10-K

                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                   FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
                                     1934

                  For the Fiscal Year ended December 31, 1996
                        Commission file number 1-12215
                                   ---------


                         QUEST DIAGNOSTICS INCORPORATED
                    --------------------------------------
             (formerly known as Corning Clinical Laboratories Inc.)

                               One Malcolm Avenue
                               Teterboro, NJ 07608
                                 (201) 393-5000

              DELAWARE                                  16-1387862
- -------------------------------------    ---------------------------------------
      (State of Incorporation)           (I.R.S. Employer Identification Number)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                               Name of Each Exchange on Which
                                                            Registered

Common Stock with attached                        New York Stock Exchange
Preferred Share Purchase Right

10.75% Senior Subordinated Notes due 2006         New York Stock Exchange

Securities registered pursuant to                 None
Section 12(g) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ X ]

As of March 17, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $466 million, based on the
closing price on such date of the Company's Common Stock on the New York Stock
Exchange.

As of March 17, 1997, there were outstanding 29,362,998 shares of Common Stock,
$.01 par value.

Documents Incorporated by Reference: None



                                    PART I

Item 1. Business

Overview

     Quest Diagnostics Incorporated, a Delaware corporation formerly known as
Corning Clinical Laboratories Inc., is one of the largest clinical laboratory
testing companies in the United States. Quest Diagnostics Incorporated and its
subsidiaries are collectively referred to as "Quest Diagnostics" or the
"Company." The Company offers a broad range of routine and esoteric testing
services used by the medical profession in the diagnosis, monitoring and
treatment of disease and other medical conditions. The Company currently
processes approximately 60 million requisitions each year.

     The Company is the successor by merger to MetPath Inc. ("MetPath"), a New
York corporation organized in 1967. Corning Incorporated ("Corning") acquired
MetPath in 1982 and in 1992 merged MetPath into the Company, which had been
organized in 1990 as a holding company. On December 31, 1996, Corning
distributed all of the outstanding shares of common stock of the Company to the
stockholders of Corning, with one share of the Company's common stock being
distributed for each eight shares of common stock of Corning outstanding on
December 31, 1996. This distribution was followed immediately by the
distribution to the stockholders of the Company of all of the outstanding common
stock of Covance Inc. ("Covance") (a contract research organization previously
known as Corning Pharmaceutical Services Inc.) with one share of Covance's
common stock being distributed for each four shares of common stock of Corning
outstanding on December 31, 1996. These two distributions are collectively
referred to as the "Spin-Off Distribution."

     Since its founding in 1967, the Company's clinical laboratory testing
business has grown into a network of 17 regional laboratories across the United
States and an esoteric testing laboratory (previously known as Nichols
Institute)("Nichols") located in San Juan Capistrano, California. In addition,
the Company has 15 smaller branch laboratories, including one located in Mexico
City, Mexico; approximately 200 STAT laboratories; and approximately 850 patient
service centers located throughout the United States. A substantial portion of
this growth has resulted from acquisitions. See "Acquisitions and Dispositions."

     The principal executive offices of the Company are located at One Malcolm
Avenue, Teterboro, New Jersey 07608, telephone number: (201) 393-5000.

Recent Organizational Changes

     Between 1990 and 1995, Corning tripled the size of its clinical laboratory
testing business, principally through acquisitions. Prior management pursued a
strategy of growth through acquisitions, including diversification outside of
the clinical laboratory testing business. As a result of difficult integrations
and increased pricing pressures and regulatory complexity in the clinical
testing industry, a new strategy was needed. In May 1995, Corning responded by
appointing Kenneth Freeman, then an Executive Vice President of Corning, as
President and Chief Executive Officer of the Company, who was charged with the
responsibility to formulate a new strategy. Mr. Freeman has over 24 years of key
financial and managerial experience at Corning, including serving as the general
manager of Corning's science products division and the President and Chief
Executive Officer of Corning Asahi Video Products Company. Under Mr. Freeman's
leadership, profitability of these operations increased.

     Mr. Freeman immediately suspended the Company's acquisition program. Under
his direction, the Company began to refocus on its core clinical laboratory
testing business and reorganize its senior management team. As a result, the
Company is in the process of implementing its best practices in each region
throughout the Company; standardizing processes and systems; analyzing the cost
of serving various customers; intensifying efforts to correct persistent billing
errors to both enhance customer satisfaction and reduce the cost of billing
operations; enhancing its compliance program to audit and correct system
defaults and to better train employees in the laws and rules governing the
industry; and improving communications with employees by improving systems and
the type and amount of current information available to employees.

                                       1




     Mr. Freeman revamped the senior management team by appointing four new
senior executives and changing the responsibilities of five other senior
executives. Additionally, approximately one-half of the existing laboratory
facility general managers were replaced.

     Mr. Freeman also changed the management structure, appointing three of the
senior executives to newly created key positions--Douglas VanOort, who focuses
exclusively on laboratory operations, Don Hardison, who focuses on commercial
activities, and Dr. Gregory Critchfield, who leads the efforts in the areas of
science and medicine and pursues innovations. All three report directly to Mr.
Freeman. The Company believes that this new management structure has greatly
enhanced the Company's ability to pursue its business strategy. Mr. VanOort and
the regional and local operations leaders who report to him focus their primary
attention on laboratory operations, efficiencies and standardization. Mr.
Hardison and the regional and local commercial leaders who report to him develop
and coordinate national, regional and local sales and marketing efforts, and
cultivate national and regional client relationships and provider alliances. Dr.
Critchfield pursues scientific excellence in the laboratory as well as seeks
out, develops and assimilates those new tests and technologies that will
differentiate the Company and help propel its growth in the future.

     This three-prong management structure is designed to implement the
Company's business strategy to make the Company the best supplier (i.e.,
lowest-cost, highest quality) of quality testing services; the preferred partner
to large health care purchasers of fairly priced and useful health care services
and information; and the industry's leading innovator of new clinical tests,
methodologies and services.

Business Strategy

     The Company's overall goal is to be recognized by its customers, employees
and competitors as the best provider of comprehensive and innovative diagnostic
testing, information and services. To achieve this, the Company has set several
strategic goals and put in place organizational structures to implement them.

     Best Supplier. The Company seeks to be the best supplier of the highest
quality and the lowest-cost testing services. Health care providers and patients
expect accurate, timely and consistent laboratory test results at a fair price.

   [bullet] Lowest Cost Provider. Currently, approximately 28% of the Company's
     net revenues are from laboratories that the Company believes are the
     lowest-cost providers in their respective markets. Management believes that
     these laboratories are the lowest cost providers in their respective
     markets based on its knowledge of such markets and information obtained in
     acquiring other laboratories. The Company currently receives approximately
     60 million requisitions for testing each year. Currently, the Company's
     average cost per requisition varies significantly among its regional
     laboratories: an approximately $8.00 difference in cost per requisition
     between the most efficient regional laboratory and the average and an
     approximately $13.00 difference in cost per requisition between the most
     and the least efficient regional laboratories. In many cases, these
     variations do not relate to testing volumes or mixes, space costs, service
     requirements or regional labor cost differences. To reduce costs, the
     Company has begun to replicate the best practices from each region
     throughout its national network. Standardization of processes, equipment
     and supplies, as well as leveraging of the Company's purchasing power, is
     part of this strategy. While the Company's overall program of
     standardization is in a preliminary stage, the Company has already selected
     its standard clinical instruments and has selected its national vendors for
     laboratory supplies, temporary services and personal computers. Management
     expects to achieve significant cost savings within the next three years as
     these programs are fully implemented, the majority of which are expected to
     be achieved by the end of 1998.*

   [bullet] Highest Quality Provider. The Company is dedicated to providing
     accurate and timely testing results and to being viewed by its customers as
     the highest quality provider of clinical testing services. The Company
     believes that implementation of best practices already developed in certain
     regions will permit the Company to be viewed by its customers as the
     highest quality provider of clinical testing services. For example, as part
     of its best practices policy, the Company is identifying the most common
     service failures in each regional laboratory and establishing procedures to
     substantially reduce these service failures. Management

- --------------
 * This is a forward looking statement and is based on current expectations.
   Actual results may vary materially from those projected. See "Cautionary
   Statement for Purposes of the 'Safe Harbor' Provisions of the Private
   Securities Litigation Reform Act of 1995." In particular see factors (c),
   (d), (g) and (j).

                                       2



     believes that implementing these best practices will increase the level of
     quality while lowering costs.* Historically, the Company's experience has
     been that the regions with the highest quality of services have also had
     the lowest costs.

     Preferred Partner. The Company seeks to be the preferred provider of
laboratory testing services to existing and new health care networks on a
selective basis determined by profitability of accounts. The Company believes
that it will become the preferred partner to these networks as (1) large
networks typically prefer to utilize large independent clinical laboratories
that can service them on a national or regional basis and (2) the Company
continues to pursue its primary strategy of becoming the highest quality, lowest
cost provider. To achieve this, the Company will employ a rigorous national and
regional process to identify prospective customers and to efficiently allocate
resources to support these efforts. The Company will also pursue innovative
alliances and seek to assist its partners in achieving their business
objectives.

   [bullet] Account Profitability. The Company intends to refocus its sales
     efforts on pursuing and keeping profitable accounts. The Company is
     engaging in an active program with current accounts, including those with
     managed care organizations, to evaluate their profitability and either
     increase pricing or eliminate accounts that cannot be serviced profitably.
     Throughout the independent clinical laboratory industry, there are
     substantial differences in pricing among, as well as the cost of serving,
     various categories of payors and health care providers. The Company is
     beginning to provide clear pricing guidelines to its sales force and is
     changing its commission structure so that compensation is tied to the
     profitability of (rather than revenues from) business. Management expects
     to achieve significant benefits from these programs within the next three
     years, the majority of which are expected to be achieved by the end of
     1998.**

   [bullet] Regional Profitability. The Company presently believes that it has
     the leading market share among independent clinical laboratories in most
     routine testing markets of the northeast, mid-Atlantic and midwest regions.
     Approximately 68% of the Company's revenues and almost all of its earnings
     before net interest, taxes, depreciation and amortization ("EBITDA") are
     generated from these markets. In most of these markets, the Company
     believes that it also is the lowest cost provider. The Company is
     evaluating its strategic alternatives relative to units whose profitability
     does not meet its internal goals. These alternatives may include asset
     swaps, joint ventures, alliances, or dispositions. In the interim, the
     Company will continue to drive its core strategy in these regions. The
     Company may also make selected local acquisitions where appropriate.

     Leading Innovator. The Company intends to remain a leading innovator in the
clinical laboratory industry by continuing to introduce new tests, technology
and services. Through its relationship with the academic community and
pharmaceutical and biotechnology firms and its own internal research and
development the Company believes it is one of the leaders in transferring
innovation from academic biotechnology laboratories to the market. For example,
the Company has been informed by its licensors that it is currently the only
independent clinical laboratory that is using both molecular signal
amplification (branched DNA) and polymerase chain reaction (PCR) technologies
for HIV testing. These technologies permit the detection of lower levels of HIV
than can be achieved using other technologies, which in turn permits health care
providers to better tailor drug therapies for HIV-infected patients. The
Company's esoteric laboratory located in San Juan Capistrano continues to be one
of the leading esoteric testing laboratories in the world. This esoteric
laboratory serves approximately 2,000 of the country's estimated 6,400 hospitals
and counts among its largest customers other independent clinical laboratory
companies. The Company hopes to leverage its existing relationships with
hospitals into increased routine testing for hospitals, which continue to
perform over half of the clinical laboratory testing in the United States.

The Clinical Laboratory Testing Industry

     Clinical testing is a critical component in the delivery of quality health
care service to patients. Currently, clinical laboratory testing is the first
step in determining how a significant amount of all health care dollars are
spent.

- --------------
 * This is a forward looking statement and is based on current expectations.
   Actual results may vary materially from those projected. See "Cautionary
   Statement for Purposes of the 'Safe Harbor' Provisions of the Private
   Securities Litigation Reform Act of 1995." In particular see factors (b),
   (c), (d), (f) and (j).

** This is a forward looking statement and is based on current expectations.
   Actual results may vary materially from those projected. See "Cautionary
   Statement for Purposes of the 'Safe Harbor' Provisions of the Private
   Securities Litigation Reform Act of 1995." In particular see factors (a),
   (b), (c), (d), (f) and (i).

                                       3



Laboratory tests and procedures are used generally by physicians and other
health care providers to assist in the diagnosis, evaluation, detection,
monitoring and treatment of diseases and other medical conditions through the
measurement and analysis of chemical and cellular components in blood, tissues
and other specimens. Clinical laboratory testing is generally categorized as
either clinical testing, which is performed on body fluids such as blood and
urine, or anatomical pathology testing, which is performed on tissue and other
samples, including human cells. Clinical and anatomical pathology procedures are
frequently ordered as part of regular physician office visits and hospital
admissions. Most clinical laboratory tests ordered by health care providers are
considered "routine" and can be performed by most independent clinical
laboratories, while "esoteric" tests (which generally require more sophisticated
equipment, materials and personnel) are generally referred to laboratories, such
as the Company's facility in San Juan Capistrano, that specialize in such tests.

     The Company believes that in 1995 the entire United States clinical
laboratory industry had revenues exceeding $30 billion. The clinical laboratory
industry consists primarily of three types of providers: hospital-affiliated
laboratories, independent clinical laboratories, such as those owned by the
Company, and physician-office laboratories. The Company believes that in 1995
approximately 56% of the clinical testing revenues in the United States were
attributable to hospital-affiliated laboratories, approximately 36% were
attributable to independent clinical laboratories and approximately 8% were
attributable to physicians in their offices and laboratories.

     The Company believes that a number of factors are likely to positively
influence the volume of clinical laboratory testing performed in the United
States in the future, including (1) the general aging of the population in the
United States; (2) an expanded base of scientific knowledge which has led to the
development of more sophisticated specialized tests and an increase in the
awareness of physicians of the value of clinical laboratory testing as a
cost-effective means of early detection of disease and monitoring of treatment;
(3) an increase in the number and types of tests which are, due to advances in
technology and increased cost efficiencies, readily available on a more
affordable basis to physicians; (4) expanded substance-abuse testing by
corporations and governmental agencies; and (5) increased testing for sexually
transmitted diseases such as AIDS. The impact of these factors is expected to be
offset in part by increased controls over the utilization of clinical laboratory
tests by Medicare and other third party payors. In addition, as a result of its
focus on account profitability, the Company expects to eliminate certain
accounts that cannot be serviced profitably, which will negatively affect
volume. See "Business Strategy-Preferred Partner-Account Profitability."

     The Company believes that the clinical laboratory industry will continue to
be subject to pricing pressures as a result of (1) continued growth of the
managed care sector; (2) a shift toward capitated payment contracts within the
managed care sector; and (3) decreases in Medicare reimbursement rates. In
addition, increased regulatory requirements in the billing of tests to Medicare
are expected to result in reimbursement reductions and additional costs to
clinical laboratory testing companies in the United States. The Company has
formulated strategies to address these challenges. See "Business Strategy."

Services

     The Company's laboratory business is comprised of routine testing, which
the Company's management estimates currently generates approximately 88% of the
Company's net laboratory revenues; and esoteric testing, which is performed at
the esoteric testing facility in San Juan Capistrano and which the Company's
management estimates generates approximately 10% of the Company's net laboratory
revenues. The balance of the Company's net revenues is derived principally from
the manufacture of clinical laboratory test kits.

      Routine Testing Services and Operations. Routine tests, which are
performed at the Company's regional laboratories, include procedures in the area
of blood chemistry, hematology, urine chemistry, virology, tissue pathology and
cytology. Commonly ordered individual tests include red and white blood cell
counts, Pap smears, blood cholesterol level tests, HIV-related tests,
urinalyses, pregnancy tests, and alcohol and other substance-abuse tests.
Routine test groups include tests to determine the function of the kidney,
heart, liver and thyroid, as well as other organs, and several health screens
that measure various important bodily health parameters.

     The Company provides services through 17 regional laboratories located in
major metropolitan areas throughout the United States, as well as 14 branch
laboratories, approximately 200 STAT laboratories and 850

                                       4



patient service centers. The Company also operates a branch laboratory in
Mexico. Regional laboratories offer a full line of routine clinical testing
procedures. "STAT" laboratories are local laboratory facilities where the
Company can quickly perform and report results of certain routine tests for
customers that require such emergency testing services. "Branch laboratories"
have a test menu that is smaller than that of regional laboratories but larger
than that of STAT laboratories. A "patient service center" is a facility
maintained by the Company, typically in or near a medical professional building,
to which patients can be referred by physicians for specimen collection.

     The Company operates 24 hours a day, 365 days a year, utilizing a fully
integrated collection and processing system. The Company generally performs and
reports most routine procedures within 24 hours, employing a variety of
sophisticated and computerized laboratory testing instruments. On an average
work day, the Company processes approximately 220,000 requisitions. The Company
provides daily pickup of specimens from most customers principally through an
in-house courier system. The specimens are sent to one of the Company's
laboratories (generally a regional or branch laboratory) where one or more tests
are performed.

     Each patient specimen is accompanied by a test requisition form, which is
completed by the customer, that indicates the tests to be performed and provides
the necessary billing information. Each specimen and related requisition form is
checked for completeness and then given a unique bar-coded identification
number. The unique identification number assigned to each specimen helps to
assure that the results are attributed to the correct patient. The requisition
form is sent to a data entry department where a file is established for each
patient and the necessary testing and billing information is entered. Once this
information is entered into the computer system, the tests are performed and the
results are entered, primarily through computer interface or manually, depending
upon the type of testing equipment involved. Most of the Company's automated
testing equipment is directly linked with the Company's information systems.
Most routine testing is performed and completed during the evening and test
results are readied for distribution the following morning either electronically
or by service representatives. Many customers have local printer capabilities
enabling laboratory medical reports to be printed in their offices. Customers
who request that they be called with a result are so notified in the morning. It
is the Company's policy to notify the customer immediately if a life-threatening
result is found at any point during the course of the testing process.

     Esoteric Testing Services and Operations. As a result of the acquisition of
Nichols in 1994, the Company operates one of the leading esoteric clinical
testing laboratories in the world. Esoteric tests are performed in cases where
the information provided by routine tests is not specific enough or is
inconclusive as to the existence or absence of disease or when a physician
requires more information. Typically, unlike routine testing, only one test is
ordered and performed per requisition. The logistics for esoteric testing are
similar to that for routine testing except that, due to the complexity of the
testing, approximately 60% of the tests are performed within 24 hours, with
almost all of the rest being performed within one week.

     Esoteric tests generally require more sophisticated equipment and materials
as well as more highly skilled personnel to perform test procedures and analyze
results than what are required for routine testing. Consequently, esoteric tests
are generally priced substantially higher than routine tests. New medical
discoveries lead to the development of new esoteric tests. However, over time
esoteric tests may become routine tests as a result of improved technology or
increased volume. The volume of esoteric tests required by most health care
providers, including hospitals, is relatively low compared to the volume of
routine tests. Because it is generally not cost effective for such health care
providers to perform the low volume of esoteric tests in-house, a significant
portion of esoteric tests are referred to clinical laboratories like the
Company's esoteric laboratory in San Juan Capistrano that specialize in such
tests. Some examples of esoteric testing procedures include capillary
electrophoresis, cell culture technology, certain chemiluminescent immunoassays,
certain enzyme immunoassays, flow cytometry, fluorescent in situ hybridization
(FISH), inductively coupled plasma mass spectroscopy (ICPMS), molecular tissue
pathology, molecular signal amplification (branched DNA), and polymerase chain
reaction (PCR) technologies.

     The Company's esoteric testing laboratory is comprised of 18 individual
laboratory departments, which offer tests or "assays" in such fields as
endocrinology, genetics, immunology, microbiology, molecular biology, oncology,
serology, special chemistry and toxicology. The Company believes that it has
been one of the leaders in transferring technological innovation from academic
biotechnology laboratories to the marketplace. Nichols was the first to
introduce a number of esoteric tests, including immunoassay methods for
measurement of circulating hormone levels and sensitive tests to predict breast
cancer prognosis. Among more recent developments have been tests to detect a
variety of tumor types, a common form of mental retardation, leukemia, cystic
fibrosis, osteoporosis, hepatitis and neurological disorders and to monitor the
success of therapy for cancer and AIDS. The branched DNA

                                       5



and PCR technologies permit the detection of lower levels of HIV than can be
achieved under other technologies. The ability to measure the amount of HIV
permits health care providers to better tailor drug therapies for HIV-infected
patients. These techniques can be applied to a variety of infectious agents. The
Company has also expanded its capabilities in molecular diagnostics by offering
important gene sequencing testing for an inherited cancer disorder in
endocrinology (the Ret gene). As part of its research and development efforts,
the Company maintains a relationship with the academic community through its
Academic Associates program, under which approximately sixty scientists from
academia and biotechnology firms work directly with the Company's staff
scientists to monitor and consult on existing test procedures and develop new
esoteric test methods. In addition, the Company relies on internal resources for
the development of new tests as well as on license arrangements and
co-development agreements with biotechnology companies and academic medical
centers.

     The Company also provides clinical laboratory testing in connection with
pre-marketing clinical trials of pharmaceutical drugs. Net revenues from such
testing accounted for less than 1% of the Company's net revenues in 1996.

     Diagnostics. Through its Nichols Institute Diagnostics ("NID")
subsidiaries, which were acquired as a result of the acquisition of Nichols in
August 1994, the Company manufactures and markets clinical laboratory kits
primarily for esoteric testing. Test kits are sold principally to hospital and
clinical laboratories.

Customers and Payors

     The Company provides testing services to a broad range of health care
providers. The primary types of customers served by the Company are as follows:

     Independent Physicians and Physician Groups. Physicians requesting testing
for their patients who are unaffiliated with a managed care plan remain the
principal source of the Company's clinical laboratory business. Fees for
clinical laboratory testing services rendered for these physicians are billed
either to the physician, to the patient, or to the patient's third-party payor
such as insurance companies, Medicare and Medicaid. In four states, including
New York and Michigan, the Company is required to bill patients directly. The
clinical laboratory industry is supporting legislative efforts to expand direct
patient billing. Billings are typically on a fee-for-service basis. If the
billings are to the physician, they are based on the laboratory's wholesale or
customer fee schedule and are typically subject to negotiation. Otherwise, the
billings are based on the laboratory's retail or patient fee schedule, subject
to limitations on fees imposed by third parties and to negotiation by physicians
on behalf of their patients. Reimbursement from Medicare and Medicaid billings
is based on fee schedules set by governmental authorities. See "Regulation and
Reimbursement."

     HMOs and Other Managed Care Groups. HMOs and other managed care
organizations typically contract with a limited number of clinical laboratories
and then designate the laboratory or laboratories to be used for tests ordered
by their participating physicians. In an effort to control costs, the managed
care groups generally negotiate discounts to the fees usually charged by such
laboratories or negotiate capitated payment contracts, whereby the clinical
laboratory receives a monthly fee per individual. The fixed monthly payment
generally covers all laboratory tests performed during the month, regardless of
the number or cost of tests actually performed. Such contracts shift the risks
of additional routine testing beyond that covered by the capitated payment to
the clinical laboratory. In certain cases, however, the monthly payment may be
subject to prospective or retroactive adjustment if the number of tests
performed exceeds (or is less than) certain thresholds. The types of tests
covered by capitated contracts are negotiated for each contract, with esoteric
tests and anatomic pathology services generally not being covered under the
capitation rate. Large regional and national HMOs and preferred provider
organization networks typically prefer to utilize large independent clinical
laboratories such as the Company that can service the managed care groups on a
national or regional basis. See "Effect of the Growth of the Managed Care Sector
on the Clinical Laboratory Business."

     Hospitals. The Company serves approximately 3,000 hospitals with services
that vary from providing esoteric testing to management contracts, where the
Company manages the hospital's laboratory for a fee. Hospitals generally
maintain an on-site laboratory to perform testing on patients receiving care and
refer less frequently needed procedures and highly specialized procedures to
outside laboratories. Hospitals are typically charged for such tests on a
negotiated fee-for-service basis which is based on the laboratory's customer fee
schedule. Some hospitals actively encourage community physicians to send their
testing to the hospital's laboratory. In addition, some

                                       6



hospitals have been purchasing physician practices and requiring that the
physicians/employees send their testing to the hospital's affiliated laboratory.
As a result, hospital-affiliated laboratories can be both a customer and a
competitor for independent clinical laboratories such as the Company.

     Other Institutions. The Company also serves other institutions, including
governmental agencies, such as the Department of Defense and prison systems,
large employers and independent clinical laboratories that do not have the full
range of the Company's testing capabilities. These institutions are typically
charged on a negotiated or bid fee-for-service basis. The Company's services to
employers principally involve the provision of substance abuse testing services.

     In 1996, no single customer or affiliated group of customers accounted for
more than 2% of the Company's net revenues. The Company believes that the loss
of any one of its customers would not have a material adverse effect on the
Company's results of operations or cash flows.

     Payors. Most clinical laboratory testing is billed to a party other than
the "customer" that ordered the test. Tests performed for various patients of a
single physician may be billed to different payors besides the ordering
physician, including third-party payors (generally an insurance company or
managed care organization), Medicare, Medicaid or the patient.

     The following table sets forth current estimates of the breakdown by payor
of the Company's total volume of requisitions and average approximate revenues
per requisition:



                                                      Requisition Volume as
                                                          % of Total           Revenue Per Requisition
                                                     -----------------------   -------------------------
                                                                                  
Patient ............................................       5%-10%                       $60-$80
Medicare & Medicaid ................................       20%-25%                      $20-$30
Monthly Bill (Physician, Hospital, Employer, Other).       35%-40%                      $15-$35
Third Party Fee-For-Service ........................       15%-20%                      $30-$40
Managed Care-Capitated .............................       15%-20%                      $ 5-$15


     For a discussion of the mix shift and the impact of the managed care sector
on volume and price trends, see "Effect of the Growth of the Managed Care Sector
on the Clinical Laboratory Business."

     Average Revenue per Requisition Trends. The Company-wide average revenue
per requisition remained relatively stable during 1996 but was lower than in
1995. Average revenue per requisition for the quarters ended September 30, 1996
and December 31, 1996 were approximately 1.7% and 1.6%, respectively, below the
comparable periods in 1995. These declines in revenue per requisition were
smaller than the approximate 4.8% and 3.6% decline experienced in the first and
second quarters of 1996, respectively.

Sales and Marketing

     The Company markets and services its customers through its direct sales
force, as well as through its account representatives and couriers. At February
28, 1997 the Company had approximately 320 sales representatives, 230 account
representatives and 2,100 couriers.

     Most sales representatives market the mainstream or traditional routine
laboratory services primarily to physicians, while others concentrate on
individual market segments, such as hospitals or managed care organizations, or
on testing niches, such as substance abuse testing. The Company's sales
representatives are compensated through a combination of salaries, commissions
and bonuses, at levels commensurate with each individual's qualifications and
responsibilities. Commissions are based primarily upon the individual's results
in generating new business for the Company. The Company is currently changing
its commission structure so that compensation is tied to the profitability of
(rather than revenues from) business. See "Business Strategy-Preferred Partner."

     The Company's account representatives interact with customers on an ongoing
basis. Account representatives monitor the status of services being provided to
customers, act as problem-solvers, provide information on new testing
developments and serve as the customer's regular point of contact with the
Company. Account representatives are compensated with a combination of salaries
and bonuses commensurate with each individual's qualifications and
responsibilities.

