($ 1,477 million).

The Group’s cash and cash equivalents at the end of 1998 were mainly denominated in USD (44%), SEK (24%), CHF (9%), NOK(6%) and DEM (5%).

Average nominal interest rates were in the range of the rates for loans (refer to table on next page).

24

Financing Receivables

1998 1997

Loans granted 982 716

Receivables, finance lease 1,163 1,099

Total 2,145 1,815

Total financing receivables at fair value 2,204 1,849

Loans

Short-term loans 1998 1997

Short-term borrowings 2,839 1,124

Short-term part of medium- and long-term loans 570 591

Total short-term loans 3,409 1,715

Short-term loans include $ 1.2 billion for the prefinancing of the Elsag Bailey acquisition in 1999 with the corresponding amountcontained in cash and cash equivalents.

Medium- and long-term loans 1998 1997

Maturity 1999 165 465

Maturity 2000 786 578

Maturity 2001 374 195

Maturity 2002 749 488

Maturity 2003 451 250

Maturity 2004 and later 283 535

Total medium- and long-term loans 2,808 2,511

Total loans 1998 1997

Short-, medium- and long-term loans 6,217 4,226

of which secured 2% 1%

Total loans at fair value 6,290 4,255

The Group’s total loans outstanding at the end of 1998 (1997) were denominated in the following original currencies(approximate values):

% of total loans Average nominal interest rates1998 1997 1998 1997

USD 51% 47% 5.4% 6.4%

CHF 16% 19% 3.0% 3.2%

ITL 10% 7% 6.4% 9.0%

DEM 3% 5% 4.1% 4.9%

JPY 2% 3% 2.0% 2.3%

Scandinavian currencies 2% 4% 4.3% 5.0%

Others 16% 15% 7.7% 8.5%

In accordance with ABB financial policies, the industrial companies primarily borrow in local currency to meet their financialrequirements. It should also be noted that the Group actively utilizes the financial markets to manage its exposures, with theresult that the original borrowing currency may not necessarily reflect the currency of final obligation.

The ABB Group has no subordinated loans and no debt convertible into own equity.

Most of the borrowing is in floating rate interest or has been converted into floating rate interest through the use of deriva-tive instruments. The combined interest rate risk of the financial assets and liabilities both recognized and unrecognized isnot significant.

There are no significant concentrations of credit risks, neither in the Trade Receivables nor in Financing Receivables nor inCash and Cash Equivalents. This is achieved on the one hand, by the global and diversified customer base of ABB and, onthe other hand, by making deposits with and holding securities from counterparties with a rating equal or better than ABB.

25

Derivative Instruments

The ABB Group uses derivative financial instruments to manage its interest rate and currency exposures arising from its operational, financing and investment activities, as well as for proprietary trading purposes within Treasury Centers. Grouppolicies require that industrial companies hedge all contracted foreign currency exposures, as well as 50% of the antici-pated sales volume of standard products over the next 12 months.

As of December 31, 1998, the notional amounts and fair values of the outstanding derivative instruments were as follows:

Instruments

(US$ in millions) Notional Fair Notional FairAmounts Values Amounts Values

1998 1998 1997 1997

Exchange-traded

Interest rate futures 14,466 – 11,696 –

Forward rate agreements 762 – 3,170 –

Over-the-counter (OTC)

Forward rate agreements 47,660 – 2 99,132 11

Interest rate and currency swaps 13,398 10 16,747 – 36

Interest rate options 789 – 83 –

Foreign exchange contracts 34,832 53 45,505 – 137

Foreign exchange options 1,940 4 1,307 4

Fair value of outstanding derivatives 65 – 158

The notional amounts indicate the extent of the outstanding derivatives at the balance sheet date and therefore do notreflect the Group’s exposures or risks arising from such transactions. The respective figures in the table above represent thenet notional amount per contract for exchange traded instruments as opposed to the gross notional amount of purchasesand sales for OTC instruments.

The larger part of the notional amounts outstanding but a smaller part of the fair values originates from proprietary risktrading. In order to exercise proper control, such activities are regulated by financial policies containing strict rules for themonitoring of market and credit risk. Market risk represents the risk of fluctuations in the value of the outstanding deriva-tives and is controlled and measured in real-time against predefined limits. Credit risk represents the loss that would beincurred if counterparts failed to meet their obligations. ABB maintains tight control over credit risk by selecting mostlycounterparts of equal or better rating than itself, as well as by avoidance of counterpart concentration. Credit risk is furtherreduced through the use of close-out netting agreements with most of its counterparts.

The fair value in 1998 (1997) of $ 65 million ($ –158 million) corresponds to the estimated net amount that would bereceived if the outstanding derivatives were liquidated on December 31, 1998. The fair value arises primarily on instrumentsused to hedge Group exposures and as such is offset by opposite values of the underlying transactions being hedged. Toderive the fair value of the outstanding derivatives, option pricing models and discounted cash flow methodology have beenapplied using the appropriate market parameters.

Note 8, Inventories


Materials 1,496 1,484

Work in progress 2,460 2,932

Finished goods 488 491

Total 4,444 4,907

Work in progress is reported net of related advances spent:

Work in progress (gross) 3,554 4,440

Advances spent (see Note 14) – 1,094 – 1,508

Work in progress (net) 2,460 2,932

26

Note 9, Other Current Assets


Non-trade receivables 1,688 1,625

Prepaid expenses/accrued income 937 887

Advances to suppliers 511 552

Advances to contractors 50 31

Sales in excess of invoicing 1,277 1,188

Total 4,463 4,283

Sales recognized in excess of invoicing originate from application of the percentage of completion method for constructioncontracts and are reported net of related advances spent, as follows:

Sales in excess of invoicing (gross) 3,241 2,808

Advances spent (see Note 14) – 1,964 – 1,620

Sales in excess of invoicing (net) 1,277 1,188

Note 10, Shares and Participations

(US$ in millions) Book value

Holdings in equity accounted companies 102

Holdings in other companies 648

Total 750

Major companies: Group interest1

ABB Chongqing Transformer Co. Ltd., Chongqing City A

ABB Daimler-Benz Transportation GmbH, Berlin A

Athens International Airport S.A., Spata, Athens B

Catalytic Distillation Technologies Inc., Bloomfield A

Dillingham Sadelmi Joint Venture, California A

Fastighets AB Skulderbladet, Västerås B

Förvaltningsbolaget Åttan HB, Stockholm A

Förvaltningsbolaget Kryddgården HB, Stockholm A

GVK Industries Ltd., India B

Hanson Electrical, West Midlands B

Humber Power Ltd., London B

Indeck North American Power Fund, Wheeling B

Isocracking Catalyst Co., San Francisco A

Jorf Lasfar Energy Company, Casablanca A

Malaysia Transformer Manufacturing, Kuala Lumpur A

Oldchurch Aviation BV, Amstelveen A

Plasticos Del Lago C.A. Venezuela B

Termobarranquilla SA, Santafé de Bogotá A

1 Group interest, direct or indirect: A = 20 to 50%, B = less than 20%.

27

Note 11, Intangible Assets


Goodwill at cost 2,529 2,552

Accumulated depreciation of goodwill – 925 – 750

Goodwill at net book value 1,604 1,802

Other intangibles at net book value 323* 179

Total 1,927 1,981

Reconciliation of goodwill

Net book value as of January 1 1,802 1,788

Additions 122 123

Disposals – – 1

Depreciation – 144 – 145

Other movements – 195 113

Translation differences 19 – 76

Net book value as of December 31 1,604 1,802

* Includes reclassification of capitalized software from tangible fixed assets.

Note 12, Tangible Fixed Assets

Machinery and equipment Land and buildings Total

(US$ in millions) 1998 1997 1998 1997 1998 1997

Acquisition value 6,888 6,843 3,149 3,318 10,037 10,161

Accumulated depreciation – 4,460 – 4,364 – 1,059 – 1,072 – 5,519 – 5,436

Net book value 2,428 2,479 2,090 2,246 4,518 4,725

Amounts committed for capital expenditure after year-end 48 122 3 20 51 142

Insurance values 8,232 8,488 5,725 5,741 13,957 14,229

Reconciliation of tangible fixed assets Construction Machinery Land and Totalin progress and equipment buildings

Net book value December 31, 1997 242 2,479 2,246 4,967

Capital expenditure 206 572 87 865

Disposals – 16 – 184 – 284 – 484

Additions through acquisitions – 42 21 63

Transfer between asset classes – 265 229 36 –

Depreciation – – 700 – 82 – 782

Other movements 3 – 63 – 18 – 78

Translation differences 3 53 84 140

Net book value December 31, 1998 173 2,428 2,090 4,691

Note 13, Other Current Liabilities


Taxes due 437 538

Non-trade payables 2,051 2,196

Accrued expenses/deferred income 2,475 2,272

Total 4,963 5,006

28

Note 14, Advances from Customers


Advances (gross) 5,704 5,740

Advances spent relating to sales in excess of invoicing – 1,964 – 1,620

Advances spent relating to work in progress – 1,094 – 1,508

Advances (net) 2,646 2,612

Advances (gross) represent the total of down and progress payments received for orders or parts of orders not yet invoiced.

Advances spent represent the part of gross advances consumed on work performed for orders not yet invoiced.

Note 15, Deferred Taxes

As per January 1, 1998, the Group has adopted the revised IAS 12 on income taxes. This resulted in an increase of both deferred tax assets and of deferred tax liabilities. The net effect of $ 36 million deferred tax assets has been creditedto equity.

(US$ in millions) 1998

Deferred tax assets/liabilities on: Assets Liabilities

Inventories 117 151

Other current assets 33 148

Shares & participations 2 164

Receivables, finance lease 7 493

Other fixed assets 19 458

Provisions 283 88

Other current liabilities 59 67

Pension liabilites and similar 70 47

Other items 136 339

Unused tax losses and unused tax credits 228 –

Total 954 1,955

Net deferred tax liabilities (1997: $ 790 million) 1,001

Accumulated unused tax losses, tax credits and deductible temporary differences that have not been recognized asdeferred tax assets have developed as follows:

Not recognized Potentialdeductible amounts tax savings

At the end of 1997 2,100 782

Used in 1998 (net) – 131 – 54

At the end of 1998 1,969 728

Not recognized deductible amounts by expiry dates:

1999 42

2000 47

2001 59

2002 68

2003 and after 1,753

Total 1,969

29

Note 16, Stockholders’ Equity

Other reserves Of which(US$ in millions) Share Restricted and retained Net translation

capital reserves earnings income Total differences

Opening balance sheet 2,087 965 1,659 572 5,283 – 604

Transfers between reserves 27 545 – 572

Dividends – 460 – 460

Change in accounting principleand other items – 5 – 69 – 74

Translation differences 116 – 211 – 95 –95

Net income 1998 1,305 1,305

Closing balance sheet 2,087 1,103 1,464 1,305 5,959 – 699

Note 17, Contingent Liabilities and Litigations

Contingent liabilities


Discounted bills of exchange 49 74

Guarantees related to financed contracts 46 28

Other contingent liabilities 53 93

Total 148 195

As part of the Group’s business operations there are, in addition to the contingent liabilities listed above, guarantees for the per-formance of various contractual undertakings. Some of these are of an on-demand nature (in respect of which ABB maintainsinsurance protection against “unfair calling”). There is no indication that such guarantees will result in any material payment notprovided for.

Litigations

Various legal actions and claims are pending or may be asserted in the future against Group companies. They mainly include mattersrelating to warranties, personal injury, damage to property, environmental liability and intellectual property rights.

Related risks have been analyzed as to likelihood of occurrence and amounts involved and provisions have been set up after takinginto consideration available insurance coverage. Although the outcome of these matters cannot always be ascertained with preci-sion, Management believes that no material liabilities exceeding those provided in the financial statements of the Group are likely toresult.

Note 18, Assets Pledged


Cash and cash equivalents 1,052 438

Receivables and inventories 23 90

Tangible fixed assets 40 34

Other assets 37 19

Total 1,152 581

30

Note 19, Transactions with Related Parties

The balance sheet includes the following amounts resulting from transactions with either associates (non-consolidatedcompanies in which ABB has a participation), Adtranz (100% in 1998, 50% in 1997) or shareholders:


Cash and cash equivalents 268 130

Receivables 72 28

Financing receivables 27 9

Payables 235 145

Loans 272 191

Note 20, Leases

Finance leases


Assets held under finance leases 14 16

Assets subject to finance lease accounting are included in the relevant categories shown under Note 12, Tangible Fixed Assets.

Liabilities from finance leases 1998 1997

– short-term 5 4

– medium- and long-term 6 13

Total 11 17

Liabilities from finance lease accounting represent the present value of outstanding lease commitments, whereby amortization iscalculated according to the annuity method. Liabilities from finance leases are reported within short-, medium-, and long-term loans.

Commitments from leases 2004Payments due 1999 2000 2001 2002 2003 and later

Finance leases 6 3 2 1 – 1

Operating leases 378 320 264 238 229 586

The above represents the non-discounted contractual lease commitments. Operating leases correspond essentially to the rentalpayments for real estate during the non-cancelable part of the lease term.

Note 21, Retirement Benefit Costs

Retirement benefit costs charged to income in respect of substantive retirement plans:


Defined benefit plans 285 254

Defined contribution plans 297 334

Total 582 588

31

Status of substantive defined benefit plans:

Benefit obligations Assets in excess ofin excess of assets benefit obligations

1998 1997 1998 1997

Projected benefit obligation – 4,045 – 3,296 – 468 – 961

Plan assets at fair value 1,841 1,438 539 1,112

Funded status – 2,204 – 1,858 71 151

Pension liability (–) / asset* – 1,632 – 1,565 117 84

* Pension liabilities stated in the Balance Sheet include in addition minor defined benefit plans as well as accruals for other post-employment benefits, thelatter referring especially to the Americas.

Principal assumptions used to determine retirement benefit costs and projected benefit obligations:

Weighted average rates: 1998 1997

Discount rate 5.8% 6.8%

Rate of compensation increase 3.5% 4.0%

Expected long-term rate of return on plan assets 7.7% 7.6%

Note 22, Acquisitions and Divestitures

Several acquisitions and divestitures of business activities during 1998 (1997) affected the Balance Sheet in the respectiveyears as follows:

Acquisitions


Cash and cash equivalents – 14

Current assets 94 141

Fixed assets 165 135

Current liabilities – 71 – 88

Non-current liabilities – 36 – 23

Net assets acquired 152 179

Goodwill 122 123

Total purchase considerations 274 302

less cash and cash equivalents acquired – – 14

Cash used for acquisitions 274 288

Divestitures

Cash and cash equivalents 142 10

Current assets 1,530 480

Fixed assets 260 149

Current liabilities – 762 – 117

Non-current liabilities – 1,049 – 74

Net assets disposed 121 448

Gains/losses on divestitures 81 300

Total sales considerations 202 748

less cash and cash equivalents disposed – 142 – 10

Cash from divestitures 60 738

The main effects in 1998 resulted from the discontinued consolidation of the share of 50% in the ABB Daimler-Benz Trans-portation Group (Adtranz). For details see the following Note 23.

Other major acquisitions and divestitures are explained under Management’s Discussion – Analysis of the Group.

32

Note 23, ABB Daimler-Benz Transportation Group (Adtranz)

During 1998, ABB decided to dispose of its 50% share in Adtranz. Subsequent to the year-end, agreement was reached forits disposal. Since Adtranz represented a separate business segment of ABB, the consequences of this decision wereaccounted for using the discontinuing operations method of accounting. Under this method, ABB discontinued the propor-tionate consolidation of Adtranz in 1998. However, the pre-tax loss of $ 64 million and the related taxes for the periodup to September 30, 1998 were fully recorded in the income statement. The proportionate assets held by ABB in respect ofAdtranz were reclassified as a participation (Note 10). While no capital gain from this transaction was recognized in 1998,the net gain on disposal (of $ 41 million) will be recorded in the 1999 financial statements when realized.

Summarized below are:– the amounts included in ABB’s financial statements in 1997– the amounts as per third quarter reporting 1998.

Income statement

(US$ in millions) 1998* 1997**

Revenues 1,296 1,870

Expenses, changes in work in progress, depreciation – 1,351 – 1,926

Unusual items – 14 – 55

Operating earnings after depreciation – 69 – 111

Finance net 5 3

Income/loss before taxes – 64 – 108

Taxes and minority interests 21 – 11

Net income/loss – 43 – 119

** 9 months ending September 30, 1998** 12 months

Balance sheet (December 31)

(US$ in millions) 1997

Current assets 1,406

Fixed assets 405

Total Assets 1,811

Current liabilities 938

Non-current liabilities 664

Stockholders’ equity 209

Total Liabilities and Equity 1,811

Note 24, Event after Balance Sheet Date

ABB successfully completed the acquisition of Elsag Bailey Process Automation Group in January 1999 for a total value of$ 2.1 billion including debt of $ 0.6 billion.

The 1998 accounts are not affected by this transaction except for the prefinancing of part of the purchase price as set outin Note 7.

33

Group Auditors’ Report

As auditors of the ABB Group, we have audited the consolidated

financial statements (balance sheet, income statement, statement

of cash flows and notes) of ABB Asea Brown Boveri Ltd for the

year ended December 31, 1998.

These consolidated financial statements are the responsibility of

the Board of Directors. Our responsibility is to express an opinion

on these consolidated financial statements based on our audit.

We confirm that we meet the legal requirements concerning pro-

fessional qualification and independence.

Our audit was conducted in accordance with auditing standards

promulgated by the profession, and with International Standards

on Auditing issued by the International Federation of Accountants

(IFAC), which require that an audit be planned and performed to

obtain reasonable assurance about whether the consolidated

financial statements are free from material misstatement. We have

examined on a test basis evidence supporting the amounts and

disclosures in the consolidated financial statements. We have also

assessed the accounting principles used, significant estimates

made and the overall consolidated financial statement presenta-

tion. We believe that our audit provides a reasonable basis for our

opinion.

In our opinion, the consolidated financial statements give a true

and fair view of the financial position, the results of operations

and the cash flows in accordance with International Accounting

Standards (IAS) and comply with the law.

We recommend that the consolidated financial statements sub-

mitted to you be approved.

KPMG Klynveld Peat Ernst & Young AG

Marwick Goerdeler SA

B. A. Mathers J. Birgerson

B. J. DeBlanc E. Rufli

Auditors in charge

Zurich, February 3, 1999

ABB Group Auditors’ Report

34

ABB’s Global Scope and Major Subsidiaries

ArgentinaAsea Brown Boveri S.A., Buenos Aires A MS

AustraliaAsea Brown Boveri Pty. Ltd., Sydney, NSW A HOABB EPT Management Ltd., Sydney, NSW A HOABB Industry Pty Ltd., Revesby, NSW A MSABB Transmission & Distribution Ltd., Moorebank, NSW A HO

AustriaAsea Brown Boveri Aktiengesellschaft, Vienna A HO

BelgiumAsea Brown Boveri S.A., Brussels A SA

BrazilAsea Brown Boveri Ltda., Osasco A MS

CanadaAsea Brown Boveri Inc., St. Laurent, Quebec A HO

ChinaAsea Brown Boveri (China) Investments Ltd.,Beijing A HOABB Hefei Transformer Co. Ltd., Hefei B MSABB Industrial and Building Systems Ltd., Hong Kong A SA

ColombiaAsea Brown Boveri Ltda., Bogotá A MS

Czech RepublicAsea Brown Boveri s.r.o., Prague A SAABB EJF Brno a.s., Brno A MSABB Energetické Systémy s.r.o., Brno A MS

DenmarkAsea Brown Boveri A/S, Odense A HOABB Electric A/S, Fredericia A MSABB Energi & Industri A/S, Skovlunde A MS

EgyptAsea Brown Boveri S.A.E., Cairo A HO

FinlandABB Oy, Helsinki A HOABB Control Oy, Vaasa A MSABB Industry Oy, Helsinki A MSABB Installaatiot Oy, Paimio A MSABB Service Oy, Helsinki A MSABB Transmit Oy, Vaasa A MS

FranceAsea Brown Boveri S.A., Paris La Défense A HOABB Flexible Automation S.N.C., Saint-Ouen-l’Aumône A MSABB Industrie S.A.S., Champagne-sur-Seine A MS

GermanyAsea Brown Boveri Aktiengesellschaft, Mannheim A HOABB Calor Emag Schaltanlagen, Mannheim A MSABB Energieanlagenbau GmbH, Dresden A MSABB Flexible Automation GmbH, Friedberg A MSABB Gebäudetechnik AG, Mannheim A HOABB Industrietechnik GmbH, Mannheim A MSABB Kraftwerke Aktiengesellschaft, Mannheim A MSABB Schaltanlagentechnik GmbH, Ladenburg A MSABB Stotz-Kontakt GmbH, Mannheim A MSABB Turbinen Nürnberg GmbH, Nürnberg A MSABB Utilities Automation GmbH, Mannheim A MSBusch-Jaeger Elektro GmbH, Mannheim/Lüdenscheid A MS

GreeceAsea Brown Boveri S.A., Metamorphossis Attica A SA

HungaryAsea Brown Boveri Ltd., Budapest A SA

IndiaAsea Brown Boveri Ltd., Bombay B MSABB ABL Ltd., New Delhi B MS

IndonesiaPT ABB Energy Systems Indonesia, Surabaya B MS

IrelandAsea Brown Boveri Ltd., Dublin A MS

ItalyAsea Brown Boveri S.p.A., Milan A HOABB Adda S.p.A., Lodi A MSABB Elettrocondutture S.p.A., Vittuone, MI A MSABB Sace S.p.A., Bergamo A MSABB Sadelmi S.p.A., Milan A MSABB SAE S.p.A., Milan A MSABB Sistemi Industriali S.p.A., Sesto San Giovanni, MI A MSSOIMI Soc. Impianti Ind. S.p.A., Sesto San Giovanni, MI A MS

JapanABB K.K., Kobe A HO

Korea, Republic ofAsea Brown Boveri Ltd., Seoul A MS

MalaysiaAsea Brown Boveri Holdings Sdn. Bhd., Petaling Jaya A HO

MexicoAsea Brown Boveri S.A. de C.V., Mexico City A HO

NetherlandsAsea Brown Boveri BV, Rotterdam A HOABB Capital, B.V., Amsterdam A FSABB Lummus Crest Holding B.V., The Hague A MS

New ZealandAsea Brown Boveri Ltd., Auckland A MS

NorwayAsea Brown Boveri AS, Billingstad A HOABB Installasjon AS, Billingstad A MSABB Kraft AS, Drammen A MSABB Norsk Kabel AS, Drammen A MSABB Offshore Systems AS, Sandnes A MS

PhilippinesAsea Brown Boveri Inc., Paranaque, MetroManila A HO

PolandAsea Brown Boveri Ltd., Warsaw A HOABB Dolmel Ltd., Wroclaw A MSABB Elta Sp.z.o.o., Lódz B MSABB Zamech Ltd., Elblag A MSABB ZWAR S.A., Warsaw B MS