                                       7



     The Company believes that the clinical laboratory service business is
shifting away from the traditional direct sales structure and into one in which
the purchasing decisions for laboratory services are increasingly made by
managed care organizations, integrated health delivery systems, insurance plans,
employers and by patients themselves. In view of these changes, the Company has
completed a rigorous regional market strategy and has reorganized its sales and
marketing organization structure to support these strategies and emerging
customers.

     The Company believes that, given the increasing regulation and complexity
of the clinical laboratory marketplace, training of its sales force is of
paramount importance. With this goal in mind, since 1995 the Company has
enhanced its comprehensive sales training program and compliance training. See
"Compliance Program."

Effect of the Growth of the Managed Care Sector on the Clinical Laboratory
Business

     The managed care industry is growing as well as undergoing rapid
consolidation which has created large managed care companies that control the
delivery of health care services for millions of people, and have significant
bargaining power in negotiating fees with health care providers, including
clinical laboratories. The Company believes that there are opportunities for
large, low-cost, clinical laboratories such as the Company to capture additional
testing volume from managed care organizations. The larger regional and national
managed care organizations typically prefer to utilize large independent
clinical laboratories, like the Company, that can service their organizations on
a national or a regional basis. In addition, smaller laboratories are unlikely
to be able to achieve the low cost structures necessary to profitably service
managed care organizations.

     The growth of the managed care sector presents various challenges to
independent clinical laboratories, including the Company. Managed care
organizations frequently negotiate capitated payment contracts, whereby the
clinical laboratory receives a monthly fee per covered individual. The fixed
monthly payment generally covers all laboratory tests (excluding certain tests,
such as esoteric tests and anatomic pathology services) performed during the
month, regardless of the number or cost of the tests performed. Unlike
fee-for-service indemnity insurance, such contracts shift the risks of
additional routine testing beyond that covered by the capitated payment to the
clinical laboratory. In certain cases, however, the monthly payment may be
subject to prospective or retroactive adjustment if the number of tests
performed exceeds (or is less than) certain thresholds. The Company expects the
amount of clinical laboratory testing performed for managed care organizations
under capitated rate agreements to continue to grow.

     Laboratory services agreements with managed care organizations have
historically been priced aggressively due to competitive pressures and the
expectation that a laboratory would capture not only the volume of testing
covered under the contract, but also additional fee-for-service business from
patients of participating physicians who are not covered under the managed care
plan. However, as the number of patients covered under managed care plans
continues to increase, there is less such fee-for-service business and,
accordingly, less high margin business to offset the low margin (and often
unprofitable) managed care business. Furthermore, increasingly, physicians are
affiliated with more than one managed care organization and as a result may be
required to refer clinical laboratory tests to different clinical laboratories,
depending on the coverage of their patients. As a result, a clinical laboratory
might not receive any fee-for-service testing from such physicians. The level of
pricing charged to managed care organizations, including under capitated payment
contracts, if continued, may adversely affect the clinical laboratory industry.

     During 1996, services to managed care organizations under capitated rate
agreements accounted for approximately 6% of the Company's net revenues from
clinical laboratory testing and approximately 15% of the number of tests
performed by the Company. The Company believes that the prices charged by the
independent clinical laboratory testing companies to managed care organizations
must be increased. The Company is currently reviewing its pricing structures for
agreements with managed care organizations and intends to ensure that all such
agreements are profitably priced. However, there can be no assurance that the
Company will be able to increase the prices charged to managed care
organizations or that the Company will not lose market share in the managed care
market to other clinical laboratories who continue to aggressively price
laboratory services agreements with managed care organizations. The Company
believes that the growth of the managed care sector presents both challenges and
opportunities. The Company, as part of its preferred partner strategy, will seek
to capitalize on the opportunity and meet the challenge by seeking to secure
large-volume, profitable managed care contracts through providing low cost, high
quality testing services at rational prices.

                                       8



Expansion Opportunities

     The Company believes that there are several expansion opportunities which
it can take advantage of without incurring significant capital expenditures or
deploying significant resources.

     Hospital Alliances. In response to the growth of the managed care sector
and the developments described under "Effect of the Growth of the Managed Care
Sector on the Clinical Laboratory Business," many health care providers have
established new alliances. Hospital-physician networks are emerging in many
markets in order to offer comprehensive, integrated service capabilities, either
to managed care plans or directly to employers.

     Since the Company has traditionally derived a substantial portion of its
esoteric testing revenues from referrals from hospitals, which perform
approximately half of all clinical laboratory tests in the United States, the
Company established a hospital business venture group whose primary goal is to
develop additional nontraditional hospital arrangements, including management
and consulting agreements, shared service and outsourcing arrangements and joint
ventures.

     Under federal cost containment legislation enacted in 1985, treatment
provided to hospital inpatients covered by Medicare is classified into
diagnosis-related groups ("DRGs") which prescribe the maximum reimbursable
payments for all services, including laboratory testing services, provided on
behalf of an inpatient under each DRG. As a result of this payment structure,
and similar price constraints from managed care organizations and other
third-party payors, hospitals have an economic incentive to seek the most
cost-effective laboratory testing services for their patients. The Company
believes that in many cases, by entering into arrangements such as those
described in the preceding paragraph, the Company can improve a hospital
laboratory's economic structure and preserve hospital capital that would be
required for needed laboratory improvements while providing accurate and timely
testing services due to greater economies of scale, increased utilization of
expensive testing and data processing equipment through optimization of the mix
between on-site and off-site testing and more efficient use of laboratory
employees. The Company has several such arrangements with hospitals, including a
joint venture with approximately twenty hospitals in northwestern Pennsylvania
and southwestern New York and a management agreement with a group of
approximately 25 hospitals in eastern Nebraska and Sioux City, Iowa. These two
laboratory arrangements, which provide testing for the hospitals as well as
unaffiliated physicians and other health care providers in their geographical
areas, serve as two of the Company's laboratory facilities. The Company also
manages the laboratories at several hospitals in the eastern United States.
However, despite the potential cost savings and additional revenues available to
hospitals through such arrangements, the Company believes that only a small
percentage of the hospitals in the United States have entered into such
arrangements with independent clinical laboratories. Nonetheless, the Company
expects to enter into alliances with various hospitals in the future and
believes that this market has potential.* The Company recently signed a letter
of intent with the University of Pittsburgh Medical Center to explore a
potential relationship, including the possibility of a partnership. As an
alternative service for hospitals that are entering into integrated delivery
systems, the Company is beginning to market consulting support and technical
solutions for integrating diverse laboratory infrastructures, systems and data.

     Employer Market. The Company is considering expanding its business in the
employer market to include the provision of laboratory services to large
employers on a basis comparable to that offered to managed care organizations,
whereby laboratory services paid under self-insured indemnity plans may be
relatively fixed (rather than on a fee-for-service basis). These services could
be offered in alliance with other service providers, including pharmaceutical
benefits and diagnostic imaging services. In 1996, the Company organized
National Imaging Associates Inc. ("NIA"), a company offering diagnostic imaging
benefit management services to employers, payors and managed care organizations.
NIA seeks to carve out the imaging component of a health care plan service
offering and manage it at lower cost through utilization controls and provider
price concessions. The Company currently owns approximately 27% of the
outstanding capital stock of NIA.

     Medical Information. The market need for medical information, particularly
disease-specific information about provider practices and patient care, is
growing rapidly. Large customers of clinical laboratories are

- --------------
* This is a forward looking statement and is based on current expectations.
  Actual results may vary materially from those projected. See "Cautionary
  Statement for Purposes of the 'Safe Harbor' Provisions of the Private
  Securities Litigation Reform Act of 1995."

                                       9



increasingly interested in using information from clinical laboratory data on
their covered population to answer financial, marketing and quality related
questions. Integrated data from clinical laboratories and other health
encounters provides additional insights to these questions. To meet these
emerging needs, the Company created the Quest Informatics Division ("Quest
Informatics"), which focuses solely on the medical information needs of managed
care organizations, integrated healthcare delivery networks and other large
customers. Through internal development, the Company now has a portfolio of
information products, based primarily upon the Company's extensive database,
that assist large customers in delivering more effective health care to their
patients. A combination of advanced information technology and experienced
analytical and data integration skills provides the platform for delivery of
these products.

     As market interest has increased, Quest Informatics has devoted experienced
account executives to work with customers to meet their information needs.
Current information products include provider profiles and benchmarks, high-risk
patient registries based on customer disease management initiatives, normative
comparisons with other populations, and quantitative clinical outcomes based on
laboratory measures. The Company believes that health care customers will
increasingly see value in the information obtained from clinical laboratory
results.

Information Systems

     The need for information systems to support laboratory, billing, customer
service, logistics, medical data, and other business requirements is significant
and will continue to place high demands on the Company's information systems
staff. The Company has historically not standardized the billing, laboratory and
other information systems at laboratories that it has acquired. As a result, the
Company has numerous different information systems to handle billing, test
result reporting and financial data and transactions. The Company believes that
the efficient handling of information involving customers, patients, payors, and
other parties will be critical to the Company's future success.

     To this end, the Company has chosen standard billing and laboratory
systems. During the third quarter of 1996, the Company recorded a charge of
$13.7 million to write off capitalized software as a result of its decision to
abandon the billing system which had been intended as its company-wide billing
system. Management now plans to standardize using a SYS billing system which has
already been implemented in seven of its billing sites, which seven sites
account for approximately 34% of the Company's net revenues. The standard
laboratory system is already operational in nine of its sites, which account for
approximately 30% of the Company's net revenues. Such sites are not necessarily
the same sites as those with standard billing systems. The Company is beginning
to convert the remaining nonstandard billing and laboratory systems to the
standard systems, prioritized on an impact basis. The most critical conversions
will be completed within three years. The New York/New Jersey (Teterboro) and
Long Island laboratories are the first priority and are expected to be converted
during 1998. The conversion costs are expected to average approximately $3
million per billing system and $1 million to $3 million per laboratory system.
As more billing sites are converted to the standard billing system,
consolidation of billing sites is expected to occur, which will reduce overall
conversion costs and improve billing efficiencies. The Company anticipates that
the cost of converting all billing and laboratory systems to the standard
systems over the next several years will cost between approximately $55 million
and $85 million, depending on the number of billing consolidations that occur.*
The Company does not anticipate that the conversion costs will result in a
significant increase in capital expenditures over the levels spent during the
last several years.

     The Company is developing systems that will permit managed care
organizations and other providers to have electronic access to test orders and
results for participating physicians, which will permit managed care
organizations to better monitor and control the utilization of testing services.

Billing

     Billing for laboratory services is a complicated process. Laboratories must
bill different payors such as doctors, patients, insurance companies, Medicare,
Medicaid and employer groups, all of whom have different billing

- --------------
* This is a forward looking statement and is based on current expectations.
  Actual results may vary materially from those projected. See "Cautionary
  Statement for Purposes of the 'Safe Harbor' Provisions of the Private
  Securities Litigation Reform Act of 1995." In particular see factors (d), (j)
  and (k).

                                       10



requirements. The Company believes that less than 30% of its bad debt expense is
attributable to specific credit or payment issues affecting its customers. The
remainder of the bad debt expense is the result of many non-credit related
issues which slow the billing process, create backlogs of unbilled requisitions
and generally increase the aging of accounts receivable. A primary cause of bad
debt expense is missing or incorrect billing information on requisitions.
Typically, approximately one-third of the requisitions that the Company receives
either do not provide all the necessary data or provide incorrect data. The
Company believes that this experience is similar to that of its primary
competitors. The Company performs the requested tests and reports back the test
results regardless of whether billing information has been provided at all or
has been provided incorrectly. The Company subsequently attempts to obtain any
missing information and rectify any incorrect billing information received from
the health care provider. Among the many other factors complicating the billing
process are pricing differences between the fee schedules of the Company and the
payor, disputes between payors as to the party responsible for payment of the
bill and auditing for specific compliance issues. Ultimately, if all issues are
not resolved in a timely manner, the related receivables are written off to bad
debt expense.

     The Company's bad debt expense increased each year from 1993 to 1995 due
principally to three developments that have further complicated the billing
process: (1) increased complexity in the health care system; (2) increased
requirements in complying with fraud and abuse regulations; and (3) changes in
Medicare reimbursement policies. These factors have placed additional
requirements on the billing process, including the need for specific test
coding, additional research on processing rejected claims, increased audits for
compliance, and management of a large number of contracts which have very
different information requirements for pricing and reimbursement. The Company is
improving its management of these requirements and bad debt expense was reduced
substantially in 1996 from 1995 levels. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company's
billing has also been hampered by the existence of multiple billing information
systems. In 1995 the Company had severe billing problems at its largest
laboratory site in Teterboro, New Jersey. A new billing information system
developed with outside consultants experienced significant implementation
problems, including excessive downtime, which severely impacted the Company's
ability to efficiently bill for its services from the Teterboro location. The
problem was compounded by a lack of experienced staff as the result of work
force reductions made to meet cost reduction initiatives undertaken in
anticipation of greater efficiencies from the new billing information system. As
a result of all of these factors, the Company recorded a charge to bad debt
expense of $62 million in the third quarter of 1995. Of this amount,
approximately $35 million was attributable to the Teterboro location. At the
time of this charge, the backlog of unbilled requisitions was estimated at over
2 million requisitions and days sales outstanding ("DSOs") for the clinical
testing business were approximately 90 days. In addition, significant backlogs
existed in (1) reconciling cash received to payment of specific bills, (2)
rejected claims that needed to be researched and (3) correspondence from
customers attempting to resolve billing problems.

     Integration of a standardized billing system is a priority of the Company
and the Company is in the process of implementing the SYS billing system, which
has proven reliable, throughout its network. Its reliability is evidenced by
both the improvement in the laboratories' bad debt experience after SYS was
implemented and the improved capability to handle new billing requirements as
compared with non-SYS laboratories, such as Teterboro. The use of a standard
system will also provide for operational efficiencies as redundant programming
efforts are eliminated and the ability to consolidate billing sites will become
more feasible. See "Information Systems." Standardizing billing systems presents
conversion risk to the Company as key databases and masterfiles are transferred
to the SYS system and because the billing workflow is interrupted during the
conversion, which may cause backlogs. In 1997 and 1998, efforts will be focused
on converting the Company's New York and New Jersey laboratories to the SYS
system. The Company has already completed seven conversions to this system and
has retained key people who have been involved in those conversions.

     The Company has concentrated on improving its billing operations in the
last year. Over the last fifteen months, the backlog of unbilled requisitions
has been reduced by approximately 40%, DSOs for the clinical testing business
have been reduced to 72 days, bad debt expense as a percentage of net revenues
has decreased, the percentage of requisitions received with missing billing
information has been reduced by approximately 30% and backlogs in rejected
claims, unapplied cash and customer correspondence have been significantly
reduced. These improvements were achieved in spite of a higher level of
information requirements necessary for correct billing, especially those bills
relating to Medicare. However, additional requirements to provide documentation
of the "medical necessity" of testing have added to the backlog of unbilled
receivables and caused bad debt expense as a percentage of revenues

                                       11



in the last two quarters of 1996 to increase above the rate the Company had
experienced during the first two quarters of 1996. See "Regulation and
Reimbursement-Regulation of Reimbursement for Clinical Laboratory Services."

Acquisitions and Dispositions

     MetPath, the Company's predecessor, originally commenced operations in 1967
with a laboratory only in the New York metropolitan area. Most of the Company's
other regional laboratories have been added through acquisitions. Principally as
the result of acquisitions that were completed in 1993 and 1994, the Company's
revenues have almost tripled since 1991. However, this increase in revenues is
not reflected in the Selected Historical Financial Data because several of the
major acquisitions are accounted for as poolings of interests and have been
restated on a combined basis. Acquisition activity has diminished significantly
since May 1995, in part so that the Company could concentrate on the integration
of the laboratory networks that had been acquired in 1993 and 1994. The Company
may resume making acquisitions in the future, most likely focusing on
acquisitions of smaller laboratories that can be folded into existing
laboratories where the Company can expect to achieve significant cost savings
and other benefits resulting from the elimination of redundant facilities and
equipment and reductions in personnel. The Company is evaluating its strategic
alternatives relative to units whose profitability does not meet its internal
goals. These alternatives may include joint ventures, alliances, asset swaps or
dispositions.

Competition

     The clinical laboratory testing business is intensely competitive. As
recently as 1993, there were seven independent clinical laboratories that
provided clinical laboratory testing services on a national basis: the Company,
SmithKline Beecham Clinical Laboratories Inc. ("SmithKline"), National Health
Laboratories Inc. ("NHL"), Roche Biomedical Laboratories Inc. ("Roche"), Damon
Corporation ("Damon"), Allied Clinical Laboratories Inc. ("Allied") and Nichols.
In April 1995 Roche merged into NHL (under the name Laboratory Corporation of
America Holdings ("LabCorp")), which had acquired Allied in June 1994. The
Company acquired Nichols in August 1994 and Damon in August 1993. In addition,
in the last several years a number of large regional laboratories have been
acquired by national clinical laboratories. There are presently three national
independent clinical laboratories: the Company, which had approximately $1.6
billion in revenues from clinical laboratory testing in 1996; LabCorp, which had
approximately $1.6 billion in revenues from clinical laboratory testing in 1996;
and SmithKline, which had approximately $1.3 billion in revenues from clinical
laboratory testing in 1996. Both LabCorp and SmithKline are affiliated with
large corporations that have greater financial resources than the Company.
SmithKline is wholly owned by SmithKline Beecham Ltd.; F. Hoffman La Roche Ltd.
beneficially owns approximately 49.9% of the outstanding capital stock of
LabCorp.

     In addition to the three national clinical laboratories, the Company
competes on a regional basis with many smaller regional independent clinical
laboratories as well as laboratories owned by hospitals and physicians. The
Company has the leading market share in most of the northeast, mid-Atlantic and
midwest routine testing markets, while its market share is much lower in the
routine testing market in the rest of the country. The Company does not
generally compete in the California routine testing market other than in the San
Diego metropolitan area.

     The independent clinical laboratory industry has experienced intense price
competition over the past several years, which has negatively impacted the
Company's profitability. However, pricing remained relatively stable during
1996. See "Customers and Payors-Average Revenue per Requisition Trends."

     The Company believes that the following factors, among others, are often
used by health care providers in selecting a laboratory: (i) pricing of the
laboratory's testing services; (ii) accuracy, timeliness and consistency in
reporting test results; (iii) number and type of tests performed; (iv) service
capability and convenience offered by the laboratory; and (v) its reputation in
the medical community. The Company believes that it competes favorably with its
principal competitors in each of these areas and is currently implementing
strategies to improve its competitive position. See "Business Strategy."

     The Company believes that consolidation will continue in the clinical
laboratory testing business. In addition, the Company believes that it and the
other large independent clinical laboratory testing companies will be able to
increase their share of the overall clinical laboratory testing market due to a
number of external factors including cost efficiencies afforded by large-scale
automated testing, Medicare reimbursement reductions and the growth of

                                       12



managed health care entities which require low-cost testing services and large
service networks.* In addition, legal restrictions on physician referrals and
the ownership of laboratories as well as increased regulation of laboratories
are expected to contribute to the continuing consolidation of the industry.

Quality Assurance

     The Company maintains a comprehensive quality assurance program for all of
its laboratories and patient service centers. The goal is to ensure optimal
patient care by continually improving the processes used for collection, storage
and transportation of patient specimens, as well as the precision and accuracy
of analysis and result reporting.

     The Company's quality assurance efforts focus on proficiency testing,
process audits, statistical process control, credentialing and personnel
training.

     Internal Quality Control and Audits. Quality control samples are processed
in parallel with the analysis of patient specimens. The results of tests on such
samples are then monitored to identify drift, shift or imprecision in the
analytical processes. In addition, the Company administers an extensive internal
program of "blind" proficiency testing. These samples are processed and reported
through the Company's systems as routine patient samples, unknown to the
laboratory as quality control samples. This provides a system to assure accuracy
of the entire pre- and post-analytical testing process. Another element of the
Company's comprehensive quality assurance program includes performance of
internal process audits.

     External Proficiency Testing and Accreditation. All of the Company's
laboratories participate in numerous externally conducted, blind sample quality
surveillance programs. These include proficiency testing programs administered
by the College of American Pathologists ("CAP"), as well as many state agencies.
These programs supplement all other quality assurance procedures.

     All of the Company's laboratories are accredited by CAP. Accreditation
includes on-site inspections and participation in the CAP Proficiency Test
Program. CAP is an independent nongovernmental organization of board certified
pathologists that offers an accreditation program to which laboratories may
voluntarily subscribe. CAP is approved by the Health Care Financing
Administration ("HCFA") to inspect clinical laboratories to determine compliance
with the standards required by the Clinical Laboratory Improvement Amendments of
1988 ("CLIA").

Regulation and Reimbursement

     Overview. The clinical laboratory industry is subject to significant
governmental regulation at the federal and state levels. All of the Company's
laboratories and patient service centers are appropriately licensed and
accredited by various state and federal agencies.

     The health care industry is undergoing significant change as third-party
payors, such as Medicare (which principally serves patients 65 and older),
Medicaid (which principally serves indigent patients), private insurers and
large employers increase their efforts to control the cost, utilization and
delivery of health care services. In an effort to address the problem of
increasing health care costs, legislation has been proposed or enacted at both
the federal and state levels to regulate health care delivery in general and
clinical laboratories in particular. Some of the proposals include managed
competition, global budgeting and price controls. Although the Clinton
Administration's health care reform proposal, initially advanced in 1994, was
not enacted, such proposal or other proposals may be considered in the future.
In particular, the Company believes that reductions in reimbursement for
Medicare services may continue to be implemented from time to time. Reductions
in the reimbursement rates of other third-party payors are likely to occur as
well. The Company cannot predict the effect health care reform, if enacted,
would have on its business, and there can be no assurance that such reforms, if
enacted, would not have a material adverse effect on the Company's business and
operations.

     Regulation of Clinical Laboratory Operations. CLIA extends federal
oversight to virtually all clinical laboratories by requiring that laboratories
be certified by the government. Many clinical laboratories must also meet

- --------------
* This is a forward looking statement and is based on current expectations.
  Actual results may vary materially from those projected. See "Cautionary
  Statement for Purposes of the 'Safe Harbor' Provisions of the Private
  Securities Litigation Reform Act of 1995." In particular see factors (j) and
  (k).

                                       13



governmental quality and personnel standards, undergo proficiency testing and be
subject to biennial inspection. Rather than focusing on location, size or type
of laboratory, this extended oversight is based on the complexity of the tests
performed by the laboratory.

     The CLIA standards were designed to ensure that all clinical laboratory
testing services are uniformly accurate and of high quality by using a single
set of requirements. The final rules implementing CLIA generally became
effective in 1992. These regulations extended federal oversight, with few
exceptions, to virtually all clinical laboratories regardless of size, type,
location or ownership of the laboratory. The standards for laboratory personnel,
quality control, quality assurance and patient test management are based on
complexity and risk factors. Laboratories categorized as "high" complexity are
required to meet more stringent requirements than either "moderate" or "waived"
(performing only tests regarded as having a low potential for error and
requiring little or no oversight) laboratories.

     All of the Company's regional and branch laboratories and most of the
Company's STAT laboratories are categorized as high complexity and these
laboratories are in compliance with the more stringent standards for personnel,
quality control, quality assurance and patient test management. A few of the
Company's laboratories are categorized as moderate complexity (some STAT
laboratories) or waived (only patient service centers). The sanction for failure
to comply with these regulations may be suspension, revocation or limitation of
a laboratory's CLIA certificate necessary to conduct business, significant fines
or criminal penalties. The loss of a license, imposition of a fine or future
changes in such federal, state and local laws and regulations (or in the
interpretation of current laws and regulations) could have a material adverse
effect on the Company.

     The Company is also subject to state regulation. CLIA permits states to
adopt regulations that are more stringent than federal law. For example, state
law may require that laboratory personnel meet certain more stringent
qualifications, specify certain quality control standards, maintain certain
records and undergo additional proficiency testing. For example, certain of the
Company's laboratories are subject to the State of New York's clinical
laboratory regulations, which contain certain provisions that are significantly
more stringent than federal law on the same matters.

     The Company believes it is in material compliance with the foregoing
standards. See "Compliance Program."

     Drug Testing. Drug testing for public sector employees is regulated by the
Substance Abuse and Mental Health Services Administration ("SAMHSA") (formerly
the National Institute on Drug Abuse), which has established detailed
performance and quality standards that laboratories must meet in order to be
approved to perform drug testing on employees of federal government contractors
and certain other entities. To the extent that the Company's laboratories
perform such testing, each must be certified by the Department of Health and
Human Services ("HHS") as meeting SAMHSA standards. Seven of the Company's
laboratories are SAMHSA certified.

     Controlled Substances. The use of controlled substances in testing for drug
abuse is regulated by the federal Drug Enforcement Administration ("DEA"). All
of the Company's laboratories using controlled substances for testing purposes
are licensed by the DEA.

     Medical Wastes and Radioactive Materials. The Company is subject to
licensing and regulation under federal, state and local laws relating to the
handling and disposal of medical specimens and hazardous waste and radioactive
materials as well as to the safety and health of laboratory employees. All of
the Company's laboratories are operated in material compliance with applicable
federal and state laws and regulations relating to disposal of all laboratory
specimens. The Company utilizes outside vendors for disposal of specimens.
Although the Company believes that it is currently in compliance in all material
respects with such federal, state and local laws, failure to comply could
subject the Company to denial of the right to conduct business, fines, criminal
penalties and other enforcement actions.

     Occupational Safety. In addition to its comprehensive regulation of safety
in the workplace, the federal Occupational Safety and Health Administration
("OSHA") has established extensive requirements relating to workplace safety for
health care employers, including clinical laboratories, whose workers may be
exposed to blood- borne pathogens such as HIV and the hepatitis B virus. These
regulations, among other things, require work practice controls, protective
clothing and equipment, training, medical follow-up, vaccinations and other
measures designed to minimize exposure to chemicals and transmission of
blood-borne and airborne pathogens.

     Specimen Transportation. Regulations of the Department of Transportation,
the Public Health Service and the Postal Service apply to the surface and air
transportation of clinical laboratory specimens.

                                       14



     Regulation of Reimbursement for Clinical Laboratory Services. Containment
of health care costs, including reimbursement for clinical laboratory services,
has been a focus of ongoing governmental activity. In 1984, Congress established
a Medicare fee schedule for clinical laboratory services performed for patients
covered under Part B of the Medicare program. Subsequently, Congress imposed a
national ceiling on the amount that would be paid under the Medicare fee
schedule. Laboratories must bill the program directly and must accept the
scheduled amount as payment in full for most tests performed on behalf of
Medicare beneficiaries. In addition, state Medicaid programs are prohibited from
paying more (and in most instances, pay significantly less) than the Medicare
fee schedule for clinical laboratory testing services furnished to Medicaid
recipients. In 1996, the Company derived approximately 18% and 3% of its net
revenues from tests performed for beneficiaries of Medicare and Medicaid
programs, respectively. In addition, the Company's other business depends
significantly on continued participation in these programs because clients often
want a single laboratory to perform all of their clinical laboratory testing
services. Since 1984, Congress has periodically reduced the ceilings on Medicare
reimbursement to clinical laboratories from previously authorized levels. In
1993, pursuant to the Omnibus Budget and Reconciliation Act of 1993 ("OBRA
'93"), Congress reduced, effective January 1, 1994, the Medicare national fee
schedule limitations from 88% of the 1984 national median to 76% of the 1984
national median, which reductions were phased in from 1994 through 1996 (to 84%
on January 1, 1994, to 80% on January 1, 1995 and to 76% on January 1, 1996, in
each case as a percentage of the 1984 national median). OBRA '93 also eliminated
the provision for annual fee schedule increases based upon the consumer price
index for 1994 and 1995 (but not for 1996 and 1997). Medicare reimbursement
reductions have a direct adverse effect on the Company's net earnings and cash
flows. The Company cannot predict if additional Medicare reductions will be
implemented. The Senate and House Medicare proposal (the Medicare Preservation
Act of 1995) passed in October 1995 would have reduced the national limitation
to 65% beginning in 1997 and would have eliminated all annual consumer price
index adjustments through 2002. This reduction in laboratory reimbursement rates
was retained in the House-Senate conference report agreed upon in November 1995.
The President vetoed this bill in December 1995. The President's budget proposal
for fiscal 1998 does not provide for any changes in the national fee schedule
limitations or any change in the annual fee schedule increases based on the
consumer price index.

     Effective January 1, 1996, HCFA adopted a new policy on reimbursement for
chemistry panel tests. As of January 1, 1996, 22 automated tests (rather than 19
tests) became reimbursable by Medicare as part of an automated chemistry
profile. An additional allowance of $0.50 per test is authorized when more than
19 tests are billed in a panel. HCFA retains the authority to expand in the
future the list of tests included in automated chemistry profile. The
President's budget proposal for fiscal 1998 proposes an increase (above the
current 22) in the number of tests that would be included in the automated
chemistry profile. Effective as of March 1, 1996, HCFA eliminated its prior
policy of permitting payment for all tests contained in an automated chemistry
panel when at least one of the tests in the panel is medically necessary. Under
the new policy, Medicare payment will not exceed the amount that would be
payable if only the tests that are "medically necessary" had been ordered. In
addition, since 1995 most Medicare carriers have begun to require clinical
laboratories to submit documentation supporting the medical necessity, as judged
by ordering physicians, for many commonly ordered tests. The Company expects to
incur additional reimbursement reductions and additional costs associated with
the implementation of these requirements of HCFA and Medicare carriers. The
amount of the reductions in reimbursements and additional costs cannot be
determined at this time. See "Billing." These and other proposed changes
affecting the reimbursement policy of Medicare and Medicaid programs could have
a material adverse effect on the Company.

     Major clinical laboratories, including the Company, use dual fee schedules:
"client" fees charged to physicians, hospitals, and institutions with which a
laboratory deals on a wholesale basis, which fees are generally subject to
negotiation or discount, and "patient" fees charged to individual patients and
third-party payors, including Medicare and Medicaid, who generally require
separate bills or claims for each requisition. Medicare and other third party
payors also set maximum fees that they will pay which are substantially lower
than the patient fees otherwise charged by the Company, but are generally higher
than the Company's fees actually charged to clients. Federal and some state
regulatory programs prohibit clinical laboratories from charging government
programs more than certain charges to other customers. During 1992, in issuing
final regulations implementing the federal statutory prohibition against
charging Medicare substantially in excess of a provider's usual charge, the OIG
declined to provide any guidance concerning the interpretation of this
legislation, including whether or not discounting or the dual fee structure
employed by clinical laboratories might be inconsistent with the provision.

     Medicare budget proposals developed by the Clinton Administration in 1993
and 1994, along with proposals incorporated in many major health reform bills
considered by Congress in 1994, called for the reinstatement of

                                       15



20% Medicare clinical laboratory co-insurance (which was last in effect in
1984). While co-insurance was in effect, clinical laboratories received from
Medicare carriers only 80% of their Medicare reimbursement rates and were
required to bill Medicare beneficiaries for the balance of the charges. A
co-insurance proposal was not included in any of the Congressional Medicare
reform packages considered in the 1995 and 1996 legislative sessions. However,
it is still possible a co-insurance provision will be proposed in the future
and, if enacted, such a proposal could materially adversely affect the revenues
and costs of the clinical laboratory industry, including the Company, by
exposing the testing laboratory to the credit of individuals and by increasing
the number of bills. In addition, a laboratory could be subject to potential
fraud and abuse violations if adequate procedures to bill and collect the
co-insurance payments are not established and followed.

     Proposals have also been developed to procure Medicare and Medicaid
laboratory testing services through competitive bidding mechanisms. To date,
none of the Congressional Medicare reform packages introduced in the 1995 or
1996 legislative sessions have included a competitive bidding provision for
clinical laboratory tests. However, President Clinton's budget for fiscal 1998
(as did his prior Medicare reform proposal) proposed the establishment of
competitive bidding for clinical laboratory services. If competitive bidding
were implemented, such action could materially adversely affect the clinical
laboratory industry, including the Company. HCFA is currently conducting a
demonstration project to determine whether competitive bidding can be used to
provide quality laboratory services at prices below current Medicare
reimbursement rates. The bidding phase of the demonstration is expected to begin
in 1997.

     Future changes in federal, state and local regulations (or in the
interpretation of current regulations) affecting governmental reimbursement for
clinical laboratory testing could have a material adverse effect on the Company.
The Company is unable to predict, however, whether and what type of legislation
will be enacted into law.

     Fraud and Abuse Regulations. The Medicare and Medicaid anti-kickback laws
prohibit clinical laboratories from, among other things, making payments or
furnishing other benefits to influence the referral of tests billed to Medicare,
Medicaid or other federal programs. Penalties for violations of these federal
laws include exclusion from participation in the Medicare/Medicaid programs,
assets forfeitures, and civil and criminal penalties and fines. Under the Health
Insurance Portability and Accountability Act of 1996 (the "Health Insurance
Act"), on January 1, 1997 civil administrative penalties for a wide range of
offenses were increased to up to $10,000 per item plus three times the amount
claimed. In the case of certain criminal offenses, exclusion from participation
in Medicare and Medicaid is a mandatory penalty.

     The fraud and abuse provisions are interpreted liberally and enforced
aggressively by various enforcing agencies of the federal government, including
the Federal Bureau of Investigation ("FBI") and the Office of the Inspector
General of HHS ("OIG"). According to public statements by the Department of
Justice ("DOJ"), health care fraud has been elevated to the second-highest
priority of the DOJ, and FBI agents have been transferred from investigating
counterintelligence activities to health care provider fraud. The OIG also is
involved in such investigations and has, according to recent workplans, targeted
certain laboratory practices for study, investigation and prosecution. The
federal government's involvement in curtailing fraud and abuse is likely to
increase as a result of the enactment in August 1996 of the Health Insurance Act
which requires the U.S. Attorney General and the OIG to jointly establish a
program to (a) coordinate federal, state and local enforcement programs to
control fraud and abuse with respect to health care, (b) conduct investigations,
audits, evaluations and inspections relating to the delivery and payment for
health care, (c) facilitate the enforcement of the health care fraud and abuse
laws, (d) provide for the modification and establishment of safe harbors and to
issue advisory opinions and Special Fraud Alerts and (e) provide for a data
collection system for the reporting and disclosure of adverse actions taken
against health care providers. The Health Insurance Act also authorizes the
establishment of an anti-fraud and abuse account funded through the collection
of penalties and fines for violations of the health care anti-fraud laws as well
as amounts authorized therefor by Congress. The Health Insurance Act also
requires HHS to establish a program to encourage Medicare beneficiaries and
others to report violations of the health care anti-fraud laws, including paying
to the reporting person a portion of any fines and penalties collected.

     In October 1994, the OIG issued a Special Fraud Alert, which set forth a
number of practices allegedly engaged in by clinical laboratories and health
care providers that the OIG believes violate the anti-kickback laws. These
practices include providing employees to collect patient samples at physician
offices if the employees perform additional services for physicians that are
typically the responsibility of the physicians' staff; selling laboratory
services to renal dialysis centers at prices that are below fair market value in
return for referrals of Medicare tests

                                       16



which are billed to Medicare at higher rates; providing free testing to a
physician's HMO patients in situations where the referring physicians benefit
from lower utilization; providing free pickup and disposal of bio-hazardous
waste for physicians for items unrelated to a laboratory's testing services;
providing facsimile machines or computers to physicians that are not exclusively
used in connection with the laboratory services performed; and providing free
testing for health care providers, their families and their employees
(professional courtesy testing). The OIG stressed in the Special Fraud Alert
that when one purpose of an arrangement is to induce referral of
program-reimbursed laboratory testing, both the clinical laboratory and the
health care provider or physician may be liable under the anti-kickback laws and
may be subject to criminal prosecution and exclusion from participation in the
Medicare and Medicaid programs. The Special Fraud Alert was issued in part at
the request of the American Clinical Laboratory Association ("ACLA"), which
sought clarification of certain of these rules. The Company does not believe
that it has been negatively affected by the issuance of the Special Fraud Alert.

     Many of these statutes and regulations, including those relating to joint
ventures and alliances, are vague or indefinite and have not been interpreted by
the courts. In addition, regulators have generally offered little guidance to
the clinical laboratory industry. Despite several requests from ACLA for
clarification of the anti-fraud and abuse rules, since 1992, OIG has issued only
two fraud alerts specifically with regard to clinical laboratory practices and
has insisted that it lacked statutory authority to issue advisory opinions.
Legislation requiring OIG to issue fraud alerts and advisory opinions was
enacted in August 1996, and as a result the Company is hopeful that additional
regulatory guidance will be given to the clinical laboratory industry.

     A federal anti- "self-referral" law commonly known as the "Stark" law has,
since 1992, generally prohibited (with certain exceptions) Medicare payments for
laboratory tests referred by physicians who have (personally or through a family
member) an investment interest in, or a compensation arrangement with, the
testing laboratory. Since January 1995, these restrictions apply to
Medicaid-covered services as well. Physicians may, however, be reimbursed by
Medicare and Medicaid for testing performed by or under the supervision of the
physician or the group practice to which the physician belongs. In addition, a
physician may refer specimens to a laboratory owned by a company, such as the
Company, whose stock is traded on a public exchange and which has stockholders'
equity exceeding $75 million even if the physician owns stock of that company.
An amendment to the Stark law in August 1993 makes it clear that ordinary
day-to-day transactions between laboratories and their customers, including, but
not limited to, discounts granted by laboratories to their customers, are not
covered by the compensation arrangement provisions of the Medicare statute.
Sanctions for laboratory violations of the prohibition include denial of
Medicare payments, refunds, civil money penalties of up to $15,000 for each
service billed in violation of the prohibition and exclusion from the Medicare
and Medicaid programs.

     The 1995 House Medicare reform proposal contained, and the House-Senate
report adopted, provisions that would significantly narrow the scope of the
Stark anti-referral laws. That proposal would, among other changes, have ended
the ban on physician referrals to laboratories based on any "compensation
arrangement" between the laboratory and the physician. The President vetoed this
bill on December 6, 1995.

Government Investigations and Related Claims

     The Company has settled various government and private claims (i.e.,
nongovernmental claims such as those by private insurers) totaling approximately
$192 million relating primarily to industry-wide billing and marketing practices
that had been substantially discontinued by early 1993. Specifically, the
Company has entered into, (i) for an aggregate of approximately $180 million,
five settlements with the OIG and the DOJ (including the MetPath and Damon
settlements discussed below) and two settlements with state governments with
respect to Medicare and Medicaid marketing and billing practices of the Company
and certain companies acquired by the Company prior to their acquisition and
(ii) thirteen settlements relating to private claims totaling approximately $12
million. In addition, there are pending investigations by the OIG and DOJ into
billing and marketing practices at three regional laboratories operated by
Nichols prior to its acquisition by the Company. There are no other material
private claims presently pending.

Government Settlements

     The MetPath Settlement. In September 1993, the Company (under the name
MetPath Inc.) entered into an agreement with the DOJ and the OIG pursuant to
which the Company paid a total of approximately $36 million in settlement of
civil claims by the United States that the Company had wrongfully induced
physicians to order

                                       17



certain laboratory tests without their realizing that such tests would be billed
to Medicare at rates higher than those the physicians believed were applicable.

     The Damon Settlement. By issuance of a civil subpoena in August 1993, the
government began a formal investigation of Damon, an independent clinical
laboratory company acquired by Corning in August 1993. Subsequent to September
1993, several additional subpoenas were issued. By a plea agreement and civil
settlement agreement and release dated October 9, 1996, between the DOJ and
Damon, all federal criminal matters within the scope of the various federal
investigations against Damon, and all claims included in the civil qui tam cases
underlying the civil investigations, were settled for an aggregate of $119
million, which sum was reimbursed to the Company by Corning. The settlement
included base recoupments of approximately $40 million and total criminal and
civil payments in excess of base recoupments of approximately $79 million. At
the time the Company began its settlement negotiations with DOJ in April 1996,
it believed it had meritorious defenses to a number of charges and claims made
by the government. Reserves established for such settlements in the second
quarter of 1996 were based on the Company's and its counsel's belief that the
merits of its factual and legal arguments would be given more weight by the
government. Certain of these positions were ultimately rejected by criminal and
civil prosecutors in the final rounds of negotiations which occurred in late
September 1996, resulting in a total settlement substantially in excess of what
had earlier been anticipated. The Damon settlement does not exclude the Company
from future participation in any federal health care programs on account of
Damon's practices. For further information regarding the Damon settlement, see
Note 15 to the Consolidated Financial Statements.

     Other Governmental Settlements. In addition to the MetPath settlement and
the Damon settlement, since 1992 the Company has settled five other federal and
state billing-related claims for a total of approximately $25 million.

Ongoing Government Investigations

     The Nichols Investigation. By issuance of a civil subpoena in August 1993,
the government began a formal investigation of Nichols, a company acquired by
Corning in August 1994. The investigation of Nichols remains open. While the
Company has established reserves in respect of the Nichols investigations, at
present there are no settlement discussions pending between the DOJ and the
Company regarding Nichols, and it is too early to predict the outcome of this
investigation. Remedies available to the government include exclusion from
participation in the Medicare and Medicaid programs, criminal fines, civil
recoveries plus civil penalties and asset forfeitures. However, in light of the
Corporate Integrity Agreement referred to below entered into between the Company
and the OIG in connection with the Damon settlement, the fact that the matters
being investigated were corrected with or before the Company's acquisition of
Nichols and the Company's cooperation in this investigation, the Company
believes the prospect of such exclusion on account of the investigation is
remote. Additionally, while application of such remedies and penalties could
materially and adversely affect the Company's business, financial condition,
results of operations and prospects, management believes that the possibility of
such effects is remote. As discussed below, Corning has agreed to indemnify the
Company against any monetary penalties, fines or settlements for any
governmental claims that may arise as a result of the Nichols investigations.

     The Damon Officer Investigations. The Company understands that the Boston
United States Attorney's Office has designated several former officers and
employees of Damon as targets of its criminal investigation, and will seek
indictments against them. Under the agreement and plan of merger under which
Damon was acquired by Corning, the Company is obligated to indemnify former
officers and directors of Damon to the fullest extent permitted by Delaware law
with respect to this investigation. These obligations (which relate primarily to
fees and expenses of counsel) will not be indemnified by Corning. In addition,
as part of the Damon settlement, Corning agreed to cooperate with DOJ in its
continuing investigation of individuals formerly associated with Damon and, in
connection therewith, the Company is providing additional information pursuant
to several subpoenas.

     Other Government Investigations. In December 1995 and December 1996, the
Company received subpoenas from the OIG seeking information as to the Company's
policies in instances in which specimens were received and tested by a
laboratory without first receiving or verifying specific test requisitions.
While compliance with the latter subpoena is ongoing, the Company has concluded
the occurrence of this practice was relatively rare and was engaged in primarily
to preserve the integrity of test results from specimens subject to rapid
deterioration. During 1996, the Company voluntarily self-reported to the
government a few isolated events, involving billings of approximately $16
million, that may have resulted in overpayment by Medicare and Medicaid to the
Company. It is the Company's policy to internally investigate all such incidents
and to self-report and reimburse payors as

                                       18



appropriate. Although the Company has commenced internal investigations to
quantify the amounts that may be recouped by the government and corrective
action has been taken as to each such event, it is too early to predict the
outcome of these disclosures to the government. As discussed below, Corning has
agreed to indemnify the Company against any monetary penalties, fines or
settlements for any governmental claims that may arise as a result of the
investigations described in this paragraph.

Outlook for Future Government Investigations

     The Damon settlement involved, and a settlement regarding Nichols is
expected to involve, only matters predating Corning's acquisition of both such
companies, and turned on, or will turn on, facts unique to those companies and
other factors individual government enforcement personnel may take into account.
However, recent experience in the Company's settlement of the Damon case and
public announcements by various government officials indicate that the
government's position on health care fraud is still hardening and collections of
amounts greatly in excess of mere recoupment of overcharges from laboratories
and other providers will be more prevalent. In addition, the newly adopted
Health Insurance Act includes provisions relating to health care fraud and abuse
that will give federal enforcement personnel substantially increased funding,
powers and remedies to pursue suspected fraud and abuse. In connection with the
Damon settlement, the Company signed a Corporate Integrity Agreement pursuant to
which the Company will maintain its corporate compliance program, modify certain
of its marketing materials, make periodic reports to the OIG and take certain
other steps to demonstrate the Company's integrity as a provider of services to
federally sponsored health care programs. This agreement also includes an
obligation to self-report instances of noncompliance that are uncovered by the
Company, but also gives the Company the opportunity to obtain clearer guidance
on matters of compliance and to resolve compliance issues directly with OIG.
Importantly, the agreement gives the Company the opportunity to cure any
asserted breaches and to otherwise initiate corrective actions, which the
Company believes should help to avoid enforcement actions outside of the process
provided in the agreement. See "Compliance Program."

Private Settlements and Claims

     Since 1992 the Company has settled thirteen private actions relating to the
governmental settlements described above for an aggregate of approximately $12
million.

Corning Indemnity

     In connection with the Spin-Off Distribution, Corning has agreed to
indemnify the Company against all monetary penalties, fines or settlements for
any governmental claims arising out of alleged violations of applicable federal
fraud and health care statutes and relating to billing practices of the Company
and its predecessors that have been settled or are pending on December 31, 1996,
when the Spin-Off Distribution was completed. This includes the settlements
described under "Government Settlements" above and the claims described under
"Ongoing Government Investigations-The Nichols Investigation" and "-Other
Government Investigations." Corning has also agreed to indemnify the Company for
50% of the aggregate of all judgment or settlement payments made by the Company
that are in excess of $42 million in respect of claims by private parties (i.e.,
nongovernmental parties such as private insurers) that relate to indemnified or
previously settled governmental claims (such as the Damon settlement) and that
alleged overbillings by the Company or any existing subsidiaries of the Company,
for services provided prior to January 1, 1997; provided, however, such
indemnification will not exceed $25 million in the aggregate and that all
amounts indemnified against by Corning for the benefit of the Company will be
calculated on a net after-tax basis by taking into account any deductions and
other tax benefits realized by the Company (or a consolidated group of which the
Company is a member after Spin-Off Distribution ("the Company Group")) in
respect of the underlying settlement, judgment payment, or other loss (or
portion thereof) indemnified against by Corning generally to the extent such
deductions or tax benefits are deemed to reduce the tax liability of the Company
or the Company Group.

     Corning will not indemnify the Company against (i) any governmental claims
that arise after December 31, 1996 pursuant to service of subpoena or other
notice of such investigation after December 31, 1996, (ii) any nongovernmental
claims unrelated to the indemnified governmental claims or investigations, (iii)
any nongovernmental claims not settled prior to December 31, 2001, (iv) any
consequential or incidental damages relating to the billing claims, including
losses of revenues and profits as a consequence of exclusion for participation

                                       19



in federal or state health care programs or (v) the fees and expenses of
litigation. The Company will control the defense of any governmental claim or
investigation unless Corning elects to assume such defense. However, in the case
of all nongovernmental claims related to indemnified governmental claims related
to alleged overbillings, the Company will control the defense. All disputes
relating to the Corning indemnification agreement are subject to binding
arbitration.

The Company's Reserves

     The Company's aggregate reserve with respect to all governmental and
private claims, including litigation costs of approximately $4.3 million, was
approximately $81 million at December 31, 1996. This reserve represents amounts
for future government and private settlements of matters which are either
presently pending or anticipated as a consequence of the government and private
settlements and self-reported matters described above. Based on information
available to management and the Company's experience with past settlements,
especially the Damon settlement, and the fact that the aggregate amount of such
settlement was significantly in excess of established reserves, management has
reassessed its reserve levels and believes that its current level of reserves is
adequate. However, it is possible that additional information may become
available (such as the indication by the government of criminal activity,
additional tests being questioned or other changes in the government's theories
of wrongdoing) which may cause the final resolution of these matters to be in
excess of established reserves by an amount which could be material to the
Company's results of operations and, for non-indemnified claims, the Company's
cash flows in the period in which such claims are settled. While none of the
current governmental or nongovernmental investigations or claims is covered by
insurance, the Company does not believe that these matters will have a material
adverse effect on the Company's overall financial condition.

Compliance Program

     Because of evolving interpretations of regulations and the national debate
over health care, compliance with all Medicare, Medicaid and other
government-established rules and regulations has become a significant concern
throughout the clinical laboratory industry. The Company began the
implementation of a compliance program early in 1993. The objective of the
program is to develop aggressive and reliable compliance safeguards. Emphasis is
placed on developing training programs for personnel intended to assure the
strict implementation and observance of all applicable rules and regulations.
Further, in-depth reviews of procedures, personnel and facilities are conducted
to assure regulatory compliance throughout the Company. The Company's current
compliance plan establishes a Compliance Committee of the Board of Directors and
requires periodic reporting of compliance operations by management to the
Compliance Committee. Such sharpened focus on regulatory standards and
procedures will continue to be a priority for the Company in the future.

     The Company's current comprehensive program is designed to ensure that it
is in compliance in all material respects with all statutes, regulations and
other requirements applicable to its clinical laboratory operations. This
program has been publicly cited by government officials as a "model" for the
industry. In addition, the government advised the Company's representatives that
the Company's compliance program, coupled with corrective action taken by the
Company after its acquisition of Damon, greatly reduced the amounts of fines and
penalties, and was influential in causing the OIG not to seek exclusion of the
Company from future participation in governmental health care programs. Pursuant
to the Damon settlement, the Company signed a five year Corporate Integrity
Agreement with the OIG pursuant to which the Company will, among other things,
maintain its corporate compliance program, make certain changes to its test
order forms, provide certain additional notices to ordering physicians, provide
to the OIG data on certain test ordering patterns, adopt certain pricing
guidelines, audit laboratory operations, deliver annual reports on compliance
activities, and investigate and report instances of noncompliance, including any
corrective actions and disciplinary steps. Importantly, the agreement gives the
Company the opportunity to cure any asserted breaches and to otherwise initiate
corrective actions, which the Company believes should help to avoid enforcement
actions outside of the process provided in the agreement. The agreement gives
the Company the opportunity to obtain clearer guidance on matters of compliance
and to resolve compliance issues directly with the OIG. LabCorp and SmithKline
have executed similar agreements with the OIG. The OIG recently published a
guideline on the essential elements of a satisfactory compliance program for the
entire clinical laboratory industry, including hospital laboratories. This
guideline is similar to the Company's compliance program, and it is believed
that this development may help create a fairer competitive environment for the
Company.

     None of the undertakings included in the Company's Corporate Integrity
Agreement or in the recently published guideline is expected to have any
material adverse affect on the Company's business, financial condition,

                                       20



results of operations and prospects. The clinical laboratory testing industry
is, however, subject to extensive regulation. The Company believes that, in all
material respects, it is in compliance with all applicable statutes and
regulations. However, there can be no assurance that any statutes or regulations
might not be interpreted or applied by a prosecutorial, regulatory or judicial
authority in a manner that would adversely affect the Company. Potential
sanctions for violation of these statutes and regulations include significant
fines and the loss of various licenses, certificates and authorizations.

Insurance

     The Company maintains liability insurance (subject to maximum limits and
self-insured retentions) for claims, which may be substantial, that could result
from providing or failing to provide clinical laboratory testing services,
including inaccurate testing results. While there can be no assurance that
coverage will be adequate to cover all future exposure, management believes that
the present levels of insurance coverage and reserves are adequate to cover
currently estimated exposures. Although the Company believes that it will be
able to obtain adequate insurance coverage in the future at acceptable costs,
there can be no assurance that the Company will be able to obtain such coverage
or will be able to do so at an acceptable cost or that the Company will not
incur significant liabilities in excess of policy limits.

Employees

     At February 28, 1997, the Company employed approximately 17,800 people.
These include approximately 15,600 full-time employees and approximately 2,200
part-time employees. The Company has no collective bargaining agreements with
any unions and believes that its overall relations with its employees are good.

Seasonality

     During the summer months, year-end holiday periods and other major
holidays, volume of testing declines, reducing net revenues and resulting cash
flows below annual averages during such periods. Winter months are also subject
to declines in testing volume due to inclement weather. As a result, comparisons
of the results of successive quarters may not accurately reflect trends or
results for the full year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Overview."

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

     The Private Securities Litigation Reform Act of 1995 ("Litigation Reform
Act") provides a new "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about their companies without fear
of litigation so long as those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
projected in the statement. The Company desires to take advantage of the new
"safe harbor" provisions of the Litigation Reform Act in connection with the
information included herein and is including this section in order to do so.
Accordingly, the Company hereby identifies the following important factors that
could cause the Company's actual financial results to differ materially from
those projected, forecast or estimated by the Company in forward-looking
statements.

     The Company wishes to caution investors that the following factors are
hereby identified as potentially important factors that could cause the
Company's actual financial results to differ materially from those projected,
forecast or estimated by the Company in forward-looking statements.


   (a) Heightened competition, including the intensification of price
       competition. See "Competition."

   (b) Impact of changes in payor mix, including the shift from traditional,
       fee-for-service medicine to managed-cost health care. See "Role of
       Managed Care."

   (c) Adverse actions by governmental or other third-party payors, including
       unilateral reduction of fee schedules payable to the Company. See
       "Regulation and Reimbursement-Regulation of Reimbursement for Clinical
       Laboratory Services."

                                       21



  (d)  The impact upon the Company's collection rates or general or
       administrative expenses resulting from compliance with Medicare
       administrative policies, including specifically the recent requirements
       of Medicare carriers to provide diagnosis codes for commonly ordered
       tests and the policy of HCFA to limit Medicare reimbursement for tests
       contained in automated chemistry panels to the amount that would have
       been paid if only the covered tests, determined on the basis of
       demonstrable "medical necessity," had been ordered. See "Regulation and
       Reimbursement-Regulation of Reimbursement for Clinical Laboratory
       Services."

   (e) Adverse results from pending governmental investigations, including in
       particular significant monetary damages and/or exclusion from the
       Medicare and Medicaid programs and/or other significant litigation
       matters. Also, the absence of indemnification from Corning for private
       claims unrelated to the indemnified governmental claims or investigations
       and for private claims that are not settled within five years of the
       Distribution Date. See "Government Investigations and Related Claims."

   (f) Failure to obtain new customers at profitable pricing, failure to retain
       existing customers or reduction in tests ordered or specimens submitted
       by existing customers.

   (g) Inability to obtain professional liability insurance coverage or a
       material increase in premiums for such coverage. See "Insurance."

   (h) Denial of CLIA certification or other licensure of any of the Company's
       clinical laboratories under CLIA, by HCFA for Medicare and Medicaid
       programs or other federal, state and local agencies. See "Regulation and
       Reimbursement".

   (i) Adverse publicity and news coverage about the Company or the clinical
       laboratory industry.

   (j) Computer or other system failures that affect the ability of the Company
       to perform tests, report test results or properly bill customers. See
       "Billing."

   (k) Development of technologies that substantially alter the practice of
       laboratory medicine.

   (l) Changes in interest rates causing a substantial increase in the Company's
       effective borrowing rate.