PortugalAsea Brown Boveri S.G.P.S., S.A., Amadora A HO

RomaniaAsea Brown Boveri SRL, Bucharest A HO

RussiaAsea Brown Boveri Ltd., Moscow A HO

Saudi ArabiaABB Electrical Industries Ltd., Riyadh C MS

SingaporeAsea Brown Boveri Holdings Pte. Ltd., Singapore A HO

South AfricaAsea Brown Boveri (Pty) Ltd., Sandton A HO

SpainAsea Brown Boveri S.A., Madrid A HOABB Generación S.A., Valle de Trapaga (Vizcaya) A MSABB Trafo S.A., Zaragoza A MS

SwedenAsea Brown Boveri AB, Västerås A HOABB Atom AB, Västerås A MSABB Automation Products AB, Västerås A MSABB Automation Systems AB, Västerås A MSABB Contracting AB, Västerås A MSABB Financial Services AB, Stockholm A FSABB Generation AB, Västerås A MSABB Network Partner AB, Västerås A MSABB Power Systems AB, Ludvika A MSABB Service AB, Västerås A SAABB Stal AB, Finspång A MSABB Switchgear AB, Ludvika A MSABB Ventilation Products AB, Jönköping A MS

SwitzerlandAsea Brown Boveri AG, Baden A HOABB Hochspannungstechnik AG, Zurich A MSABB Industrie AG, Baden A MSABB Installationen AG, Volketswil A MSABB Kraftwerke AG, Baden A MSABB Network Partner AG, Baden A MSABB Turbo-Systems AG, Baden A MS

TaiwanAsea Brown Boveri Ltd., Taipei A MS

ThailandAsea Brown Boveri Ltd., Bangkok A HO

TurkeyAsea Brown Boveri Holding A.S., Istanbul A HO

UkraineAsea Brown Boveri Ltd., Kiev A HO

United KingdomAsea Brown Boveri Ltd., London A HOABB Industrial Systems Ltd., Stevenage A MSABB Kent plc, Luton A HOABB Power T&D Ltd., Telford A MSABB Vetco Gray U.K. Ltd., Aberdeen A MSWilliam Steward (Holdings) Ltd., London A HO

United StatesAsea Brown Boveri Inc., Norwalk, CT A HOABB Air Preheater Inc., Wellsville, NY A MSABB C-E Services Inc., Windsor, CT A MSABB Flexible Automation Inc., New Berlin, WI A MSABB Industrial Systems Inc., Columbus, OH A MSABB Lummus Global Inc., Bloomfield, NJ A MSABB Power Generation Inc., Midlothian, VA A SAABB Power T&D Company Inc., Raleigh, NC A MSABB Service Inc., Massillon, OH A MSABB Susa, Inc., North Brunswick, NJ A MSABB Vetco Gray Inc., Houston, TX A MSCombustion Engineering Inc., Norwalk, CT A HO

VenezuelaAsea Brown Boveri S.A., Caracas A MS

VietnamABB Transformers Ltd., Hanoi B MS

ZimbabweAsea Brown Boveri (Private) Ltd., Harare A MS

1 Parent company’s interest, direct or indirect: A = more than 95%, B = 50 to 95%, C = less than 50%

2 FS = Financial services, HO = Holding, MS = Manufacturing and sales, SA = Sales

Country/Company Group Activity2

Interest1Country/Company Group Activity2

Interest1Country/Company Group Activity2

Interest1

35

ABB Group Statistical Data

(US$ in millions, unless otherwise stated) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989

Consolidated Income Statement

Revenues 30,872 31,265 33,767 32,751 28,758 27,521 29,109 28,443 26,337 20,260

Depreciation of Fixed Assets – 926 – 997 – 1,044 – 1,021 – 893 – 844 – 901 – 819 – 750 – 549

Operating Earnings after Depreciation 2,111 1,137 2,113 2,181 1,574 1,311 1,219 1,417 1,386 918

Income before Taxes 1,865 853 1,901 2,003 1,362 520 861 997 1,052 872

Net Income before Minority Interest 1,322 595 1,242 1,361 795 72 528 633 628 628

Net Income 1,305 572 1,233 1,315 760 68 505 609 590 589

Consolidated Balance Sheet

Cash and Cash Equivalents 7,790 5,790 5,553 6,831 7,612 5,700 5,534 5,211 4,975 4,332

Other Current Assets 15,080 14,846 15,606 15,437 12,348 10,672 11,432 12,688 12,848 10,470

Fixed Assets 9,513 9,148 9,737 9,808 9,095 8,532 8,983 10,157 10,286 7,743

Total Assets 32,383 29,784 30,896 32,076 29,055 24,904 25,949 28,056 28,109 22,545

Current Liabilities 17,883 16,520 17,147 17,302 15,458 13,390 13,203 15,394 15,441 13,209

Advances from Customers 2,646 2,612 2,610 3,576 3,417 2,567 2,983 2,820 2,798 1,768

Medium- and Long-Term Loans 2,808 2,511 1,823 2,644 3,049 2,866 2,993 2,496 2,712 1,746

Other Long-Term Liabilities 2,772 2,538 3,094 2,971 2,732 2,244 2,384 2,547 2,442 1,447

Stockholders’ Equity incl. Minority Interest 6,274 5,603 6,222 5,583 4,399 3,837 4,386 4,799 4,715 4,375

Consolidated Statement of Cash Flows

Cash Flows from Operating Activities 2,104 1,791 834 951 2,135 1,515 1,942 2,128 1,044 1,437

Cash Flows related to Investing Activities – 1,091 – 722 – 1,118 – 402 – 501 – 839 – 373 – 316 – 1,024 – 3,951

Cash Flows related to Financing Activities 942 – 421 – 855 – 1,696 – 122 – 54 – 477 – 1,528 218 3,323

Effects of Translation Differences 45 – 411 – 139 366 400 – 456 – 769 – 48 405 27

Net Changes in Cash and Cash Equivalents 2,000 237 – 1,278 – 781 1,912 166 323 236 643 836

Other Data

Orders Received 31,462 34,803 33,884 35,163 30,827 28,644 31,153 29,209 28,938 21,348

Capital Expenditure for Tangible Fixed Assets 865 1,093 1,168 1,171 935 816 957 1,035 961 783

Capital Expenditure for Acquisitions 274 302 333 315 196 212 253 612 677 3,090

Expenditure for Research and Development 2,463 2,657 2,638 2,627 2,353 2,271 2,386 2,342 1,931 1,361

Dividends Declared Pertaining toFiscal Year (Swiss francs in millions) 740 700 650 520 370 340 340 330 300 290

Net cash/net debt position 1,573 1,564 1,204 1,997 1,686 242 – 7 – 950 – 2,110 – 1,760

Average Capital Employed 12,319 12,085 12,537 12,478 11,816 11,579 12,531 13,403 12,724 9,585

Number of Employees 199,232 213,057 214,894 209,637 207,557 206,490 213,407 214,399 215,154 189,493

Ratios

Operating Earnings after Depreciation/Revenues 6.8% 3.6% 6.3% 6.7% 5.5% 4.8% 4.2% 5.0% 5.3% 4.5%

Return on Equity 23.2% 10.3% 22.2% 28.4% 20.2% 1.8% 11.8% 13.9% 14.5% 16.8%

Return on Capital Employed 21.1% 12.2% 19.9% 21.8% 16.9% 15.4% 14.7% 14.7% 17.3% 15.1%

36

ABB Board of Directors

Percy N. Barnevik (born 1941) Chairman

Chairman: ABB AB, Investor, Sandvik

Board Member: General Motors

Robert A. Jeker (born 1935) Vice-Chairman

Chairman: ABB AG, Batigroup, Feldschlösschen-Hürlimann,Georg Fischer, Messe Basel, Stratec, Swiss Steel





Board Member: ABB AG, Allianz, Suez Lyonnaise des Eaux,Veba, Volkswagen


CEO: Hoechst

Board Member: ABB AG, Allianz, IBM Corporation

Yotaro Kobayashi (born 1933)

Chairman and Co-CEO: Fuji XEROX

Board Member: Xerox Corporation

Japanese Chairman: The Trilateral Commission

Vice Chairman: International University of Japan, Keizai Doyokai (Japan Association of Corporate Executives)

Donald H. Rumsfeld (born 1932)

Chairman: Gilead Sciences

Board Member: ABB AB, Gulfstream Aerospace, Kellogg,Tribune Company

Former U.S. Ambassador to NATO, U.S. Secretary of Defense, CEO of G.D. Searle & Co., and CEO of General Instrument Corp.

Agostino Rocca (born 1945)

President and CEO: Techint Group

Chairman: Siderar, Techint S.A., Techint Engineering Co.,Tecpetrol

Deputy Chairman: Siderca

Advisory Member: New York Stock Exchange (NYSE), Praxair, Santander Group


President: The Association of Swiss Engineering Employers, The Swiss Association of Machinery Manufacturers

Board Member: ABB AG, Georg Fischer, SIG, Swiss Steel

Peter D. Sutherland (born 1946)

Chairman and Managing Director: GoldmanSachs International


Board Member: ABB AB, Ericsson, Investor

Former Director-General GATT and WTO, Former EU Commissioner

Björn Svedberg (born 1937)

Board Member: ABB AB, Gambro, Investor, SAAB, SAGA Petroleum

Lodewijk C. van Wachem (born 1931)

Chairman: Royal Dutch Petroleum

Board Member: Akzo Nobel, ATCO, Bayer, BMW, IBM, Philips, Zurich Financial Services

Former President and CEO: Royal Dutch/Shell

Beat Hess, Secretary to the Board

Auditors

KPMG Klynveld Peat Marwick Goerdeler SAZurich

Ernst & Young AGZurich

Proposed Changes in the ABB Board of Directors

Messrs. Björn Svedberg and Lodewijk C. van Wachemhave announced their intentions to resign from the ABBGroup Board of Directors at the Annual General Meeting onMarch 18, 1999. The Board thanks them for their outstand-ing contributions to the company.

The Board intends to propose to the shareholders onMarch 18, 1999 to newly elect to the ABB Group BoardMr. Martin Ebner, Chairman of BZ Group Holding andPresident of BZ Bank, Switzerland and Mr. JacobWallenberg, Chairman of Skandinaviska Enskilda Bankenand member of the management group of Investor AB,Sweden. In addition, the President and CEO of the ABBGroup, Mr. Göran Lindahl is proposed to join the Board.

Further, the remaining members will be proposed forreelection to the ABB Group Board.

The ABB Group Board has also declared its intention toreelect Mr. Percy N. Barnevik as Chairman of the ABBGroup Board and Mr. Robert A. Jeker as Vice-Chairman.

37

ABB Asea Brown Boveri Ltd, Zurich

Income Statement

Year ended December 31 (CHF in thousands) 1998 1997

Revenues 169,804 181,357


Other expenses* – 217,381 – 154,814

Depreciation of fixed assets – 4,422 – 20,671

Unusual items – –

Dividend income 899,625 1,094,007

Interest income 96,427 31,193

Interest expense – 50,488 – 43,231

Capital gains on sales of shares and participations 920,513 110,598

Write-down of shares and participations – 842,503 – 151,363

Income Before Taxes 888,936 952,021

Income taxes* – 8,621 – 10,510

Net Income 880,315 941,511

* 1997 restated in accordance with new principles of tax recognition.

Balance Sheet

December 31 (CHF in thousands) Notes 1998 1997

Assets

Current Assets

Cash and cash equivalents 1, 7 2,019,578 790,858

Receivables 2 105,955 162,781

Total Current Assets 7 2,125,533 953,639

Fixed Assets

Loans granted 7 1,677,013 404,475

Shares and participations 8 7,293,386 7,384,883

Trademarks 6,369 8,492

Machinery and equipment 9 3,060 4,195

Total Fixed Assets 8,979,828 7,802,045

Total Assets 11,105,361 8,755,684

Fiduciary assets (ABB Group) 257,736 238,735


Liabilities

Current liabilities 3, 7 3,068,014 717,533


Medium- and long-term loans 7 – 180,600

Bonds 4 300,000 300,000

Total Liabilities 3,397,369 1,228,007


Share capital 2,768,000 2,768,000

Legal reserve 5 553,600 553,600

Other reserves 1,869,866 1,869,866

Retained earnings 1,636,211 1,394,700

Net income 880,315 941,511

Total Stockholders’ Equity 7,707,992 7,527,677

Total Liabilities and Equity 11,105,361 8,755,684

Fiduciary liabilities (ABB Group) 257,736 238,735

Contingent liabilities 6 126,411 45,117

38

Note 1, Cash and Cash Equivalents

(CHF in thousands) 1998 1997

Cash and bank 1,650,551 601,551


Total 2,019,578 790,858

Note 2, Receivables


Non-trade receivables 57,088 156,742

Prepaid expenses / accrued income 48,867 6,039

Total 105,955 162,781

Note 3, Current Liabilities


Non-trade payables 218,862 610,517

Accrued expenses / deferred income 592,414 107,016

Short-term loans 2,256,738 –

Total 3,068,014 717,533

Note 4, Bonds


1992–2002 7.00 % 150,000 150,000

1992–2002 7.25 % 150,000 150,000

Total 300,000 300,000

Note 5, Legal Reserve


Balance at the beginning of the year 553,600 553,600

Allocation to legal reserve – –

Balance at the end of the year 553,600 553,600

Note 6, Contingent Liabilities


Guarantees related to financial operations 126,411 45,117

In addition to the above stated contingent liabilities the company has provided certain guarantees, indemnities andsimilar instruments (“Guarantees”) securing the performance by Group companies of contracts and undertakings enteredinto in the normal course of business. Quantified guarantees amount to CHF 171,043 thousand (CHF 185,545 thousandin 1997). Unquantified guarantees relate to contracts and undertakings of an aggregate value of approximately CHF1,917,389 thousand (CHF 1,967,335 thousand in 1997). The extent of the company’s potential exposure can, however, notreliably be assessed on the basis of such values and no liabilities are expected to arise from the Guarantees.

Notes to the Financial Statements

39

Note 7, Transactions with Related Parties


The balance sheet includes the following amounts resulting from transactions with subsidiaries:

Current assets 1,688,985 648,486

Loans granted 1,663,138 383,227

Current liabilities 2,514,923 392,524

Medium- and long-term loans – 180,600

The balance sheet includes the following amounts resulting from transactions with shareholders:



Major subsidiaries of ABB Asea Brown Boveri Ltd are listed on page 34 of the Financial Review.

Note 9, Insurance Value of Machinery and Equipment

The insurance value of machinery and equipment amounts to CHF 13 million at the end of 1998 (CHF 13 million in 1997).

There are no further items which require disclosure in accordance with Art. 663 b of the Swiss Code ofObligations.

Proposed Appropriation of Profit


Net income for the year 880,315 941,511

Carried forward from previous year 1,636,211 1,394,700

2,516,526 2,336,211

Dividend on class A shares in favor of ABB AB – 370,000 – 350,000

Dividend on class B shares in favor of ABB AG – 370,000 – 350,000

Balance to be carried forward 1,776,526 1,636,211

40

Auditors’ Report

As statutory auditors, we have audited the accounting records

and the financial statements (balance sheet, income statement

and notes) of ABB Asea Brown Boveri Ltd, Zurich, for the year

ended December 31, 1998.

These financial statements are the responsibility of the Board

of Directors. Our responsibility is to express an opinion on these

financial statements based on our audit. We confirm that we meet

the legal requirements concerning professional qualification and

independence.

Our audit was conducted in accordance with auditing standards

promulgated by the profession, which require that an audit be

planned and performed to obtain reasonable assurance about

whether the financial statements are free from material misstate-

ment. We have examined on a test basis evidence supporting

the amounts and disclosures in the financial statements. We have

also assessed the accounting principles used, significant

estimates made and the overall financial statement presentation.

We believe that our audit provides a reasonable basis for our

opinion.

In our opinion, the accounting records, financial statements and

the proposed appropriation of available earnings comply with the

law and the company’s articles of incorporation.

We recommend that the financial statements submitted to you be

approved.

KPMG Klynveld Peat Marwick Goerdeler SA

B. A. Mathers

B. J. DeBlanc

Auditors in charge

Zurich, February 3, 1999

41

ABB Parent Companies’ Financial Results 1998




Zurich

Switzerland

ABB AGBaden

Switzerland

50%


50%

ABB AB Shareholders ABB AG Shareholders ABB AB (Sweden) and ABB AG (Switzerland) are

the two sole owners in equal parts of ABB Asea

Brown Boveri Ltd, Zurich (Switzerland), which is

the holding company of the ABB Group with

approximately 1,000 companies around the world.

The two parent companies each provide a trans-

parent vehicle for investing in ABB as virtually all

of their income and stockholders’ equity comes

from their respective 50-percent shares of the ABB

Group income and equity.

ABB companies throughout the world report

their financial results in local currencies, which

are then translated to U.S. dollars to establish

the ABB Group’s consolidated accounts. In order

to compute the income of the two parent com-

panies, ABB AB (Sweden) and ABB AG (Switzer-

land), their 50-percent shares of ABB Group

income are translated from U.S. dollars to Swedish

kronor (SEK) and Swiss francs (CHF), respectively.

42

ABB AB Annual Report 1998

ABB AB Board of Directors, President and Auditors

Honorary Chairman

Curt Nicolin (born 1921).

President of ASEA 1961–1975.

Chairman 1976–1991.

Members elected by the shareholders

Chairman

Percy N. Barnevik (born 1941). Elected 1998.

Chairman: ABB Asea Brown Boveri Ltd, Investor, Sandvik.

Board Member: General Motors.

Shares held: 45,000 A shares,107,260 B shares.

Donald H.Rumsfeld (born 1932). Elected 1996.

Chairman: Gilead Sciences.

Board Member: ABB Asea Brown Boveri Ltd,Gulfstream Aerospace, Kellogg, Tribune Company.

Former U.S. Ambassador to NATO, U.S. Secretary ofDefense, CEO of G.D. Searle & Co., and CEO of GeneralInstrument Corp.

Shares held: 100 (ADR).

Peter D.Sutherland (born 1946). Elected 1996.

Chairman and Managing Director: GoldmanSachs International.


Board Member: ABB Asea Brown Boveri Ltd, Ericsson, Investor.

Former Director-General GATT and WTO.

Former EU Commissioner.

Shares held: 112.

Björn Svedberg (born 1937). Elected 1991.

Board Member: ABB Asea Brown Boveri Ltd, Gambro, Investor, SAAB, Saga Petroleum.

Shares held: 0.

President

Gunnar Björkenor (born 1951). Appointed 1998.

General Counsel Asea Brown Boveri AB.

Shares held: 161 A shares,14 B shares.

ABB AB’s Statutory Auditors and Group Auditors

Gunnar Widhagen (born 1938). Elected 1985.

(Elected Deputy Auditor 1973.)

Authorized Public Accountant.

Carl-Gustaf Gutberg (born 1946). Elected 1994.

(Elected Deputy Auditor 1988.)


Deputy Auditors:

Torbjörn Hanson (born 1943). Elected 1985.


Jan Birgerson (born 1954). Elected 1996.


43

ABB AB Board of Directors Report

ABB AB (Sweden) and associated companyABB AB’s share of ABB Group’s income beforetaxes and after minority interests for 1998was US$ 920 million (1997: US$ 409 million),an increase of 125 percent. The average U.S.dollar exchange rate increased 4 percent fromSEK 7.61/US$ during 1997 to SEK 7.95/US$ in1998.The year-end exchange rate was up 3 per-cent from SEK 7.90/US$ at the close of 1997to SEK 8.13/US$ at December 31,1998. Aftertranslation, ABB AB’s share of ABB Groupincome before taxes and after minority interestsincreased from SEK 3,116 million in 1997 toSEK 7,318 million in 1998. ABB AB’s income be-fore taxes, including associated company,amounted to SEK 7,311 million in 1998 (1997:SEK 3,114 million). After taxes of SEK 2,130 mil-lion (1997: SEK 940 million), net incomeamounted to SEK 5,181 million (1997: SEK 2,174million) for the year, an increase of 138 percent.

ABB AB’s net income per share amounted toSEK 5.52 in 1998 (1997: 2.32).

ABB AB, parent companyFor fiscal year 1998, ABB AB will receive adividend of CHF 370 million from ABB AseaBrown Boveri Ltd. In order for ABB Group’s1998 profits to be made available to ABB ABshareholders in the spring of 1999, the amountin SEK of 2,042 million was anticipated in theparent company’s 1998 financial statements.

Administrative expenses increased fromSEK11 million in 1997 to SEK 14 million in 1998,and interest net decreased from SEK 9 millionto SEK 7 million. Net income amounted toSEK 2,046 million (1997: SEK1,925 million) forthe year.

The Board of Directors of ABB AB proposes adividend of SEK 2.18 per share (1997: SEK 2.10),totaling SEK 2,045 million (1997: SEK1,970 mil-lion).

For information on compensation to the Boardof Directors, employees and auditors, seeNote 2 “ABB AB Notes to the Financial State-ment” on page 47.

1998 Board ActivitiesDuring 1998, the Board has held four meetingsand a statutory meeting. In addition to thematters normally attended by the Board, theBoard has also (i) prepared a prospectuspursuant to Chapter 4, Article18 of the Com-

panies Act in relation to Gambro AB’s saleof ABB AB A shares and (ii) adopted Rulesof Procedures for the Board. The Rules of Procedures specifies that the Board shallconvene four times a year in addition to thestatutory meeting.

ABB Single-Class ShareThe Boards of Directors of ABB Asea BrownBoveri Ltd of Switzerland, ABB AB of Swedenand ABB AG of Switzerland have approveda plan that would simplify the share capitalstructure of the ABB Group. The plan contem-plates the creation of a Swiss company thatwould offer a single class of shares in exchangefor existing ABB AB and ABB AG shares intwo separate exchange offers. The exchangeoffers are expected to commence shortlyfollowing the Annual General Meetings ofboth ABB AB and ABB AG, scheduled to takeplace on March 18, 1999. More informationabout the offer will be separately distributedto the shareholders of ABB AB and ABB AGsubject to prevailing securities laws and regula-tions.

Board of DirectorsMr. Björn Svedberg has announced hisintention to resign from the Board of Directorsof ABB AB at the next Annual General Meet-ing on March 18,1999 and decided not to standfor reelection to the Board of ABB Group.After serving 8 years on the ABB AB and ABBGroup Boards, Mr. Svedberg has renderedgreat and lasting services on behalf of the com-pany and the Board expresses its sinceregratitude and recognition for his valuable efforts.The remaining members are proposed to be re-elected to the ABB AB Board. The Board intendsto propose to the shareholders to elect Mr.Jacob Wallenberg, Chairman of SkandinaviskaEnskilda Banken and member of the manage-ment group of Investor AB, Sweden to the ABBAB Board.

Introduction of the EuroNo transactions made by ABB AB are affectedby the euro introduction. No decision hasbeen taken by the Board of Directors to intro-duce euro accounting in the Annual Report.

The effects of the euro conversion for the ABBGroup are described on page 6.