Item 2. Properties

     The Company's principal laboratories (listed alphabetically by state) are
located in the following metropolitan areas:



                 Location                            Type of Laboratory         Leased or Owned
- ------------------------------------------------   ----------------------   ------------------------
                                                                      
Phoenix, Arizona    ............................        Regional                    Leased
San Diego, California  .........................        Regional                    Leased
San Juan Capistrano, California    .............        Esoteric                    Owned
Denver, Colorado    ............................        Regional                    Leased
New Haven, Connecticut    ......................        Regional                    Owned
Miami, Florida   ...............................        Branch                      Leased
Tampa, Florida   ...............................        Regional                    Leased
Atlanta, Georgia    ............................        Regional                    Leased
Chicago, Illinois   ............................        Regional                    Leased
Indianapolis, Indiana  .........................        Branch                      Leased
Baltimore, Maryland    .........................        Regional                    Owned
Boston, Massachusetts  .........................        Regional            Owned subject to put/call
                                                                              with option to lease
Detroit, Michigan   ............................        Regional                    Leased
Grand Rapids, Michigan    ......................        Branch                      Leased
Kansas City, Missouri  .........................        Branch                      Leased
St. Louis, Missouri    .........................        Regional                    Leased
Billings, Montana   ............................        Branch                      Leased
Lincoln, Nebraska   ............................        Regional               Managed (hospital)
Teterboro, New Jersey(near New York City)   ....        Regional                     Owned


                                       22
                                                    




  
                  Location                           Type of Laboratory         Leased or Owned
- -----------------------------------------------   ------------------------  --------------------------
                                                                              
Albuquerque, New Mexico   .....................         Branch                      Leased
Buffalo, New York   ...........................         Branch                      Owned
Long Island, New York  ........................         Branch                      Leased
Cleveland, Ohio  ..............................         Branch                      Owned
Columbus, Ohio   ..............................         Branch                      Leased
Portland, Oregon    ...........................         Regional                    Leased
Erie, Pennsylvania  ...........................         Branch                Leased by joint venture
Philadelphia, Pennsylvania   ..................         Regional                    Leased
Pittsburgh, Pennsylvania  .....................         Regional                    Leased
Nashville, Tennessee   ........................         Branch                      Owned
Dallas, Texas    ..............................         Regional                    Leased
El Paso, Texas   ..............................         Branch                      Leased
Salt Lake City, Utah   ........................         Branch                      Leased



     The Company's executive offices are located in Teterboro, New Jersey in the
building that serves as the Company's regional laboratory in the New York City
metropolitan area. The Company owns its branch laboratory facility in Mexico
City. The Company believes that, in general, its laboratory facilities are
suitable and adequate for its current and anticipated future levels of
operation. The Company believes that if it were unable to renew the lease on any
of its testing facilities, it could find alternative space at competitive market
rates and relocate its operations to such new locations.

Item 3. Legal Proceedings

     In addition to the investigations described in "Government Investigations
and Related Claims," the Company is involved in various legal proceedings
arising in the ordinary course of business. Some of the proceedings against the
Company involve claims that are substantial in amount. Although it is not
feasible to predict the outcome of such proceedings or any claims made against
the Company, it does not anticipate that the ultimate liability of such
proceedings or claims will have a material adverse effect on the Company's
financial position or results of operations as they primarily relate to
professional liability for which the Company believes it has adequate insurance
coverage. See "Business-Insurance."

Item 4. Submission of Matters to a Vote of Security Holders

     On December 31, 1996, prior to the consummation of the Spin-Off
Distribution, an annual meeting of stockholders was held at which Corning, the
then sole stockholder of the Company, was present. The record date for the
meeting was December 20, 1996, at which time there were issued and outstanding
400,000 shares of common stock and 1,000 shares of voting cumulative preferred
stock. At the meeting, David A. Duke and Kenneth D. Brody were elected as
directors of the Company, each to serve until the annual meeting of stockholders
held in 1998 and until the election and qualification of his successor; Van C.
Campbell and Dan C. Stanzione were elected as directors of the Company, each to
serve until the annual meeting of stockholders held in 1999 and until the
election and qualification of his successor; and Kenneth W. Freeman and Gail R.
Wilensky were elected as directors of the Company, each to serve until the
annual meeting of stockholders held in 2000 and until the election and
qualification of his or her successor. All outstanding shares were voted in
favor of the election of each of the foregoing. All these elections became
effective on January 1, 1997. Also during the fourth quarter of 1996 but prior
to the effective date of the Company's registration statement on Form 10,
Corning Life Sciences Inc. ("CLSI") as the then sole stockholder of the Company,
executed a written consent approving the change in the corporate name from
Corning Clinical Laboratories Inc. to Quest Diagnostics Incorporated and
approving the adoption of the Employees Equity Participation Program, the
Employees Stock Purchase Plan, the Restricted Stock Plan for Non-Employee
Directors and the Deferred Compensation Plan for Directors.

                                    PART II

Item 5. Market for the Registrant's Common stock and Related Security Holder
   Matters

     The common stock of the Company is listed and traded on the New York Stock
Exchange under the symbol "DGX". The common stock began trading on December 17,
1996, on a when issued basis. During the period from

                                       23



December 17, 1996, through December 31, 1996, the high sales price was $15.75
per share and the low sales price was $13.25 per share. On January 14, 1997, the
common stock began trading on a regular way basis. As of March 17, 1997, the
Company had approximately 14,650 record holders of its common stock.

     The Company does not expect to pay dividends on its common stock in the
foreseeable future. The bank credit facility prohibits the Company from paying
cash dividends on its common stock. The Indenture relating to the Company's
10.75% senior subordinated notes due 2006 restricts the ability of the Company
to pay cash dividends based primarily on a percentage of the Company's earnings,
as defined.

     On November 26, 1996, the Company issued to CLSI, which then owned all of
the outstanding capital stock of the Company, 200,000 shares of its common stock
and 1,000 shares of its voting cumulative preferred stock. In addition, the
Company transferred $250,000 in cash to CLSI. In exchange, CLSI contributed to
the Company substantially all of CLSI's assets. CLSI dissolved on November 27,
1997 and all of then outstanding capital stock of the Company, which was held by
CLSI, was transferred to Corning. On December 31, 1996, Corning contributed to
the Company all of the outstanding capital stock of Corning MRL Inc. (which
operates the branch laboratory in Billings, Montana) and all of the then
outstanding common stock of the Company in exchange for approximately 28 million
shares of common stock of the Company, which shares were distributed later that
day by Corning to its shareholders pursuant to the Spin-off Distribution.

Item 6. Selected Financial Data

     See page 28.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

     See pages 29-35.

Item 8. Financial Statements and Supplementary Data

     See Item 14 (a) 1. and 2.

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

   None

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

     To be filed by amendment to this Form 10-K.

Item 11. Executive Compensation

     To be filed by amendment to this Form 10-K.

Item 12. Security Ownership by Certain Beneficial Owners and Management

     To be filed by amendment to this Form 10-K.

Item 13. Certain Relationships and Related Transactions

     To be filed by amendment to this Form 10-K.

                                       24




                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

     (a) Documents filed as part of this report:

     1. Index to financial statements and supplementary data filed as part of
this report:

     Item                                                                   Page
     Report of Independent Accountants  .................................    F-1
     Consolidated Balance Sheets  .......................................    F-2
     Consolidated Statements of Operations    ...........................    F-3
     Consolidated Statements of Cash Flows    ...........................    F-4
     Consolidated Statements of Stockholders' Equity   ..................    F-5
     Notes to Consolidated Financial Statements  ........................    F-6
     Supplementary Data: Quarterly Operating Results (unaudited)   ......   F-19

     2. Financial Statement Schedule:

     Schedule II-Valuation Accounts and Reserves ........................   F-20


     3. Exhibits filed as part of this report:

     See (c) below.

     (b) Reports on Form 8-K filed during the last quarter of 1996:

     None

     (c) Exhibits filed as part of this report:



Exhibit
 Number                                                      Description
- --------- -----------------------------------------------------------------------------------------------------------------
       
2.1        Form of Transaction Agreement among Corning Incorporated, Corning Life Sciences Inc., Corning Clinical
           Laboratories Inc. (Delaware), Covance Inc. and Corning Clinical Laboratories Inc. (Michigan), dated as of
           November 22, 1996 (filed as an exhibit to Corning Clinical Laboratories Inc.'s ("CCL") Registration
           Statement on Form 10 (File No. 1-12215) and incorporated herein by this reference)
3.1        Certificate of Incorporation of the Registrant (filed as an exhibit to CCL's Registration Statement on Form 10
           (File No. 1-12215) and incorporated herein by this reference)
3.2        By-Laws of the Registrant (filed as an exhibit to CCL's Registration Statement on Form 10 (File No.
           1-12215) and incorporated herein by this reference)
4.1        Form of Rights Agreement dated December 31, 1996 between Corning Clinical Laboratories Inc. and Harris
           Trust and Savings Bank as Rights Agent (filed as an Exhibit to CCL's Registration Statement on Form 10
           (File No. 1-12215) and incorporated herein by reference)
10.1       Form of Tax Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories Inc. and
           Covance Inc. (filed as an Exhibit to CCL's Registration Statement on Form 10 (File No. 1-12215) and
           incorporated herein by this reference)
10.2       Form of Spin-Off Distribution Tax Indemnification Agreement between Corning Incorporated and Corning
           Clinical Laboratories Inc. (filed as an Exhibit to CCL's Registration Statement on Form 10 (File No.
           1-12215) and incorporated herein by this reference)
10.3       Form of Spin-Off Distribution Tax Indemnification Agreement between corning Clinical Laboratories Inc. and
           Covance Inc. (filed as an Exhibit to CCL's Registration Statement on Form 10 (File No. 1-12215) and
           incorporated herein by reference)
10.4       Form of Spin-Off Distribution Tax Indemnification Agreement between Covance Inc. and Corning Clinical
           Laboratories Inc. (filed as an Exhibit to CCL's Registration Statement on Form 10 (File No. 1-12215) and
           incorporated herein by reference)
10.5       Form of Executive Retirement Supplemental Plan (filed as an Exhibit to CCL's Registration Statement on
           Form 10 (File No. 1-12215) and incorporated herein by reference)

                                       25




10.6     Form of Variable Compensation Plan (filed as an Exhibit to CCL's Registration Statement on Form 10 (File
         No. 1-12215) and incorporated herein by reference)
10.7     Form of Employees Stock Purchase Plan (filed as an Exhibit to CCL's Registration Statement on Form 10
         (File No. 1-12215) and incorporated herein by reference)
10.8     Form of Employees Equity Participation Program (filed as an Exhibit to CCL's Registration Statement on
         Form 10 (File No. 1-12215) and incorporated herein by reference)
10.9     Form of Profit Sharing Plan (filed as an Exhibit to CCL's Registration Statement on Form 10 (File No.
         1-12215) and incorporated herein by reference)
10.10    Form of Director's Restricted Stock Plan (filed as an Exhibit to CCL's Registration Statement on Form 10
         (File No. 1-12215) and incorporated herein by reference)
10.11    Form of Credit Agreement among Corning Clinical Laboratories Inc., the Banks named therein, NationsBank N.A., as Issuing 
         Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, Morgan Guaranty Trust Company of New York, as Administrative
         Agent, and Morgan Guaranty Trust Company of New York, NationsBank, N.A. and Wachovia Bank of Georgia, N.A., as Arranging
         Agents, dated December 5, 1996 (filed as an Exhibit to CCL's Registration Statement on Form S-1 (File No. 333-15867) and
         incorporated herein by reference)
10.12    Form of 10.75% Senior Subordinated Notes due 2006 (included in Exhibit 4.2) (filed as an Exhibit to CCL's  Registration
         Statement on Form S-1 (File No. 333-15867) and incorporated herein by reference)
10.13    Form of Indenture between Corning Clinical Laboratories Inc. and The Bank of New York, as Trustee, dated December 16, 1996
         (filed as an Exhibit to CCL's Registration Statement on Form S-1 (File No. 333-15867) and incorporated herein by reference)
10.14    Employment Agreement between Corning Clinical Laboratories Inc. and Kenneth W. Freeman
21.      Subsidiaries of Quest Diagnostics Incorporated
23.      Consent of Price Waterhouse LLP
27.      Financial Data Schedule




                                       26




                                  Signatures

     Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


Quest Diagnostics Incorporated
                                                                      
By /s/ Kenneth W. Freeman       President and Chief Executive Officer      March 17, 1997
- --------------------------
       Kenneth W. Freeman

By /s/ Robert A. Carothers      Vice President and                         March 17, 1997
- --------------------------      Chief Financial Officer                  
       Robert A. Carothers         

By /s/ Robert A. Hagemann       Vice President and                         March 17, 1997
- --------------------------      Controller
       Robert A. Hagemann       



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
on the dates indicated.



                               Capacity                                      Date
                               --------                                      ----
                                                                   
/s/ Kenneth W. Freeman         Chairman of the Board,                    March 17, 1997
- -------------------------      President and Chief Executive Officer 
    Kenneth W. Freeman         

/s/ Kenneth D. Brody           Director                                  March 17, 1997
- -------------------------
    Kenneth D. Brody

/s/ Van C. Campbell            Director                                  March 17, 1997
- -------------------------
    Van C. Campbell

/s/ David A. Duke              Director                                  March 17, 1997
- -------------------------
    David A. Duke

/s/ Dan C. Stanzione           Director                                  March 17, 1997
- -------------------------
    Dan C. Stanzione

/s/ Gail R. Wilensky           Director                                  March 17, 1997
- -------------------------
    Gail R. Wilensky


                                       27




                 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                       SELECTED HISTORICAL FINANCIAL DATA



                                                                   Year Ended December 31,
                                    --------------------------------------------------------------------------------------
                                          1996                 1995             1994(a)           1993           1992
                                          ----                 ----             -------           ----           ----
                                                                            (in thousands)
                                                                                               
Operations Data:
Net revenues   ..................         $1,616,296           $1,629,388     $1,633,699      $1,416,338      $1,228,964
Restructuring and other special
 charges    .....................            668,544(b)            50,560         79,814          99,600          13,000
Net income (loss) (c)   .........           (625,960)             (52,052)(d)     28,345          34,197         102,396

Balance Sheet Data (at end of
 period):
Accounts receivable, net   ......         $  297,743           $  318,252     $  360,410      $  315,902      $  238,601
Total assets   ..................          1,395,066            1,853,385      1,882,663       1,861,162       1,024,806
Long-term debt    ...............            515,008            1,195,566      1,153,054       1,025,787         431,624
Stockholders' equity    .........            538,719              295,801        386,812         395,509         408,149

Other Data:
Net cash provided by (used in)
 operating activities   .........         $  (88,486)(e)       $   85,828     $   37,963      $   99,614      $  101,077
Net cash used in investing
 activities    ..................            (63,674)             (93,087)       (46,186)       (473,687)       (203,884)
Net cash provided by financing
 activities    ..................            157,674                4,986          7,532         392,956          99,267
Adjusted EBITDA (f)  ............            166,358              176,521(d)     295,381         278,665         255,527
Bad debt expense  ...............            111,238              152,590(d)      59,480          47,240          40,572
Rent expense   ..................             49,713               46,900         49,400          46,900          31,800
Capital expenditures    .........             70,396               74,045         93,354          65,317          70,717


(a)    In August 1993, Quest Diagnostics acquired Damon, a national
       clinical-testing laboratory with approximately $280 million in annualized
       revenues, excluding Damon's California-based laboratories, which were
       sold in April 1994. In November 1993, Quest Diagnostics acquired certain
       clinical-testing laboratories of Unilab Corporation ("Unilab"), with
       approximately $90 million in annualized revenues. The Damon and Unilab
       acquisitions were accounted for as purchases. Quest Diagnostics acquired
       Maryland Medical Laboratory, Inc. ("MML"), Nichols and Bioran Medical
       Laboratory ("Bioran") in June, August and October 1994, respectively, and
       accounted for these acquisitions as poolings of interest. Results
       presented include the results of Quest Diagnostics, MML, Nichols and
       Bioran on a pooled basis. The increase in 1994 net revenues compared to
       1993 net revenues was primarily due to the Damon and Unilab acquisitions.
(b)    Includes a charge of $445 million to reflect the write-down of intangible
       assets as discussed in Note 2 to the Consolidated Financial Statements.
(c)    Historical earnings per share data is not meaningful as the Company's
       historical capital structure is not comparable to the capital structure
       subsequent to the Spin-Off Distribution.
(d)    Includes a third quarter charge of $62 million to increase the reserve
       for doubtful accounts and allowances resulting from billing systems
       implementation and integration problems at certain laboratories and
       increased regulatory requirements.
(e)    Includes the payment of Damon and other billing related settlements
       totaling approximately $144 million and the settlement of amounts owed to
       Corning of approximately $45 million.
(f)    Adjusted EBITDA represents income (loss) before income taxes plus net
       interest expense, depreciation and amortization and non-recurring
       charges. Adjusted EBITDA is presented and discussed because management
       believes that Adjusted EBITDA is a useful adjunct to net income and other
       measurements under generally accepted accounting principles since it is a
       meaningful measure of a leveraged company's performance and ability to
       meet its future debt service requirements, fund capital expenditures and
       meet working capital requirements. Adjusted EBITDA is not a measure of
       financial performance under generally accepted accounting principles and
       should not be considered as an alternative to (i) net income (or any
       other measure of performance under generally accepted accounting
       principles) as a measure of performance or (ii) cash flows from
       operating, investing or financing activities as an indicator of cash
       flows or as a measure of liquidity.

                                       28



                        Quest Diagnostics Incorporated
                    Management's Discussion and Analysis of
                 Financial Condition and Results of Operations

Overview

     In the last several years, Quest Diagnostics' business has been affected by
significant government regulation, price competition and rapid change resulting
from payors' efforts to control cost, utilization and delivery of health care
services. As a result of these factors, Quest Diagnostics' profitability has
been impacted by changes in the volume of testing and mix of payors, the prices
and costs of its services and the level of bad debt expense.

     Payments for clinical laboratory services are made by the government,
managed care organizations, insurance companies, physicians and patients.
Increased government regulation focusing on health care cost containment has
reduced prices and added costs for the clinical laboratory industry by
increasing complexity and adding new regulatory requirements. Also, in recent
years there has been a significant shift away from traditional fee-for-service
health care to managed health care, as employers and other payors of health care
costs aggressively move the populations they control into lower cost plans.
Managed care organizations frequently negotiate capitated payment contracts
whereby healthcare providers receive a fixed monthly fee per covered individual
for all services included under the contract. Capitated contract arrangements
shift the risks of additional routine testing beyond that covered by the
capitated payment to the clinical laboratory. The managed care industry is
growing as well as undergoing rapid consolidation which has created large
managed care companies that control the delivery of health care services for
millions of people, and have significant bargaining power in negotiating fees
with providers, including clinical laboratories. These market factors have had a
significant adverse impact on prices in the clinical laboratory industry, and
are major contributors to the Company's decline in profitability over the last
two years. This growth of managed care and use of capitated agreements are
expected to continue for the foreseeable future. See "Business--Effect of the
Growth of the Managed Care Sector on the Clinical Laboratory Business."

     The clinical laboratory industry is subject to seasonal fluctuations in
operating results. The Company's cash flows are influenced by seasonal factors.
During the summer months, year-end holiday periods and other major holidays,
volume of testing declines, reducing net revenues and resulting cash flows below
annual averages. Winter months are also subject to declines in testing volume
due to inclement weather, which varies in severity from year to year.

     The clinical laboratory industry is labor intensive. Approximately half of
the Company's total costs and expenses are associated with employee compensation
and benefits. Cost of services, which have approximated sixty percent of net
revenues over the past several years, consists principally of costs for
obtaining, transporting and testing specimens. Selling, general and
administrative expenses consist principally of the cost of the sales force,
billing operations (including bad debt expense), and general management and
administrative support.

     A substantial portion of Quest Diagnostics' growth has come from
acquisitions in the last four years. The largest of these acquisitions were the
purchases of Damon and certain operations of Unilab in 1993 and the acquisitions
of MML, Nichols and Bioran in 1994. The MML, Nichols and Bioran transactions
were accounted for as poolings of interests. Acquisitions accounted for as
purchases have generated large amounts of goodwill which are not deductible for
tax purposes, giving rise to a high effective income tax rate and increased
sensitivity of the income tax rate to changes in pre-tax income. See Note 4 to
the Consolidated Financial Statements.

     On December 31, 1996, Corning distributed to its shareholders on a pro rata
basis all of the shares of Quest Diagnostics. In conjunction with the Spin-Off
Distribution, the Company was recapitalized by borrowing $500 million in
long-term debt to repay Corning for certain intercompany borrowings, with the
remaining intercompany borrowings contributed by Corning to Quest Diagnostics'
capital. This recapitalization had the effect of reducing the Company's total
debt by approximately $700 million. Additionally, coincident with the Spin-Off
Distribution, the Company adopted a new accounting policy for valuing intangible
assets which resulted in a $445 million reduction in the carrying value of
intangible assets.

Pro Forma Impact of Spin-Off Distribution and Change in Accounting Policy

     As a result of the Spin-Off Distribution and related debt reduction, as
well as the change in accounting policy, the Company's interest and amortization
expense will be significantly reduced in 1997. If the Spin-Off Distribution

                                       29



and the accounting policy change had occurred on January 1, 1996, the Company's
1996 interest expense would have been reduced by approximately $27.8 million,
1996 amortization expense would have been reduced by approximately $14.6
million, and 1996 net loss would have been reduced by approximately $31.5
million. The annual amortization expense reduction differs from that initially
disclosed by the Company as a result of finalizing the amount and specific
components of the intangible asset write-down. In the opinion of management, no
other material pro forma adjustments are necessary to reflect the impact of the
Spin-Off Distribution and the change in accounting policy.

Results of Operations

     Year Ended December 31, 1996 Compared with Year Ended December 31, 1995.
Earnings were substantially below those for the prior year due principally to
special charges, price declines, increases in salaries and wages, and unusually
severe winter weather experienced during the first quarter of 1996.

     Net Revenues

     Net revenues decreased by $13.1 million, from the prior year, principally
due to average price declines of approximately 3%, partially offset by a 0.6%
increase in clinical testing volume and increased revenues from the Company's
nonclinical testing businesses. Adversely affecting the volume growth was
unusually severe winter weather in the northeastern and central parts of the
United States during the first quarter of 1996. While the prices for laboratory
tests were stable over the course of the year, they were lower than 1995 when
prices declined steadily. The majority of the price declines for 1996 compared
to 1995 resulted from changes in reimbursement policies of various third-party
payors, shifts in volume to lower-priced managed care business, and intense
price competition in the industry. Also contributing to the price declines was a
reduction in Medicare fee schedules effective January 1, 1996, which accounted
for approximately a 1% decrease in net revenues.

     Costs and Expenses

     Cost of services increased by 2.4% as a percentage of net revenues from the
prior year. These increases were due principally to the effects of declining
prices and increases in salaries and wages associated with improving customer
service levels and wage adjustments.

     Selling, general and administrative expense decreased by $27.9 million, or
1.5% as a percentage of net revenues from the prior year. These decreases were
due principally to a reduction in bad debt expense, which decreased by $41.4
million to 6.9% of net revenues from 9.4% of net revenues in 1995, and was
partially offset by costs associated with developing and implementing strategic
action plans and operating improvement plans. The reduction in bad debt expense
results primarily from the unusually high level of bad debt expense in the prior
year, which included a charge of $62 million to increase receivable reserves.
The Company has established, and maintains, rigorous programs to improve the
effectiveness of its billing and collection operations. The established programs
include standard policies and procedures, employee training programs and regular
reporting and tracking of key measures by senior management. The implementation
of these programs during the fourth quarter of 1995 has aided in reducing bad
debt expense. However, additional requirements to provide documentation of the
medical necessity of testing have added to the backlog of unbilled receivables
and caused bad debt expense during the second half of 1996 to increase above the
rate the Company had experienced during the first half of 1996. Additional
efforts to collect medical necessity documentation are currently being made and
are expected to lower bad debt expense below the 1996 rate during 1997.*

     Net interest expense decreased by $7.1 million from the prior year as a
result of Corning contributing greater than $700 million of intercompany debt to
the Company's equity during the fourth quarter. Amortization of intangible
assets decreased below the prior year level by $3.0 million due to certain
intangible assets having been fully amortized.

     In the second quarter of 1996, as a consequence of an investigation begun
in 1993, the DOJ notified Quest Diagnostics that it had taken issue with
payments related to certain tests received by Damon from federally funded health
care programs prior to the acquisition of Damon by the Company. Management met
with the DOJ several

- --------------
* This is a forward looking statement and is based on current expectations.
  Actual results may vary materially from those projected. See "Cautionary
  Statement for Purposes of the 'Safe Harbor' Provisions of the Private
  Securities Litigation Reform Act of 1995." In particular see factors (c), (d)
  and (j).

                                       30



times to evaluate the substance of the government's allegations. The Company
recorded a charge of $46 million in the second quarter of 1996 to establish
additional reserves equal to management's estimate, at that time, of the low end
of the range of potential amounts which could be required to satisfy the
government's claims. During the third quarter of 1996, the Company recorded a
$142 million charge to establish additional reserves associated with government
and other claims primarily related to billing practices at certain laboratories
of Damon and Nichols prior to their acquisition. During the fourth quarter, the
Company entered into an agreement with the DOJ to pay $119 million to settle all
federal and Medicaid claims related to the billing by Damon of certain blood
test series for federally sponsored health care programs. Corning contributed
$119 million to the Company's capital to fund the payment of the Damon
settlement. Additionally, Corning has agreed to indemnify Quest Diagnostics
against all settlements for any government claims pending on December 31, 1996
and for 50% of the aggregate of all private party settlements that are in excess
of $42 million that relate to indemnified or previously settled governmental
claims for services provided prior to January 1, 1997, however, the
indemnification of private party claims will not exceed $25 million and will be
paid to the Company net of anticipated tax benefits to be realized by the
Company. Aggregate reserves with respect to all governmental and nongovernmental
claims, including litigation costs, approximated $81 million at December 31,
1996. Although management believes that established reserves for both
indemnified and non-indemnified claims are sufficient, it is possible that the
final resolution of these matters could be in excess of established reserves by
an amount which could be material to the Company's results of operations and,
for non-indemnified claims, the Company's cash flows in the periods in which
such claims are settled. The Company does not believe that these matters will
have a material adverse effect on its overall financial condition. See
"Business--Government Investigations and Related Claims" and Note 15 to the
Consolidated Financial Statements.

     In the third quarter of 1996 the Company recorded a charge of $13.7 million
to write off capitalized software as a result of its decision to abandon what
had been intended as its company-wide billing system. Management now plans to
standardize billing systems using a system already implemented in several of its
sites.

     In the fourth quarter of 1996, Quest Diagnostics recorded a non-recurring
charge of $21.9 million. The charge consisted of the value of the Company's
stock contributed to fund an employee stock ownership plan ($11.7 million) and
fees for advisors and other costs associated with establishing Quest Diagnostics
as an independent entity.

     Coincident with the Spin-Off Distribution, the Company adopted a new
accounting policy for valuing its intangible assets. Most of the Company's
intangible assets resulted from purchase business combinations in 1993.
Significant changes in the clinical laboratory and health care industries
subsequent to 1993 have caused the fair value of the Company's intangible assets
to be significantly less than carrying value. Management believes that a
valuation of intangible assets based on the amount for which each of its
regional laboratories could be sold in an arm's-length transaction is preferable
to using projected undiscounted pre-tax cash flows. Management believes fair
value is a better indicator of the extent to which the intangible assets may be
recoverable and therefore, may be impaired. The change in policy resulted in the
Company recording a non-cash charge of $445 million. See Note 2 to the
Consolidated Financial Statements.