44

ABB AB and associated company, five-year overview

(SEK in millions) 1998 1997 1996 1995 1994

Share of ABB Group income before taxes and after minority interests 7,318 3,116 6,304 6,904 5,057

Parent Company’s result before taxes (excluding dividend from ABB) – 7 – 2 8 7 – 7

Income before taxes 7,311 3,114 6,312 6,911 5,050

Net income 5,181 2,174 4,144 4,682 2,923

Stockholders’ equity 24,363 21,053 20,413 17,655 15,029

Per-share data1

(SEK) 1998 1997 1996 1995 1994

Net income 5.52 2.32 2 4.42 4.99 3 3.21

Stockholders’ equity 26.0 22.4 21.8 18.8 16.5

Dividend (1998 proposed) 2.18 2.10 1.75 1.60 1.151 Per-share data 1994–1996 have been adjusted for the 10 :1 stock split in ABB AB shares effective as of April 21, 1997.2 Excluding ABB AB’s part of the ABB Group restructuring charge in 1997, net income per share was SEK 4.77.3 Excluding ABB AB’s part of the gain from the transfer of the ABB Group transportation activities in 1995 to ABB-Daimler Benz Transportation,

net income per share was SEK 4.04.

Key ratios

1998 1997 1996 1995 1994

Pay-out ratio (%) 39.5 90.6 39.6 32.1 35.9

Direct yield (%) 2.5 2.2 2.3 2.5 2.1

Market-to-book (%) 332 418 354 343 329

P/E (price/net income) 15.6 40.5 17.4 12.9 16.9

See “Definitions and Key Ratios”, page 48.

ABB AB in Brief

ABB AB Board of Directors Report

Proposed Appropriation of Profits

At the disposal of the Annual General Meeting are the following earnings (SEK in millions):

Income for the year 2,046

and the balance carried forward 1,230

Total 3,276

The Board of Directors and the President propose that the earnings be appropriated as follows:

to the Shareholders, a dividend of SEK 2.18 per share, totaling 2,045

to be carried forward 1,231

Total 3,276

No transfer to restricted equity is required

Year 2000No problem areas have been identified in theadministrative routines of ABB AB. Consequently

no special actions have been taken in relationto the Year 2000 issue.

45

ABB AB Financial Statements

Income StatementsABB AB and ABB AB,

Notes associated company 1 parent company

Year ended December 31 (SEK in millions) 1998 1997 1998 1997

Administrative expenses – 14 – 11 – 14 – 11

Share of ABB Group income before taxes and after minority interests 7,318 3,116 – –

Dividend income2 – – 2,053 1,927

Interest income 7 9 7 9

Interest expense 0 0 0 0

Income before taxes 7,311 3,114 2,046 1,925

Taxes 4 – 2,130 – 940 – –

Net income 5,181 2,174 2,046 1,9251 ABB AB’s share in the ABB Group results recognized according to the equity method.2 of which anticipated in 1998 SEK 2,042 million and in 1997 SEK 1,920 million.

Statement of Cash FlowsABB AB and ABB AB,

associated company parent company

Year ended December 31 (SEK in millions) 1998 1997 1998 1997


Income before taxes 7,311 3,114 2,046 1,925

Adjustments for earnings in equity accounted company in excess of dividend – 3,257 – 524 – –

4,054 2,590 2,046 1,925


Changes in other current receivables 1 0 1 0

Changes in receivables for anticipated dividend – – 122 – 275

Changes in accrued expenses – 1 – – 1 0

Changes in other current liabilities (excl. taxes due) 1 – 1 1 – 1

4,055 2,589 1,925 1,649

Taxes paid – 2,130 – 940 0 0

Net cash from Operating Activities 1,925 1,649 1,925 1,649

Cash Flow from Investing Activities

Changes in financing receivables 1 4 1 4

Acquisition of shares and participations – – – 0

Net cash from Investing Activities 1 4 1 4

Cash Flow from Financing Activities

Dividend paid – 1,969 – 1,639 – 1,969 – 1,639

Changes in short-, medium- and long-term loans – 3 – 4 – 3 – 4

Net cash from Financing Activities –1,972 –1,643 –1,972 –1,643

Net Change in Cash and Cash Equivalents –46 10 –46 10

Cash and cash equivalents at the beginning of the year 186 176 186 176

Cash and cash equivalents at the end of the year1 140 186 140 1861 Cash and Cash Equivalents

Cash and Bank 4 3 4 3Marketable securities 136 183 136 183

Total 140 186 140 186

46

ABB AB Financial Statements

Balance SheetsABB AB and ABB AB,

Notes associated company 1 parent company

December 31 (SEK in millions) 1998 1997 1998 1997

Assets

Fixed Assets

Financial Assets

Shares and participations 6 24,223 20,868 8,985 8,985

Financing receivables – 1 – 1

Total Fixed Assets 24,223 20,869 8,985 8,986

Current Assets

Current Receivables

Other current receivables 2 3 2 3

Receivables for anticipated dividend – 2,042 1,920

Marketable securities 136 183 136 183

Cash and Bank 4 3 4 3

Total Current Assets 142 189 2,184 2,109

Total Assets 24,365 21,058 11,169 11,095

Equity and Liabilities

Equity 5, 7

Restricted Equity

Share capital 4,690 4,690 4,690 4,690

Restricted reserves 3,201 3,201 3,201 3,201

Equity method reserve 10,061 9,714 – –

Unrestricted Equity

Retained earnings 1,230 1,274 1,230 1,274

Net income 5,181 2,174 2,046 1,925

Total Stockholders’ Equity 24,363 21,053 11,167 11,090

Medium- and Long-term Loans 3 0 1 0 1

Current Liabilities

Short-term loans 3 1 3 1 3

Other current liabilities 1 0 1 0

Accrued expenses 0 1 0 1

Total Current Liabilities 2 4 2 4

Total Equity and Liabilities 24,365 21,058 11,169 11,095

Asset Pledged – – – –

Contingent Liabilities – – – –1 ABB AB’s participation in the ABB Group accounted for according to the equity method.

47

ABB AB Notes to the Financial Statements

SEK/US$ rate was SEK 8.13/US$ (December 31,1997: SEK 7.90/US$).

Note 2, Compensations

Board of directorsAt the 1998 Annual General Meeting, share-holders adopted a resolution stating thatno compensation should be paid to the Boardof Directors for the year 1998.

EmployeesAs of July1,1996 ABB AB has no employees.

AuditorsThe audit fee for the year 1998 amounted toSEK 0.2 million (1997: SEK 0.2 million).

Note 3, Loans (Short- and long-term portion)

“Loans” consists of a bond designating ABB ABas the formal borrower, although it is actuallyattributable to Gambro AB for which ABB ABhas a corresponding receivable.The loan was issued in 1974 at an originalamount of SEK18 million, to an interest rate of7.25 percent and maturing in 1999.The remaining short-term portion loan amountsto SEK1 million (1997: SEK 3 million), long-termportion loans amount to SEK 0 (1997: SEK1 mil-lion).

Note 4, Taxes, ABB AB and associated company

(SEK in millions) 1998 1997

Current taxes on income1 1,192 1,434

Deferred taxes1 938 – 494

Total 2,130 9401 Associated company only

Note 1, Principles of accounting

Principles of accounting for associated companyThe equity method is used in accounting forthe interest of ABB AB in the ABB Group. Themethod is in accordance with the recommen-dation issued by the Swedish Financial Account-ing Standard Council. Following the equitymethod, ABB AB reports its share in the ABBGroup’s earnings and stockholder’s equity only,and not a full consolidation. The ABB Groupaccounting is in accordance with the Interna-tional Accounting Standards (IAS). There are nodeviations from the recommendations of theSwedish Financial Accounting Standards Council.

Anticipated dividendIn ABB AB’s financial statements for 1998, theproposed dividend from ABB Asea BrownBoveri Ltd for fiscal year 1998 has been antici-pated. This procedure was also used in 1997.

TaxationProvision is made for all taxes estimated to bepayable on reported income. These taxes are calculated in accordance with the applicableregulations.

Cash and marketable securitiesBank balances and fixed-term deposits of ABBAB are stated at face value.

Foreign currenciesABB AB’s share of ABB Group’s earnings isbased on the average SEK/US$ exchange rateand ABB AB’s share of ABB Group’s stock-holders’ equity is based on the year-endSEK/US$ exchange rate. The average SEK/US$rate during 1998 was SEK 7.95/US$ (1997: SEK 7.61/US$), while the year-end 1998

Note 5, Stockholders’ equity, ABB AB and associated company

(SEK in millions) Share Restricted Equity meth- Retained Net Totalcapital reserves od reserve earnings income

Opening balance sheet 4,690 3,201 9,714 3,448 21,053

Share of earnings in the ABB Group

in excess of dividend 246 – 246

Dividend1 – 1,969 – 1,969

Change in accounting principlesand other items – 300 – 300

Translation differences 401 – 3 398

Net income 1998 5,181 5,181

Closing balance sheet 4,690 3,201 10,061 1,230 5,181 24,3631 Rounded to SEK1,970 million in last year’s proposed dividend.

48

Definitions and Key Ratios

The key ratios below are based on recommen-dations of the Industry and Commerce Commit-tee of the Stockholm Stock Exchange (NBK).

1 Earnings per shareEarnings per share are calculated in accordancewith the equity accounting method consideringABB AB’s share in ABB Group net income plusABB AB’s own net income. Earnings per shareare calculated on the basis of the average num-ber of shares outstanding during the period.

2 Stockholders’ equity per shareStockholders’ equity per share is calculatedon total stockholders’ equity in ABB AB andassociated company balance sheet, dividedby the number of shares outstanding at year-end.

3 Market capitalization of ABB ABThe market capitalization of ABB AB is cal-culated on the number of shares outstandingat year-end.

Västerås, February 3,1999

Percy N. Barnevik(Chairman)

Donald H. Rumsfeld Peter D. Sutherland Björn Svedberg

Gunnar Björkenor(President)

Our auditors report was submitted on February 5, 1999.

Gunnar Widhagen Carl-Gustaf GutbergAuthorized Public Accountant Authorized Public Accountant

Note 6, Shares and participations

(SEK in millions, Equity Net Number Percent Par value Book value Book valueunless otherwise stated) income of shares holding ABB AB ABB AB and

parent Co. assoc. Co.

ABB Asea Brown Boveri Ltd,Zurich, Switzerland1 48,446 10,375 1,384,000 50 CHF 1,384 million 8,985 24,223

ASEA AB,Västerås, Sweden1 SEK 100,000 – 1,000 100 SEK 100,000 0 –

Total 8,985 24,2231 No change compared to 1997

Note 7, Stockholders’ equity, ABB AB, parent company

SEK in millions Share Restricted Retained Net Totalcapital reserves earnings income

Opening balance sheet 4,690 3,201 3,199 11,090

Dividends1 – 1,969 – 1,969

Net income 1998 2,046 2,046

Closing balance sheet 4,690 3,201 1,230 2,046 11,1671 Rounded to SEK1,970 million in last year’s proposed dividend.

ABB AB Notes to the Financial Statements/Definition and Key Ratios

49

Auditors’ Report

To the general meeting of the shareholders of ABB AB.

We have audited the parent company and the consolidated financial

statements, the accounts and the administration of the Board of

Directors and the Managing Director of ABB AB for the 12-month period

ending December 31,1998. These accounts and the administration of

the Company are the responsibility of the Board of Directors and

the Managing Director. Our responsibility is to express an opinion on the

financial statements and the administration based on our audit.

We conducted our audit in accordance with Generally Accepted Auditing

Standards in Sweden. Those Standards require that we plan and perform

the audit to obtain reasonable assurance that 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 their application by the Board of Directors and the Managing

Director, as well as evaluating the overall presentation of information

in the financial statements. We examined significant decisions, actions

taken and circumstances of the Company in order to be able to deter-

mine the possible liability to the Company of any Board Member or the

Managing Director or whether they have in some other way acted in

contravention of the Companies Act, the Annual Accounts Act or the

Articles of Association. We believe that our audit provides a reasonable

basis for our opinion set out below.

In our opinion, the parent company and the consolidated financial

statements have been prepared in accordance with the Annual Accounts

Act and give a true and fair view of the result of its operations and of

the financial position of the Parent Company and the Group, and, conse-

quently we recommend that the income statements and the balance

sheets of the Parent Company and the Group be adopted, and that the

profit (loss) of the Parent Company be dealt with in accordance with

the proposal in the Administration Report.

In our opinion, the Board Members and the Managing Director have

not committed any act or been guilty of any omission which could give

rise to any liability to the Company. We therefore recommend that

the Members of the Board of Directors and the Managing Director be

discharged from liability for the financial year.

Stockholm, February 5,1999

Gunnar Widhagen Carl-Gustaf Gutberg

Authorized Public Accountant Authorized Public Accountant

ABB AB Auditors’ Report

50

Turnover of ABB AB shares 1994–1998(Millions of shares)

1998 1997 1996 1995 1994

Stockholm Stock Exchange 844 450 416 435 484

London Stock Exchange(incl. SEAQ International) 595 404 423 366 386

NASDAQ (New York), ADRs 59 54 59 70 60

Other Stock Exchanges 20 11 7 4 5

Turnover data1994–1997 have been adjusted for10 :1 stock split in ABB ABoriginal shares and ADRs effective as of April 21,1997 and December 23,1998, respectively.

ABB AB Investor Information

Ten largest ABB AB shareholders, December 31,1998Excluding non-Swedish shareholders

Number of % of voting % of capitalshares held rights stock(thousands)

Investor 92,966 13.4 9.9

Fourth National PensionInsurance Fund 64,731 9.3 6.9

Swedish Staff PensionSociety (SPP) 35,345 4.4 3.8

Nordbanken funds 25,792 1.6 2.7

Skandia 16,075 1.8 1.7

Trygg Hansa Insurance 14,762 1.4 1.6

SEB/Trygg/ABB funds 13,329 1.6 1.4

AMF Pension (insurance) 12,000 1.7 1.3

SHB funds 11,883 1.7 1.3

AMF Sick Pay Insurance 8,270 1.2 0.9

Source: DN Ägarservice AB

Shareholders and shares held, by size of holding, December 31, 1998

Size of Number of Number of Percent ofholding shareholders shares held capital stock

1–500 120,707 15,285,887 1.63

501–1,000 19,310 15,404,811 1.64

1,001–10,000 27,442 75,666,347 8.07

10,001–100,000 1,940 48,869,681 5.21

100,001– 378 782,686,294 83.45

Total 169,777 937,913,020 100.00

Source: Värdepapperscentralen VPC AB

ABB AB shareholdersAs of December 31,1998, the total number ofABB AB shareholders was 169,777 (December 31,1997: 170,125). About 44 percent of ABB AB’sshares are owned by institutional investorsin Sweden.Non-Swedish shareholders ownapproximately 43 percent of the share capital(1997: 32 percent) and 33 percent of the votes(1997: 23 percent).

The majority of foreign owners are registered inthe name of nominees; therefore, actual foreignowners are not officially registered. Includingowners registered in the name of nominees,BZ Bank AG is the largest foreign shareholderwith 12.9 percent of the share capital and 8.8 percent of the voting rights.

Dividend policy and dividend ABBAB’s principal source of revenue is dividendincome on its holding of shares in ABB AseaBrown Boveri Ltd. The Board of Directors’ policyis to distribute the full dividend received fromABB Asea Brown Boveri Ltd to its shareholders.The amount of the dividend, calculated in SEK,is affected both by the actual amount paid byABB in CHF and the SEK/CHF exchange rate onthe dividend date.

For fiscal year 1998, ABB AB will receive a divi-dend of CHF 370 million from ABB (dividendpayment is received in April,1999). This dividendfrom ABB Asea Brown Boveri Ltd has beenhedged and equals SEK 2,042 million. In orderfor profits generated by the ABB Group in 1998to be made available to ABB AB shareholdersin the spring of 1999, SEK2,042 million was an-ticipated in the Parent Company’s 1998 financialstatements.

The Board of Directors of ABB AB, accordingly,has resolved to propose a dividend of SEK 2.18per share, totaling SEK 2,045 million (1997:SEK1,970 million). Dividend per share in 1997amounted to SEK 2.10.

During1998, for fiscal year 1997, ABB AB re-ceived a dividend of CHF 350 million from ABB,corresponding to SEK 1,931 million. In orderfor profits generated by the ABB Group in 1997to be made available to ABB AB shareholdersin the spring of 1998, SEK 1,920 million of thedividend in question was anticipated in the Par-ent Company’s 1997 financial statements. Thedividend that ABB AB received from ABB AseaBrown Boveri Ltd is not subject to Swedishtaxation.

51

15

12

9

6

J F M A M J J A S O N D J F M A M J J A S O N D1997 1998

US$

18

Price Trend for ABB AB B shares, Stockholm, Sweden

Bars indicate highest and lowest prices paid for shares each month (in SEK). Affärsvärlden Generalindex (rebased)

120

100

80

60


SEK

140

Bars indicate highest and lowest prices paid for ADRs each month (in U.S. dollars). NASDAQ Composite Index (rebased)

Note: The price trend for ABB AB ADRs has been adjustedfor 10 :1 stock split effective as of December 23,1998.

Per-share data1 A Shares B Shares(SEK, unless otherwise stated)

1998 1997 1998 1997

Net income 5.52 2.32 2 5.52 2.32 2

Dividend (1998 proposed) 2.18 2.10 2.18 2.10

Stockholders’ equity 26.0 22.4 26.0 22.4

Price: – High 131.5 126.0 130.0 126.0

– Low 60.5 76.8 60.0 76.5

– Year-end 86.5 94.0 86.0 93.5

Par value 5 5 5 5

Vote per share 1 1 1/10 1/10

Key ratios1

Return on equity (%) 22.8 11.2 22.8 11.2

Direct yield (%) 2.5 2.2 2.5 2.2

Market-to-book (%) 333 420 331 417

P/E (price/net income) 15.7 40.5 15.6 40.3

Number of shares outstanding 668,197,570 668,197,570 269,715,450 269,715,450

% of total capital stock 71.2 71.2 28.8 28.8

% of voting rights 96.1 96.1 3.9 3.9

Number of shares fully diluted 668,197,570 668,197,570 269,715,450 269,715,450

Stock exchanges listing3 Stockholm Stockholm, Copenhagen,London, NASDAQ (ADR)

1 See “Definitions and Key Ratios” page 48.2 Excluding ABB AB’s part of the restructuring charge in 1997, net income per share was SEK 4.77.3 On NASDAQ in the U.S., ABB AB B shares are traded as level-two sponsored American Depositary Receipts (ADR).

1 ABB AB ADR represents 1 ABB AB B share. ABB AB A and B shares are traded on SEAQ International, London.ABB AB B shares are traded in Frankfurt, XETRA, and on the “Freiverkehr” (third segment) in Munich.

Price Trend for ABB AB ADRs in the United States1 ABB AB ADR represents 1 ABB AB B share

ABB AB has no restriction as to share ownership. At the end of 1998, ABB AB’s market capi-talization, based on outstanding shares, was approximately SEK 81.0 billion (US$10.0 billion),making ABB AB the sixth-largest company in Sweden in terms of market capitalization.

Trend of ABB AB share prices during 1998

During 1998, the price of ABB AB A shares traded on the

Stockholm Stock Exchange decreased by 7 percent, which

meant that the shares developed less than the general

trend in Stockholm (Affärsvärlden Generalindex: +10 per-

cent). In New York, where ABB AB shares are traded in U.S.

dollars, the price of the ADR decreased 6 percent, com-

pared with an increase of the NASDAQ Composite Index

of 40 percent.

52

ABB AB Annual General Meeting

The Annual General Meeting of ABB AB will beheld in the Aros Congress Center, Munkgatan7,Västerås, Sweden at 9.30 a.m.,Thursday, March18, 1999.

At the Annual General Meeting, approval isrequired from the ABB AB shareholders asto both the composition of the ABB Asea BrownBoveri Ltd Board and its dividend policy.

For withholding tax reasons, there is no directconnection between the date of the AnnualGeneral Meeting and the date for dividend pay-out and ex-dividend trading. In 1999, the divi-dend pay-out and ex-dividend trading will takeplace as described in the following text.

NoticeShareholders who wish to participate in theMeeting must notify the Board of Directors oftheir intention to attend, not later than 12.00noon, Monday, March 15,1999.Written notifica-tion should be made to: ABB ABc/o WM-data Assistans ABP.O.Box 1495SE-17129 SolnaNotification may also be made by telephone +46 (0) 8 670 7430 or by fax, +46 (0) 8 470 8560 or bye-mail [email protected] must state their name, address,telephone number, Swedish personal identitynumber (where applicable), and the number ofshares held. Shareholders should also indicatewhether they plan to be present for lunch. ABBAB will confirm receipt of notification bysending an admission card to shareholders notlater than Tuesday, March 16,1999. This cardshould be shown when entering the premisesfor the meeting.

Right to participateOnly shareholders listed not later than March 8,1999, in the share register maintained by Värde-papperscentralen VPC AB (Swedish SecuritiesRegister Center) are entitled to participate in themeeting. To be eligible to participate in themeeting, shareholders who have transferredtheir shares to the trust department of a bank,or to a private broker, must request that theshares be temporarily registered in their ownname in the VPC share register. Shareholdersare advised to notify their trustees of this requestbefore March 8,1999.

ADR holdersRegistered holders of American DepositaryReceipts representing ABB AB B shares have previously been advised by Citibank, N.A.,the depositary, of the steps to be taken tocomply with the requirements cited above ifthey wish to participate in the Annual GeneralMeeting in person or by proxy. If a holderhas not received these instructions, or desiresadditional information, the holder should callthe depositary at +1-800-422-2066.

Record date of dividendMonday, March 29,1999, is the final day for trad-ing in shares carrying rights to dividends.TheBoard of Directors has proposed Thursday, April1,1999, as the record date for payment of thedividend. If shareholders at the Annual GeneralMeeting approve this proposal, it is estimatedthat VPC will dispatch dividend payments onMonday, April 12,1999. To facilitate dividendpayments, shareholders should have a bankaccount which is linked to their VP securitiesaccount.

Change of addressVPC automatically performs address changesfor individuals who have made the customarydefinitive registration of their new addressvia the Swedish Post Office, providing that theshareholder has informed his/her bank thathis/her VP account should be subject to thistype of “SPAR” updating. This means that thereis no obligation to inform ABB AB or VPC ofa change of address. If preferred, it is possibleto register a business address through a de-signated account-operating institute, instead ofusing a personal address.

To ensure that dividend payments, information,etc., are sent to the correct address, legal enti-ties should give notice of any change of addressas soon as possible.

53

ABB AG Annual Report 1998

ABB AG Board of Directors and Auditors

ABB AG’s Statutory Auditors and Group Auditors

KPMG Klynveld Peat Marwick Goerdeler SA, Zurich

Board of Directors

As of December 31,1998

Chairman

Robert A. Jeker (born 1935)

Chairman: Batigroup, Feldschlösschen-Hürlimann, Georg Fischer, Messe Basel, Stratec, Swiss Steel

Vice Chairman: ABB Asea Brown Boveri Ltd



Elected 1986, term expiring 1999.