     In the second quarter of 1995, the Company recorded a provision for
restructuring totaling $33 million primarily for work force reduction programs
and the costs of exiting a number of leased facilities. Additionally, in the
first quarter of 1995 the Company recorded a special charge of $12.8 million for
the settlement of claims related to inadvertent billing errors of certain
laboratory tests that were not completely and/or successfully performed or
reported due to insufficient samples and/or invalid results.

     Gains on the sale of several small investments and the favorable settlement
of a contractual obligation, both of which occurred in 1996, accounted for the
majority of the change in other, net compared to the prior year.

     Quest Diagnostics' effective tax rate is significantly impacted by goodwill
amortization which is not deductible for tax purposes. This had the effect of
reducing the tax benefit rate of the Company in both 1996 and 1995. The
Company's 1996 tax rate was also impacted by the write-down of intangible assets
which was not deductible for tax purposes. The effect of this non-deductibility
is particularly apparent when amortization and other non-deductible charges
increase in proportion to pre-tax earnings, as was the case in both 1996 and
1995. As a result of the intangible asset write-down, non-deductible goodwill
amortization will be reduced in future periods. Accordingly, its impact on the
effective tax rate will be reduced. See Note 4 to the Consolidated Financial
Statements.

                                       31



     Year Ended December 31, 1995 Compared with Year Ended December 31, 1994.
Earnings for 1995 were significantly below those for the prior year as a result
of price declines, higher bad debt expense, and the impact of restructuring and
other special charges. The 1995 bad debt expense included a $62 million charge
to increase accounts receivable reserves in the third quarter.

     Net Revenues

     Net revenues of $1.6 billion in fiscal 1995 remained essentially unchanged
from the prior year. Average price declines, estimated to be 3.7%, were offset
by estimated growth of approximately 4% in requisition volume. The majority of
the price declines resulted from changes in reimbursement policies of various
third-party payors, an accelerated shift in volume to lower-priced managed care
business, and intense price competition in the industry. Also contributing to
the price declines was a reduction in Medicare fee schedules effective January
1, 1995 which accounted for approximately a 1% decrease in net revenues.

     Costs and Expenses

     Cost of services increased 0.8% as a percentage of net revenues from 1994.
These increases were due principally to the impact of price declines and the
added cost of doing business in an increasingly complex environment. Partially
offsetting these factors were synergies associated with the elimination of
duplicate facilities, personnel and administrative functions of acquired
entities, including Damon, MML and Nichols.

     Selling, general and administrative expense increased $111.3 million, or
6.9% as a percentage of net revenues, from 1994. These increases resulted
primarily from a higher level of bad debt expense during 1995. Excluding bad
debt expense, selling, general and administrative expenses as a percentage of
net revenues were approximately 22.7% as compared to 21.6% in 1994.

     Bad debt expense increased $93.1 million from 1994, to 9.4% of net revenues
in 1995 from 3.6% of net revenues in 1994. This increase resulted from an
increase in ongoing bad debt expense of $31.1 million throughout 1995 and a $62
million charge to increase bad debt reserves in the third quarter of 1995.

     During 1995, ongoing bad debt expense increased from 4.4% of net revenues
in the first quarter to 6.5% of net revenues in the fourth quarter. This
increase is due principally to three developments that have complicated the
billing process: (1) increased complexity in the health care system; (2)
increased requirements in complying with fraud and abuse regulations; and (3)
changes in Medicare reimbursement policies. These three factors have placed
additional requirements on the billing process, including the need for specific
test coding, additional research on processing rejected claims that comply with
prior practices, increased audits for compliance, and management of a large
number of contracts which have very different information requirements for
pricing and reimbursement.

     In addition to the changes in the billing process, in mid-1995, the Company
experienced problems integrating billing operations from recent acquisitions
into existing billing operations and experienced significant problems
implementing a new billing system at its largest facility in Teterboro, New
Jersey. These factors, along with the significant changes in the billing process
discussed in the preceding paragraph, contributed to a significant increase in
the backlog of unbilled receivables and a significant deterioration in the
collection of receivables during the third quarter of 1995. As a result, the
Company recorded a charge of $62 million in the third quarter to increase
accounts receivable reserves. Quest Diagnostics has put in place a rigorous
program to improve the effectiveness of its billing and collection operations
and has stabilized the current billing system in Teterboro.

     Net interest expense increased by $18.7 million over the 1994 level due to
an increase in average debt levels, resulting principally from funding investing
activities and cash requirements associated with restructuring and other special
charges.

     Amortization expense increased principally due to additional intangible
assets arising from acquisitions completed in 1994 and 1995. The Company's
effective tax rate is significantly impacted by goodwill amortization which is
not deductible for tax purposes. This had the effect of reducing the tax benefit
rate in 1995 while increasing the overall tax rate in 1994. See Note 4 to the
Consolidated Financial Statements.

     In the second quarter of 1995, the Company recorded a provision for
restructuring totaling $33 million, consisting primarily of costs for work force
reduction programs and exiting a number of leased facilities. In the first
quarter of 1995, the Company recorded a special charge of $12.8 million for the
settlement of claims related to inadvertent billing errors of certain laboratory
tests that were not completely and/or successfully performed or

                                       32



reported due to insufficient samples and/or invalid results. In the third
quarter of 1994, the Company recorded a provision for restructuring and other
special charges totaling $79.8 million which included $48.2 million of
integration costs, $21.6 million of transaction expenses, and $10 million of
other reserves primarily related to the Nichols, MML and Bioran acquisitions.
See Note 5 to the Consolidated Financial Statements.

Liquidity and Capital Resources

     Historically, Quest Diagnostics has financed its operations and growth with
cash flow from operations, borrowings from Corning, and stock issued by Corning
to finance certain acquisitions on its behalf. Investing activities have
included business acquisitions and capital expenditures for facility expansions
and upgrades and information systems improvements. Replacement of laboratory
equipment has typically been financed through operating leases.

     During the fourth quarter of 1996, Quest Diagnostics' debt was restructured
and equity recapitalized. The Company issued $150 million of senior subordinated
notes and borrowed $350 million under a credit agreement with several banks (the
"Credit Agreement"). The proceeds from these borrowings were used to repay
amounts owed to Corning. Amounts owed to Corning in excess of the proceeds from
these borrowings were contributed by Corning to the Company's capital. As a
result of these actions, Quest Diagnostics' long-term debt was reduced by
approximately $700 million, and its annual interest expense will be reduced by
approximately $28 million. The Credit Agreement includes a revolving working
capital credit facility of $100 million (the "Working Capital Facility"), of
which $20 million may be used for letters of credit. Borrowings under the
Working Capital Facility approximated $19 million at December 31, 1996. All of
these borrowings were repaid in January 1997. Additionally, letters of credit
approximating $5 million were outstanding at December 31, 1996, reducing the
availability under the Working Capital Facility. Other than the reduction for
outstanding letters of credit, all of the Working Capital Facility is currently
available for borrowing.

     As a part of the Spin-Off Distribution, Corning agreed that the Company
would retain a minimum of $30 million of "adjusted cash" at December 31, 1996.
Adjusted cash represents cash net of borrowings under the Working Capital
Facility, and certain other transactions. Adjusted cash was approximately $21.5
million at December 31, 1996, resulting in a receivable from Corning and a
contribution of capital of approximately $8.5 million. The $8.5 million was
received from Corning in January 1997.

     Net cash from operating activities for the year ended December 31, 1996 was
below the level for the comparable period of the prior year as a result of
reduced earnings, payment of the Damon and other billing related settlements
totaling approximately $144 million and the settlement of amounts owed to
Corning. Excluding the impact of the billing settlements and the settlement of
amounts owed to Corning, cash from operating activities was above the level for
the prior year. This was due to a reduction in restructuring spending to
approximately $16 million and an improved collection rate of accounts
receivable. The improvement in accounts receivable is a direct result of
specific programs initiated in the fourth quarter of 1995 to improve billing
operations. Although these programs are continuing, additional requirements of
customers to provide documentation of the medical necessity of testing are
expected to make it increasingly difficult to reduce receivable levels. Days
sales outstanding ("DSOs") for the clinical testing business is one measure used
by the Company to monitor the effectiveness of its billing operations. DSOs were
72 days at December 31, 1996, 74 days at December 31, 1995, and 81 days at
December 31, 1994.

     Net cash provided by operating activities during 1995 increased above the
prior year despite reduced earnings, due primarily to changes in accounts
payable and accrued expenses and reduced spending for restructuring integration
and other special charges.

     Cash used for investing activities for the year ended December 31, 1996 was
below the prior year level due to reduced acquisition activity and the sale of
several small investments during 1996. Investing activities during 1996, 1995
and 1994 were funded principally by cash flow from operations and borrowings
from Corning, and were principally for capital expenditures and acquisitions.
Cash used in investing activities in 1995 exceeded the prior year level due
principally to cash proceeds generated from the sale of certain California
operations in 1994.

     Net cash provided by financing activities for the year ended December 31,
1996 increased above the prior year level due primarily to Corning's
contribution of $119 million to capital to fund the Damon settlement and

                                       33



a reduction in dividends paid to Corning. Financing activities in 1995, and 1994
consisted principally of dividend payments to and net borrowing activities with
Corning.

     The Company estimates that it will invest approximately $57 million during
1997 for capital expenditures, principally related to equipment and facility
upgrades and investments in information technology.* The Company expects to
expand its operations principally through internal growth and accelerated growth
in strategic markets and related lines of business. The Company expects such
activities will be funded from existing cash and cash equivalents, cash flow
from operations, and borrowings under the Working Capital Facility. Quest
Diagnostics believes that the Working Capital Facility will be sufficient to
meet both its short-term and its long-term financing needs. As a result, the
Company believes it has sufficient financial flexibility and sufficient access
to funds to meet seasonal working capital requirements, to fund capital
expenditures and to fund growth opportunities.

     The Company does not anticipate paying dividends on its common stock in the
foreseeable future. In addition, the Credit Agreement prohibits the payment of
cash dividends. Further, the senior subordinated notes restrict the Company's
ability to pay cash dividends on its common stock based primarily on a
percentage of the Company's earnings, as defined.

     Periodically, there may be acquisitions or other growth opportunities which
will require additional external financing, and the Company may from time to
time seek to obtain funds from public or private issuances of equity or debt
securities. There can be no assurance that such financing will be available on
terms acceptable to the Company.

     Management believes that the recapitalization of Quest Diagnostics and the
indemnification by Corning against monetary fines, penalties or losses from
outstanding government claims, together with the successful implementation of
its business strategy, will generate more predictable and improved cash flows.**
Additionally, management believes that these actions, together with the
Company's leading market position or low cost provider status in a number of
geographic regions accounting for the majority of its net revenues, will aid the
Company in meeting the ongoing challenges in the clinical laboratory industry
brought on by growth in managed care and increased regulatory complexity.***

     Adjusted EBITDA

     Adjusted EBITDA represents income (loss) before income taxes plus net
interest expense, depreciation and amortization and non-recurring charges.
Adjusted EBITDA is presented and discussed because managment believes that
Adjusted EBITDA is a useful adjunct to net income and other measurements under
generally accepted accounting principles since it is a meaningful measure of a
leveraged company's performance and ability to meet its future debt service
requirements, fund capital expendutures and meet working capital requirements.
Adjusted EBITDA is not a measure of financial performance under generally
accepted accounting principles and should not be considered as an alternative to
(i) net income (or any other measure of performance under generally accepted
accounting principles) as a measure of performance or (ii) cash flows from
operating, investing or financing activities as an indicator of cash flows or as
a measure of liquidity.

     Adjusted EBITDA for 1996 was $166.4 million, or 10.3% of net revenues.
Adjusted EBITDA for the prior period was $176.5 million, or 10.8% of net
revenues. The decline in Adjusted EBITDA was principally due to price declines,
increases in salaries and wages and a reduction in volume during the first
quarter of 1996 as a result of the unusually severe winter weather.

- --------------
 *  This is a forward looking statement and is based on current expectations.
    Actual results may vary materially those projected. See "Cautionary
    Statement for Purposes of the 'Safe Harbor' Provisions of the Private
    Securities Litigation Reform Act of 1995." In particular see factors (d),
    (j) and (k).

 ** This is a forward looking statement and is based on current expectations.
    Actual results may vary materially from those projected. See "Cautionary
    Statement for Purposes of the 'Safe Harbor' Provisions of the Private
    Securities Litigation Reform Act of 1995." In particular see factors (a),
    (b), (c), (d), (e), (f), (j) and (l).

*** This is a forward looking statement and is based on current expectations.
    Actual results may vary materially from those projected. See "Cautionary
    Statement for Purposes of the 'Safe Harbor' Provisions of the Private
    Securities Litigation Reform Act of 1995." In particular see factors (a),
    (b), (c), (d), (e), (f) and (j).

                                       34



     Adjusted EBITDA for 1995 was $176.5 million, or 10.8% of net revenues.
Adjusted EBITDA for the prior period was $295.4 million, or 18.1% of net
revenues. The decline in Adjusted EBITDA was principally due to price declines
and higher bad debt expense.

Inflation

     The Company believes that inflation generally does not have a material
adverse effect on its operations or financial condition because the majority of
its contracts are short-term.

                                       35



                       REPORT OF INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP

To the Board of Directors and Stockholders of
Quest Diagnostics Incorporated

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) 1. and 2. on page 25 present fairly, in all material
respects, the financial position of Quest Diagnostics Incorporated and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

     As discussed in Note 2, the Company adopted a new accounting policy for
evaluating the recoverability of intangible assets during 1996.



Price Waterhouse LLP
New York, New York
January 24, 1997



                                      F-1




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 and 1995
                       (in thousands, except share data)



                                                                          1996           1995
                                                                       -----------    ----------
                                                                                 
ASSETS
- ------
Current Assets:
 Cash and cash equivalents   .......................................    $   41,960     $   36,446
 Accounts receivable, net of allowance of $115,018 and
  $147,947 for 1996 and 1995, respectively  ........................       297,743        318,252
 Inventories  ......................................................        28,524         26,601
 Deferred taxes on income    .......................................        98,162         98,845
 Due from Corning Incorporated  ....................................        30,894             --
 Prepaid expenses and other assets    ..............................        13,682         22,014
                                                                        ----------     ----------
  Total current assets    ..........................................       510,965        502,158
Property, plant and equipment, net    ..............................       287,749        296,116
Intangible assets, net    ..........................................       546,457      1,030,633
Deferred taxes on income  ..........................................        20,420          6,062
Other assets  ......................................................        29,475         18,416
                                                                        ----------     ----------
TOTAL ASSETS  ......................................................    $1,395,066     $1,853,385
                                                                        ==========     ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
 Accounts payable and accrued expenses   ...........................    $  206,701     $  240,525
 Short-term borrowings    ..........................................        20,785         12,148
 Income taxes payable  .............................................        21,946         39,766
 Due to Corning Incorporated and affiliates    .....................            --          8,979
                                                                        ----------     ----------
  Total current liabilities  .......................................       249,432        301,418
Long-term debt, third party  .......................................       515,008         49,930
Long-term debt, Corning Incorporated  ..............................            --      1,145,636
Other liabilities   ................................................        91,907         60,600
                                                                        ----------     ----------
  Total liabilities    .............................................       856,347      1,557,584
                                                                        ----------     ----------
Commitments and Contingencies

Stockholders' Equity:
 Preferred Stock    ................................................         1,000             --
 Common stock, par value $0.01 per share; 100,000,000 shares
  authorized; 28,822,366 shares issued at December 31, 1996   ......           288             --
 Additional paid-in capital  .......................................     1,170,152        297,823
 Accumulated deficit   .............................................      (627,892)        (3,118)
 Cumulative translation adjustment    ..............................          (619)         2,325
 Market valuation adjustment    ....................................        (4,210)        (1,229)
                                                                        ----------     ----------
  Total stockholders' equity   ....................................        538,719        295,801
                                                                        ----------     ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    .....................    $1,395,066     $1,853,385
                                                                        ==========     ==========



The accompanying notes are an integral part of these statements.


                                      F-2




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                (in thousands)



                                                                     1996            1995           1994
                                                                  -----------    -----------     -----------
                                                                                         
Net revenues   ................................................    $1,616,296     $1,629,388      $1,633,699
Costs and expenses:
 Cost of services    ..........................................     1,010,875        980,232         969,844
 Selling, general and administrative   ........................       495,323        523,271         411,939
 Interest expense, net  .......................................        74,918         82,016          63,295
 Amortization of intangible assets  ...........................        41,625         44,656          42,588
 Provision for restructuring and other special charges   ......       223,590         50,560          79,814
 Write-down of intangible assets    ...........................       444,954             --              --
 Other, net    ................................................         1,213          6,221           3,464
                                                                   ----------     ----------      ----------
  Total  ......................................................     2,292,498      1,686,956       1,570,944
                                                                   ----------     ----------      ----------
Income (loss) before taxes    .................................      (676,202)       (57,568)         62,755
Income tax expense (benefit)  .................................       (50,242)        (5,516)         34,410
                                                                   ----------     ----------      ----------
Net income (loss)    ..........................................    $ (625,960)    $  (52,052)     $   28,345
                                                                   ==========     ==========      ==========




The accompanying notes are an integral part of these statements.


                                      F-3


                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                (in thousands)


                                                                      1996            1995            1994
                                                                   ------------    -----------     -----------
                                                                                          
Cash flows from operating activities:
Net income (loss)  .............................................     $ (625,960)     $ (52,052)      $  28,345
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
  Depreciation and amortization   ..............................         99,098        101,513          89,517
  Provision for doubtful accounts    ...........................        111,238        152,590          59,480
  Provision for restructuring and other special charges   ......        223,590         50,560          79,814
  Write-down of intangible assets    ...........................        444,954             --              --
  Deferred income tax provision   ..............................         (4,472)       (32,384)         (4,742)
  Other, net    ................................................            558          8,303          14,600
  Changes in operating assets and liabilities:   ...............
   Accounts receivable   .......................................        (94,657)      (109,500)       (103,402)
   Accounts payable and accrued expenses   .....................        (16,671)        14,604         (32,756)
   Restructuring, integration and settlement charges   .........       (160,627)       (57,768)        (88,093)
   Due from/to Corning Incorporated and affiliates  ............        (44,729)         2,934          14,783
   Other assets and liabilities, net    ........................        (20,808)         7,028         (19,583)
                                                                     ----------      ---------       ---------
Net cash (used in) provided by operating activities    .........        (88,486)        85,828          37,963
                                                                     ----------      ---------       ---------
Cash flows from investing activities:
  Capital expenditures   .......................................        (70,396)       (74,045)        (93,354)
  Proceeds from disposition of assets   ........................         11,989          2,880          55,762
  Acquisition of businesses, net of cash acquired   ............             --        (22,907)        (12,154)
  (Increase) decrease in investments    ........................         (5,267)           985           3,560
                                                                     ----------      ---------       ---------
Net cash used in investing activities   ........................        (63,674)       (93,087)        (46,186)
                                                                     ----------      ---------       ---------
Cash flows from financing activities:
  Net borrowings under Working Capital Facility  ...............         19,300             --              --
  Proceeds from borrowings  ....................................        559,342         55,729         186,046
  Repayment of long-term debt  .................................       (528,178)       (13,784)       (118,046)
  Payment of debt issuance costs  ..............................        (10,681)            --              --
  Contribution of capital from Corning Incorporated    .........        119,063             --              --
  Dividends paid   .............................................         (1,172)       (36,959)        (60,468)
                                                                     ----------      ---------       ---------
Net cash provided by financing activities  .....................        157,674          4,986           7,532
                                                                     ----------      ---------       ---------
Net change in cash and cash equivalents    .....................          5,514         (2,273)           (691)
Cash and cash equivalents, beginning of year  ..................         36,446         38,719          39,410
                                                                     ----------      ---------       ---------
Cash and cash equivalents, end of year  ........................     $   41,960      $  36,446       $  38,719
                                                                     ==========      =========       =========


The accompanying notes are an integral part of these statements.


                                      F-4


                 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                        (in thousands, except share data)



                                                             Additional
                                      Preferred     Common    Paid-in
                                        Stock       Stock     Capital
                                       -------     -------   ---------
                                                      
Balance, December 31, 1993    ......    $   --        $ --     $265,649
Net income  ........................
Dividends paid to Corning
 Incorporated  .....................
Dividends paid to S-Corporation
 shareholders  .....................
Dividends in-kind to S-Corporation
 shareholders  .....................
Capital contribution    ............                             32,174
Translation adjustment  ............   
                                        -----        ----    ----------
Balance, December 31, 1994    ......       --          --       297,823
Net loss    ........................
Dividends paid to Corning
 Incorporated  .....................
Translation adjustment  ............
Market valuation adjustment   ...... 
                                        -----        ----    ----------
Balance, December 31, 1995    ......       --          --       297,823
Net loss    ........................
Dividends paid to Corning
 Incorporated  .....................
Issuance of preferred stock   ......     1,000                   (1,000)
Capital contribution and Spin-Off   
 Distribution (28,043,816 shares) ..                  280       861,683
Establishment of employee stock
 ownership plan (778,550 shares) ...                    8        11,646
Translation adjustment  ............
Market valuation adjustment ........    
                                        -----        ----    ----------
Balance, December 31, 1996    ......    $1,000       $288    $1,170,152
                                        ======       ====    ==========

                                        Retained
                                        Earnings      Cumulative       Market           Total
                                      (Accumulated    Translation    Valuation      Stockholders'
                                        Deficit)      Adjustment     Adjustment       Equity
                                     --------------- -------------- -------------  --------------
                                                                          
Balance, December 31, 1993    ......   $ 125,561        $4,299        $   --          $ 395,509
Net income  ........................      28,345                                         28,345
Dividends paid to Corning
 Incorporated  .....................     (33,275)                                       (33,275)
Dividends paid to S-Corporation
 shareholders  .....................     (27,193)                                       (27,193)
Dividends in-kind to S-Corporation
 shareholders  .....................      (7,545)                                        (7,545)
Capital contribution    ............                                                     32,174
Translation adjustment  ............                    (1,203)                          (1,203)
                                       ---------        ------        -------         ---------
Balance, December 31, 1994    ......      85,893         3,096             --           386,812
Net loss    ........................     (52,052)                                       (52,052)
Dividends paid to Corning
 Incorporated  .....................     (36,959)                                       (36,959)
Translation adjustment  ............                      (771)                            (771)
Market valuation adjustment   ......                                   (1,229)           (1,229)
                                       ---------        ------        -------         ---------
Balance, December 31, 1995    ......      (3,118)        2,325         (1,229)          295,801
Net loss    ........................    (625,960)                                      (625,960)
Dividends paid to Corning
 Incorporated  .....................      (1,172)                                        (1,172)
Issuance of preferred stock   ......                                                         --
Capital contribution and Spin-Off
 Distribution (28,043,816 shares) ..                                                    861,963
Establishment of employee stock
 ownership plan (778,550 shares) ...                                                     11,654
Translation adjustment  ............       2,358        (2,944)                            (586)
Market valuation adjustment   ......                                   (2,981)           (2,981)
                                       ---------        ------        -------         ---------
Balance, December 31, 1996    ......   $(627,892)       $ (619)       $(4,210)        $ 538,719
                                       =========        ======        =======         =========

The accompanying notes are an integral part of these statements.

                                      F-5



                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              (dollars in thousands, unless otherwise indicated)

1. BASIS OF PRESENTATION

     Quest Diagnostics Incorporated (formerly Corning Clinical Laboratories
Inc.) and its subsidiaries ("Quest Diagnostics" or the "Company") is one of the
largest clinical laboratory testing businesses in the United States. Prior to
January 1, 1997, Quest Diagnostics was a wholly-owned subsidiary of Corning
Incorporated ("Corning"). On December 31, 1996, Corning distributed all of the
outstanding shares of common stock of the Company to the stockholders of
Corning, with one share of common stock of the Company being distributed for
each eight shares of outstanding common stock of Corning. This distribution was
followed immediately by the distribution to the stockholders of the Company of
all the outstanding common stock of Covance Inc. ("Covance") (formerly Corning
Pharmaceutical Services Inc.), with one share of common stock of Covance being
distributed for each four shares of outstanding common stock of Corning. These
two distributions are collectively referred to as the "Spin-Off Distribution."
The result was the creation of two independent, publicly-owned companies. Prior
to the Spin-Off Distribution, Corning received a ruling from the Internal
Revenue Service that the Spin-Off Distribution would be tax-free. In conjunction
with the Spin-Off Distribution, Corning, Quest Diagnostics and Covance entered
into a transaction agreement and tax indemnification and tax sharing agreements.
The transaction agreement provides for, among other things, Corning to indemnify
the Company against all settlements for government claims pending at December
31, 1996 (see Note 15). Additionally, in conjunction with the Spin-Off
Distribution, the Company borrowed $500 million in long-term debt to repay
Corning for certain intercompany borrowings. The remaining intercompany debt was
contributed by Corning to the Company's equity.

     The accompanying consolidated financial statements present the results of
operations, cash flows and financial position of the clinical laboratory testing
business being conducted by Quest Diagnostics. Covance, as well as the
environmental testing business formerly held by Quest Diagnostics are excluded.
In 1994, Corning acquired three clinical laboratory testing businesses on the
behalf of Quest Diagnostics in separate transactions accounted for as poolings
of interests (see Note 3). Results presented for 1994 include the results of
Quest Diagnostics and the pooled entities on a combined basis.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

     The consolidated financial statements include the accounts of all entities
controlled by the Company. The equity method of accounting is used for
investments in affiliates which are not Company controlled and in which the
Company's interest is generally between 20 and 50 percent. All significant
intercompany accounts and transactions are eliminated.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

     Revenue Recognition

     The Company generally recognizes revenue as services are rendered upon
completion of the testing process. Billings for services under third-party payor
programs, including Medicare and Medicaid, are recorded as revenues net of
allowances for differences between amounts billed and the estimated receipts
under such programs. Adjustments to the estimated receipts, based on final
settlement with the third-party payors, are recorded upon settlement. In 1996,
1995 and 1994, approximately 21%, 23% and 28%, respectively, of net revenues
were generated by Medicare and Medicaid programs.

     Concentrations of Credit Risk

     Concentrations of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's clients as well as their
dispersion across many different geographic regions.

     Taxes on Income

     The Company uses the asset and liability approach to account for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of differences between the carrying amounts
of assets and liabilities and their respective tax bases using tax rates in
effect for the year in which the

                                      F-6




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)

differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period when
the change is enacted.

     Cash and Cash Equivalents

     Cash and cash equivalents include all highly-liquid investments with
original maturities at the time acquired by the Company of three months or less.

     Inventories

     Inventories, which consist principally of supplies, are valued at the lower
of cost (first in, first out method) or market.

     Property, Plant and Equipment

     Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided on the straight-line method over expected useful asset
lives, which range from three to forty years.

     Long-Lived Assets

     The Company follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which it adopted in 1995. The Company reviews the
recoverability of its long-lived assets when events or changes in circumstances
occur that indicate that the carrying value of the asset may not be recoverable.
Evaluation of possible impairment is based on the Company's ability to recover
the asset from the expected future pre-tax cash flows (undiscounted and without
interest charges) of the related operations. If the expected undiscounted
pre-tax cash flows are less than the carrying value of such asset, an impairment
loss would be recognized for the difference between estimated fair value and
carrying value. This assessment of impairment requires management to make
estimates of expected future cash flows. It is at least reasonably possible that
future events or circumstances could cause these estimates to change.

     In addition, the carrying value of intangible assets is subject to an
additional evaluation as set forth below.