Board Member: ABB Asea Brown Boveri Ltd, Allianz, Suez Lyonnaise des Eaux, Veba, Volkswagen



CEO: Hoechst

Board Member: ABB Asea Brown Boveri Ltd, Allianz, IBM Corporation



Former CEO: ABB Switzerland (1988–1997)

Chairman: The Association of Swiss Engineering Employers, The Swiss Association of Machinery Manufacturers

Board Member: ABB Asea Brown Boveri Ltd Georg Fischer, SIG, Swiss Steel


54

ABB AG Board of Directors Report

ABB AG (Switzerland) and associated companyABB AG’s share of ABB Group’s income beforetaxes and after minority interests for 1998 wasUS$ 920 million (1997: US$ 409 million), an in-crease of 125 percent. The average U.S. dollarexchange rate was slightly up from CHF 1.44/US$during 1997 to CHF 1.45/US$ in 1998. The year-end exchange rate was down 5 percent fromCHF 1.45/US$ at the close of 1997 to CHF1.38/US$at December 31,1998. After translation, ABB AG’sshare of ABB Group income before taxes andafter minority interests increased from CHF 590million in 1997 to CHF 1,335 million in 1998.ABB AG’s income before taxes, including asso-ciated company, amounted to CHF 1,346 million(1997: CHF 612 million) in 1998. After taxesof CHF 390 million (1997: CHF180 million), netincome amounted to CHF 956 million (1997:CHF 432 million) for the year, an increase of121 percent.

ABB AG’s net income per bearer share amountedto CHF 103.30 in 1998 (1997: CHF 46.80) andCHF 20.66 (1997: CHF 9.36) per registered share.

ABB AG, parent companyThe dividend from ABB AG’s shareholding inABB Asea Brown Boveri Ltd amounted toCHF 350 million in 1998 (1997: CHF 325 million).For fiscal year 1998, ABB AG will receive adividend of CHF 370 million from ABB AseaBrown Boveri Ltd. This amount was anticipatedin the parent company’s 1998 financial state-ments. Therefore a total of CHF 720 million re-sults as dividend income in fiscal 1998. Interestincome totaled CHF 20 million (1997: CHF 30million). Interest income divided by averagecash and cash equivalents of CHF 435 millionamounts to a return of 4.6 percent. Total ex-penditures decreased to CHF11 million (1997:CHF15 million). Net income amounted toCHF 730 million (1997: CHF 345 million) forthe year.

The Board of Directors proposes that thedividend to shareholders be increased toCHF 41.00 gross per bearer share (1997:CHF 40.00) and CHF 8.20 gross per registeredshare (1997: CHF 8.00), a total of CHF 379 mil-lion (1997: CHF 370 million).

Board of DirectorsThe term of office for Mr. Robert A. Jeker expiresat the next General Meeting on March 18,1999.Robert A. Jeker is available for reelection for afurther term.

The Board of Directors proposes the reelectionof Robert A. Jeker to the Board for a four-yearterm of office, i.e. until the Annual GeneralMeeting in 2003.

ABB Single-Class ShareThe Boards of Directors of ABB Asea BrownBoveri Ltd of Switzerland, ABB AB of Swedenand ABB AG of Switzerland have approveda plan that would simplify the share capitalstructure of the ABB Group. The plan contem-plates the creation of a Swiss company thatwould offer a single class of shares in exchangefor existing ABB AB and ABB AG shares intwo separate exchange offers. The exchangeoffers are expected to commence shortlyfollowing the Annual General Meetings of bothABB AB and ABB AG, scheduled to takeplace on March 18, 1999. In order to equalizethe asset values in ABB AG and ABB AB theBoard of Directors suggests that the excess cashin ABB AG be paid out as a special dividendto ABB AG shareholders. More information aboutthe offers will be separately distributed to theshareholders of ABB AB and ABB AG subject toprevailing securities laws and regulations.

55

ABB AG and associated company, five-year overview

(CHF in millions) 1998 1997 1996 1995 1994

Share of ABB Group income before taxesand after minority interests 1,335 590 1,156 1,146 899

Parent Company’s result before taxes (excluding dividend from ABB) 11 22 27 47 – 14

Income before taxes 1,346 612 1,183 1,193 885

Net income 956 432 783 822 505

Stockholders’ equity 4,411 4,140 4,640 3,604 3,096

Per-share data

(CHF) 1998 1997 1996 1995 1994

Net income per:

– Bearer share1 103.30 46.80 2 85.40 90.20 3 57.30

– Registered share1 20.66 9.36 2 17.08 18.04 3 11.46

Stockholders’ equity per:

– Bearer share 477 447 4 506 395 351

– Registered share 95 89 4 101 79 70

Dividend (1998 proposed) per:

– Bearer share 41.00 40.00 38.00 30.00 20.00

– Registered share 8.20 8.00 7.60 6.00 4.001 As from 1997: Basic and diluted earnings per share.2 Excluding ABB AG's part of the ABB Group restructuring charge in 1997, net income per bearer share was CHF 93.80 and per registered share CHF 18.76.3 Excluding ABB AG’s part of the gain from the transfer of the ABB Group transportation activities in 1995, net income per bearer share was CHF 73.95 and

per registered share CHF 14.79.4 Shareholders’ equity per share reduced through lowering of the par value. This led to a repayment of CHF 50 per bearer share and CHF 10 per registered

share. A total of CHF 463 million was paid back to the shareholders on July 10,1997.

Key ratios

1998 1997 1996 1995 1994

Pay-out ratio (%) 39.6 85.7 44.5 33.3 34.9

Direct yield (%), Bearer share 2.5 2.2 2.3 2.2 1.8

Market-to-book (%) 338 410 328 338 319

P/E (price/net income), Bearer share 15.6 39.2 19.5 14.9 19.7

See “Definitions and Key Ratios,” page 59.

ABB AG in Brief

56

Income StatementsABB AG and ABB AG,

associated company1 parent company

Year ended December 31 (CHF in millions) 1998 1997 1998 1997

Share of ABB Group income before taxes and after minority interests 1,335 590 – –

Dividend income – – 720 2 325

Other operating income 1 5 1 5

Administrative expenses – 5 – 7 – 5 – 7

Interest income 20 30 20 30

Interest expense – 5 – 6 – 5 – 6

Income Before Taxes 1,346 612 731 347

Income Taxes – 390 3 – 180 3 – 1 – 2

Net Income 956 432 730 345

1 ABB AG’s share in the ABB Group results recognized according to the equity method.2 Of which anticipated for fiscal 1998: CHF 370 million.3 Contains share in ABB Group taxes.

Statement of Cash Flows1

Year ended December 31 (CHF in millions) 1998 1997


Income before taxes 731 347


Changes in receivables for anticipated dividend – 370 0

Changes in other current receivables 2 5

Changes in other current liabilities (excl. taxes due) – 1 – 3

362 349

Taxes paid – 2 – 6

Net Cash from Operating Activities 360 343

Cash Flow from Investing Activities

Changes in financing receivables 0 148

Net Cash from Investing Activities 0 148

Cash Flow related to Financing Activities

Dividend paid – 370 – 348

Repayment of loan 1987–1999 0 – 148

Repayment of loan 1989–2000 – 150 0

Repayment of share capital through reduction of par value 0 – 463

Changes in other financing liabilities 0 – 3

Net Cash related to Financing Activities –520 –962

Net Change in Cash and Cash Equivalents –160 –471

Cash and cash equivalents – beginning of year 450 921

Cash and cash equivalents – end of year 290 4501 Cash flows for ABB AG and associated company and for the parent company are identical.

ABB AG Financial Statements

57

Balance SheetsABB AG and ABB AG,

associated company1 parent company

December 31 (CHF in millions) Notes 1998 1997 1998 1997

Assets

Current Assets

Cash and cash equivalents 1 290 450 290 450

Receivables for anticipated dividend 0 0 370 0

Other current receivables 11 13 11 13

Total Current Assets 301 463 671 463

Fixed Assets

Financing receivables 6 6 6 6

Shares and participations 2 4,120 3,839 2,363 2,363

Intangible assets 0 0 0 0

Land and buildings 3 0 0 0 0

Total Fixed Assets 4,126 3,845 2,369 2,369

Total Assets 4,427 4,308 3,040 2,832


Current Liabilities

Accrued expenses 1 2 1 2

Other current liabilities 15 16 15 16

Total Current Liabilities 16 18 16 18

Medium- and Long-term Loans 4 0 150 0 150


Share capital 5 463 463 463 463

Restricted reserves 2,859 3,087 1,698 1,698

Retained earnings 133 158 133 158

Net income 956 432 730 345

Total Stockholders’ Equity 7 4,411 4,140 3,024 2,664

Total Liabilities and Equity 4,427 4,308 3,040 2,8321 ABB AG’s participation in the ABB Group accounted for according to the equity method.

ABB AG Financial Statements

58

ABB AG Notes to the Financial Statements

ABB AG, parent company

Note 1*, Cash and Cash Equivalents

(CHF in millions) 1998 1997

Bank balances and short-term deposits 49 39

Other fixed-time deposits1 106 192

Bonds 132 214

Shares 3 5

Total 290 450

Of which funds invested inaffiliated companies 55 91

The carrying amounts approximate fair values.1 At December 31,1998, the Company had two interest rate swap

contracts with an obligation to pay floating interest rate and the right to receive interest at a fixed rate:Notional amount Expiry dateCHF 47 million January 15,1999CHF 12 million June 28,1999The positive fair value of these interest rate swaps of approximately CHF 0.3 million has not been reflected in the income statement.



ABB Asea Brown Boveri Ltd, Zurich1 2,354 2,354

Other participations 9 9

Total 2,363 2,3631 Share of participation: 50%

Number of shares: 1,384,000 (ABB Asea Brown Boveri Ltd total: 2,768,000 shares)

Par value: CHF 1,384 million (ABB Asea Brown Boveri Ltd total: CHF 2,768 million)

Note 3, Land and Buildings


Insured value (fire) 1 3

Note 4*, Medium- and Long-term Loans


31⁄2% loan 1989–2000 (ex option)early repayment (at par) as per December 12,1998 0 150

Total 0 150

Weighted average interest rate – 3.50%

Note 5*, Share Capital


8,159,470 bearer shares, CHF 50 par value 408 408

5,470,750 registered shares,CHF 10 par value 55 55

Total 463 463

Note 6*, Guarantee Commitments


Total 0 0

* Notes apply to both ABB AG, parent company and ABB AG and associatedcompany.

ABB AG and associated company

Note 7, Stockholders’ Equity

(CHF in millions) Share Reserved Total Restricted Retained Net Total Translationcapital shares reserves earnings income differences

Opening balance sheet 463 0 463 3,174 503 4,140 – 36

Dividends – 370 – 370

Translation differences – 264 – 264 - 264

Change in accounting principle and other items – 51 – 51

Net income 1998 956 956

Closing balance sheet 463 0 463 2,859 133 956 4,411 –300

59

ABB AG Principles of Accounting/Definitions and Key Ratios

Principles of accounting

1 Principles of accounting for associatedcompanyThe equity method is used in accounting for theinterest of ABB AG in the ABB Group. Follow-ing the equity method, ABB AG reports its sharein the ABB Group’s income and stockholders’equity only and not a full consolidation.

ABB Group’s consolidated accounts are present-ed in accordance with International AccountingStandards (IAS).

2 Cash and cash equivalentsCash and cash equivalents includes bank de-posits, time deposits and bonds which canreadily be converted into liquid assets. Bankbalances and fixed-term deposits of ABB AGare stated at face value. Fixed-term deposits inforeign currencies are translated at the ex-change rates on the balance sheet date. Securi-ties are valued at market price. Gains andlosses are included in interest income on theincome statement.

3 Foreign currenciesABB AG’s share of ABB Group’s income isbased on the average CHF/US$ exchange rateand ABB AG’s share of ABB Group’s stock-holders’ equity is based on the year-endCHF/US$ exchange rate. The average CHF/US$rate during 1998 was CHF 1.45/US$ (1997:CHF 1.44/US$), while the year-end 1998 CHF/US$ rate was CHF 1.38/US$ (December 31,1997: CHF 1.45/US$).

Definitions and key ratios

1 Earnings per shareEarnings per share are calculated in accordancewith the equity accounting method consideringABB AG’s share in ABB Group net income plusABB AG’s own net income.

Earnings per share are calculated on the basisof the average number of shares outstandingduring the period (basic earnings per share)and, where applicable, on the basis of the fullydiluted number of shares (diluted earnings pershare).

2 Stockholders’ equity per shareStockholders’ equity per share is calculated ontotal stockholders’ equity in ABB AG andassociated company balance sheet, divided bythe number of shares outstanding at year-end.

3 Market capitalization of ABB AGThe market capitalization of ABB AG is calcu-lated on the number of shares outstanding atyear-end.

60

Proposal of the Board of Directors for the Appropriation of Available Earnings of ABB AG


Profit brought forward from previous year 133 158

Net income for the year 730 345

Balance sheet profit available to the General Meeting 863 503

Dividend of 82% on the share capital of CHF 462,681,000 (1997: 80% on CHF 462,681,000) entitled to dividend – 379 – 370

To be carried forward to new account 484 133

If this proposal is accepted, the following dividends will be paid from April 12,1999:

On bearer shares with a par value of CHF 50:

– against presentation of coupon No. 7 CHF 41.00

– less 35% withholding tax CHF 14.35

Net CHF 26.65

On registered shares with a par value of CHF 10:

– remittance to shareholders of record on April 12,1999 CHF 8.20

– less 35% withholding tax CHF 2.87

Net CHF 5.33

Baden, February 3,1999

Robert A. Jeker Edwin Somm(Chairman) (Member)

61

Auditors’ Report

Report of the statutory and group auditors to the general meeting on

March 18,1999 of ABB AG, Baden

As statutory and group auditors we have audited the accounting records

and the financial statements (balance sheet, income statement, state-

ment of cash flow and notes) of the parent company (ABB AG, parent

company) and the group (ABB AG and associated company) for the year

ended December 31,1998.

These parent company and group financial statements are the respon-

sibility of the Board of Directors. Our responsibility is to express an

opinion on these parent company and group financial statements based

on our audit. We confirm that we meet the legal requirements concerning

professional qualification and independence.

Our audit was conducted in accordance with auditing standards pro-

mulgated by the profession and with the International Standards on

Auditing issued by the International Federation of Accountants (IFAC),

which require that an audit be planned and performed to obtain

reasonable assurance about whether the financial statements are free

from material misstatement. We have examined on a test basis evidence

supporting the amounts and disclosures in the parent company and

group financial statements. We have also assessed the accounting

principles used, significant estimates made and the overall group financial

statement presentation. We believe that our audit provides a reasonable

basis for our opinion.

ABB AG, parent company

In our opinion, the accounting records and parent company financial

statements and the proposed appropriation of available earnings comply

with the law and the company’s articles of incorporation.

We recommend that the parent company financial statements submitted

to you be approved.

ABB AG and associated company

In our opinion, the group financial statements give a true and fair view

of the financial position, the results of operations and the cash flows in

accordance with the International Accounting Standards (IAS), and

comply with the law.

We recommend that the group financial statements submitted to you

be approved.

KPMG Klynveld Peat Marwick Goerdeler SA

B. A. Mathers B. J. DeBlanc

Auditor in Charge Auditor in Charge

Zurich, February 3,1999

ABB AG Auditors’ Report

62

ABB AG Investor Information

ABB AG shareholders Number of Percent of Percent ofDecember 31,1998 shareholders share capital votes

Bearer shares (CHF 50 par value; 1 vote) 45,000 1 88.2 59.9

Registered shares (CHF 10 par value; 1 vote) 5,214 11.8 40.1

– Private persons 4,978 1.3

– Banks, finance companies 94 5.0

– Insurance companies, pension funds 63 1.1

– Industry, commerce, services, holding companies 49 4.2

– Non-provident foundations 23 0.1

– Public corporations 7 0.11 Estimate

Important shareholders

At the end of December 1998 the largest shareholders known to the Company are:

Unotec Holding AG, Glarus, together with companies linked to it, held 1,762,065 registered shares. This corresponds to12.9 percent of total voting rights.

Stillhalter Vision AG, Wilen, held 1,394,058 registered shares which corresponds to 10.2 percent of total voting rights. Of thistotal only 475,955 registered shares are recorded in the share register as shares with voting rights, due to statutory regula-tions.

To the best of the Company’s knowledge, no further shareholder holds 5 percent or more of total voting rights.

Trading volumes of ABB AG shares 1994–1998(CHF in millions)

1998 1997 1996 1995 1994

Swiss Exchange 30,252 28,224 16,910 13,839 12,759

SEAQ International, London 5,626 8,220 5,656 7,460 9,355

Dividend policy and dividendABB AG’s principal source of revenue is divi-dend income on its holding of shares in ABBAsea Brown Boveri Ltd. The Board of Directors’policy is to distribute the full dividend receivedfrom ABB Asea Brown Boveri Ltd to its share-holders.

For fiscal year 1998, ABB AG will receive adividend of CHF 370 million from ABB AseaBrown Boveri Ltd (1997: CHF 350 million).

This amount was anticipated in the parent com-pany’s 1998 financial statements. The Boardof Directors of ABB AG proposes a dividend for1998 of CHF 41.00 gross per bearer share (1997:CHF 40.00) and CHF 8.20 gross per registeredshare (1997: CHF 8.00), a total dividend fordistribution of CHF 379 million (1997: CHF 370million). This corresponds to the full dividendreceived from ABB Asea Brown Boveri Ltd aswell as ABB AG’s own result for 1998.

63

2500

2000

1500

1000


CHF

3000

3500

Bars indicate highest and lowest prices paid for ADRs each month (in U.S. dollars). NASDAQ Composite Index (rebased)

Bars indicate highest and lowest prices paid for shares each month (in CHF). Swiss Performance Index (rebased)

Per-share data1 Bearer shares Registered shares(CHF, unless otherwise stated)

1998 1997 1998 1997

Net income2 103.30 46.80 3 20.66 9.36 3

Dividend (1998 proposed) 41.00 40.00 8.20 8.00

Stockholders’ equity 477 447 95 89

Price: – High 2,591 2,448 529 487

– Low 1,150 1,605 240 307

– Year end 1,610 1,835 322 369

Par value 50 50* 10 10*

Vote per share 1 1 1 1

Key ratios1

Return on equity (%) 22.4 9.8 22.4 9.8

Direct yield (%) 2.5 2.2 2.5 2.2

Market-to-book (%) 338 410 338 412

P/E (price/net income) 15.6 39.2 15.6 39.4

Number of shares outstanding4 8,159,470 8,159,470 5,470,750 5,470,750

% of total capital stock 88.2 88.2 11.8 11.8

% of voting rights 59.9 59.9 40.1 40.1

Number of shares fully diluted 8,159,470 8,159,470 5,470,750 5,470,750

Stock exchanges listing5 Swiss Exchange, Swiss Exchange Frankfurt (Xetra), Vienna

1 See “Definitions and Key Ratios” page 59.2 Basic and diluted earnings per share.3 Excluding ABB AG's part of the restructuring charge in 1997, net income per bearer share was CHF 93.80 and

per registered share CHF 18.76.4 ABB AG bearer and registered shares entitled to dividend.5 In addition, ABB AG bearer shares are traded as level-one sponsored American Depositary Receipts (ADR) in

the U.S.10 ABB AG ADRs represent 1 bearer share. ABB AG bearer shares are traded on SEAQ International,London and on the “Freiverkehr” (third segment) in Munich.

ABB AG has no restriction as to share ownership, with the exception that no single share-holder or group of shareholders can be recorded in the share register with more than 8.7 percent of the registered shares issued.

At the end of 1998, ABB AG’s market capitalization, based on outstanding shares, wasapproximately CHF 14.9 billion (US$10.8 billion), making ABB AG the ninth-largest companyin Switzerland in terms of market capitalization.

* The capital reduction via lowering of the nominal share value was approved at the Annual General Meeting onApril 3,1997. This led to a repayment of CHF 50 per bearer share and CHF 10 per registered share. A total of CHF 463 million was paid back to the shareholders on July 10,1997.

Price trend for ABB AG ADRs in the United States10 ABB AG ADRs represents 1 ABB AG bearer share

Price trend for ABB AG bearer shares, Zurich

160

140

120

100


US$

180

200

Trend of ABB AG share prices during 1998During 1998, the price of ABB AG bearer shares traded on the Swiss Stock Exchange decreased by 12 percent, whichmeant that the shares developed less than the generaltrend in Zurich (Swiss Performance Index: +15 percent). InNew York, where ABB AG shares are traded in U.S. dollars,the price of the ADR decreased by 7 percent, comparedwith an increase of the NASDAQ Composite Index by 40 percent.

64

ABB AG Annual General Meeting

The 1999 Annual General Meeting of ABB AGwill be held on Thursday, March 18,1999, at3.30 p.m. in the “Tägerhard” sports center inWettingen (near Zurich), Switzerland.

At the Annual General Meeting, ABB AG share-holders will be consulted on both the compo-sition of the ABB Asea Brown Boveri Ltd Boardand its dividend policy.

For withholding tax reasons, there is no directconnection between the date of the AnnualGeneral Meeting and the date for dividend pay-out and ex-dividend trading. In 1999, thedate for dividend pay-out and ex-dividend trading will be April 12.

Admission CardsHolders of registered shares of ABB AG willreceive their admission cards on request usingthe reply form enclosed with the invitation.

Upon depositing their shares, holders of bearershares can obtain their admission cards upto March 12, 1999, from one of the followingbanks:

UBS AG, ZurichCredit Suisse First Boston, ZurichCredit Suisse, ZurichZürcher Kantonalbank, ZurichAargauische Kantonalbank, AarauNeue Aargauer Bank, Badenor, against confirmation of having depositedtheir shares, directly from ABB AG, Share Office,CH-5401 Baden.

The full text of the invitation in accordance withArt. 700 of the Swiss Code of Obligations, waspublished in Schweizerisches Handelsamtsblatton February 18,1999.

ABB Asea Brown Boveri LtdInvestor RelationsP. O. Box 8131CH-8050 ZurichSwitzerland Phone +41 (0)1 317 7111Telefax +41 (0)1 311 9817

ABB ABP. O. BoxSE-72160 VästeråsSwedenPhone +46 (0)21 13 7020Telefax +46 (0)21 32 5448

ABB Asea Brown Boveri LtdEnvironmental AffairsV. Esplanaden 9a 4 F1SE-35231 VäxjöSwedenPhone +46 (0)470 22 005Telefax +46 (0)470 22 002

ABB AGP. O. BoxCH-5401 BadenSwitzerland Phone +41 (0)56 205 7700Telefax +41 (0)56 222 1026

ABB Asea Brown Boveri LtdCorporate CommunicationsP. O. Box 8131CH-8050 ZurichSwitzerland Phone +41 (0)1 317 7111Telefax +41 (0)1 311 7958

Internet addresshttp://www.abb.com

a

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