     Accounting for Intangible Assets

     Acquisition costs in excess of the fair value of net tangible assets
acquired are capitalized and amortized over periods not exceeding forty years.
Other intangible assets are recorded at cost and amortized over periods not
exceeding fifteen years.

     Coincident with the Spin-Off Distribution, management adopted a new
accounting policy for evaluating the recoverability of intangible assets and
measuring possible impairment under Accounting Principles Board Opinion No. 17,
"Intangible Assets." Most of the intangible assets resulted from purchase
business combinations in 1993. Significant changes in the clinical laboratory
and health care industries subsequent to 1993, including increased government
regulation and movement from traditional fee-for-service care to managed cost
health care, had caused the fair value of the intangible assets to be
significantly less than historical carrying value. Management believes that a
valuation of intangible assets based on the amount for which each regional
laboratory could be sold in an arm's-length transaction is preferable to using
projected undiscounted pre-tax cash flows. The Company believes fair value is a
better indicator of the extent to which the intangible assets may be recoverable
and therefore, may be impaired. This change in method of evaluating the
recoverability of intangible assets resulted in a charge of $445.0 million to
operations coincident with the Spin-Off Distribution to reflect the impairment
of intangible assets. This will result in a reduction of future amortization
expense of approximately $14.6 million annually and $3.6 million quarterly.

     The fair value method is applied to each of the regional laboratories.
Management's estimate of fair value is primarily based on multiples of
forecasted revenue or multiples of forecasted earnings before net interest,
taxes, depreciation and amortization ("EBITDA"). The multiples are primarily
determined based upon publicly available information regarding comparable
publicly-traded companies in the industry, but also considers (i) the financial
projections of each regional laboratory, (ii) the future prospects of each
regional laboratory, including its growth opportunities, managed care
concentration and likely operational improvements, and (iii) comparable sales
prices, if available. Multiples of revenues are used to estimate fair value in
cases where the Company believes that the

                                      F-7




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)

likely acquirer of a regional laboratory would be a strategic buyer within the
industry which would realize synergies from such an acquisition. In regions
where management does not believe there is a potential strategic buyer within
the industry, and, accordingly, believes the likely buyer would not have synergy
opportunities, multiples of EBITDA are used for estimating fair value. Regional
laboratories with lower levels of profitability valued using revenue multiples
would generally be ascribed a higher value than if multiples of EBITDA were
used, due to assumed synergy opportunities. Management's estimate of fair value
is currently based on multiples of revenue primarily ranging from 0.5 to 0.7
times revenue and on multiples of EBITDA primarily ranging from 5 to 6 times
EBITDA. While management believes the estimation methods are reasonable and
reflective of common valuation practices, there can be no assurance that a sale
to a buyer for the estimated value ascribed to a regional laboratory could be
completed. Changes to the method of valuing regional laboratories will be made
only when there is a significant and fundamental change in facts and
circumstances, such as significant changes in market position or the entrance or
exit of a significant competitor from a regional market.

     For purposes of estimating the fair value of each of the regional
laboratories, management assumed that a potential buyer would seek to be
indemnified for litigation or other contingencies resulting from preacquisition
activities. Therefore, the reserves recorded for billing and marketing claims
were not allocated to the regional laboratories for purposes of estimating their
fair value.

     On a quarterly basis, management will perform a review of each regional
laboratory to determine if events or changes in circumstances have occurred
which could have a material adverse effect on the fair value of the business and
its intangible assets. If such events or changes in circumstances were deemed to
have occurred, management would consult with one or more of its advisors in
estimating the impact on fair value of the regional laboratory. Should the
estimated fair value of a regional laboratory be less than the net book value
for such laboratory at the end of a quarter, the Company will record a charge to
operations to recognize an impairment of its intangible assets for such
difference.

     Investments

     The Company accounts for investments in equity securities, which are
included in other assets, in conformity with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). SFAS 115 requires the use of fair value accounting for
trading or available-for-sale securities. Unrealized losses for
available-for-sale securities are recorded as a separate component within
stockholders' equity. Investments in equity securities are not material to the
Company.

     Earnings Per Share

     Earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Historical earnings per share data
is not meaningful as the Company's historical capital structure is not
comparable to the capital structure subsequent to the Spin-Off Distribution.

3. BUSINESS COMBINATIONS AND DIVESTITURES

     Acquisitions

     During 1995, the Company acquired several laboratories in separate
transactions accounted for under the purchase method. The total cost of the
acquired businesses aggregated approximately $23 million and was financed
through borrowings from Corning. Intangible assets of approximately $21.6
million resulted from the transactions and are being amortized over periods not
to exceed forty years.

     During 1994, Corning acquired three clinical laboratory testing companies
on behalf of the Company in separate transactions accounted for as poolings of
interests. In June 1994, Corning acquired the stock of Maryland Medical
Laboratory, Inc. ("MML") in exchange for approximately 4.5 million shares of
Corning common stock; in August 1994, Corning acquired the stock of Nichols
Institute ("Nichols") in exchange for approximately 7.5 million shares of
Corning common stock and reserved an additional 1.1 million shares for future
issuance upon the exercise of stock options; and, in October 1994, Corning
acquired the stock of Bioran Medical Laboratory ("Bioran") in exchange for
approximately 6.0 million shares of Corning common stock. Results presented for
1994 include the results of the Company, MML, Nichols and Bioran on a combined
basis.

     In 1994, the Company also acquired several other laboratories in separate
transactions accounted for under the purchase method. The total cost of the
acquired businesses aggregated approximately $26 million and was

                                      F-8




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)

financed through the issuance of Corning stock and borrowings from Corning.
Intangible assets of approximately $24 million resulted from these transactions
and are being amortized over periods not to exceed forty years.

     Divestitures

     In the second quarter of 1994, the Company sold for cash proceeds of $51
million the California clinical laboratory testing operations acquired in 1993.

4. TAXES ON INCOME

     For periods prior to the Spin-Off Distribution, the Company was included in
the consolidated Federal income tax return filed by Corning and had a tax
sharing agreement with Corning, pursuant to which the Company was required to
compute its provision for income taxes on a separate return basis and pay to
Corning the separate Federal income tax return liability so computed. In
conjunction with the Spin-Off Distribution, the Company, Corning, and Covance
entered into a tax sharing agreement which allocates among them responsibility
for federal, state and local taxes relating to taxable periods before and after
the Spin-Off Distribution and provides for computing and apportioning tax
liabilities and tax benefits for such periods among the parties.

     The Company, Corning, and Covance also entered into tax indemnification
agreements that prohibit the Company and Covance for a period of two years after
the Spin-Off Distribution from taking certain actions that might jeopardize the
favorable tax treatment of the Spin-Off Distribution and that provide Corning
with certain rights of indemnification against the Company and Covance.
Additionally, the tax indemnification agreements provide the Company and Covance
with certain rights of indemnification against each other. The tax
indemnification agreements also require the Company and Covance to take such
actions as Corning may request to preserve the favorable tax treatment provided
for in any rulings obtained from the Internal Revenue Service in respect of the
Spin-Off Distribution.

     The components of the provision (benefit) for income taxes for 1996, 1995
and 1994 are as follows:

                                               1996          1995        1994
                                             --------      --------    --------
Current:
 Federal    ...........................      $(47,429)     $ 22,786    $31,598
 State and local  .....................           765         3,556      7,019
 Foreign    ...........................           894           526        535

Deferred:
 Federal    ...........................         2,524       (28,109)    (1,339)
 State and local  .....................        (6,996)       (4,275)    (3,403)
                                             --------      --------    -------
  Income tax expense (benefit)   ......      $(50,242)     $ (5,516)   $34,410
                                             ========      ========    =======

     Prior to acquisition by Corning, Bioran and certain MML operations were
S-Corporations; accordingly, no federal provision for income taxes has been
reflected relative to these operations.

     A reconciliation of the Federal statutory rate to the Company's effective
tax rate for 1996, 1995 and 1994 is as follows:



                                                                       1996          1995          1994
                                                                       ----          ----          ---- 
                                                                                          
Tax provision (benefit) at statutory rate   .....................     (35.0%)       (35.0%)        35.0%
State and local income taxes, net of federal tax benefit   ......      (0.6%)        (0.8%)         3.8%
Income from partnership and S-Corporations not subject
 to federal and state income tax   ..............................      (0.1%)         1.7%        (10.3%)
Goodwill   ......................................................       1.4%         17.6%         14.3%
Write-down of intangible assets    ..............................      23.0%           --            --
Non-deductible items   ..........................................       3.7%          6.0%          8.6%
Other, net    ...................................................       0.2%          0.9%          3.4%
                                                                       -----         -----        ------
 Effective tax rate    ..........................................      (7.4%)        (9.6%)        54.8%
                                                                       =====         =====        ======


                                      F-9




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)


     The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets at December 31, 1996 and 1995 are as
follows:

                                                          1996          1995
                                                        --------      --------
Current deferred tax asset (liability):
 Accounts receivable reserve    ......................   $34,667     $ 48,584
 Liabilities not currently deductible    .............    50,552       49,222
 Establishment of employee stock ownership plan   ....     4,597           --
 Net operating losses  ...............................     9,897        1,990
 Other  ..............................................    (1,551)        (951)
                                                         -------      -------
  Current deferred tax asset    ......................   $98,162      $98,845
                                                         =======      =======
Non-current deferred tax asset (liability):
 Liabilities not currently deductible    .............   $34,129      $21,152
 Depreciation and amortization  ......................   (13,709)     (15,090)
                                                         -------      -------
  Non-current deferred tax asset   ...................   $20,420      $ 6,062
                                                         =======      =======

     At December 31, 1996 the Company had net operating losses for state income
tax purposes of approximately $9.9 million with expiration dates through 2011.

     Income taxes payable at December 31, 1996 and 1995 consist of Federal
income taxes payable of $16.8 million and $34.2 million, respectively, state
income taxes payable of $4.0 million and $5.0 million, respectively, and foreign
income taxes payable of $1.1 million and $0.6 million, respectively. The Company
paid income taxes of $13.1 million, $21.7 million and $58.5 million during 1996,
1995 and 1994, respectively.

5. PROVISION FOR RESTRUCTURING AND OTHER SPECIAL CHARGES

     Coincident with the Spin-Off Distribution, the Company recorded a
non-recurring charge of $21.9 million. The largest component of the charge
related to the value of the Company's common stock contributed to fund an
employee stock ownership plan ($11.7 million). The remainder of the charge
consisted principally of the costs for advisors and other costs associated with
establishing the Company as a separate publicly-traded entity.

     As discussed in Note 15, in the second and third quarters of 1996, the
Company recorded charges of $46.0 million and $142.0 million, respectively, to
increase its reserves related to claims by the Civil Division of the U.S.
Department of Justice ("DOJ") for certain payments received by Damon Corporation
("Damon") prior to its acquisition by the Company, and other related and similar
claims. Additionally, in the third quarter of 1996, the Company recorded a
special charge of $13.7 million to write off capitalized software as a result of
its decision to abandon what had been intended as its standard company-wide
billing system. Management now plans to standardize billing systems using a
system already implemented in several of its sites.

     In the second quarter of 1995, the Company recorded a provision for
restructuring totaling $33.0 million primarily for workforce reduction programs
and the costs of exiting a number of leased facilities. Additionally, in the
first quarter of 1995, the Company recorded a special charge of $12.8 million
for the settlement of claims related to inadvertent billing errors of certain
laboratory tests that were not completely and/or successfully performed or
reported due to insufficient samples and/or invalid results. Also, in the fourth
quarter of 1995, the Company recorded a charge of $4.8 million related to claims
by the DOJ of alleged billing errors related to a laboratory test performed by
Bioran prior to its acquisition by the Company.

     In the third quarter of 1994, the Company recorded a provision for
restructuring and other special charges totaling $79.8 million which included
$48.2 million of integration costs, $21.6 million of transaction expenses
related to the Nichols, MML and Bioran acquisitions, and $10.0 million of
settlement reserves primarily related to government investigations of billing
practices by Nichols prior to its acquisition by the Company. The integration
costs represented the expected costs for closing clinical laboratories in
certain markets where duplicate Company, Nichols, MML or Bioran facilities
existed at the time of the acquisitions.

                                      F-10




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)

     The following summarizes the Company's restructuring activity (in
millions):



                                             Balance at                 Amounts     Balance at    Amounts    Balance at
                                              Dec 31,        1995       Utilized     Dec 31,      Utilized     Dec 31,
                                                1994       Provision    in 1995        1995       in 1996       1996
                                            ------------- ------------ ----------- ------------- ----------- ------------
                                                                                              
Employee termination costs  ...............     $17.7        $23.4        $27.0        $14.1       $ 6.6        $ 7.5
Write-off of fixed assets   ...............      16.5          3.7          9.2         11.0        10.0          1.0
Costs of exiting leased facilities   ......      12.4          3.1          6.8          8.7         3.2          5.5
Other  ....................................       1.6          2.8          0.5          3.9         1.8          2.1
                                                -----        -----        -----        -----       -----        -----
 Total    .................................     $48.2        $33.0        $43.5        $37.7       $21.6        $16.1
                                                =====        =====        =====        =====       =====        =====


     Employee termination costs included estimated severance benefits related to
approximately 2,700 employees. The actual number of employees to be terminated
was less than initially estimated. The decrease from the initial estimate of
employee terminations is primarily attributable to higher than expected
attrition. However, as a result of higher than expected average termination
costs, management's estimate of total employee termination costs is unchanged.
All employees to be terminated have been terminated or notified of their
termination and all facility exits have occurred as of December 31, 1996.
Certain severance and facility exit costs have payment terms extending beyond
1997.

6. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment at December 31, 1996 and 1995 consists of the
following:

                                                           1996         1995
                                                        ---------     ---------
Land    .............................................   $  16,303     $  18,568
Buildings and improvements   ........................     191,428       186,192
Laboratory equipment, furniture and fixtures   ......     310,972       286,326
Leasehold improvements    ...........................      46,927        39,078
Construction-in-progress  ...........................       9,537        19,490
                                                        ---------     ---------
                                                          575,167       549,654
Less: accumulated depreciation and amortization   ...    (287,418)     (253,538)
                                                        ---------     ---------
 Property, plant and equipment, net   ...............   $ 287,749     $ 296,116
                                                        =========     =========


     Depreciation and amortization expense aggregated $57.5 million, $56.8
million and $46.9 million for 1996, 1995 and 1994, respectively.

7. INTANGIBLE ASSETS

     Intangible assets at December 31, 1996 and 1995 consist of the following:

                                                          1996          1995
                                                       ----------    ----------
Goodwill   ..........................................  $  621,873    $1,056,073
Customer lists   ....................................      76,967        84,558
Other (principally non-compete covenants)   .........      48,949        50,626
                                                       ----------    ----------
                                                          747,789     1,191,257
Less: accumulated amortization  .....................    (201,332)     (160,624)
                                                       ----------    ----------
 Intangible assets, net   ...........................  $  546,457    $1,030,633
                                                       ==========    ==========

     Amortization expense aggregated $41.6 million, $44.7 million and $42.6
million for 1996, 1995 and 1994, respectively.


     As discussed in Note 2, coincident with the Spin-Off Distribution,
management adopted a new accounting policy for evaluating the recoverability of
intangible assets and measuring possible impairment, which resulted in a charge
of $445.0 million to reflect the estimated impairment of intangible assets.

                                      F-11




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)


8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses at December 31, 1996 and 1995 consist
of the following:

                                                          1996         1995
                                                        --------     --------
Accrued wages and benefits    .....................     $ 71,031     $ 81,985
Accrued expenses  .................................       57,331       65,533
Restructuring, integration and settlements   ......       50,145       61,878
Trade accounts payable  ...........................       28,194       31,129
                                                        --------     --------
 Accounts payable and accrued expenses    .........     $206,701     $240,525
                                                        ========     ========

9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

     Short-term borrowings at December 31, 1996 and 1995 consist of the
following:

                                                         1996          1995
                                                        -------      -------
Working Capital Facility   ..................           $19,300      $    --
Current maturities of long-term debt   ......             1,485        2,148
Notes payable to Corning   ..................                --       10,000
                                                        -------      -------
 Total   ....................................           $20,785      $12,148
                                                        =======      =======

     Long-term debt, exclusive of current maturities, at December 31, 1996 and
1995 consists of the following:



                                                                             1996          1995
                                                                          ---------     ----------
                                                                                   
Variable rate bank term loans   .......................................    $350,000      $      --
10.75% senior subordinated notes due 2006   ...........................     150,000             --
Note payable denominated in pounds Sterling, interest at the
 London Interbank Sterling Rate minus 1%,
 due 2002  ............................................................       7,632          8,049
Mortgage note payable through 2011, interest at 9.25%   ...............       5,916          6,138
Capital lease obligations expiring through 2031   .....................          36         32,518
Other   ...............................................................       1,424          3,225
Notes payable to Corning:
 Revolving credit notes, interest at the London Interbank offered rate
  ("LIBOR") plus 1/8% to 1/4%, maturing 1997    ........................         --        605,636
 Installment note with interest at 9%, maturing 2001    ...............          --         90,000
 Term note with interest at 6.24%, maturing 2003  .....................          --        100,000
 Term note with interest at 6.93%, maturing 2013  .....................          --        100,000
 Term note with interest at 7.17%, maturing 2004  .....................          --        150,000
 Term note with interest at 7.77%, maturing 2024  .....................          --        100,000
                                                                           --------      ---------
  Total    ............................................................    $515,008      $1,195,566
                                                                           ========      ==========



     During 1996 the Company repaid a capital lease obligation related to one of
its facilities. The repayment was funded through additional borrowings from
Corning.


     On December 6, 1996, in connection with the Spin-Off Distribution, Quest
Diagnostics entered into a credit agreement (the "Credit Agreement") with
several banks providing for a $450.0 million credit facility (the "Credit
Facility"). The $450.0 million commitment under the Credit Facility is comprised
of three sub-facilities: (i) a $300.0 million six-year amortizing term loan,
(ii) a seven-year $50.0 million term loan with minimal amortization until the
seventh year and (iii) a $100.0 million six-year revolving working capital
credit facility (the "Working Capital Facility"). Under the Working Capital
Facility, up to $20 million may be used for letters of credit. At December 31,
1996, approximately $5 million in letters of credit were outstanding, which
reduced the amount available under the Working Capital Facility. The Credit
Facility is secured by substantially all of the Company's accounts

                                      F-12




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)

receivable and by a guaranty from, and a pledge of all capital stock, accounts
receivable and intercompany loans of, substantially all of the Company's
domestic subsidiaries. The borrowings under the Credit Facility rank senior in
priority of repayment to any Permitted Subordinated Debt (as defined in the
Credit Agreement), including the senior subordinated notes discussed below.
Interest is based on certain published rates plus an applicable margin which
will vary depending on the financial performance of the Company. The weighted
average interest rate at December 31, 1996 was 7.4% and 8.2% for the term loans
and Working Capital Facility, respectively.

     On December 16, 1996, the Company issued $150.0 million of 10.75% senior
subordinated notes due 2006 (the "Notes"). The Notes are general unsecured
obligations of the Company and are subordinated in right of payment to all
existing and future senior debt (as defined in the indenture relating to the
Notes (the "Indenture")), including all indebtedness of the Company under the
Credit Facility. Interest is payable on June 15 and December 15. The Notes will
be redeemable, in whole or in part, at the option of the Company at any time on
or after December 15, 2001, at specified redemption prices. The Notes are
guaranteed, fully, jointly and severally, and unconditionally, on a senior
subordinated basis by substantially all of the Company's wholly-owned, domestic
subsidiaries.

     The Credit Agreement and the Indenture contain various customary
affirmative and negative covenants, including, in the case of the Credit
Agreement, the maintenance of certain financial ratios and tests. The Credit
Agreement prohibits the Company from paying cash dividends on its common stock.
The Indenture restricts the Company's ability to pay cash dividends based
primarily on a percentage of the Company's earnings, as defined. Additionally,
the Company will be required to offer to purchase the Notes and repay amounts
borrowed under the Credit Facility upon a change of control, as defined, and in
the event of certain asset sales.

     The proceeds from the Notes, together with approximately $350.0 million of
borrowings under the term loans of the Credit Facility, were used to repay
approximately $495.0 million of intercompany debt with Corning. Corning
contributed to the Company's equity the remaining intercompany debt owed to
Corning. Long-term debt, including capital leases, maturing in each of the years
subsequent to December 31, 1997 is as follows:

          Year ending December 31,
          1998 ........................  $ 39,261
          1999 ........................    51,475
          2000 ........................    71,505
          2001 ........................    76,484
          2002 and thereafter .........   276,283
                                         --------
          Total long-term debt ........  $515,008
                                         ========


     The Company paid interest of $91.0 million, $74.2 million and $60.2 million
during 1996, 1995 and 1994, respectively.

     Based on borrowing rates currently available to the Company, the carrying
amount of the Company's long-term debt at December 31, 1996 approximates fair
value. The fair value of loans payable, excluding amounts owed to Corning, was
approximately $62.0 million at December 31, 1995.

10. SUMMARIZED FINANCIAL INFORMATION

     The Notes described in Note 9 are guaranteed, fully, jointly and severally,
and unconditionally, on a senior subordinated basis by substantially all of the
Company's wholly-owned, domestic subsidiaries ("Subsidiary Guarantors").
Non-guarantor subsidiaries, individually and in the aggregate, are
inconsequential to the Company. The following is summarized financial
information of the Subsidiary Guarantors as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996. Full
financial statements of the Subsidiary Guarantors are not presented because
management believes they are not material to investors.

                                      F-13




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)

                                                   December 31,
                                             -----------------------
                                               1996          1995
                                               ----          ----
 Current assets  ......................      $230,024     $244,547
 Noncurrent assets  ...................       547,219      864,351

 Current liabilities   ................        61,383       71,828
 Noncurrent liabilities   .............       290,980      682,805
 Stockholder's equity  ................       424,880      354,265

                                 For the Years Ended December 31,
                             ----------------------------------------
                                 1996           1995         1994
                                 ----           ----         ----
 Net revenues    .........     $ 892,805      $930,472    $923,205
 Cost of services   ......       566,126       587,100     581,397
 Net loss  ...............      (322,781)      (33,961)    (44,056)


11. STOCKHOLDERS' EQUITY

     Voting Cumulative Preferred Stock

     In conjunction with the Spin-Off Distribution, Quest Diagnostics issued to
Corning 1,000 shares of Voting Cumulative Preferred Stock, which have a $1
million aggregate liquidation preference. Dividends are at an annual rate of
11.75% and are payable quarterly. The Voting Cumulative Preferred Stock is
generally entitled to one vote per share, voting together as one class with the
Company's common stock. Whenever dividends on the Voting Cumulative Preferred
Stock are in arrears, no dividends or redemptions or purchases of shares may be
made with respect to any stock ranking junior as to dividends or liquidation to
the Voting Cumulative Preferred Stock until all such amounts have been paid. The
Voting Cumulative Preferred Stock is not convertible into shares of any other
class or series of stock of the Company and will be redeemable in whole or in
part, at the option of the Company at any time on or after December 31, 2002, at
specified redemption prices. On January 1, 2022, the Company must redeem all of
the then outstanding shares of the Voting Cumulative Preferred Stock at a
redemption price equal to the liquidation preference plus any unpaid dividends.
The Voting Cumulative Preferred Stock ranks senior to the Quest Diagnostics
common stock and the Series A Preferred Stock, discussed below.

     Series Preferred Stock

     Quest Diagnostics authorized the issuance of up to 10 million shares of
Series Preferred Stock, par value $1.00 per share. The Company's Board of
Directors has the authority to issue such shares without shareholder approval
and to determine the designations, preferences, rights, and restrictions of such
shares. Of the authorized shares, 600,000 shares have been designated Series A
Preferred Stock and 1,000 shares have been designated Voting Cumulative
Preferred Stock. No shares have been issued, other than the Voting Cumulative
Preferred Stock.

     Preferred Share Purchase Rights

     Each share of Quest Diagnostics common stock trades with a preferred share
purchase right which entitles shareholders to purchase one-hundredth of a share
of Series A Preferred Stock upon the occurrence of certain events. In addition,
the rights entitle shareholders to purchase shares of common stock at a
predefined price in the event a person or group acquires 20% or more of the
Company's outstanding common stock. The preferred share purchase rights expire
December 31, 2006.

12. STOCK OWNERSHIP AND COMPENSATION PLANS

     Prior to the Spin-Off Distribution, certain employees of Quest Diagnostics
were granted stock awards, including stock options to acquire Corning common
stock and restricted shares of Corning common stock, under various Corning
compensation programs. Company employees were also eligible to participate in
the Corning Employee Stock Purchase Plan. Expenses related to these programs
have been included in the Company's financial statements.

                                      F-14



                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)


     Coincident with the Spin-Off Distribution, with the exception of certain
options granted in 1995 and 1996, the number and exercise price of the Corning
options outstanding were adjusted and will remain options to purchase Corning
common stock. Additionally, certain options outstanding and held by Company
employees which were granted in 1995 and 1996 were canceled. On January 1, 1997,
the Company issued, in substitution for two-thirds of the canceled options,
approximately 725,000 options to purchase its common stock under the Employees
Equity Participation Program, discussed below, with exercise prices ranging from
$10.51 to $11.33 per share (the "Substitute Options"). The Substitute Options
become exercisable in installments starting four to five years from their
original grant dates in 1995 and 1996. The adjusted Corning stock options and
the Substitute Options have the same vesting provisions, option periods, and
other terms and conditions as the awards they replaced. Additionally, the
adjusted Corning stock options and the Substitute Options have the same ratio of
the exercise price per share to the market value per share, and the same
aggregate difference between market value and exercise price as the stock
options they replaced.

     Quest Diagnostics has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but follows Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock based compensation plans. Compensation expense was
immaterial for 1996 and 1995. If the Company had elected to recognize
compensation cost based on the fair value at the grant dates for awards under
those plans, consistent with the method prescribed by SFAS No. 123, the pro
forma impact on the Company's net loss would have been immaterial.

     The pro forma impact on net loss was estimated using the fair value of the
Corning stock options and the fair value of the Substitute Options. The fair
value of the Corning stock options is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions for 1996 and 1995: dividend yield of 2.3%; expected volatility of
24.5%; risk free interest rate of 6.5%; and an expected holding period of seven
years. The fair value of the Substitute Options was determined using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0.0%; expected volatility of 38.0%; risk free
interest rate of 5.5%; and an expected holding period of seven years.

     Employees Equity Participation Program

     The Employees Equity Participation Program (the "EEPP") consists of two
plans: (a) a stock option plan and (b) an incentive stock plan. The EEPP
provides for the grant to eligible employees of either non-qualified or
incentive stock options, or both, to purchase shares of Quest Diagnostics'
common stock at no less than fair market value on the date of grant. The EEPP
also allows for awards to eligible employees of shares, or the right to receive
shares, of Quest Diagnostics' common stock, the equivalent value in cash or a
combination thereof. Key executive, managerial and technical employees are
eligible to participate in the plan.

     Under the EEPP, the maximum number of shares of Quest Diagnostics' common
stock which may be optioned or granted is 3 million, excluding the Substitute
Options. No grants were made under the program in 1996.

     Employees Stock Purchase Plan

     Under the Company's Employees Stock Purchase Plan ("ESPP"), substantially
all employees can elect to have up to 10% of their annual wages withheld to
purchase Quest Diagnostics' common stock. The purchase price of the stock is 85%
of the lower of its beginning-of-quarter or end-of-quarter market price. Under
the ESPP, the maximum number of shares of Quest Diagnostics' common stock which
may be purchased by eligible employees is 2 million. No purchases were made in
1996.

     Employee Stock Ownership Plan

     Under the Company's employee stock ownership plan ("ESOP"), 778,550 shares
of Quest Diagnostics' common stock were issued for the account of all active
regular employees as of December 31, 1996. The cost of funding the ESOP was
$11.7 million, as discussed in Note 5.

                                      F-15




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)


13. EMPLOYEE RETIREMENT PLANS

     Defined Benefit Plans

     An acquired entity had a defined benefit pension plan which in 1990 was
frozen as to the further accrual of benefits. At December 31, 1996 the present
value of the projected benefit obligation using a discount rate of 7.5% was
$22.0 million and the fair value of the plan assets (publicly traded corporate
debt and equity securities, government obligations and money market funds) was
$24.2 million. Coincident with the Spin-Off Distribution, the Company
established a nonqualified, unfunded defined benefit plan for the benefit of key
employees and executive officers who are former Corning employees. The present
value of the projected benefit obligation of this plan was immaterial at
December 31, 1996.

     Defined Contribution Plan

     The Company maintains a defined contribution plan covering substantially
all of its employees. Company contributions to this plan aggregated $14.1
million, $12.0 million and $10.4 million for 1996, 1995 and 1994, respectively.

14. TRANSACTIONS WITH CORNING

     The Company, in the ordinary course of business, conducted a number of
transactions with Corning and its affiliates. The significant transactions
occurring during the years ended December 31, 1996, 1995 and 1994 are as
follows:

                                             1996          1995        1994
                                            -------      -------     -------
Interest expense on borrowings    ......    $72,861      $78,930     $55,835
Purchase of laboratory supplies   ......      8,893       11,261      11,607
Corporate fees  ........................      2,695        2,800       2,800

     In 1996, Corning contributed capital to the Company of $862.0 million. Of
this amount, $712.0 million was contributed primarily through the forgiveness of
certain intercompany indebtedness (see Note 9), $119.1 million through the
funding of the Damon settlement (see Note 15) and $30.9 million primarily
related to management's best estimate of amounts which are probable of being
received from Corning to satisfy the remaining indemnified government claims
(see Note 15).

     In 1994, capital contributions totaled $32.2 million. Capital contributions
consisted primarily of Corning contributing capital of $25.2 million through the
reduction of revolving credit notes and the contribution of a business acquired
with Corning stock and former S-Corporation shareholders contributing capital
approximating $4.4 million.

15. COMMITMENTS AND CONTINGENCIES

     Minimum rental commitments under noncancelable operating leases, primarily
real estate, in effect at December 31, 1996 are as follows:

          Year ending December 31,
          1997    .................................     $ 48,886
          1998    .................................       38,831
          1999    .................................       28,978
          2000    .................................       21,979
          2001    .................................       18,850
          2002 and thereafter    ..................      140,968
                                                        --------
          Minimum lease payments    ...............      298,492
          Noncancelable sub-lease payments   ......      (55,230)
                                                        --------
          Net minimum lease payments   ............     $243,262
                                                        ========

     Operating lease rental expense for 1996, 1995 and 1994 aggregated $49.7
million, $46.9 million and $49.4 million, respectively.

                                      F-16




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)


     The Company is substantially self-insured for all casualty losses and
maintains excess coverage primarily on a claims made basis. The basis for the
insurance reserve at December 31, 1996 and 1995 is the actuarially determined
projected losses for each program (within the self-insured retention) based upon
the Company's loss experience.

     The Company has entered into several settlement agreements with various
governmental and private payors during recent years. At present, a government
investigation of certain practices by Nichols prior to its acquisition in 1994
is ongoing. In the second quarter of 1996, the DOJ notified the Company that it
had taken issue with certain payments received by Damon from federally funded
healthcare programs prior to its acquisition by the Company. Specifically, in
late April 1996, the DOJ for the first time disclosed to the Company the total
amount of the claims that it proposed to assert against Damon. The government
presented its claim for the base recoupment (by lab, by test, by year) and
discussed various theories on which criminal and civil payments of up to three
times the various base recoupment amounts could be assessed. During May and
June, management analyzed the government's claim in detail. Management and
outside counsel then believed that there were meritorious defenses to a number
of the claims for recoupments and potential payments in excess of the base
recoupment and these were presented to the government in early July 1996.

     At the end of the second quarter, the Company recorded a $46.0 million
charge to increase its reserves to $72.0 million, to equal management's estimate
of the low end of the range of amounts necessary to satisfy claims related to
Damon and other related and similar investigations. With respect to the Damon
investigation, the low end of the range was estimated to be equal to the base
recoupment sought by the government reflecting the basis on which the Company
had settled an earlier claim with the government in 1993. The low end of the
range for the Nichols and other government investigations was based on the base
recoupment estimated by management from internal investigations. Reserves for
pending private claims were estimated based on the Company's experience in
settling private claims following its 1993 government settlement.

     Management considered the potential for some payments to be assessed in
excess of the base recoupment in estimating its liability at June 30, 1996.
Management estimated that the range of reasonably possible amounts necessary to
satisfy claims related to Damon and other related and similar investigations was
between $72.0 million and approximately $300.0 million at June 30, 1996, and,
because no amount in the range was more probable than other amounts, the Company
increased its reserves to equal the low end of the range. This position was
based on the Company's experience with the government in 1993, in which the
recovery in excess of base recoupments was not significant, the government's
representatives' invitation to present information and arguments to them and
their stated intention not to consider the issue of payment multiples until the
base recoupment amount had been established, and management's and counsel's
belief that it had meritorious factual, legal and equitable defenses and
mitigations of the government claims.

     Management was aware that similar investigations of other clinical
laboratories in the industry were ongoing. Other than the Company's 1993
settlement, the only other similar settlement known to management was the 1992
civil and criminal Medicare and Medicaid settlement by a major competitor for
approximately $111 million. The Company had reviewed the publicly-available
information about that settlement, including press releases and the settlement
agreement. The competitor's settlement agreement did not specify whether the
civil settlement included substantial payments to be assessed in excess of the
base recoupment. It was believed by the Company that it did not. Although the
competitor and its chief executive officer each pleaded guilty to criminal
charges, the fine was only $1 million for conduct that was contemporaneous with,
and considered by the Company's management and its counsel to be more egregious
than, that of Damon.

     During the third quarter 1996, management met with the government several
times to evaluate the substance of the government's allegations. During a
meeting with the government in mid-August, further information and legal
arguments were exchanged. Importantly, at this time, the government for the
first time began to disclose to the Company and its outside counsel grand jury
testimony and other evidence that was inconsistent with certain of the Company's
defenses.

     The final settlement discussions began in late September. The government
responded to and rejected many of the Company's defenses and made its tentative
final settlement offer, which included significant payments in

                                      F-17




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
               (dollars in thousands, unless otherwise indicated)

excess of base recoupments, to Quest Diagnostics. Negotiations on the final
settlement amount and terms (including releases from various federal and state
payors, compliance program requirements, etc.) continued into early October and
ended with the settlement agreement dated October 9, 1996. The settlement
included base recoupments of approximately $40 million (which did not differ
materially from management's estimate at June 30, 1996) and total criminal and
civil payments in excess of base recoupments of approximately $79 million. This
settlement concludes all federal and Medicaid civil claims relating to the
billing by Damon of certain blood tests to Medicare and Medicaid patients and
all criminal matters relating to Damon being investigated by the DOJ.
Additionally, the Company entered into a separate settlement agreement with the
DOJ totaling $6.9 million related to billings of hematology indices provided
with hematology test results. This claim was paid during the fourth quarter of
1996.

     As a result of these settlement agreements, management reassessed the level
of reserves recorded for other asserted and unasserted claims related to the
Damon and other similar government investigations, including the investigation
of billing practices by Nichols prior to its acquisition by the Company in 1994.
The Company recorded a charge totaling $142.0 million in the third quarter 1996
to establish additional reserves to provide for the above settlement agreements
and management's best estimate of potential amounts which could be required to
satisfy the remaining claims. Based on information currently available to the
Company, management does not believe that the exposure to claims in excess of
recorded claims is material. Although the Damon settlement was substantially in
excess of amounts anticipated by management, it was primarily due to the civil
and criminal payments in excess of the base recoupment assessed by the
government and the Company has now increased its reserves for asserted and
unasserted claims to approximate the amount that may be required to settle the
Nichols and other government civil claims taking into account the basis for the
Damon civil settlement. In addition, although there is the possibility that the
Company could be excluded from participation in Medicare and Medicaid programs,
management believes that the possibility is remote as a result of the Damon
settlement, which included the Company signing a Corporate Integrity Agreement,
and due to the fact that the government has publicly commended the Company for
its cooperation in the investigation and cited Quest Diagnostics as having the
"model" compliance program for the industry.

     During the fourth quarter 1996, Corning contributed $119.1 million to the
Company's capital to fund the Damon settlement. Additionally, Corning has agreed
to indemnify the Company against all settlements for any governmental claims
relating to billing practices of the Company and its predecessors that were
pending on December 31, 1996. Corning also agreed to indemnify the Company for
50% of the aggregate of all settlement payments made by the Company that are in
excess of $42 million to private parties that relate to indemnified or
previously settled governmental claims (such as the Damon settlement) for
services provided prior to January 1, 1997; however, the indemnification of
private party claims will not exceed $25 million and will be paid to the Company
net of anticipated tax benefits to be realized by the Company. Such
indemnification does not cover any non-governmental claims settled after
December 31, 2001. Coincident with the Spin-Off Distribution, the Company
recorded a receivable and a contribution of capital from Corning of $22.4
million which is equal to management's best estimate of amounts which are
probable of being received from Corning to satisfy the remaining indemnified
governmental claims on an after-tax basis.

     At December 31, 1996, recorded reserves approximated $80.6 million,
including $41.2 million in other long-term liabilities. Although management
believes that established reserves for both indemnified and non-indemnified
claims are sufficient, it is possible that additional information (such as the
indication by the government of criminal activity, additional tests being
questioned or other changes in the government's theories of wrongdoing) may
become available which may cause the final resolution of these matters to exceed
established reserves by an amount which could be material to the Company's
results of operations and, for non-indemnified claims, the Company's cash flows
in the period in which such claims are settled. The Company does not believe
that these issues will have a material adverse effect on its overall financial
condition.

                                      F-18




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
              (dollars in thousands, unless otherwise indicated)
                    Quarterly Operating Results (unaudited)



                                       First       Second        Third      Fourth                Total
                                      Quarter     Quarter       Quarter     Quarter                Year
                                    ----------   ----------    ----------  ---------              ------
                                                                                  
1996
- ----
Net revenues  ...................   $401,395     $424,543      $ 405,352     $ 385,006           $1,616,296 
Gross profit  ...................    154,277      158,242        149,962       142,940              605,421
Loss before taxes   .............     (1,642)     (37,518)(a)   (162,989)(a)  (474,053)(a),(b)     (676,202)
Net loss   ......................     (1,511)     (37,922)      (119,436)     (467,091)            (625,960)

1995
- ----
Net revenues  ...................   $417,662     $421,853      $ 399,959     $ 389,914           $1,629,388
Gross profit  ...................    168,606      175,793        159,091       145,666              649,156 
Income (loss) before taxes   ....     19,827(c)    (5,088)(c)    (56,405)(d)   (15,902)(c)          (57,568)
Net income (loss)   .............      4,423       (3,852)       (38,595)      (14,028)             (52,052)
                                                                                                           



(a) Includes impact of restructuring and other special charges of $46.0 million,
    $155.7 million, and $21.9 million, in the second quarter, third quarter and
    fourth quarter, respectively, which are discussed in Notes 5 and 15 to the
    Consolidated Financial Statements.

(b) Includes a charge of $445.0 million to reflect the write-down of intangible
    assets as discussed in Note 2.

(c) Includes impact of restructuring and other special charges of $12.8 million,
    $33.0 million and $4.8 million in the first quarter, second quarter and
    fourth quarter, respectively, which are discussed in Note 5 to the
    Consolidated Financial Statements.

(d) Includes a $62.0 million charge to increase the accounts receivable reserves
    and allowances resulting from billing systems implementation and integration
    problems at certain laboratories, and increased regulatory requirements.

                                      F-19




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                 SCHEDULE II--VALUATION ACCOUNTS AND RESERVES
                                (in thousands)



                                              Balance at                     Net Deductions      Balance at
                                               1-1-96         Additions        and Other         12-31-96
                                             -------------   ------------   -----------------   ------------
                                                                                    
Year ended December 31, 1996
 Doubtful accounts and allowances   ......    $147,947        $111,238       $144,167            $115,018




                                              Balance at                     Net Deductions      Balance at
                                               1-1-95         Additions        and Other         12-31-95
                                             -------------   ------------   -----------------   ------------
                                                                                    
Year ended December 31, 1995
 Doubtful accounts and allowances   ......    74,829          152,590        79,472              147,947




                                              Balance at                     Net Deductions      Balance at
                                               1-1-94         Additions        and Other         12-31-94
                                             -------------   ------------   -----------------   ------------
                                                                                    
Year ended December 31, 1994
 Doubtful accounts and allowances   ......    71,991          59,480         56,642              74,829


                                      F-20

EX-10.14

                              Employment Agreement
                                   
                                     between

                               Kenneth W. Freeman
                                        &
                   Corning Clinical Laboratories, Incorporated

    This EMPLOYMENT AGREEMENT (the "Agreement") is entered into between CORNING
CLINICAL LABORATORIES, INC. (the "Company"), a Delaware corporation having its
principal place of business at One Malcolm Avenue, Teterboro, NJ 07608, and
KENNETH W. FREEMAN (the "Executive").

    WHEREAS, Executive has been employed by the Company as President and Chief
Executive Officer; and WHEREAS, the Company considers the services of the
Executive to be unique and essential to the success of the Company's business;
and

    WHEREAS, it is anticipated that the Company will be subject to a tax-free
spin-off by Corning Incorporated ("Corning") (the "Spin-off") and the parties
desire that the Executive continue as President and Chief Executive Officer of
the Company following the Spin-off; and

    WHEREAS, the Company and the Executive now wish to enter into an agreement
of employment that will constitute the sole and exclusive agreement relating to
the employment of Executive by the Company on the terms and conditions set forth
herein.



    NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants, terms and conditions set forth herein, and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is hereby agreed between the Corporation and the Executive as follows:

1.       Employment: The Company shall continue to employ the Executive in a
         full-time capacity in the position set forth in this paragraph, and the
         Executive shall continue to accept such employment upon the terms and
         conditions set forth herein. Such employment shall be in the capacity
         of President and Chief Executive Officer of the Company, and as a
         Director and Chairman of the Board of Directors of the Company,
         reporting directly to the Board. The Company shall nominate the
         Executive as a Director of the Company and shall use its best efforts
         to have the Executive elected and re-elected to the Board for the
         duration of the "Employment Term" (as hereinafter defined).

2.       Term: Unless earlier terminated pursuant to Section (9) hereof, the
         term of employment under this agreement shall commence on the later of
         January 1, 1997 or the date upon which the Spin-off is consummated (the
         "Effective Date"), and shall continue through December 31, 1999 (the
         "Employment Term"). On or before June 1, 1999, the Company and the
         Executive agree to use their good faith efforts to negotiate a renewal
         of this Agreement (the "Renewal Agreement"), on mutually satisfactory
         terms and conditions. In the event that the Company and Executive are
         unable to agree to a Renewal Agreement, and subject to continued
         service by the Executive through December 31, 1999 (absent any
         termination by the Company without Cause, or termination by the
         Executive for Good Reason, or as a result of the death or disability

                                       2


         of the Executive, in each case giving rise to payments pursuant to
         Section 12 hereof) (each individually a "Section 12 Event"), then upon
         the expiration of this Agreement on December 31, 1999, and in lieu of
         any other amounts otherwise payable to the Executive pursuant to
         Section 12 hereof, the Executive shall receive the "Non-Renewal
         Payment" (as hereinafter defined). "Non-Renewal Payment" shall mean (i)
         a lump-sum cash payment equal to two times the highest annual cash
         compensation paid to the Executive during the Employment Term, and (ii)
         reimbursed health benefits under COBRA for eighteen months for the
         Executive and his family following the expiration of this Agreement.
         Notwithstanding the foregoing, the Executive shall not be entitled to
         receive the Non-Renewal Payment if upon the expiration of the
         Employment Term (and absent any Section 12 Event) the Executive accepts
         an executive position at Corning on terms and conditions satisfactory
         to the Executive.

3.       Duties: During the Employment Term, the Executive shall, subject to the
         supervising powers of the Board, have those powers and duties
         consistent with his position as Chief Executive Officer and Chairman,
         which powers shall in all cases include, without limitation, the power
         of supervision and control over, and responsibility for, the general
         management and operations of the Company. Executive agrees to devote
         substantially all his working time and attention to the business of the
         Company. The Executive shall not, without the prior written consent of
         the Company's Board of Directors, be directly or indirectly engaged in
         any other trade, business or occupation for compensation requiring his
         personal services during the Employment Term. Nothing in this agreement
         shall preclude the Executive from: (i) engaging in charitable and
         community activities or 

                                        3


         from managing his personal investments, or (ii) serving as a member of
         the board of directors of an unaffiliated company not in competition
         with the Company, subject however, in each such case of board
         membership, to approval by the Company's Board of Directors (not to be
         unreasonably withheld).

4.       Place of Performance: The principal place of employment of the
         Executive shall be at the Company's principal executive offices in
         Teterboro, New Jersey, or such other location as may be agreed to by
         the Board and Executive.

5.       Cash Compensation: Executive shall be compensated for services rendered
         during the Employment Term as follows:

         (a) Base Salary: Executive shall be compensated at an annual base
         salary of no less than $500,000 (the base salary, at the rate in effect
         from time to time, is hereinafter referred to as the "Base Salary").
         The Company's Board of Directors shall review and may, if appropriate,
         at its discretion, increase this annual base salary effective the first
         day of any future new year during the Employment Term; provided that
         the Base Salary shall be increased annually to reflect ordinary salary
         actions generally granted to other Company executives. The Base Salary
         shall be payable in equal semi-monthly installments.

         (b) Variable (bonus) Pay: In addition to the Base Salary provided for
         in Section 5(a) above, the Company will provide annual bonus awards to
         Executive under its Variable Compensation (VC) program in accordance
         with the plan and financial performance targets as established by the
         Company's shareholders and/or Board of Directors. During the Employment
         Term, Executive's target incentive opportunity under the Company's VC

                                        4


         program will be no less than 65% of Base Salary as in effect at the
         time such target incentive opportunity is established.

6.       Equity/Awards: Executive may be awarded additional compensation (such
         as stock options or restricted stock) (collectively the "Annual 
         Incentive Awards") pursuant to the present or any future incentive 
         compensation or long-term compensation program established for 
         the senior officers of the Company (collectively the "Incentive
         Compensation Programs"), which, in the sole judgment of the Company's
         Board of Directors, is appropriate for the position occupied by
         Executive and his performance therein; provided that no executive,
         consultant or individual shall receive any annual award under the
         Incentive Compensation Programs in excess of the annual award (if any)
         made to the Executive, without Executive's express written consent.
         Compensation granted under such plans will be subject to the actual
         provisions and conditions applicable to such plans.

7.       Initial Incentive Awards:

         (a) The Executive is hereby granted (i) options on 180,000 shares of
         common stock of the Company ("Common Stock") at an exercise price equal
         to the lesser of $12.50 or the fair market value of the Common Stock as
         of the effective date of the Spin-Off (the "Exercise Price"); and (ii)
         90,000 shares of the Company's common stock (collectively the "Initial
         Incentive Awards"). The Initial Incentive Awards shall be subject to
         the general terms and conditions of the incentive plans under which
         they were granted subject in each case to any provisions of this
         Agreement providing for accelerated vesting.

                                       5

         (b) The Executive's rights with respect to certain previously granted
         incentive awards in Corning shall be converted into (i) options on
         185,600 shares of Common Stock (representing first and second year
         CPP-6 stock options under Corning's long-term plan), and (ii) 55,085
         shares of Common Stock (the "CCL Career Shares") (such CCL Career
         Shares to be subject to the vesting provisions set forth in Annex A
         hereto, absent accelerated vesting under the terms of this Agreement)
         (collectively "Converted Incentive Awards").

         (c) The final number of Initial Incentive Awards and Converted
         Incentive Awards granted to the Executive shall be adjusted pro rata
         upward or downward, as the case may be, depending on the appropriate
         pricing formula finally adopted with the approval of the Executive, and
         the extent to which the price of the Common Stock on the effective date
         of the Spin-off is less than or greater than $12.50 per share.

8.       Employee Benefits:

         (a) General Provisions: Except as expressly provided in this Agreement,
         Executive shall be eligible to participate in all employee benefit and
         welfare plans offered by the Company (e.g. Life Insurance, Medical &
         Dental Insurance, Travel, Accident, STD<D, Flexible Spending
         Accounts, Regular and Supplemental AD&D, Optional/Supplemental Life
         Insurance, Investment Plan - 401k, Employee Stock Purchase Plan and
         other personal benefit plans of the Company) on a basis which is no
         less favorable to the Executive than that made available to other
         senior officers of the Company.

                                       6


         (b) Transferred Executive Supplemental Retirement Plan: (i) Executive
         will be eligible to participate in the "Transferred Executive
         Supplemental Retirement Plan" (the "SRP") established by the Company
         for certain executives of the Company, effective upon the Effective
         Date. Under the terms of such plan, Executive will be entitled to
         receive a nonqualified retirement benefit in accordance with the terms
         and provisions of the plan, as administered by the Company's Board of
         Directors, subject to the terms of this Agreement.

               (ii) Notwithstanding any terms of the SRP to the contrary,
          Executive shall be entitled to receive a retirement pension benefit
          under this Agreement (the "Company Non-Qualified Benefit") as provided
          for below. The Company Non-Qualified Benefit shall be an annuity
          commencing on the later of (i) his date of termination or (ii) the
          Executive's 57th birthday (the "SRP Commencement Date"), and shall be
          (1) fully equivalent in value to the pension benefits Executive would
          have received under the Corning non-qualified and qualified pension
          plans as in effect on the date of this Agreement (including all
          across-the-board plan improvements or benefit decreases and/or
          successor plans, in each case adopted after the date of this Agreement
          and applicable to the class of executives of which the Executive was a
          part while employed by Corning), (2) based on Executive's combined
          years of service with the Company and Corning (but in any case not
          less than 34 years of service), (3) computed on an unreduced basis as
          if Executive were a retiree, rather than on a deferred vested basis,
          and (4) based on all compensation earned by Executive from Corning and
          Company through to the SRP Commencement Date (provided that for
          purposes of such computation, Executive's

                                       7


         benefit eligible compensation shall be his 1997 Base Salary and Bonus
         and such amount increased at 5% per annum for subsequent years);
         provided that if the Executive terminates his employment under this
         Agreement without Good Reason or the Company terminates the Executive's
         employment under this Agreement with Cause, then the pension benefits
         payable to the Executive under the SRP shall be determined based only
         on actual years of service and compensation through to the Termination
         Date.

               (iii) On or before the Effective Date, the Company shall deliver
          to Executive a standby letter of credit in the amount of $5.4 million,
          in form acceptable to Executive and his counsel and with an evergreen
          term of no less than eighteen (18) months, to ensure that the
          Company's obligation under the SRP and the Company Non-Qualified
          Benefit are fully funded and secured on an after-tax basis to the
          Executive (the "SRP LC"). As of the first day of any calendar year
          thereafter (the "Adjustment Date") as of which the Company's pension
          liability (on an after-tax basis) to Executive as computed hereunder,
          as determined by an actuary acceptable to Executive on or before
          November 1 of the preceding calendar year, has a present value that
          exceeds by more than $250,000 the SRP LC (on an after-tax basis), the
          Company shall, within 60 days of the Adjustment Date, increase the
          amount of the SRP LC or secure and deliver to the Executive an
          additional letter of credit in form acceptable to the Executive and
          his counsel so that, in the aggregate, the letter(s) of credit then in
          place are not less than the present value of such liability (on an
          after-tax basis).

               (iv) Immediately upon (x) the termination of Executive's
          employment with the Company for any reason, including, without
          limitation, failure to negotiate a Renewal 

                                       8


         Agreement (and other than a termination of Executive's employment by
         the Company for Cause or by the Executive without Good Reason), (y)
         failure of the Company to renew the SRP LC or increase the amount of
         the SRP LC or secure an additional letter of credit, as provided herein
         (in each case, without the consent of the Executive not to do so), or
         (z) upon the Executive's retirement, the Executive may draw on the SRP
         LC; it being understood that the Executive may elect to draw on the SRP
         LC (and any supplemental letter of credit) pursuant to subclause (y)
         above and continue his employment hereunder.

               (v) Amounts payable to the Executive in satisfaction of the
          Company Non-Qualified Benefit shall be reduced by (i) any qualified
          plan benefits actually received by Executive under Corning's qualified
          plan ("Qualified Corning Benefits") and (ii) any non-qualified
          benefits to the extent funded pursuant to Section III (c) of the
          Transition Agreement, dated as of December 18, 1996 between Corning
          and the Executive, and actually received by the Executive ("Section
          III (c) Benefits"), and any amounts realized by the Executive upon
          drawing upon the SRP LC (or any supplemental letter of credit) shall
          be adjusted to take into account such Qualified Corning Benefits and
          Section III (c) Benefits.

         (c) Relocation: The Company shall reimburse the Executive up to $10,000
         per month (grossed-up for tax purposes at a rate of 45%) until the
         earlier of: (i) suitable housing in the New York Metropolitan area
         being obtained by the Executive, or (ii) June 30, 1998. lf the
         Executive has not utilized Corning's relocation benefits prior to the
         Effective Date, the Company shall extend equal benefits (to the extent
         the Company's

                                       9

         relocation policies are of lesser value to the Executive) for
         relocating the Executive and his family from the Corning, New York area
         to the New York City Metropolitan area. In addition, the Company will
         provide for an interest-free housing loan to the Executive in the
         amount of $400,000, all of which shall be forgiven in five (5) annual
         installments at each annual anniversary of this Agreement's Effective
         Date. Any compensation income to Executive resulting from the loan
         forgiveness or interest-free features of this loan will be grossed-up
         for tax purposes at the Executive's effective tax rate.


         (d) Vacation and Sick Leave: Executive shall be entitled to vacation
         and sick leave in accordance with the vacation and sick leave policies
         adopted by the Company from time to time, provided that the Executive
         shall be entitled to no less than five (5) weeks of paid vacation each
         calendar year. Any vacation shall be at such times and for such periods
         as shall be mutually agreed upon between the Executive and the Company.
         The Executive shall be entitled to all public holidays observed by the
         Company.

9.       Applicable Taxes: There shall be deducted from any compensation
         payments made under this Agreement any federal, state and local taxes
         or other amounts required to be withheld by any entity having
         jurisdiction over the matter.

10.      Miscellaneous Benefits: During the Employment Term, the Company shall
         provide the Executive with the following additional benefits: 

         (a) Business Travel and Expenses: Executive shall be reimbursed by the
         Company for reasonable travel and other business expenses, as approved
         by the Company, which are

                                       10

         incurred and accounted for in accordance with the Company's normal
         practices and procedures for reimbursement of expenses.

         (b) Legal Fees: The Company shall reimburse Executive for reasonable
         legal fees and disbursements incurred in connection with the
         negotiation, preparation and implementation of this Agreement (grossed
         up for tax purposes at a rate of 45%).

         (c) Clubs and Memberships: The Company will reimburse Executive for
         annual and one-time costs associated with memberships for the Executive
         and his family in a country club and city club (grossed-up for tax
         purposes at a rate of 45%).

         (d) Executive Driver: In order to ensure the accessibility and safety
         of the Executive during the Employment Term, the Company will reimburse
         Executive for the costs of an executive driver comparable to the costs
         presently incurred on behalf of the Executive, subject to annual COLA
         adjustments (grossed up for tax purposes at a rate of 45%).

         (e) Use of Aircraft: In order to ensure the accessibility and safety of
         the Executive during the Employment Term, the Company shall reimburse
         Executive for all costs associated with the Executive's use of aircraft
         in accordance with the Company's policies, whether for business
         purposes or for personal reasons, whether the aircraft is being
         chartered or is Company-owned. Any payments under this provision which
         are to be treated as taxable compensation to the Executive (in
         accordance with IRS rules and regulations) will be grossed-up for tax
         purposes at a rate of 45%.

         (f) Automobile Expenses: The Company will provide Executive with a
         gross automobile allowance of $1,070 per month (or other greater
         monthly amount as is

                                       11

         provided to other senior executives of the Company) in accordance with
         the provisions of the Company's auto allowance program.

         (g) Financial Counseling and Legal Services: The Company shall
         reimburse the Executive for financial counseling, tax preparation and
         legal services (grossed-up for tax purposes at a rate of 45%) in an
         annual amount comparable to that paid on behalf of similarly situated
         senior executives, but in no event less than $25,000/year.

         (h) Non-Exclusivity: Nothing in this Agreement shall prevent the
         Executive from being entitled to receive any additional compensation or
         benefits as approved by the Company's Board of Directors.

11.      Termination of Employment: Notwithstanding any other provisions of this
         Agreement to the contrary, the employment of the Executive pursuant to
         this Agreement may be terminated as follows:

         (a) Termination by the Company For Cause: Executive may be terminated
         for "Cause" by the Company as provided below. As used herein, the term
         "Cause" shall mean (i) conviction of the Executive of a felony; (ii) if
         Executive is not disabled (as defined below), a willful failure or
         refusal to substantially perform the duties and services specified
         herein for a period of not less than thirty (30) days, and after having
         been afforded (x) written notice of any alleged failure to
         substantially perform such duties and services and (y) a reasonable
         opportunity to cure any alleged failure; (iii) the commission by the
         Executive of fraud or theft against, or embezzlement from, the Company;
         or (iv) gross misconduct intentionally undertaken by the Executive that
         is demonstrably and materially injurious to the operations of the
         Company. For purposes of this section, no

                                       12

         act or failure to act on Executive's part shall be considered to be
         reason for termination for Cause if done, or omitted to be done, by
         Executive in good faith and with the reasonable belief that the action
         or omission was in the best interests of the Company. Cause shall not
         exist unless and until there shall have been delivered to the Executive
         a copy of a resolution, duly adopted by the affirmative vote of not
         less than two thirds of the entire membership of the Board at a meeting
         of the Board held for the purpose (after ten (10) days' prior written
         notice to the Executive of such meeting and the purpose thereof and an
         opportunity for him, together with his counsel, to be heard before the
         Board at such meeting), of finding that in the good faith opinion of
         the Board, the Executive was guilty of the conduct set forth above in
         this Section 11(a) and specifying the particulars thereof in detail. As
         set forth more fully in Section 11(f) hereof, the "Date of Termination"
         shall be the date specified in the "Notice of Termination;" provided,
         however, that in the case of a termination for Cause under clause (ii)
         above, the Date of Termination shall not be earlier than 30 days after
         delivery of the Notice of Termination. Anything herein to the contrary
         notwithstanding, if, following a termination of the Executive's
         employment by the Company for Cause based upon the conviction of the
         Executive for a felony, such conviction is overturned in a final
         determination on appeal, the Executive shall be entitled to the
         payments and the economic equivalent of the benefits the Executive
         would have received if his employment had been terminated by the
         Company without Cause.

         (b) Termination By the Company For Disability: At the sole discretion
         of the Company's Board of Directors, Executive may be terminated if the
         Executive is disabled (as defined below) and shall have been absent
         from his duties with the Company on a full-time basis for

                                       13


         one hundred and twenty (120) consecutive days, and if within thirty
         (30) days after written Notice of Termination is given by the Company
         to the Executive, the Executive shall not have resumed the performance
         of his duties hereunder on a full-time basis. In this event, the date
         of termination shall be thirty (30) days after Notice of Termination is
         given by the Company (provided that the Executive shall not have
         returned to the full-time performance of his duties). As used herein,
         the term "disabled" shall mean that the Executive is unable, as a
         result of a medically determinable physical or mental impairment, to
         perform the duties and services of his position.

         (c) Death: The Executive's employment shall terminate upon his death,
         and the date of his death shall be the Date of Termination for purposes
         of this Agreement.

         (d) Termination by the Executive for Good Reason: The Executive may
         terminate his employment hereunder for "Good Reason," provided that the
         Executive shall have delivered a Notice of Termination within ninety
         (90) days after the occurrence of the event of Good Reason giving rise
         to such termination. For purposes of this Agreement, "Good Reason"
         shall mean the occurrence of one or more of the following
         circumstances, without the Executive's express written consent, which
         are not remedied by the Company with thirty (30) days of receipt of the
         Executive's Notice of Termination:

                       (i) an assignment to the Executive of any duties
                   materially inconsistent with his positions, duties,
                   responsibilities and status with the Company, or any material
                   limitation of the powers of the Executive not consistent with
                   the powers of the Executive contemplated by Section (3)
                   hereof;

                                       14


                       (ii) any removal of the Executive from, or any failure to
                   re-elect the Executive to, the positions specified in Section
                   (1) of this Agreement;

                       (iii) the change of the Executive's title as specified by
                   Section (1) of this Agreement;

                       (iv) the Company's requiring the Executive without his
                   written consent to be based at any office or location more
                   than 75 miles commuting distance from the location as
                   described in Section (4) of this Agreement;

                       (v) a reduction in the Executive's Base Salary or
                   Variable Compensation bonus opportunity as in effect from
                   time to time, without his written consent;

                       (vi) the failure of the Company to continue in effect any
                   Benefit Plan that was in effect on the date hereof or provide
                   the Executive with equivalent benefits, without his written
                   consent;

                       (vii) the failure of the Company, within not more than
                   thirty (30) days after the Effective Date, to have the
                   Executive duly elected as a member of its Board of Directors
                   and to maintain the Executive in such position at all times
                   thereafter, for so long as he shall serve as Chief Executive
                   Officer of the Company;

                       (viii) any other material breach by the Company of this
                   Agreement;

                       (ix) a Change in Control;

                       (x) a failure of the Company to secure a written
                   assumption by any successor company as provided for in
                   Section 15(g) hereof; or

                                       15


                       (xi) the failure of the Company to secure, maintain,
                   renew or supplement the SRP LC (and any supplemental letter
                   of credit) as provided for in Section 8(b)(iii) hereof. In
                   the event of a termination for Good Reason, the Date of
                   Termination shall be the date specified in the Notice of
                   Termination, and shall be more than thirty (30) days after
                   the Notice of Termination.

         In the event of a termination for Good Reason pursuant to Section
         11(d)(xi) hereof, the Executive shall retain the right to draw on the
         SRP LC (and any supplemental letter of credit) as provided for in
         Section 8(b) hereof.

         (e) Other Terminations: Notwithstanding the foregoing, the Executive
         may terminate his employment at any time, subject to the provisions of
         Section (11)(f) hereof. If the Executive's employment is terminated
         hereunder for any reason other than as set forth in Sections
         (11)(a)-(11)(d) hereof, the date on which a Notice of Termination is
         given or any later date (within 30 days) set forth in such Notice of
         Termination shall be the Date of Termination.

         (f) Notice of Termination: Any termination of the Executive's
         employment hereunder by the Company or by the Executive shall be
         communicated by written Notice of Termination to the other party
         hereto. For purposes of this Agreement, a "Notice of Termination" shall
         mean a notice which shall indicate the specific termination provision
         in this Agreement relied upon and shall set forth in reasonable detail
         the facts and circumstances claimed to provide a basis for termination
         of the Executive's employment under the provisions so indicated.


                                       16


12.      Compensation upon Termination or during Disability:

         (a) Disability Period. During any period during the Employment Term
         that the Executive fails to perform his duties hereunder as a result of
         incapacity due to physical or mental illness ("Disability Period"), the
         Executive shall continue to (i) receive his full Base Salary and bonus
         otherwise payable for that period of the Employment Term including the
         Disability Period and (ii) participate in the Benefit Plans. Such
         payments made to the Executive during the Disability Period shall be
         reduced by the sum of the amounts, if any, payable to the Executive at
         or prior to the time of any such payment under disability benefit plans
         of the Company or under the Social Security disability insurance
         program, where such amounts were not previously applied to reduce any
         such payment.

         (b) Death. If the Executive's employment hereunder is terminated as a
         result of his death, then: (i) the Company shall pay the Executive's
         estate or designated beneficiary, as soon as practicable after the Date
         of Termination, a lump sum payment equal to (1) any Base Salary
         installments due in the month of death and any reimbursable expenses
         accrued or owing the Executive hereunder as of the Date of Termination,
         (2) a pro rata portion of any bonus owed to the Executive for that
         portion of the Employment Term through to the Date of Termination, and
         (3) the greater of (x) Base Salary payments otherwise payable for the
         remainder of the Employment Term or (y) two (2) times the average
         annual Base Salary paid to the Executive prior to his death (the
         payments provided for in subclauses (x) and (y) are the "Reduced
         Severance Benefits"), and (ii) the Initial Incentive Awards, Converted
         Incentive Awards, and all other Annual Incentive Awards granted to the
         Executive shall


                                       17

         immediately become fully vested as of the Date of Termination, subject
         to such exercise periods as shall be provided for under the terms of
         the initial grant.

         (c) Disability. If the Executive's employment hereunder is terminated
         as a result of Disability, then (i) the Company shall pay the
         Executive, as soon as practicable after the Date of Termination (1) any
         Base Salary and any reimbursable expenses accrued or owing the
         Executive hereunder as of the Date of Termination, (2) a pro rata
         portion of any bonus owed to the Executive for that portion of the
         Employment Term through to the Date of Termination, and (3) the
         "Reduced Severance Benefits;" and (ii) the Initial Incentive Awards,
         Converted Incentive Awards, and all other Annual Incentive Awards
         granted to the Executive shall immediately become fully vested as of
         the Date of Termination, subject to such exercise periods as shall be
         provided for under the terms of the initial grant.

         (d) Termination for Cause or by the Executive other than for Good
         Reason. If the Executive's employment hereunder is terminated by the
         Company for Cause or by the Executive (other than for Good Reason),
         then (i) the Company shall pay the Executive, as soon as practicable
         after the Date of Termination, any Base Salary and any reimbursable
         expenses accrued or owing the Executive hereunder for services as of
         the Date of Termination; and (ii) the Executive shall immediately
         forfeit any unvested CCL Career Shares. In the event of termination by
         the Company for Cause, the Executive shall have the right to exercise
         the vested unexercised portion of any Initial Incentive Awards,
         Converted Incentive Awards or any other Annual Incentive Awards prior
         to the Date of Termination, and the unexercised portion of any such
         awards shall be forfeited thereafter. In the event of termination by
         the Executive other than for Good Reason, the Executive shall have the


                                       18


         right to exercise the vested unexercised portion of any Initial
         Incentive Awards, Converted Incentive Awards or any other Annual
         Incentive Awards then held by the Executive for such period following
         the Date of Termination as shall be provided for under the terms of the
         initial grant, and the unexercised portion of any such awards shall be
         forfeited thereafter.

         (e) Termination by Company Without Cause or by Executive with Good
         Reason:

             Executive's employment may be terminated without Cause by the
          Company's Board of Directors (other than as a result of Disability) or
          by the Executive for Good Reason, provided that in such event:

                       (i) Executive shall be entitled to receive three (3)
                   years base salary (at the Executive's effective annual rate
                   on the date of termination) to be paid in a lump-sum (net of
                   appropriate withholdings) within sixty (60) days of the Date
                   of Termination;

                       (ii) Executive shall be entitled to receive three (3)
                   years of his annual bonus award (defined to be three (3)
                   times his most recent target incentive opportunity under the
                   Variable Compensation plan times his annual base salary on
                   the date of termination) to be paid in a lump sum (net of
                   appropriate withholdings) within sixty (60) days of the Date
                   of Termination;

                       (iii) Executive shall be entitled to continue
                   participation in the Company's health and benefit plans (to
                   the extent allowable in accordance with the administrative
                   provisions of those plans and applicable federal and state
                   law) for a period of up to three (3) years or until Executive
                   is covered by a successor employer's benefit plans, whichever
                   is sooner;

                                       19


                       (iv) The Initial Incentive Awards, Converted Incentive
                   Awards and any other Annual Incentive Awards granted to the
                   Executive shall become vested and fully exercisable as of the
                   Date of Termination; and

                       (v) In the event that the Executive receives any payment
                   or benefit (including but not limited to the payments or
                   benefits pursuant to Section 12 of this Agreement (a
                   "Payment") that is subject to the excise tax (the "Excise
                   Tax") under Section 4999 of the Internal Revenue Code of
                   1986, as amended (the "Code"), the Company shall pay to the
                   Executive, as soon thereafter as practicable, an additional
                   amount (a "Gross-Up Payment") such that the net amount
                   retained by the Executive, after deduction of any Excise Tax
                   imposed upon the Payment and any federal, state and local
                   income tax and Excise Tax imposed upon the Gross-Up Payment,
                   shall be equal to the Payment. The determination of whether
                   an Excise Tax is due in respect to any payment or benefit,
                   the amount of the Excise Tax and the amount of the Gross-Up
                   Payment shall be made by an independent auditor (the
                   "Auditor") jointly selected by the Company and the Executive
                   and paid by the Company. If the Executive and the Company
                   cannot agree on the firm to serve as the Auditor, then the
                   Executive and the Company shall each select one nationally
                   recognized accounting firm and those two firms shall jointly
                   select the nationally recognized accounting firm to serve as
                   the Auditor. Notwithstanding the Payment, (i) any other
                   payments or benefits received or to be received by the
                   Executive in connection with a Change in Control or the
                   Executive's termination of employment (whether pursuant to
                   the terms of this Agreement or any other plan, arrangement or
                   agreement

                                       20


         with the Company, any person whose actions result in a Change in
         Control or any person affiliated with the Company or such person) shall
         be treated as "parachute payments" within the meaning of Section
         280G(b)(2) of the Code, and all "excess parachute payments" within the
         meaning of Section 280G of the Code shall be treated as subject to the
         Excise Tax, unless in the opinion of the tax counsel selected by the
         Auditor, such other payments or benefits (in whole or in part) do not
         constitute parachute payments, or are otherwise not subject to the
         Excise Tax, and (ii) the Executive shall be deemed to pay federal
         income tax at the highest marginal rate applicable in the calendar year
         in which the Gross-up Payment is made, and state and local income taxes
         at the highest marginal rate of taxation in the state and locality of
         the Executive's residence on the Date of Termination, net of the
         maximum reduction in federal income taxes which could be obtained from
         deduction of such state and local taxes. In the event the actual Excise
         Tax or such income tax is more or less than the amount used to
         calculate the Gross-Up Payment, the Executive or the Company, as the
         case may be, shall pay to the other an amount reflecting the actual
         Excise Tax or such income tax.

(f)      Change in Control. For purposes of this Agreement, a
         "Change-in-Control" is defined to be:

                  (i) any person (as such term is used in Sections 13(d) and
                  14(d)(2) of the Securities Exchange Act of 1934) becoming the
                  beneficial owner, directly or indirectly, of Company
                  securities representing 20% or more of the combined voting
                  power of the Company's then outstanding securities; or

                                       21


                  (ii) the majority of the Board consists of individuals other
                  than Incumbent Directors, which term means the members of the
                  Board as of the date of the Spin-off and any other Director
                  elected to the Board with the consent of the Executive,
                  provided that any person becoming a director subsequent to
                  such date whose election or nomination for election was
                  supported by two-thirds of the directors who then comprised
                  the Incumbent Directors shall be considered to be an Incumbent
                  Director; or 

                  (iii) the Company's shareholders approve a merger (pursuant to
                  which the Company is not the surviving entity), consolidation,
                  sale or disposition of all or substantially all of the
                  Company's assets or a plan of partial or complete liquidation;
                  provided that notwithstanding anything to the contrary in this
                  subclause (iii), no such merger, consolidation or sale shall
                  be deemed to constitute a "Change in Control" if such
                  transaction or series of transactions required the Executive
                  to be identified in any United States securities law filing as
                  a person or a member of any group acquiring, holding or
                  disposing of beneficial ownership of the Company's securities
                  and/or assets and effecting a "Change in Control" as defined
                  in this subclause (iii).

13.      Arbitration: In the event of any difference of opinion or dispute
         between the Executive and the Company with respect to the construction
         or interpretation of this Agreement or the alleged breach thereof,
         which cannot be settled amicably by agreement of the parties, then such
         dispute shall be submitted to and determined by arbitration by a single
         arbiter in the city of New York, New York in accordance with the rules
         then in effect of the Commercial

                                       22

         Arbitration Panel of the AMERICAN ARBITRATION ASSOCIATION, and judgment
         upon the award rendered shall be final, binding and conclusive upon the
         parties and may be entered in the highest court, state or federal,
         having jurisdiction. The costs of the arbitration shall be borne as
         determined by the arbitrator; provided, however, that if the Company's
         position is not substantially upheld, as determined by the arbitrator,
         the expenses of the Executive (including, without limitation, fees and
         expenses payable to the AAA and the arbitrator, fees and expenses
         payable to witnesses, including expert witnesses, fees and expenses
         payable to attorneys and other professionals, expenses of the Executive
         in attending the hearings, costs in connection with obtaining and
         presenting evidence and costs of the transcription of the proceedings),
         as determined by the arbitrator, shall be reimbursed to him by the
         Company.

14.      Confidentiality: During the Employment Term, and except as otherwise
         required by law, the Executive shall not disclose or make accessible to
         any business, person or entity, or make use of (other than in the
         course of the business of the Company) any trade secrets, proprietary
         knowledge or confidential information, which he shall have obtained
         during his employment by the Company and which shall not be generally
         known to or recognized by the general public. All information regarding
         or relating to any aspect of either the Company's business, including
         but not limited to that relating to existing or contemplated business
         plans, activities or procedures, current or prospective clients,
         current or prospective contracts or other business arrangements, or any
         other information acquired because of the Executive's employment by the
         Company, shall be conclusively presumed to be confidential; provided
         however, that Confidential Information shall not include any


                                       23



         information known generally to the public (other than as a
         result of unauthorized disclosure by the Executive) or any specific
         information or type of information generally not considered information
         disclosed by the Company or any officer thereof to a third party
         without restrictions on the disclosure of such information. The
         Executive's obligations under this Section 14 shall be in addition to
         any other confidentiality or nondisclosure obligations of the Executive
         to the Company at law or under any other agreements. 

15.      Other Matters:
     
         (a) Entire Agreement: This Agreement constitutes the entire agreement
         between the Company and the Executive relating to the subject matter
         hereof, and supersedes any previous agreements, commitments and
         understandings, written or oral, with respect to the matters provided
         herein. As used in this Agreement, terms such as "herein," "hereof,"
         "hereto" and similar language shall be construed to refer to this
         entire instrument and not merely the paragraph or sentence in which
         they appear, unless so limited by express language.

         (b) Assignment: Except as set forth below, this Agreement and the
         rights and obligations contained herein shall not be assignable or
         otherwise transferable by either party to this Agreement without the
         prior written consent of the other party to this Agreement.
         Notwithstanding the foregoing, any amounts owing to the Executive upon
         his death shall inure to the benefit of his heirs, legatees, personal
         representatives, executor or administrator.

         (c) Notices: Any and all notices provided for under this Agreement
         shall be in writing and hand delivered or sent by first class
         registered or certified mail, postage prepaid,


                                       24

         return receipt requested, addressed to the Executive at his residence
         or to the Company at its usual place of business, and all such notices
         shall be deemed effective at the time of delivery or at the time
         delivery is refused by the addressee upon presentation.

         (d) Amendment/Waiver: No provision of this Agreement may be amended,
         waived, modified, extended or discharged unless such amendment, waiver,
         extension or discharge is agreed to in writing signed by both the
         Company and the Executive.

         (e) Applicable Law: This Agreement and the rights and obligations of
         the parties hereunder shall be construed, interpreted, and enforced in
         accordance with the laws of the State of New York (applicable to
         contracts to be performed wholly within such State).

         (f) Severability: The Executive hereby expressly agrees that all of the
         covenants in this Agreement are reasonable and necessary in order to
         protect the Company and its business. If any provision or any part of
         any provision of this Agreement shall be invalid or unenforceable under
         applicable law, such part shall be ineffective only to the extent of
         such invalidity or unenforceability and shall not affect in any way the
         validity or enforceability of the remaining provisions of this
         Agreement, or the remaining parts of such provision.

         (g) Successor of Interests: In the event the Company merges or
         consolidates with or into any other corporation or corporations, or
         sells or otherwise transfers substantially all of its assets to another
         corporation, the provisions of this Agreement shall be binding upon and
         inure to the benefit of the corporation surviving or resulting from the
         merger or consolidation or to which the assets are sold or transferred
         and, prior to the


                                       25

         consummation of any such event, the Company shall obtain the express
         written assumption of this Agreement by the other corporation (other
         than in the case of a merger after which the Company is the surviving
         entity). All references herein to the Company refer with equal force
         and effect to any corporate or other successor of the corporation that
         acquires directly or indirectly by merger, consolidation, purchase or
         otherwise, all or substantially all of the assets of the Company.

         (h) No Mitigation: The Executive shall not be required to mitigate
         amounts payable pursuant to Section (12) hereof by seeking other
         employment or otherwise.


16.      Condition Subsequent: This Agreement shall be null and void and of no
         effect if the Spin-off is not consummated on or before March 1, 1997.

17.      Indemnification: The Company shall indemnify the Executive to the full
         extent permitted by law and the By-laws of the Company for all
         expenses, costs, liabilities and legal fees which the Executive may
         incur in the discharge of all his duties hereunder, including, without
         limitation, the right to be paid in advance by the Company for his
         expenses in defending a civil or criminal action, proceeding or
         investigation prior to the final disposition thereof. The Executive
         shall be insured under the Company's Directors' and Officers' Liability
         Insurance Policy as in effect from time to time. Notwithstanding any
         other provision of this Agreement to the contrary, any termination of
         the Executive's employment or of this Agreement shall have no effect on
         the continuing operation of this Section (17).


                                       26



18.      Authority: The execution, delivery and performance of this Agreement
         has been duly authorized by the Company and this Agreement represents
         the valid, legal and binding obligation of the Company, enforceable
         against the Company according to its terms.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its
own behalf and has caused its corporate seal to be affixed, and the Executive
has executed this Agreement on his own behalf intending to be legally bound, as
of the date first written above.

                          CORNING CLINICAL LABORATORIES

                          By: /s/ Van C. Campbell
                             __________________________________
                             Van C. Campbell
                             Chairman CLSI

ATTEST:

/s/
- -------------------------------
Secretary

                                            EXECUTIVE:

                                            /s/ Kenneth W. Freeman
                                            ------------------------------------
                                            Kenneth W. Freeman


                                       27




                                     ANNEX A

                                CCL Career Shares
                                Vesting Schedule



                  1997                                     11,997
                  1998                                     22,766
                  1999                                     33,538
                  2000                                     44,310
                  2001                                     55,085
                                   
                                   
                                   

EX-21

                                                                      Exhibit 21


Quest Diagnostics Incorporated (DE)

     100.00 Quest Diagnostics Incorporated (MI)
     100.00 Quest Holdings Incorporated (MI)
          100.00 Quest Diagnostics Incorporated (CA)
     100.00 Laboratories Holdings Incorporated
          100.00 Quest Diagnostics Incorporated (CT)
          100.00 Quest Diagnostics Incorporated (MA)
     100.00 Quest Diagnostics of Pennsylvania Incorporated
          100.00 Deyor CPF/MetPath, Inc. (2)
          100.00 Quest Diagnostics Incorporated (OH)
          100.00 Medical Management Systems Inc.
               53.50 Associated Clinical Laboratories L.P. (partnership)
          50.00 Surgical Eye Enterprise L.P. (partnership)
               50.00 Surgical Eye Institute L.P. (partnership)
     100.00 Quest MRL Inc.
     100.00 DPD Holdings, Inc.
          100.00 MetWest Inc.
     100.00 Quest Holdings Incorporated (MD)
          100.00 Quest Diagnostics Incorporated (MD)
               100.00 Diagnostic Reference Services Inc.
                    50.00 Pathology Building Partnership (1)
     100.00 Nichols Institute Diagnostics
          100.00 Nichols Institute Sales Corporation
     100.00 Nichols Institute Diagnostics Limited
     100.00 Nichols Institute Diagnostics Trading S.A.
     100.00 Nichols Institute Diagnostika GMBH (Germany)
          100.00 Nichols Institute Diagnostika GMBH (Austria)
     100.00 Nichols Institute International Holding B.V.
          100.00 Nichols Institute Diagnostics B.V.
          100.00 Nichols Institute Diagnostics SARL
     100.00 CLMP Inc.
     100.00 Damon Investment Holdings, Inc.
     100.00 Nomad-Massachusetts, Inc.
          100.00 Corning Laboratorios Clinicos, S.A. de C.V.
          100.00 Analisis, S.A.
          100.00 Laboratorios Clinicos de Mexico, S.A. de C.V.
               100.00 Servicios de Laboratoria, S.A. de C.V.
          100.00 Laboratorios de Frontera Polanco, S.A. de C.V.
          100.00 Laboratorios de Analisis Biomedicos, S.A.
     100.00 New England Medical Laboratory Inc. (2)
     100.00 Stat Toxicology Service of Boston Inc. (2)
     100.00 MetPath Europe Limited (2)
     100.00 Trans United Casualty and Indemnity Insurance Company (2)

(1) The other 50% partner of Pathology Building Partnership is Quest Diagnostics
    Incorporated (MD).
(2) In process of dissolution.

EX-23

                                                                      Exhibit 23

                       CONSENT OF INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP


We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-17077, 333-17079 and 333-17083) of Quest
Diagnostics Incorporated of our report dated January 24, 1997 appearing on page
F-1 of this Form 10-K.




Price Waterhouse LLP
New York, New York
March 17, 1997

EX-27

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

 

<ARTICLE>                     5


<CIK>                         0001022079
<NAME>                        Quest Diagnostics Incorporated
<MULTIPLIER>                                     1,000
<CURRENCY>                                        U.S.
       
                             
<PERIOD-TYPE>                   12-mos
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                          41,960
<SECURITIES>                                         0
<RECEIVABLES>                                  297,743
<ALLOWANCES>                                   115,018
<INVENTORY>                                     28,524
<CURRENT-ASSETS>                               510,965
<PP&E>                                         287,749
<DEPRECIATION>                                 287,418
<TOTAL-ASSETS>                               1,395,066
<CURRENT-LIABILITIES>                          249,432
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                      1,000
<COMMON>                                     1,170,440
<OTHER-SE>                                   (632,721)
<TOTAL-LIABILITY-AND-EQUITY>                 1,395,066
<SALES>                                      1,616,296
<TOTAL-REVENUES>                             1,616,296
<CGS>                                        1,010,875
<TOTAL-COSTS>                                1,506,198
<OTHER-EXPENSES>                                 1,213
<LOSS-PROVISION>                               111,238
<INTEREST-EXPENSE>                              74,918
<INCOME-PRETAX>                              (676,202)
<INCOME-TAX>                                  (50,242)
<INCOME-CONTINUING>                          (625,960)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 (625,960)
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                        0